wescast industries inc. - Canadian Stocks
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
ANNUAL INFORMATION FORM<br />
For the Year Ended January 1, 2012<br />
March 29, 2012
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Presentation of Information<br />
Unless otherwise indicated, all information in this Annual Information Form (“AIF”) is<br />
presented as at and for the year ended January 1, 2012 (“Fiscal 2011”) and amounts are<br />
expressed in <strong>Canadian</strong> dollars. Financial information is presented in accordance with<br />
International Financial Reporting Standards.<br />
Documents Incorporated by Reference<br />
The following documents of Wescast Industries Inc. are <strong>inc</strong>orporated by reference into this AIF:<br />
(i) Management’s Discussion and Analysis for the year ended January 1, 2012 (“MD&A”); and<br />
(ii) audited consolidated financial statements and accompanying notes for the year ended January<br />
1, 2012. These documents have been filed with applicable securities regulators in Canada and<br />
may be accessed at www.sedar.com.<br />
Forward-Looking Statements<br />
The contents of this AIF contain statements which, to the extent that they are not recitations of historical fact, may<br />
constitute forward-looking statements based on certain assumptions. Forward-looking statements are provided for<br />
the purpose of providing information about management’s current expectations and plans relating to the future.<br />
Persons reading this AIF are cautioned that such information may not be appropriate for other purposes. Such<br />
forward-looking statements may <strong>inc</strong>lude financial and other projections as well as statements regarding Wescast’s<br />
future plans, objectives or performance for the current fiscal year and subsequent periods and regarding the markets<br />
for our products. The words “may”, “would”, “could”, “will”, “likely”, “expect”, “anticipate”, “estimate”, “intend”,<br />
“plan”, “forecast”, “project” and “believe” or other similar words and phrases (<strong>inc</strong>luding negative variations) are<br />
intended to identify forward-looking statements. These statements are not guarantees of future performance and<br />
Wescast’s actual future results or performance may be materially different.<br />
This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or<br />
making a forecast or projection as reflected in the forward-looking statements, <strong>inc</strong>luding our perception of historical<br />
trends, current conditions and expected future developments as well as other factors we believe are appropriate in<br />
the circumstances.<br />
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may<br />
cause actual results to differ materially from those expressed or implied by such forward-looking statements. These<br />
risks and uncertainties pr<strong>inc</strong>ipally relate to the risks associated with the automotive industry and <strong>inc</strong>lude, but are not<br />
limited to: the result of Wescast's review of strategic alternatives and consummation of any transaction, our<br />
operating and/or financial performance, <strong>inc</strong>luding the effect of new accounting standards on our reported financial<br />
results, fluctuations in interest rates, changes in consumer and business confidence levels, consumers’ personal debt<br />
levels, vehicle prices, the extent and nature of purchasing or leasing <strong>inc</strong>entive campaigns offered by automotive<br />
manufacturers, environmental emission regulations, fuel prices and availability, the continuation and extent of<br />
outsourcing by automotive manufacturers, changes in raw material and other input costs, our ability to continue to<br />
meet customer specifications relating to product performance, cost, quality, delivery and service, industry cyclicality<br />
or seasonality, trade and/or labour issues or disruptions, customer pricing pressures, pricing concessions and cost<br />
absorptions, actual levels of program production volumes by our customers compared to original expectations,<br />
<strong>inc</strong>luding program cancellations or delays, price reduction pressures, dependence on certain engine programs and<br />
the market success and consumer acceptance of the vehicles into which such powertrain products are installed, our<br />
relationship with and dependence on certain customers, currency exposure, failures in implementing Wescast’s<br />
strategy, technological developments by Wescast’s competitors and customers, government and regulatory policies<br />
and changes in the competitive environment in which Wescast operates.<br />
Wescast does not undertake any obligation to update or release any revisions to these forward-looking statements to<br />
reflect events or circumstances after the date of this AIF or to reflect the occurrence of unanticipated events, except<br />
as required by law.<br />
Annual Information Form
TABLE OF CONTENTS<br />
-i-<br />
Page<br />
1. CORPORATE STRUCTURE ........................................................................................... 1<br />
1.1 Name and Incorporation ........................................................................................ 1<br />
1.2 Intercorporate Relationships .................................................................................. 1<br />
2. GENERAL DEVELOPMENT OF THE BUSINESS........................................................ 2<br />
2.1 Overview ................................................................................................................ 2<br />
2.2 Three Year History of the Business ....................................................................... 2<br />
2.3 Trends in the Automotive Industry ........................................................................ 5<br />
2.4 Company’s Business Strategy.............................................................................. 11<br />
3. DESCRIPTION OF THE BUSINESS ............................................................................. 13<br />
3.1 Products................................................................................................................ 13<br />
3.2 Stainless Steel Technologies ................................................................................ 14<br />
3.3 Business Unit Segments ....................................................................................... 15<br />
3.4 Credit Facilities .................................................................................................... 17<br />
3.5 Sales and Marketing ............................................................................................. 18<br />
3.6 Sources, Pricing and Availability of Raw Materials ............................................ 19<br />
3.7 Seasonality ........................................................................................................... 22<br />
3.8 Intellectual Property Rights ................................................................................. 22<br />
3.9 Competition.......................................................................................................... 22<br />
3.10 Research and Development Activities ................................................................. 24<br />
3.11 Engineering & Design.......................................................................................... 24<br />
3.12 Technical Development Centre............................................................................ 25<br />
3.13 Economic/Contract Dependence .......................................................................... 25<br />
3.14 Environmental, Health & Safety .......................................................................... 27<br />
3.15 Human Resources ................................................................................................ 28<br />
3.16 Pr<strong>inc</strong>ipal Properties .............................................................................................. 29<br />
4. RISK FACTORS ............................................................................................................. 30<br />
5. DESCRIPTION OF CAPITAL STRUCTURE ............................................................... 30<br />
5.1 Authorized Capital ............................................................................................... 30<br />
5.2 Dividends ............................................................................................................. 30<br />
5.3 Dissolution ........................................................................................................... 30
TABLE OF CONTENTS<br />
(continued)<br />
-ii-<br />
Page<br />
5.4 Voting Rights ....................................................................................................... 31<br />
5.5 Conversion Rights ................................................................................................ 31<br />
5.6 Takeover Bid Protection ...................................................................................... 31<br />
6. DIVIDEND POLICY....................................................................................................... 31<br />
7. MARKET FOR SECURITIES ........................................................................................ 32<br />
7.1 Trading Price and Volume ................................................................................... 32<br />
8. DIRECTORS AND OFFICERS ...................................................................................... 33<br />
8.1 Directors ............................................................................................................... 33<br />
8.2 Officers ................................................................................................................ 35<br />
9. LEGAL PROCEEDINGS ................................................................................................ 36<br />
10. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL<br />
TRANSACTIONS ........................................................................................................... 36<br />
11. TRANSFER AGENT AND REGISTRAR ...................................................................... 36<br />
12. MATERIAL CONTRACTS ............................................................................................ 36<br />
13. NAMES AND INTERESTS OF EXPERTS ................................................................... 37<br />
14. CODE OF CONDUCT .................................................................................................... 37<br />
15. ADDITIONAL INFORMATION .................................................................................... 37<br />
APPENDIX A .............................................................................................................................. 40
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
1. CORPORATE STRUCTURE<br />
1.1 Name and Incorporation<br />
Pursuant to articles of amalgamation dated October 31, 1994, Wescast Industries Inc.<br />
amalgamated with Western Machining Inc. and LFT Investments Ltd. under the Business<br />
Corporations Act (Ontario) to form Wescast Industries Inc. References to “Wescast”, the<br />
“Company”, “our” or “we” in this AIF <strong>inc</strong>lude Wescast Industries Inc. and its subsidiaries.<br />
Wescast’s head office, which is also our registered office, is located at 150 Savannah Oaks<br />
Drive, Brantford, Ontario, N3T 5L8.<br />
1.2 Intercorporate Relationships<br />
The following is a list of the subsidiaries of Wescast Industries Inc. as of January 1, 2012 and<br />
their respective jurisdictions of <strong>inc</strong>orporation.<br />
Subsidiaries of Wescast<br />
1102734 Ontario Inc. Ontario<br />
1277521 Ontario Inc. Ontario<br />
Jurisdiction of<br />
Incorporation<br />
Wescast Industries GmbH Germany<br />
Wescast U.K. Limited England<br />
Wescast Japan, K.K. Japan<br />
Wescast France SARL France<br />
Weslin Industries Inc. Ontario<br />
Wescast Hungary Zrt. Hungary<br />
Wescast Holdings USA, Inc. Delaware<br />
Wescast (USA) Inc. Delaware<br />
United Machining Inc. Michigan<br />
Wescast Industries of Georgia, Inc. Delaware<br />
o Wescast Industries Cordele, LLC Delaware<br />
Wescast Holdings (Barbados) Inc. Barbados<br />
Wescast (Barbados) Inc. Barbados<br />
o Wescast Industries (China) Co., Ltd. China<br />
Wescast owns directly and indirectly, 100% of the outstanding shares of all subsidiaries listed<br />
above.<br />
Annual Information Form Page 1
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
2. GENERAL DEVELOPMENT OF THE BUSINESS<br />
2.1 Overview<br />
Wescast is a global automotive parts supplier that primarily designs, engineers, casts, machines<br />
and assembles high-quality engineered exhaust system components, <strong>inc</strong>luding exhaust<br />
manifolds, turbocharger housings and integrated turbomanifolds, as well as various other<br />
components, for the car and light truck markets. The Company supplies a diversified group of<br />
global original equipment manufacturers (“OEMs”) and Tier 1 customers in North America,<br />
Europe, Asia, Africa, South America and Australia.<br />
The Company employs approximately 2,000 people in our regionally-based operations and sales<br />
and design centres in Canada, the United States, Hungary, China, Germany, Japan, the United<br />
Kingdom and France.<br />
The Company's resources are strategically located by geographic business units in North<br />
America, Europe and Asia. The Company believes that it provides its customers with a strong<br />
value proposition through best in class manufacturing, engineering, design and testing<br />
capabilities. The Company believes this is the reason that it is the world's leading supplier of<br />
cast exhaust manifolds for passenger cars and light truck applications.<br />
The Company’s resources in North America are well established and consist of 6 production<br />
facilities. The Company’s North American objectives are to expand our stainless steel<br />
operations, grow through product diversification and remain cost-competitive in an effort to<br />
grow and preserve our leading market position. The European operations are conducted from an<br />
integrated foundry and machining facility in Hungary through a subsidiary, Wescast Hungary<br />
Zrt. These operations continue to focus on strengthening Wescast’s market position in Europe.<br />
The Company’s newest integrated foundry and machining facility located in Wuhan, China<br />
continues to secure and launch a number of new customer programs.<br />
The Company is focused on developing and delivering products and materials that meet coming<br />
automotive trends, <strong>inc</strong>luding vehicle weight reduction and improved efficiency of the internal<br />
combustion engine. The Company believes that developments in these key areas should allow<br />
the Company to grow with new products, materials and with new customers globally.<br />
2.2 Three Year History of the Business<br />
Through its global expansion, Wescast believes that it has established its position as the only<br />
manufacturer of cast exhaust system components with manufacturing capability in the three<br />
major automotive regions of the world (North America, Europe and Asia).<br />
The Company has undergone significant restructuring activity which began in 2008 <strong>inc</strong>luding the<br />
closure of the Company’s Wingham North Huron foundry. These restructuring activities were<br />
carried out to adjust the Company’s cost structure, to streamline various support activities and to<br />
Annual Information Form Page 2
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
“right-size” the Company’s manufacturing North American footprint, to address the current and<br />
expected market conditions and ultimately improve the profitability of the Company. Total<br />
restructuring charges <strong>inc</strong>urred in 2008 and 2009 totalled $75 million. The Company recorded a<br />
net restructuring recovery of approximately $0.7 million in 2010 and $0.1 million in 2011 related<br />
to our North American operations due to fewer employee terminations than planned under the<br />
original restructuring plan as a result of improved North American automotive market<br />
conditions.<br />
The use of stainless steel exhaust manifolds and turbocharger housings as a significant growth<br />
opportunity continues to be a focus of the Company. In 2009, the Company launched production<br />
for two key customers from the stainless steel facility in Stratford, Ontario. In Stratford, the<br />
Company utilizes a patented and licensed technology to design and manufacture stainless steel<br />
products that have a thinner wall and smoother surface, which provides both lighter-weight and<br />
superior air-flow in manifold or turbocharger housing alternatives for our customers. We believe<br />
Wescast is the only company with stainless steel manufacturing capability for our types of<br />
products and characteristics in North America.<br />
S<strong>inc</strong>e launching production in 2009, the Company continued to ramp-up production for two key<br />
customers from our stainless steel facility in North America and also continued its development<br />
and validation activities for more complex and advanced designs for thin walled, lightweight<br />
castings. During 2011, the Company began a significant expansion of its North American<br />
stainless steel facility’s capacity. As the market for stainless steel components continues to<br />
grow, the Company believes that it is well positioned to participate and be recognized as a leader<br />
in this segment in North America and globally.<br />
During 2011, the Company successfully launched stainless steel in China; numerous successful<br />
prototype projects were completed and the operations in China won their first two stainless steel<br />
programs. In Europe, capital investments were completed to enable the use of NiResist and<br />
stainless steel materials; the operation is currently launching its first program in stainless steel.<br />
Over the past few years, two key technical trends have been shaping the global automotive<br />
industry and in turn serving as the foundation for Wescast’s market focus moving forward. They<br />
are fuel economy and reduced emissions, specifically with a focus on turbochargers,<br />
turbomanifolds and waste energy recovery. In order to take advantage of these market trends,<br />
Wescast formed an Innovation Council in 2009 comprised of Wescast executive and senior<br />
technical personnel to review new innovative ideas for growth and to support internal research<br />
and development as well as product development initiatives. In 2011 certain key innovative<br />
products were further advanced in response to customer requirements for improved fuel<br />
economy, lower emissions and to respond to regulatory requirements and the need for lower cost<br />
materials and products that deal with higher exhaust temperatures. These innovative products<br />
have applications in the followings areas:<br />
a. Exhaust energy recovery: The use of waste heat energy in product applications helps<br />
improve fuel economy and <strong>inc</strong>reases in-cabin passenger comfort. Rapidly heating engine<br />
Annual Information Form Page 3
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
coolant and engine and transmission oils helps decrease the fluid viscosity, thus<br />
providing a potential benefit to OEMs of a 3% to 5% improvement in fuel economy. The<br />
Company has entered into agreements with certain OEMs to provide prototypes for<br />
testing and evaluation. The Company believes this will result in a new product offering<br />
for the Company.<br />
b. Water cooled exhaust manifolds and turbocharger housings: Due to emissions legislation<br />
requirements and engine performance optimization, exhaust gas temperatures continue to<br />
<strong>inc</strong>rease and water cooling for durability is an effective way for OEMs to obtain durable<br />
exhaust manifolds or turbocharger housings using lower cost materials. The Company<br />
has entered into agreements with certain OEMs to provide prototypes for testing and<br />
evaluation.<br />
The Company believes that innovative new products being developed will preserve and grow its<br />
market share and that these actions will continue to position Wescast as a market leader with the<br />
ability to support its customers globally with cost competitive innovative products.<br />
Throughout 2011, the Company continued to look for revenue diversification opportunities,<br />
booking more than $125 million in average annualized new and replacement business across all<br />
of the business units. Of this new and replacement business, 48% of the revenue is related to<br />
turbocharger housings and turbomanifolds which continue to be an exciting avenue for growth as<br />
the automotive industry is trending toward the production of smaller turbocharged engines.<br />
In North America, the Company’s strategy is to continue to develop and expand its product<br />
offerings and to leverage its stainless steel operations to secure and maintain a market leadership<br />
position in exhaust manifolds and turbocharger housings and integrated turbomanifolds.<br />
The Company’s European operations continue to focus on expanding its customer and product<br />
base by leveraging its capability in multiple materials <strong>inc</strong>luding NiResist and stainless steel.<br />
The Company’s Asian operations continue to focus on growing its domestic sales in exhaust<br />
manifolds, turbocharger housings and integrated turbomanifolds in multiple materials.<br />
The Company believes that its strategies of expanding its global manufacturing capabilities,<br />
continuing to develop and commercialize new technologies and innovation, expansion of its<br />
stainless steel capabilities in North America, development and expansion of product offerings<br />
and continued pursuit of operational excellence position it well for profitable sales growth.<br />
In the first quarter of 2011, the Company announced that the Board of Directors was undertaking<br />
a review of strategic alternatives for the Company with the objective of enhancing shareholder<br />
value. A Special Committee of the Board of Directors was established to assist with the process<br />
and Canaccord Genuity was retained to act as the Board of Directors’ financial adviser.<br />
Annual Information Form Page 4
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
As part of the strategic alternative review, the Company was in discussion with several parties<br />
regarding possible alternatives and, on September 6, 2011, announced that it had entered into a<br />
Memorandum of Understanding with Sichuan Bohong Industry Co., Ltd. ("Bohong") regarding<br />
Bohong's proposed acquisition of 100% of the issued and outstanding capital of Wescast. The<br />
Memorandum of Understanding terminated automatically in December 2011 in accordance with<br />
its terms when Bohong did not obtain a financing commitment letter by a specified date. The<br />
Board of Directors is continuing with its review of strategic alternatives but does not intend to<br />
comment further regarding its evaluation of strategic alternatives unless a specific transaction or<br />
process is concluded, or it otherwise deems further disclosure is appropriate or required.<br />
For additional information regarding the general development of Wescast’s business, see pages 1<br />
to 11 of the MD&A, which pages are <strong>inc</strong>orporated herein by reference.<br />
2.3 Trends in the Automotive Industry<br />
Automotive Industry - General<br />
2011 marked a continued recovery in most global markets with global light vehicle sales<br />
<strong>inc</strong>reasing in every major market in 2011 compared to 2010.<br />
Light vehicle sales in North America continued to recover as consumer confidence <strong>inc</strong>reased and<br />
the US economy stabilized. Light vehicle sales in North America finished the year 9.3% higher<br />
than in 2010 and recorded a second consecutive year of strong growth.<br />
Europe continues to work through several financial crises in certain countries which saw the<br />
overall devaluation of the Euro. Even with this uncertainty, the European market grew with light<br />
vehicle sales in Europe <strong>inc</strong>reasing 4.4% in 2011 compared to 2010.<br />
Asia, led by China, has grown to become the largest automotive market in the last decade. In<br />
China specifically, overall light vehicle sales growth was less robust than in previous years; with<br />
lower vehicle purchase <strong>inc</strong>entives and <strong>inc</strong>reased government restrictions on the number of<br />
vehicle licences issued, growth was restrained. Nevertheless, China light vehicle sales grew by<br />
3.3% in 2011 as compared to 2010.<br />
The market charts outlined below indicate continued recoveries in light vehicle engine<br />
production in North America and Europe and forecasted continued growth in Asia for the next 3<br />
to 5 years. In 2012, Europe is expected to contract slightly; however, the long term view is that<br />
the market will continue to recover.<br />
Annual Information Form Page 5
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
European Light Vehicle Engine Production (Millions units)<br />
Asian Light Vehicle Engine Production (Millions units)<br />
North American Light Vehicle Engine Production (Millions units)<br />
16<br />
14<br />
12<br />
10<br />
-<br />
8<br />
6<br />
4<br />
2<br />
30<br />
25<br />
20<br />
15<br />
10<br />
-<br />
5<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
-<br />
5<br />
Expected North American Market Recovery<br />
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019<br />
Source: IHS Global Inc.<br />
Expected European Market Recovery<br />
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019<br />
Source: IHS Global Inc.<br />
Expected Asian Market Growth<br />
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019<br />
Source: IHS Global Inc.<br />
Annual Information Form Page 6
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
With strong sales growth in 2011, continued growth expected in 2012 in North America and<br />
Asia, and automakers’ renewed focus on emissions, fuel economy, safety, and technology,<br />
automotive suppliers such as Wescast will be expected to ramp up production and bring new<br />
innovative technologies to market to meet post-recession demands.<br />
In 2011 the automotive sector returned to higher production levels in each of the key markets.<br />
The Company believes it is well positioned to grow due to our ability to ramp-up production in<br />
our global network.<br />
The Company remains focused on its long-term strategy of diversifying and growing sales by<br />
region, customer and product type while maintaining its market share with existing customers.<br />
Fuel Economy, Higher Engine Operating Temperatures and Reduced Emissions<br />
The Company is committed to providing full-service engineering solutions in partnership with its<br />
customers from its Technical Development Centre in Canada which houses all of the Company's<br />
research and development, product design and diversification initiatives in one state-of-the-art<br />
facility. This allows the Company to accelerate its product development activities, provide<br />
advanced process development, and carry out focused and innovative research and development<br />
to support its growth initiatives.<br />
The Company believes that our engineering and design capabilities are well suited to meet the<br />
changing technical needs of our current and future customers. These customers are facing many<br />
challenges with which we believe Wescast can specifically help, <strong>inc</strong>luding:<br />
The need to reduce engine emission levels and fuel consumption;<br />
The need to deal with higher engine operating temperatures;<br />
The need to meet customer-driven demand for high horsepower levels, given the<br />
constraints above; and<br />
The potential for an <strong>inc</strong>reased focus on diesel and hybrid-electric vehicles globally, to<br />
meet upcoming government mandated emissions and fuel economy targets.<br />
Wescast’s engineering and design efforts are aimed at developing innovations that it believes<br />
will help customers meet these future needs. These efforts <strong>inc</strong>lude the continued development of<br />
new higher-temperature alloys, such as various grades of stainless steel and NiResist; the<br />
continued development of advanced waste energy recovery systems to improve fuel economy;<br />
and innovations to improve durable, lighter weight, and cost competitive high-temperature<br />
exhaust designs.<br />
The development and commercialization potential of innovative ideas is managed by the<br />
Company’s Innovation Council which <strong>inc</strong>ludes cross-functional leaders from across the<br />
Annual Information Form Page 7
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
organization. In 2011 certain key innovative products were further advanced in response to<br />
customer requirements for improved fuel economy, lower emissions to respond to regulatory<br />
requirements and the need for lower cost materials and products that deal with higher exhaust<br />
temperatures. As discussed above, these innovation products have applications in the following<br />
areas:<br />
Exhaust energy recovery: The use of waste heat energy in product applications helps<br />
improve fuel economy and <strong>inc</strong>reases in-cabin passenger comfort. Rapidly heating engine<br />
coolant and engine and transmission oils help decrease the fluid viscosity, thus providing<br />
a potential benefit to OEMs of a 3% to 5% improvement in fuel economy. The Company<br />
has entered into agreements with certain OEMs to provide prototypes for testing and<br />
evaluation.<br />
Water cooled exhaust manifolds and turbocharger housings: Due to emissions<br />
requirements and engine calibration, exhaust gas temperatures continue to <strong>inc</strong>rease and<br />
water cooling for durability is an effective way for OEMs to have durable exhaust<br />
manifolds or turbocharger housings using lower cost materials. The Company has entered<br />
into agreements with certain OEMs to provide prototypes for testing and evaluation.<br />
The Company believes that these actions will continue to position Wescast as a market leader<br />
with the ability to support our customers globally with cost competitive innovative products.<br />
Global Supply on a Regional Basis<br />
A significant cost for OEMs and suppliers arises from shipping automotive parts and vehicles.<br />
Due to the materials used in their production, manifolds, turbocharger housings and integrated<br />
turbomanifolds can be expensive to ship, which can impact the profitability of contracts. In<br />
addition, foreign exchange risks can have a significant impact on the profitability of cross-border<br />
contracts. The Company’s global production facilities allow it to manufacture products<br />
regionally, which the Company believes provides it with a significant competitive advantage<br />
over peers with a lesser geographic reach.<br />
In North America growth from stainless steel products and other components in this region<br />
remains a significant opportunity upon which the Company intends to capitalize.<br />
Wescast’s European operations provide access to: (i) strong global brands, (ii) a fast growing<br />
market for turbochargers through Wescast’s turbocharger housings and turbomanifolds, and (iii)<br />
growing markets in Eastern Europe and Russia.<br />
The Company’s Asian operations provide access to the largest and one of the fastest growing<br />
automobile consumer markets in the world and the Company is able to leverage its customer<br />
relationships established in North America and Europe to support further growth.<br />
Annual Information Form Page 8
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Increased Global Turbocharger Demand<br />
The automotive industry is trending toward the production of smaller vehicles. These vehicles<br />
have smaller engines, and a turbocharger <strong>inc</strong>reases the density of air entering the engine to create<br />
more power. Global turbocharger demand is anticipated to show significant growth over the<br />
next several years as automakers work to install new cost effective engine technology to boost<br />
fuel economy while also maintaining consumer’s desire for power performance. Wescast has<br />
devoted significant resources to the development of our turbocharger housing business. As<br />
illustrated by the chart below, it is anticipated that global turbocharger demand for light vehicles<br />
will <strong>inc</strong>rease from 21.6 million units in 2011 to more than 41.5 million units in 2019.<br />
We believe Wescast’s production of turbocharger housings for the turbocharger market provides<br />
both a revenue diversification opportunity and an avenue for significant growth.<br />
45,000,000<br />
40,000,000<br />
35,000,000<br />
30,000,000<br />
25,000,000<br />
20,000,000<br />
15,000,000<br />
10,000,000<br />
5,000,000<br />
-<br />
Source: IHS Global Inc.<br />
Projected Global Light Vehicle Turbochargers<br />
CY 2011 CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019<br />
Europe Asia North America<br />
Historically, high volume turbocharger applications have been found on diesel engines, but a<br />
large percentage of the anticipated growth in turbocharger demand is expected to come from an<br />
<strong>inc</strong>rease in forced induction gasoline engines.<br />
Annual Information Form Page 9
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
25,000,000<br />
20,000,000<br />
15,000,000<br />
10,000,000<br />
5,000,000<br />
-<br />
Source: IHS Global Inc.<br />
Projected Global Turbocharged Gasoline Engines<br />
CY 2011 CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 CY 2019<br />
Europe Asia North America<br />
This <strong>inc</strong>rease in turbocharger demand, in addition to demand for other new “lean-burn”<br />
technologies, is driving up the exhaust temperatures in future powertrain offerings at many<br />
automakers. We believe that this trend is not only leading to more potential turbocharger<br />
business, but also an <strong>inc</strong>rease in demand for higher-temperature cast iron, NiResist and stainless<br />
steel alloys for both turbochargers and exhaust manifolds. Due to Wescast’s capabilities in these<br />
materials globally, as well as potential new developments in material alloys from our Technical<br />
Development Centre, we believe that we are well positioned to support our customers.<br />
2011 Turbocharger Housings Market Share<br />
Europe Asia<br />
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The Company currently holds an estimated 13% market share of turbocharger housings in<br />
Europe, and our continued focus on global sales and engineering support is designed to assist in<br />
penetrating this market segment in other global regions. As an example, the Company holds an<br />
esimated 2% market share of turbocharger housings in Asia. With continued focus, the<br />
Company believes that this market share will <strong>inc</strong>rease.<br />
The Company also produces a large number of integrated turbomanifolds, where the exhaust<br />
manifold and turbocharger housing are cast as one combined part. Growth in integrated<br />
turbomanifolds is anticipated as automakers work to reduce complexity and improve part<br />
packaging within the engine compartment. The Company currently holds an estimated 9% share<br />
of the integrated turbomanifold market in Europe and looks to build on this market share in other<br />
markets globally.<br />
2.4 Company’s Business Strategy<br />
2011 Integrated Turbomanifolds Market Share<br />
Europe<br />
The Company’s goal is to diversify and grow sales by region, customer and product type while<br />
maintaining market share with existing customers and generating attractive growth and strong<br />
financial returns for its shareholders. The following strategies and actions are planned to deliver<br />
this goal:<br />
Continue to expand our global manufacturing capabilities to:<br />
Participate in growth in specific geographic regions;<br />
Grow with OEMs as they <strong>inc</strong>rease their requirement for global supply<br />
partners; and<br />
Position the Company with strategic manufacturing capabilities regionally to<br />
service the needs and wants of key customers in materials, processes and<br />
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products and to offset risks associated with foreign exchange and<br />
transportation costs.<br />
Develop and commercialize new technologies and innovation to address market trends<br />
for vehicle weight reductions and improved efficiency of the internal combustion engine.<br />
The Company expects to achieve this by:<br />
Leveraging multi material capabilities <strong>inc</strong>luding NiResist and stainless steel;<br />
Continue developing new lower cost materials that have the ability to<br />
withstand higher engine temperatures; and<br />
The commercialization of innovation platforms related to exhaust energy<br />
recovery and water cooled exhaust manifolds and turbocharger housings.<br />
Expand stainless steel capabilities in North America and establish a market leadership<br />
position in this rapid high growth segment.<br />
Complete the expansion of the existing North American stainless steel<br />
operating facility’s capacity and successfully launch customer awarded<br />
programs to utilize the expanded capacity; and<br />
Implement a stainless steel strategy to supply the North American market<br />
beyond the existing facility’s capacity.<br />
Continue to develop and expand the Company’s product offerings to address expected<br />
declines in demand for bolt-on manifolds in North America.<br />
Grow turbocharger housing and integrated turbomanifold sales; and<br />
Develop and grow other components for the car and light truck market where<br />
the Company can leverage its metallurgical and engineering expertise.<br />
The Company expects that sales growth in new products and materials in Asia, Europe<br />
and North America will significantly outpace the forecasted penetration of manifolds<br />
integrated into cylinder heads and the decline in bolt-on iron manifold market share.<br />
Continue the development and implementation of operational excellence in all operations<br />
to reduce costs, leverage technologies and processes, and enhance best practices globally.<br />
Continue to improve and enhance product launch and management<br />
capabilities.<br />
The Company believes that these strategies and actions position the Company to benefit from the<br />
market trends in the car and light truck market, while managing the risks that are inherent in the<br />
automotive industry and the business of the Company itself. We expect that these strategies,<br />
combined with strong new and replacement business that the Company has successfully booked<br />
for future years, will provide the potential for significant growth in revenue and earnings.<br />
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3. DESCRIPTION OF THE BUSINESS<br />
3.1 Products<br />
Companies which supply products directly to automotive OEMs and which design, engineer and<br />
manufacture such products are generally referred to in the automotive industry as “Tier 1”<br />
suppliers. Tier 1 suppliers may be awarded longer term purchase orders by OEMs as a result of<br />
their involvement in the development and design of the product with the OEM. Tier 1 suppliers<br />
generally have the capability to supply these components on a just-in-time basis which helps the<br />
OEMs reduce or better manage inventory levels.<br />
As primarily a Tier 1 supplier, Wescast designs, casts, machines and assembles high-quality<br />
engineered exhaust system components <strong>inc</strong>luding exhaust manifolds, turbocharger housings and<br />
integrated turbomanifolds for the car and light truck markets in North America, Europe and Asia.<br />
Manifolds<br />
The exhaust manifold is a critical engine component because its<br />
design affects overall engine performance, <strong>inc</strong>luding fuel<br />
efficiency, horsepower, effectiveness of the catalytic converter,<br />
environmental emissions and engine sound volume. The production of cast iron exhaust<br />
manifolds is essentially a two-step process consisting of: (1) casting, which is the pouring<br />
of molten metal into moulds; and (2) machining, which is the finishing of the raw exhaust<br />
manifold by milling, drilling, tapping, assembling and testing by highly-automated<br />
machines to prepare the exhaust manifold for final assembly on the engine. Wescast’s<br />
exhaust manifolds are made of ductile iron, SiMo, CGI, NiResist and stainless steel in<br />
order to meet diverse global customer needs.<br />
Turbocharger Housings<br />
The turbocharger housing is a significant component of a<br />
turbocharger assembly. The turbocharger is positioned<br />
downstream of the manifold within the exhaust system, and is<br />
driven by hot exhaust gases exiting the engine through the exhaust<br />
manifold. As the hot exhaust gas enters through the turbine, it<br />
drives a shaft connected to the compressor. This rotation of the<br />
compressor impeller draws cool air into the compressor housing<br />
and forces it into the intake manifold under higher pressure. By<br />
raising the pressure of the intake air, the turbocharger can help to achieve higher power<br />
output for a given engine displacement. This allows for the use of smaller and lighter<br />
engines, which can result in improved vehicle performance and potential improvements<br />
in fuel economy and total emissions output. Wescast currently supplies turbo charger<br />
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housings to the largest global turbo charger systems manufacturers such as Mitsubishi<br />
Heavy Industries, Borg Warner, IHI and Honeywell Turbo Technologies. Wescast’s<br />
global footprint allows the Company to be positioned to offer these products with<br />
flexibility where supply is needed. Wescast’s turbocharger housings are made of SiMo,<br />
CGI, NiResist and stainless steel in order to meet diverse global customer needs.<br />
Integrated Turbomanifolds<br />
An integrated turbomanifold is a manifold and a turbocharger<br />
housing designed as one single component. The European<br />
market demands compact exhaust solutions and turbocharging<br />
for its smaller gas and diesel engines and Wescast can provide a<br />
cast “turbo-manifold” all in one cast piece. This integrated<br />
approach yields benefits where tight packaging constraints exist<br />
in the engine compartment, eliminates an assembly operation as<br />
well as reduces the potential for leakage between exhaust components. This<br />
turbomanifold also offers great flexibility to optimize the manifold design to enhance<br />
turbocharger performance. Wescast’s turbomanifolds are made of SiMo, CGI, Ni-Resist<br />
and stainless steel in order to meet diverse global customer needs.<br />
3.2 Stainless Steel Technologies<br />
Wescast utilizes two types of manufacturing technologies for the production of stainless<br />
steel products.<br />
In Stratford, Ontario, the Company utilizes a patented and licensed technology to develop<br />
and manufacture stainless steel products that have a thinner wall and smoother surface,<br />
which provides both lighter-weight and superior air-flow in manifold or turbocharger<br />
housing alternatives for our customers. These products are intended to capitalize on an<br />
industry trend toward lighter, more fuel-efficient vehicles. In 2011, the Company began<br />
an expansion to <strong>inc</strong>rease the capacity of the Stratford facility in order to meet production<br />
requirements that are expected to ramp up in early 2012.<br />
In addition, the Company will produce stainless steel components using its sand casting<br />
process in its operations located in Hungary and China to support customer demand for a<br />
conventional stainless steel product.<br />
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The manifolds, turbocharger housings and integrated turbomanifolds are designed, engineered<br />
and manufactured in close collaboration with the Company’s customers to meet their<br />
performance, quality and pricing requirements.<br />
Wescast’s exhaust manifolds, turbocharger housings and integrated turbomanifolds are produced<br />
in Wingham and Stratford Ontario; Oroszlany Hungary and Wuhan China. They are machined<br />
at the Company’s facilities in Wingham, Stratford and Strathroy Ontario, Sterling Heights and<br />
Macomb Township in Michigan, Oroszlany Hungary and Wuhan China.<br />
3.3 Business Unit Segments<br />
Significant economic recovery continued during 2011, but for some regions of the world, in<br />
particular Europe where various financial crises cast greater uncertainty in local economies, it is<br />
expected that a full recovery will take a number of years. For the automotive industry, abundant<br />
growth in vehicle sales is anticipated globally as the middle class in China, Brazil, and India<br />
continue to grow at unprecedented levels. In more developed regions, more modest growth is<br />
anticipated but significant opportunities are available for companies that can provide innovative<br />
solutions to meet upcoming safety, emissions, and fuel economy regulations.<br />
In Fiscal 2011, Wescast’s operations were conducted primarily in Canada, the United States,<br />
Hungary and China. For Fiscal 2011, consolidated sales to the Company’s three largest<br />
customers, amounted to 57% of consolidated sales, compared to 60% of consolidated sales, in<br />
2010.<br />
The North American powertrain segment is focused on the design and manufacture of exhaust<br />
system components primarily for sale to the Detroit 3 automakers as well as Tier 1 customers for<br />
car and light truck markets in North America and Europe. As a result, it is exposed to any loss in<br />
market share or less-than-projected light vehicle sales by the Detroit 3 automakers, for whom the<br />
Company supplies powertrain components. The Company’s powertrain operations in North<br />
America are well established and in fiscal 2011 represented approximately 49% of our<br />
consolidated gross sales <strong>inc</strong>luding inter-segment sales compared to 57% in the preceding fiscal<br />
year. The Company continues to pursue a diversification strategy that has led to new products<br />
and securing business with new customers.<br />
Sales by the Company’s North American operations, <strong>inc</strong>luding inter-segment sales, excluding<br />
prototype and tooling sales, were $140.3 million in fiscal 2011, a decrease of 9.0% compared to<br />
the $154.1 million reported in 2010. The North American operations experienced a year-overyear<br />
decrease in casting unit sales of 12.8% and machining volumes of 5.3% compared to 2010.<br />
According to industry estimates, North American light vehicle production <strong>inc</strong>reased by 9.8% in<br />
2011 and the Detroit 3 <strong>inc</strong>reased light vehicle production by 14.7% over the same time period.<br />
The decrease in sales experienced by the Company was the result of customer programs ending<br />
production while the start up of significant new programs that the Company was awarded were<br />
delayed by the customer and are in the lower volume stages of production. Also, sales to<br />
Chrysler decreased significantly in 2011 as certain programs that Wescast supplied in 2010 have<br />
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ended and Chrysler in certain cases has moved to engine designs that no longer require bolt-on<br />
manifolds. The Company believes that new program launches in stainless steel and the<br />
implementation of technologies in growth areas will offset these declines in the future. The<br />
Company launched 26 new customer parts in North America during 2011. The Company’s<br />
expansion of its stainless steel capacity is progressing well with new programs expected to<br />
launch in 2012. The stronger <strong>Canadian</strong> dollar against the U.S. dollar compared to 2010<br />
negatively impacted sales by $1.7 million. In addition, higher raw material pricing positively<br />
impacted the Company’s sales prices to its customers resulting in an <strong>inc</strong>rease in sales of $1.2<br />
million compared to 2010.<br />
The European powertrain segment is conducted through the Company’s subsidiary, Wescast<br />
Hungary Zrt. In Fiscal 2011, the European operation comprised approximately 33% of the<br />
Company’s consolidated gross sales <strong>inc</strong>luding inter-segment sales compared to 29% in the<br />
preceding fiscal year. The operation experienced a year-over-year <strong>inc</strong>rease in casting unit sales<br />
volume of 1.7% compared to 2010. Total units machined in 2011 were 11.3% higher than 2010<br />
as the Company’s European operations launched a considerable number of new customer<br />
programs during the year and will continue to grow given the business unit’s recently expanded<br />
material offerings to customers.<br />
Sales generated by the Company’s European operations, <strong>inc</strong>luding inter-segment sales, excluding<br />
prototype and tooling sales, were $95.1 million in 2011 compared to $78.6 million in 2010, an<br />
<strong>inc</strong>rease of 21.0%. Sales <strong>inc</strong>reased by $11.8 million or 15.0% due to <strong>inc</strong>reased volumes and<br />
changes in product mix and pricing compared to the prior year. The foreign exchange impact of<br />
a stronger Euro against the <strong>Canadian</strong> dollar compared to the prior year <strong>inc</strong>reased the <strong>Canadian</strong><br />
dollar amount of sales by $1.6 million. Pricing adjustments due to higher raw material prices<br />
that the Company passed on to its customers resulted in an <strong>inc</strong>rease in sales of $3.1 million.<br />
With a customer list that <strong>inc</strong>ludes Mercedes, BMW, Audi, Renault, Honeywell TT, BorgWarner<br />
TS, IHI, Volkswagen, Ford of Europe, PSA, Mitsubishi Heavy Industries, the Company believes<br />
the European powertrain segment represents Wescast’s best near-term opportunity to expand our<br />
customer base, on the basis of the Company’s ability to design, cast and machine manifolds,<br />
integrated turbomanifolds and turbocharger housings. The European business unit continues to<br />
focus on expanding its customer and product base by broadening its capability in multiple<br />
materials. The Company has been successful in winning new stainless steel and NiResist<br />
programs and is currently launching its first program in stainless steel.<br />
In Europe, a moderate decline is anticipated in 2012 and industry estimates anticipate a decrease<br />
of approximately 2.5% or 500,000 less vehicles being produced, for an estimated total of 19.3<br />
million vehicles in 2012.<br />
The Asian powertrain segment is conducted through the Company’s subsidiary, Wescast<br />
Industries (China) Co., Ltd. The Asian operation provides production and prototype parts for a<br />
number of customers within Asia (China, Japan and Malaysia) as well as exporting to other<br />
regions in support of our global customers (North America, Europe, Africa and South America).<br />
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The Asian operation comprised approximately 18% of consolidated sales, <strong>inc</strong>luding intersegment<br />
sales in fiscal 2011, compared to 14% in the preceding year.<br />
Sales generated by the Company’s Asian operations, excluding prototype and tooling sales, were<br />
$55.1 million in 2011 compared to $39.2 million 2010. This <strong>inc</strong>rease in sales was related to<br />
<strong>inc</strong>reased volumes. The operation experienced a year-over-year <strong>inc</strong>rease in casting unit sales<br />
volume of 11.9% compared to 2010. Total units machined in 2011 were 25.4% higher than<br />
2010. In addition, the product mix sold during fiscal 2011 versus fiscal 2010 was favourable to<br />
the Company and pricing adjustments due in part to higher raw material prices that the Company<br />
passed on to its customers resulted in an <strong>inc</strong>rease in sales.<br />
3.4 Credit Facilities<br />
North America<br />
The Company’s revolving term facility provided for $30.0 million in committed revolving<br />
advances, subject to the Company maintaining certain financial covenants and adhering to<br />
limitations on specified activities. Availability under the facility was also subject to a borrowing<br />
base comprised of a percentage of eligible receivables and inventory, certain real estate as well<br />
as the credit amount of advances outstanding to a maximum of the credit amount of balances on<br />
deposit with the lenders. At January 1, 2012, drawings under the facility <strong>inc</strong>luding bank<br />
indebtedness and outstanding letters of credit amounted to $1.7 million. At January 1, 2012,<br />
considering the borrowing base calculation, the bank indebtedness and the outstanding letters of<br />
credit, the Company had $23.4 million of unutilized credit available under the facility.<br />
At January 1, 2012 the Company was not in compliance with one financial covenant under the<br />
facility constituting an event of default. The event of default was subsequently waived by the<br />
lenders.<br />
On March 27, 2012, the Company’s revolving term facility was amended and extended to<br />
March, 2013. This credit facility provides for a maximum of $25.0 million in committed<br />
revolving advances, subject to the Company maintaining certain financial covenants and<br />
adhering to limitations on specified activities, <strong>inc</strong>luding the payment of dividends. Substantially<br />
all of the Company’s assets have been charged as security in favour of the Company’s lenders.<br />
Availability under the facility is also subject to a borrowing base comprised of a percentage of<br />
eligible receivables and inventory as well as the credit amount of advances outstanding to a<br />
maximum of the credit amount of balances on deposit with the lenders. The new facility<br />
<strong>inc</strong>ludes a leverage covenant that more appropriately matches the global nature of the<br />
Company’s operations and is guaranteed by certain material subsidiaries.<br />
The Company’s revolving term facility <strong>inc</strong>ludes a swingline which allows for an overdraft limit<br />
up to $5.0 million. The swingline bears interest at the lender’s prime bank rate, plus an<br />
applicable margin. The swingline does not have a fixed maturity date; however, it must be fully<br />
repaid by the expiry date of the revolving term facility.<br />
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Hungary<br />
The Company’s Hungarian subsidiary had an overdraft facility available of Euro 1.5 million<br />
($1.9 million CAD) that was drawn for Euro 0.3 million ($0.4 million CAD) as at January 1,<br />
2012. The overdraft facility was secured by a mortgage on the Hungarian real property, which<br />
had a carrying value of $24.2 million at January 1, 2012, and a guarantee from the Company.<br />
On March 23, 2012, the overdraft facility was cancelled and replaced by a new facility which<br />
provides for overdraft in Euros and Hungarian forints up to a total of Euro 3.0 million. The<br />
facility is secured by a mortgage on the Hungarian real property and a guarantee from the<br />
Company and bears interest at the rate of 1-day EURIBOR plus 2% or BUBOR + 1.5%. The<br />
facility expires in April, 2013.<br />
China<br />
At January 1, 2012 the Company’s Chinese subsidiary had a working capital line of credit<br />
available for a maximum of RMB 50 million ($8.1 million CAD) that was drawn for an amount<br />
of RMB 45 million ($7.3 million CAD). The line of credit bears interest based on the People’s<br />
Bank of China benchmark lending rate, which at January 1, 2012 was 6.56%, plus applicable<br />
margin and is secured by a mortgage on the Chinese real property which had a carrying value of<br />
$18.4 million at January 1, 2012. The facility provides 1 year term loans and matures in<br />
February, 2013.<br />
3.5 Sales and Marketing<br />
Wescast sells its products to North American OEMs located in Canada and the U.S., through its<br />
sales personnel located at a U.S. sales and distribution office in Michigan. Sales to OEMs in<br />
Europe are made through the Company’s sales office located in Germany. Sales to OEMs in<br />
Asia are made through its sales offices in China and Japan. Wescast also has a sales and design<br />
office in Canada, and sales representation in the United Kingdom and France.<br />
The Company typically receives a purchase order to produce a particular product for several<br />
model years. However, volume orders generally come into existence when Wescast receives<br />
releases from its customers under such purchase orders, authorizing the Company to produce and<br />
deliver specific quantities of the product. After a purchase order is received by the Company<br />
from an OEM, the actual volume produced under the purchase order in any given year is<br />
dependent upon the actual number of engines produced or planned to be produced by the OEM.<br />
Actual OEM production levels of a particular engine program may vary from OEM estimates<br />
and programs may be delayed or cancelled.<br />
The Company continues to see changes in the sourcing practices of its OEM customers as they<br />
relate to the Company’s products. Historically, a customer awarded a supplier with the<br />
commercial production requirements for a product related to a specific engine program.<br />
Assuming delivery, quality, and other performance criteria were maintained, the supplier would<br />
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retain and supply the product over the life of the engine program. Now, customers from time to<br />
time, and during the life of the engine program, market test their purchasing requirements<br />
globally to ensure they are continuing to receive globally competitive pricing. This accelerates<br />
the timeframe over which the Company’s current business can be impacted by global<br />
competition, <strong>inc</strong>luding the Company’s ability to recover capital invested.<br />
Continuing price reduction pressures from the Company’s customers could reduce profit<br />
margins. Historically, the Company has entered into, and will continue to enter into, supply<br />
agreements with its customers that provide for, among other things, price concessions over the<br />
term of the agreement. To the extent that price reductions continue in the future that are not<br />
offset through cost reductions, there could be an adverse affect on the Company’s future profit<br />
margins.<br />
3.6 Sources, Pricing and Availability of Raw Materials<br />
The Company’s production costs are dependent on the price of certain raw materials. 2011<br />
proved to be a challenging year for the Company as most raw material prices experienced<br />
upward pressure. We are expecting these prices to stabilize in 2012. Price <strong>inc</strong>reases in scrap<br />
steel, molybdenum, and nickel raw materials will cause the cost of production to rise. The<br />
Company has agreements in place with the majority of its customers that will help mitigate the<br />
impact of price fluctuations on these raw materials. As raw material prices rise and fall, the<br />
difference between the payment of these changes to the Company’s suppliers and the adjusted<br />
selling prices to the customers is subject to some delay effect. The Company believes the<br />
average scrap steel prices for 2012 will be similar to the averages experienced in 2011. Industry<br />
publications for molybdenum are predicting upward pricing as markets recover and demand<br />
<strong>inc</strong>reases. Supply side fundamentals are tight, any <strong>inc</strong>rease in demand could <strong>inc</strong>rease price. The<br />
Company believes the average molybdenum price for 2012 will be higher than the averages<br />
experienced in 2011.<br />
The charts on the next page illustrate the changes in molybdenum, scrap steel and scrap stainless<br />
steel prices s<strong>inc</strong>e the end of 2009. (Note: index price is the average price in effect at the end of the<br />
quarter.)<br />
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Molybdenum Prices in North America, Europe and China:<br />
While molybdenum is found in many areas of the world, three regions account for over 70 % of<br />
the world’s supply (North America, Chile and China). Our primary molybdenum supplier for our<br />
<strong>Canadian</strong> and Hungarian operations is North America based, with our facility in China buying<br />
from a local source. Our current supply agreements and a surplus in molybdenum inventories<br />
worldwide due to the current global economic situation are expected to ensure the Company of<br />
continued supply without interruption. With the current supply agreements that are in place,<br />
forecasted volumes are protected to ensure the continued supply to the Company without<br />
interruption.<br />
Scrap Steel Prices in North America, Europe and China:<br />
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Scrap Stainless Steel Prices in North America:<br />
S<strong>inc</strong>e Ontario is a net exporter of scrap steel, the Company believes that there is no overall<br />
supply risk. The Company obtains the majority of our scrap steel from two of the largest scrap<br />
processors in Ontario. The supply of scrap steel in Hungary is protected by the use of three<br />
suppliers, the largest of which has sufficient availability of scrap steel to supply well over 100%<br />
of the Company’s requirements. Current scrap steel requirements in China remain well below<br />
the capacity of the Company’s current supplier.<br />
The costs of raw materials used in the Company’s stainless steel facility in Stratford, Ontario are<br />
expected to remain stable through 2012, with the exception of Zircon Sand and Flour. Industry<br />
publications indicate that Zircon demand is double the available supply. China consumes 50%<br />
of the world’s supply. We have seen prices <strong>inc</strong>rease in 2011 and we expect the <strong>inc</strong>reases to<br />
continue in 2012.<br />
Total Rare Earth (TRE) are raw materials found in some of the alloys used in the Company's<br />
manufacturing process. China currently produces 97% of the world's supply of TRE, and the<br />
price rose drastically in 2011 as China reduced export quotas. With such restrictions, world<br />
demand for TRE currently exceeds world supply. The Company expects that the combination of<br />
higher prices and current demand will result in new mines opening to supply market demand.<br />
Pricing levels have recently declined but not to the levels seen prior to 2011.<br />
The Company continues to implement risk management strategies to help mitigate supply<br />
concerns on all raw materials.<br />
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3.7 Seasonality<br />
Historically, Wescast’s sales and production volumes are generally lower in the months of July<br />
and August of each year due to summer shutdowns and model changeovers by the OEMs. Also,<br />
production volumes are usually lower during the months of December and January of each year<br />
due to the shutdowns associated with the holiday seasons in North America, Europe and Asia.<br />
3.8 Intellectual Property Rights<br />
Wescast is licensed to use third party, intellectual property. The Company’s intellectual property<br />
rights are an important asset, but the loss of any particular right would not have a material effect<br />
on its business.<br />
In addition, the Company utilizes a licensed and patented production process in Stratford,<br />
Ontario. As this operation expands, a loss of this license could become material. This license is<br />
subject to termination by the licensor upon bankruptcy or insolvency of Wescast or of a material<br />
breach of the terms of the license if not remedied by Wescast.<br />
3.9 Competition<br />
Wescast is the world’s leading manufacturer of bolt-on cast exhaust manifolds. However, the<br />
exhaust manifold business is highly competitive. The Company believes that the primary<br />
elements of this competition are price, quality, performance and service, <strong>inc</strong>luding delivery time.<br />
Historically, the worldwide demand for manifolds has been satisfied by bolt-on manifold<br />
designs. However, sales of manifolds integrated into the cylinder head of the engine (integrated<br />
manifolds) continue to grow with the greatest impact felt in North America with a market share<br />
of 22% in 2011.<br />
Wescast’s manifold production continues to be focused on bolt-on cast manifolds. The demand<br />
for bolt-on exhaust manifolds is satisfied by two dist<strong>inc</strong>t types of designs: cast and fabricated. A<br />
cast manifold is produced using various grades of metal alloys, with different temperature and<br />
performance characteristics. Fabricated manifolds are manufactured by bending and welding<br />
steel tubes and stampings to meet the shape and style of the product design.<br />
In North America, the use of cast manifolds has traditionally dominated the marketplace. Cast<br />
manifold designs are currently estimated by the Company to represent approximately 53% of the<br />
overall demand for manifolds in North America. In other parts of the world, cast manifold<br />
designs are less dominant due to customer preferences and specific engine applications. In North<br />
America, Wescast holds a market share currently estimated at approximately 29% of the overall<br />
exhaust manifold market compared to 35% in 2010. Wescast experienced a reduced cast exhaust<br />
manifold market share in North America during 2011 compared to 2010. Several customer<br />
programs ended production while the start up of significant new programs that the Company was<br />
awarded were delayed by the customer and are in the lower volume stages of production. Also,<br />
sales to Chrysler decreased significantly in 2011 as certain programs that Wescast supplied in<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
2010 have ended and Chrysler in certain cases has moved to engine designs that no longer<br />
require bolt-on manifolds.<br />
North American OEM’s began implementing low cost country strategies in the early 2000’s to<br />
deal with the economic uncertainty in the automotive industry as well as emerging global low<br />
cost alternative supply. Although price still remains an important factor in the minds of the<br />
OEMs, reliability, quality, logistics costs and foreign exchange are now also major<br />
considerations for them.<br />
In Europe, the Company continues to hold a strong position and its manifold market share was<br />
12% in 2011 where the Company is the market leader in cast manifolds.<br />
The following charts illustrate the Company’s estimated share of total the exhaust manifold<br />
market in North America, Europe, and Asia:<br />
2011 Exhaust Manifold Market Share<br />
North America Europe Asia<br />
The supply base for fabricated manifolds in areas such as Europe, where historically, the market<br />
comprised of a larger number of automakers with smaller individual platform volumes, has<br />
evolved to <strong>inc</strong>lude a larger number of suppliers than is the case in North America. The European<br />
market is not dominated by any one supplier.<br />
The Company’s European operations continue to focus on expanding its customer and product<br />
base by broadening its capability in multiple materials. The Company has leveraged its<br />
experience in both NiResist and stainless steel from its China operations and Technical<br />
Development Centre in Canada in order to expand these capabilities in Europe and take<br />
advantage of a large and growing market for both NiResist and stainless steel applications. The<br />
Company acted on this strategic decision and invested in capital to manufacture these materials<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
in its existing facility. The Company has subsequently been successful in winning new stainless<br />
steel and NiResist programs and is launching its first stainless steel program.<br />
In Asia, the Company holds a minor share of the local markets; however, we anticipate this<br />
market share to <strong>inc</strong>rease in future years as certain new programs begin to serve the China<br />
domestic market. The Company’s Asian facility in Wuhan, China is successfully providing<br />
production and prototype parts for numerous customers <strong>inc</strong>luding a number of Asian customers.<br />
In addition, the China operation expanded its material capabilities to successfully supply<br />
prototypes for stainless steel products to several customers in anticipation of production of<br />
turbocharger housings in 2012. It is vital to expand our material offerings in order to compete in<br />
the rapidly growing requirement for higher temperature engine applications which require these<br />
more durable materials.<br />
3.10 Research and Development Activities<br />
Wescast’s research and development efforts are focused on exhaust components, materials<br />
research and process improvements. The Company’s technical development facility <strong>inc</strong>ludes<br />
metallurgical and materials testing laboratories. These labs are used to support customers’<br />
metallurgical needs and to test and evaluate high temperature materials. This knowledge is being<br />
integrated with advanced analytical engineering techniques to provide superior modeling<br />
capabilities and innovative technical solutions.<br />
Exploration of new ideas and concepts for improving the Company’s products is an ongoing<br />
process. The research and development team at Wescast also works very closely with the<br />
manufacturing team to collaborate and identify process improvements within the Company’s<br />
production environment. Wescast takes pride in utilizing our leadership in product design,<br />
engineering and manufacturing to quickly resolve complex technical issues.<br />
Research, development and design expenses were $4.2 million in Fiscal 2011 compared to $3.9<br />
million in fiscal 2010. The Company remains committed to being able to offer our customers the<br />
highest quality, technologically advanced products at globally competitive prices. As a result,<br />
the Company will maintain its commitment to fund research and development activities so that it<br />
may respond with innovative product technology solutions through the use of innovative<br />
manufacturing techniques.<br />
The development and commercialization potential of innovative ideas is managed by the<br />
Company’s Innovation Council which <strong>inc</strong>ludes cross-functional leaders from across the<br />
organization. Through this effort Wescast expects to commercialize new products and processes<br />
focused on future growth.<br />
3.11 Engineering & Design<br />
Employees at Wescast are committed to technical innovation in design and manufacturing and<br />
the Company works closely with our customers to find creative, cost-effective solutions.<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Wescast’s global sales and design centres provide local support to the OEMs, assisting in the<br />
development of advanced products that maximize engine, system and vehicle performance.<br />
Wescast’s research teams are continually striving to improve upon metallurgical alloy<br />
compositions and material properties to support higher exhaust gas temperatures while<br />
optimizing durability, weight and packaging characteristics.<br />
Wescast understands the need to be flexible and efficient as OEMs continue to demand quicker<br />
turnaround times in all development phases - concept through production. Wescast is able to<br />
employ innovative computer simulations, rapid prototyping and product testing, thereby<br />
improving product durability and air-flow management along with reducing customer<br />
developmental and testing lead-time.<br />
3.12 Technical Development Centre<br />
Wescast provides full-service engineering solutions in partnership with our customers from our<br />
Technical Development Centre (“TDC”) in Brantford, Ontario which houses the Company’s<br />
research and development, product design and diversification initiatives in one state-of-the-art<br />
facility. This allows the Company to accelerate our product development activities, provide<br />
advanced process development, and carry out focused and innovative research and development<br />
to support our growth initiatives. The TDC provides the capabilities to advance several of the<br />
Company’s initiatives <strong>inc</strong>luding welding, waste energy recovery, hybrid engine systems, as well<br />
as several other proprietary product initiatives. The building also houses a mini-foundry and a<br />
machine shop for making prototypes and for advanced engineering projects.<br />
3.13 Economic/Contract Dependence<br />
The Company is largely dependent upon three customers in North America, the Detroit 3<br />
automakers. As a result, it is exposed to any loss in market share or less-than-projected light<br />
vehicle sales by the Detroit 3 automakers, for whom the Company supplies powertrain<br />
components. The Company has pursued a diversification strategy that has led to securing<br />
business with new customers and products.<br />
The Company’s top five North American programs, as currently projected for 2012 based on unit<br />
production, are represented by the following OEM platforms:<br />
OEM Platform/Program<br />
Representative Vehicle Applications (Exhaust<br />
Manifolds, unless otherwise noted)<br />
GM GEN IV V8 Truck Silverado, Sierra, Suburban, Yukon, Avalanche, Escalade<br />
Ford 3.5L D35 V6 Taurus, Fusion, Edge, Flex, MKX, MKS, CX9, 6<br />
GM 3.6L Lambda/Epsilon V6 Acadia, Enclave, Traverse, Malibu<br />
Ford 5.0L Modular V8 F150<br />
Ford 6.7L Scorpion V8 F250, F350<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Further penetration of non-Detroit 3 customers would assist Wescast in diversifying our sales<br />
base and reducing this concentration of risk in North America. The Company believes the<br />
expansion of our global business structure and product mix will aid in these diversification<br />
efforts.<br />
The Company’s top five programs in Europe, as currently projected for 2012 based on unit<br />
production, are represented by the following OEM platforms:<br />
OEM Platform/Program Representative Vehicle Applications (Exhaust<br />
Manifolds, unless otherwise noted)<br />
MHI 1.6L DV6 4V DOHC I4 DV Turbocharger housing for Peugeot (207, Partner), Citroen<br />
(C3, C4)<br />
Ford 2.2/ 2.4L PUMA Peugeot (Boxer), Fiat (Ducato), Ford (Transit)<br />
Audi 2.5/2.8/3.0L TFSI 4V Audi A4, A6<br />
Renault 1.5L K9K III/IV/Gen 5/6 I4 Renault (Cleo, Laguna, Megane, Kangoo), Dacia Logan<br />
Renault 1.5L K9K 4V I4 Gen 6 Turbocharger housing for Renault (Laguna, Megane)<br />
The Company’s top five programs produced in Asia, as currently projected for 2012 based on<br />
unit production, are represented by the following OEM platforms:<br />
OEM Platform/Program<br />
Representative Vehicle Applications (Exhaust<br />
Manifolds, unless otherwise noted)<br />
Ford 3.7L Duratec V6 Ford F150, Mustang, Land Rover Discovery<br />
Ford FSAO ROCAM Ford Ka, Fiesta<br />
GM GMT 900 Gen II Chevrolet Silverado, Express, GMC Sierra, Savannah<br />
PSA 1.6L Pr<strong>inc</strong>e I4 Mini, Mini Cooper, Mini Countryman<br />
VW 1.4L 4V I4 Turbomanifold for VW Golf, Jetta, Beetle<br />
The Company believes it could be negatively impacted by government regulations, <strong>inc</strong>luding<br />
U.S. Corporate Average Fuel Economy standards or emissions regulations and <strong>Canadian</strong>,<br />
European, Asian and U.S. federal, prov<strong>inc</strong>ial, state and local environmental laws and regulations<br />
that have an adverse impact on the automotive industry or that promote the adoption of<br />
alternative powertrains. New product research at Wescast is focused on innovations that will<br />
allow the Company to take advantage of any such changes.<br />
The Company’s consolidated financial results are reported in <strong>Canadian</strong> dollars. A portion of the<br />
Company’s sales, operating costs and capital investment requirements are realized in U.S.<br />
dollars, Euros, Hungarian forints, Chinese renminbi, and other currencies. As a result,<br />
fluctuations in the exchange rate between foreign currencies and the <strong>Canadian</strong> dollar could affect<br />
the Company’s profitability. The Company has agreements in place with some of our customers<br />
Annual Information Form Page 26
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
to help protect against currency fluctuations and the resulting impact on the consolidated<br />
financial results.<br />
To the extent the Company is unable to negotiate freight adjustment agreements with its<br />
customers; the Company bears the impact of <strong>inc</strong>reasing shipping costs.<br />
During 2011, the Company launched a number of programs for customers in North America,<br />
Europe and Asia. In addition, the Company’s expansion of it stainless steel capacity in Stratford,<br />
Ontario is progressing well with new programs launched in the fourth quarter of 2011 and<br />
additional programs expected to launch in 2012. Similarly, the European business unit continue<br />
to focus on expanding its customer and product base by leveraging its capability in multiple<br />
materials <strong>inc</strong>luding NiResist and stainless steel. The Asian business unit continues to focus on<br />
growing its domestic sales in exhaust manifolds, turbocharger housings and integrated<br />
turbomanifolds in multiple materials. Financial performance of the business units has been and<br />
will continue to be impacted by the timeliness and the efficiency of these program launches.<br />
3.14 Environmental, Health & Safety<br />
Wescast believes it has established and maintains sound environmental practices. The ISO<br />
14001 Environmental Management System International Standard is now integrated into the<br />
culture of Wescast. The most significant benefit from implementing ISO 14001 is the ability to<br />
demonstrate, through third party verification, Wescast’s degree of success in continuous<br />
environmental improvement, prevention of pollution and compliance with applicable<br />
environmental laws. The Company monitors and controls the impact of all production processes,<br />
and has developed policies with the objective of assuring a safe and healthy environment for our<br />
employees and communities. For example, Wescast has indoor air and noise monitoring<br />
programs in place to ensure employee protection and shares those results with employees.<br />
External stack emissions are regulated by the local jurisdiction and Wescast’s ventilation systems<br />
have been designed to maintain external emissions below regulated limits. Wescast strives to<br />
reduce water usage wherever possible through maintaining and optimizing equipment and<br />
discharges are monitored to ensure compliance.<br />
The Company strives to recycle materials wherever possible. In order to be environmentally<br />
conscious and help offset rising raw material costs, metal chips from our machining facilities are<br />
re-melted in our foundry operations wherever possible. Wescast recycles or reuses almost 100%<br />
of the spent foundry materials either in-house or off-site.<br />
In addition to external third party verification audits, Environmental Compliance and<br />
Management System audits are conducted each year. Quarterly Environmental Management<br />
Reports to the Board of Directors and the Wescast Executive Leadership Team form part of the<br />
review of environmental performance of the Company which assists with the development and<br />
refinement of future environmental objectives. Through the Company’s standardized<br />
environmental key performance indicators at all of our facilities, it monitors opportunities to<br />
maximize recycling, reduce waste, and encourage the sharing of management’s best practices.<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Ongoing continuous improvement initiatives provide opportunities for energy efficiency, raw<br />
material usage and other environmental aspects and impacts.<br />
Wescast believes that existing environmental laws and regulations have not had a material effect<br />
on Wescast’s capital expenditures, earnings or competitive position. Wescast intends to continue<br />
environmental monitoring and measurement and maintaining emission control equipment, as<br />
well as making capital improvements related to environmental practice.<br />
All facilities are subject to annual internal health and safety audits to measure the effectiveness<br />
of our Health and Safety management system. As a result, Wescast believes that our global<br />
safety performance is better than the foundry sector industry average. Wescast’s lost time<br />
accident frequency (injuries per 100 employees) is approximately 45% lower than the foundry<br />
sector industry standard.<br />
3.15 Human Resources<br />
As at January 1, 2012, the Company had approximately 2,000 employees worldwide, working<br />
mainly in Canada, the United States, Hungary, and China. The Company’s manufacturing<br />
employees have specialized manufacturing process and tooling design expertise. The<br />
engineering and design staff have specialized design, analysis and testing expertise, and the<br />
research group has proprietary materials, process and product knowledge.<br />
Ultimately, the success of any company depends on the skill, commitment and engagement of its<br />
employees. Wescast has its own unique system for management known throughout the<br />
organization as the Wescast Way. The result of this is that our employees are highly engaged<br />
and have been effective in managing the Company through the recent downturn in the pursuit of<br />
excellent performance. This competitive advantage results in a winning organization that is able<br />
to provide the best value to our customers. We believe that best value is created by our<br />
employees in a lean enterprise that is innovative. Our employees operate using the four Scanlon<br />
Pr<strong>inc</strong>iples of: (i) Equity – fairness to all stakeholders and shared beliefs; (ii) Participation –<br />
working together in a team effort that creates synergy; (iii) Identity – shared purpose and values,<br />
knowing the current reality and doing the right job effectively; and (iv) Competence – personal,<br />
professional and organizational. Being a lean enterprise means we strive to eliminate waste<br />
through continuous improvement and innovation is defined as bringing both <strong>inc</strong>remental and<br />
quantum improvements to products, processes and materials.<br />
The Company has collective labour agreements in place at three of its production facilities in<br />
Ontario, Canada. Two contracts were renegotiated in 2010 for 2.5 and 3 year periods. One of<br />
these contracts expires on August 31, 2012. The third collective agreement related to the casting<br />
facility in Wingham, Ontario was renegotiated in 2011 for a 3 year period. There is no collective<br />
labour agreement in place at the Company’s production facilities in Sterling Heights, Michigan,<br />
Macomb Township, Michigan or Stratford, Ontario.<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Employees in Oroszlany Hungary are covered by a labour contract that is negotiated annually.<br />
The agreement applies to all employees except senior management and is binding for all<br />
employees even though they do not have to be members of the union to work at Wescast.<br />
In Wuhan, China the employees have an employee association that represents all levels of<br />
employees where they can provide input on policies and procedures. There is no formal labour<br />
contract that is negotiated.<br />
The Company strives to maintain good relationships with its employees and has a history of<br />
resolving labour issues amicably.<br />
3.16 Pr<strong>inc</strong>ipal Properties<br />
The Company’s pr<strong>inc</strong>ipal facilities as at January 1, 2012 are listed below:<br />
Size<br />
(sq. ft.)<br />
225,000<br />
161,400<br />
160,000<br />
125,600<br />
121,400<br />
121,000<br />
80,000<br />
79,400<br />
78,000<br />
70,260<br />
2840 Oroszlany,<br />
Szent Borbala u. 16, Hungary<br />
Facilities Details<br />
Location Ownership Use<br />
799 Zhushanhu Ave.<br />
Wuhan Economic Tech. Development<br />
Zone, Hubei, China<br />
200 Water Street<br />
Wingham, Ontario<br />
R.R. #4,<br />
Wingham, Ontario<br />
100 Water Street<br />
Wingham, Ontario<br />
28648 Centre Road,<br />
Strathroy, Ontario<br />
6300 –18 ½ Mile Rd.,<br />
Sterling Heights, Michigan<br />
130 Wright Blvd.,<br />
Stratford, Ontario<br />
150 Savannah Oaks Drive,<br />
Brantford, Ontario<br />
51362 Quadrate Drive,<br />
Macomb Township, Michigan<br />
Owned<br />
Owned<br />
Cast, machine and assemble exhaust<br />
manifolds, turbocharger housings and<br />
integrated turbomanifolds<br />
Cast, machine and assemble exhaust<br />
manifolds, turbocharger housings and<br />
integrated turbomanifolds<br />
Owned Cast exhaust manifolds<br />
Owned<br />
Formerly used to cast exhaust manifolds;<br />
available for future production<br />
Owned Machine and assemble exhaust manifolds<br />
Owned Machine and assemble exhaust manifolds<br />
Leased Machine and assemble exhaust manifolds<br />
Owned<br />
Owned<br />
Enhanced stainless steel investment<br />
casting technology <strong>inc</strong>luding manifolds<br />
turbocharger housings and other<br />
powertrain products<br />
Technical Development Centre and<br />
corporate support group<br />
Leased Machine and assemble exhaust manifolds<br />
Annual Information Form Page 29
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
4. RISK FACTORS<br />
See pages 37-40 of the 2011 MD&A which are <strong>inc</strong>orporated by reference into this AIF.<br />
5. DESCRIPTION OF CAPITAL STRUCTURE<br />
5.1 Authorized Capital<br />
The classes and maximum number of shares that the Company is authorized to issue are:<br />
(i) an unlimited number of preference shares, issuable in series (the “Preference Shares”);<br />
(ii) an unlimited number of Class A subordinate, voting shares, no par value (“Class A<br />
Shares”); and<br />
(iii) 9,000,000 Class B Common Shares, no par value (“Class B Shares”).<br />
There are no Preference Shares currently issued and outstanding. As of March 29, 2012, there<br />
were 5,864,399 Class A Shares and 7,376,607 Class B Shares issued and outstanding.<br />
5.2 Dividends<br />
The holders of Class A Shares and Class B Shares are entitled to receive dividends and the<br />
Company shall pay dividends, as and when declared by the Board of Directors. All dividends<br />
declared on both the Class A Shares and Class B Shares shall be paid in equal amounts per share<br />
and at the same time. The Preference Shares are entitled to priority over the Class A Shares and<br />
Class B Shares and over any other shares of any other class of the Company ranking junior to the<br />
Preference Shares with respect to priority in the payment of dividends and the return of capital<br />
and the distribution of assets in the event of the liquidation, dissolution or winding-up of the<br />
Company, whether voluntary or involuntary, or any other distribution of the assets of the<br />
Company among our shareholders for the purpose of winding up its affairs.<br />
5.3 Dissolution<br />
In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or<br />
involuntary, or any other distribution of assets of the Company among our shareholders for the<br />
purpose of winding up its affairs, subject to the prior rights of the holders of any shares ranking<br />
senior to the Class A Shares and Class B Shares with respect to priority in the distribution of<br />
assets upon liquidation, dissolution or winding-up, the holders of the Class A Shares and Class B<br />
Shares then outstanding shall be entitled to receive the remaining property and assets of the<br />
Company in equal amounts per share and at the same time.<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
5.4 Voting Rights<br />
The holders of the Class A Shares are entitled to receive notice of and to attend all meetings of<br />
the shareholders of the Company and have one vote for each Class A Share held at all meetings<br />
of the shareholders of the Company, except for meetings at which only holders of another<br />
specified class or series of shares of the Company are entitled to vote separately as a class. The<br />
holders of the Class A Shares are entitled, voting separately as a class, to elect two directors at<br />
each annual meeting of the shareholders of the Company.<br />
The holders of the Class B Shares are entitled to receive notice of and to attend all meetings of<br />
the shareholders of the Company and have five votes for each Class B Share held at all meetings<br />
of the shareholders of the Company, except for meetings at which only holders of another<br />
specified class or series of shares of the Company are entitled to vote separately as a class or<br />
series.<br />
13.7% of the aggregate voting rights (Class A Shares and Class B Shares together) are<br />
represented by Class A Shares as of March 29, 2012.<br />
Any holders of Preference Shares as a class shall not be entitled to receive notice of, to attend or<br />
to vote at any meeting of the shareholders of the Company.<br />
5.5 Conversion Rights<br />
The Class B Shares may be converted at any time by the holder or holders into fully-paid Class<br />
A Shares on the basis of one Class A Share for each Class B Share converted, provided, that in<br />
the event of liquidation, dissolution or winding-up of the Company, such right of conversion<br />
shall cease and expire on the date of such liquidation, dissolution or winding-up.<br />
5.6 Takeover Bid Protection<br />
The Company and all of the holders of Class B Shares entered into an agreement on November<br />
1, 1994 (as amended by agreement dated January 1, 1996, the “Coattail Agreement”) with a<br />
trustee in order to provide the holders of Class A Shares with specified rights in the event that a<br />
takeover bid (as defined under Ontario securities law) having certain characteristics is made for<br />
the Class B Shares. A takeover bid is generally defined under Ontario securities laws as an offer<br />
to acquire outstanding equity or voting shares by an offeror who, after the bid, would own more<br />
than 20% of the shares of the class which is the subject of the bid. Under securities law<br />
applicable in Canada, and apart from the Coattail Agreement, an offer to purchase Class B<br />
Shares would not necessarily require that an offer be made to purchase Class A Shares.<br />
6. DIVIDEND POLICY<br />
The declaration and payment of dividends is at the sole discretion of the Board of Directors and<br />
is subject to, among other things, current financial, economic, and operating conditions and other<br />
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<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
relevant circumstances, <strong>inc</strong>luding future expected earnings, cash flow, capital requirements and<br />
the financial condition of the Company. When the Board of Directors determines that a dividend<br />
should be declared, the Company’s policy is to target our annual dividend to approximately 10%<br />
of the previous year’s net earnings.<br />
Other than restrictions which may be imposed by the Company’s credit facility based on loanrelated<br />
covenants, there are no contractual restrictions on the Company that would prevent it<br />
from paying a dividend.<br />
In light of the difficult automotive market conditions that the Company faced in 2008, the<br />
Company’s Board of Directors decided to suspend the payment of dividends on February 26,<br />
2008.<br />
7. MARKET FOR SECURITIES<br />
7.1 Trading Price and Volume<br />
The Class A Shares are listed and posted for trading on the TSX under the trading symbol<br />
WCS.A. The Class B Shares are not listed on a stock exchange.<br />
The following table sets forth the reported high and low prices and trading volumes of the Class<br />
A Shares on the TSX for the periods indicated.<br />
Common Shares (WCS.A)<br />
Month High ($) Low ($) Total Volume Traded<br />
2011/December 6.91 6.05 103,306<br />
2011/November 8.90 6.75 65,172<br />
2011/October 9.40 8.00 76,136<br />
2011/September 12.20 7.60 453,282<br />
2011/August 10.92 8.80 99,502<br />
2011/July 11.92 9.30 270,285<br />
2011/June 9.44 8.40 160,652<br />
2011/May 8.93 8.45 119,989<br />
2011/April 8.82 8.17 200,613<br />
2011/March 8.61 5.70 205,638<br />
2011/February 6.50 5.71 87,618<br />
2011/January 6.99 5.99 70,564<br />
Annual Information Form Page 32
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
8. DIRECTORS AND OFFICERS<br />
8.1 Directors<br />
The following table sets out the directors of Wescast as at March 29, 2012 and, for each director,<br />
his or her prov<strong>inc</strong>e or state and country of residence, pr<strong>inc</strong>ipal occupation during the 5 preceding<br />
years and the period each director has served as a director. Each director will hold office until<br />
the next annual meeting of shareholders of the Company or until his or her respective successor<br />
is elected or appointed in accordance with applicable law and the Company’s by-laws.<br />
Name and Prov<strong>inc</strong>e/State<br />
and Country of Residence<br />
Edward G. Frackowiak (4)<br />
Ontario, Canada<br />
William R. LeVan<br />
Ontario, Canada<br />
(2) (3)<br />
J. Dwane Baumgardner<br />
(1)(3)(6)(10)<br />
Michigan, United States<br />
Hugh W. Sloan Jr.<br />
Michigan, United States<br />
James R. Barton<br />
Ontario, Canada<br />
(1) (2)(3) (7) (10)<br />
(1) (2)(3)(9)(10)<br />
Gerald A. Hooper (1)(3)(5)(10)<br />
Ontario, Canada<br />
Director<br />
S<strong>inc</strong>e Position<br />
1992 Chairman and<br />
Chief Executive<br />
Officer and<br />
Director<br />
Pr<strong>inc</strong>ipal Occupation During the Five<br />
Preceding Years<br />
Chairman & CEO of the Company s<strong>inc</strong>e 2004.<br />
Executive Chairman of the Company from<br />
2003 to 2004. Prior to that, Mr. Frackowiak<br />
was Vice President and General<br />
Counsel/Canada of First American Title<br />
Insurance Company (title insurance company).<br />
1991 Director Mr. LeVan is currently President of LightBoss<br />
Inc. (a manufacturer of energy reduction<br />
solutions for industrial and commercial<br />
lighting). Prior to that, he was Vice President,<br />
Technology of the Company until January 13,<br />
2004.<br />
1998 Director Retired Vice Chairman and President, Magna<br />
Donnelly Corporation (automotive parts<br />
supplier). Prior to that, Mr. Baumgardner was<br />
Chairman and CEO of Donnelly Corporation<br />
for approximately 20 years.<br />
1998 Director Chairman of the Board of Spartan Motors Inc.<br />
(a specialty vehicle & chassis manufacturer).<br />
Formerly, Deputy Chairman of the Board of<br />
Directors of Woodbridge Foam Corporation<br />
(automotive parts supplier) s<strong>inc</strong>e 1998. Prior to<br />
that, Mr. Sloan was President of the<br />
Woodbridge Automotive Group (automotive<br />
parts supplier).<br />
2004 Lead<br />
Independent<br />
Director<br />
Retired Chief Operating Officer, DuPont<br />
Canada Inc. (a diversified science company<br />
serving the agricultural, electronic,<br />
communications, safety and protection<br />
markets).<br />
2006 Director Chairman of The Economical Insurance Group<br />
(a property and casualty insurance company).<br />
Annual Information Form Page 33
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Name and Prov<strong>inc</strong>e/State<br />
and Country of Residence<br />
Richard E. Legate (8)<br />
Ontario, Canada<br />
(1) Member of the Audit Committee.<br />
Director<br />
S<strong>inc</strong>e Position<br />
2008 Chief Operating<br />
Officer and<br />
Director<br />
(2) Member of the Nominating and Corporate Governance Committee.<br />
(3) Member of the Human Resources Committee.<br />
Pr<strong>inc</strong>ipal Occupation During the Five<br />
Preceding Years<br />
From 2003 to 2005, Mr. Hooper was Executive<br />
Vice President of Maple Leaf Foods (a global<br />
food processing company) and prior to 2003,<br />
Executive Vice President and Chief Financial<br />
Officer of Schneider Corporation.<br />
Chief Operating Officer of the Company s<strong>inc</strong>e<br />
January 2008. Prior to that, Mr. Legate was<br />
Vice President Automotive Products at Dofasco<br />
Tubular Product Inc., (2006-2008). From 2001<br />
to 2005 he was President and CEO of Tiercon<br />
Holdings Limited (an automotive parts<br />
supplier). A receiver manager was appointed to<br />
Tiercon Holdings Limited on or about April 15,<br />
2005 and Mr. Legate resigned on April 16,<br />
2005.<br />
(4) Other than the Special Committee, Mr. Frackowiak attends all committee meetings at the invitation of each<br />
committee.<br />
(5) Mr. Hooper is Chair of the Audit Committee.<br />
(6) Mr. Baumgardner is Chair of the Human Resources Committee.<br />
(7) Mr. Sloan is Chair of the Nominating and Corporate Governance Committee.<br />
(8) Mr. Legate attends the Audit Committee and Human Resources Committee at the invitation of each<br />
Committee.<br />
(9) Mr. Barton is Chair of the Special Committee.<br />
(10) Member of the Special Committee.<br />
Annual Information Form Page 34
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
8.2 Officers<br />
The executive officers of Wescast as at March 29, 2012 were as follows:<br />
Name and Prov<strong>inc</strong>e/State<br />
and Country of Residence Position<br />
Edward G. Frackowiak<br />
Ontario, Canada<br />
Richard E. Legate<br />
Ontario, Canada<br />
Teresa H. Fortney<br />
Ontario, Canada<br />
James W. McNaughton<br />
Ontario, Canada<br />
Alan V. Blignaut<br />
Ontario, Canada<br />
Pr<strong>inc</strong>ipal Occupation During the<br />
Five Preceding Years<br />
Chairman and Chief Executive Officer Chairman and CEO of the Company<br />
s<strong>inc</strong>e May 2004. Executive Chairman<br />
of the Company from May 2003 to<br />
May 2004. Prior to that, Mr.<br />
Frackowiak was Vice President and<br />
General Counsel/Canada of First<br />
American Title Insurance Company<br />
(title insurance company).<br />
Chief Operating Officer Chief Operating Officer of the<br />
Company s<strong>inc</strong>e January 2008. Prior to<br />
that, Mr. Legate was Vice President<br />
Automotive Products at Dofasco<br />
Tubular Product Inc., (2006-2008).<br />
From 2001 to 2005 he was President<br />
and CEO of Tiercon Holdings Limited<br />
(automotive parts supplier).<br />
Chief Financial Officer Chief Financial Officer of the<br />
Company s<strong>inc</strong>e July 2010. Prior to<br />
that, Ms. Fortney was Vice President<br />
of Finance and CFO at McCormick<br />
Canada, (2009-2010). Prior to that she<br />
was Senior Vice President, Finance –<br />
Consumer Foods with Maple Leaf<br />
Foods.<br />
Vice President, Sales & Innovation Vice President, Sales & Innovation<br />
s<strong>inc</strong>e October 2008. Vice President,<br />
Strategic Development of the<br />
Company from October 2005 to<br />
October 2008. Prior to that Mr.<br />
McNaughton was Director of<br />
Corporate Development of the<br />
Company.<br />
Vice President, Human Resources Vice President, Human Resources of<br />
the Company s<strong>inc</strong>e July 2006. Prior to<br />
that Mr. Blignaut held Director,<br />
Human Resource positions with Maple<br />
Leaf Foods (2006) and Apotex Inc.<br />
(2003 -2005). From 1998 until 2003<br />
he held Senior Human Resource roles<br />
with Cognis Gmbh.<br />
Annual Information Form Page 35
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Name and Prov<strong>inc</strong>e/State<br />
and Country of Residence Position<br />
Thomas K. Shea<br />
Ontario, Canada<br />
Pr<strong>inc</strong>ipal Occupation During the<br />
Five Preceding Years<br />
Director of Corporate Finance Director of Corporate Finance of the<br />
Company s<strong>inc</strong>e 2005.<br />
The number and percentage of securities of each class of voting securities of the Company<br />
beneficially owned, directly or indirectly, or over which control or direction was exercised, by all<br />
directors and officers of the Company as a group, was 46,738 shares or 0.8% of the Class A<br />
Shares as at March 29, 2012.<br />
9. LEGAL PROCEEDINGS<br />
Management is not aware of any current or contemplated material legal proceedings to which the<br />
Company is a party or which any of our property is the subject which requires disclosure herein.<br />
10. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS<br />
In 2011, the Company paid freight for delivery of our products within North America of $2.3<br />
million to a related company, Wingex Limited, 30% of whose shares are owned by RyVan Inc., a<br />
holding company 25% of whose shares are beneficially owned by certain members of the LeVan<br />
family (<strong>inc</strong>luding Mr. William R. LeVan, a director of the Corporation). Mr. Edward G.<br />
Frackowiak, the Chairman and Chief Executive Officer of the Company is also married to one of<br />
the LeVan children who owns 25% of the shares of RyVan Inc. through a personal holding<br />
company. RyVan Inc.’s offices are located in Brantford, Ontario. These transactions were<br />
measured at the exchange amount which represents fair value.<br />
11. TRANSFER AGENT AND REGISTRAR<br />
The registrar and transfer agent for the Company’s Class A Shares is Computershare Investor<br />
Services Inc. The register of the Class A Shares is maintained at Computershare’s office in<br />
Toronto (100 University Avenue, 9 th Floor, Toronto, Ontario, M5J 2Y1). The Company acts as<br />
its own transfer agent and registrar for the Class B Shares. The register of the Class B Shares is<br />
maintained at the Company’s head office in Brantford, Ontario. The Class B Shares are not<br />
traded or quoted on any stock exchange.<br />
12. MATERIAL CONTRACTS<br />
The Company has not entered into any material contracts, other than contracts entered into in the<br />
ordinary course of business, on or after January 1, 2012 or that before January 1, 2012 remains in<br />
effect, other than the agreements related to the Coattail agreement dated November 1, 1994 and<br />
the amendment of the agreement dated January 1, 1996, both of which have been filed on the<br />
Company’s public record at www.sedar.com.<br />
Annual Information Form Page 36
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
13. NAMES AND INTERESTS OF EXPERTS<br />
The Company’s auditors are Deloitte & Touche LLP, 1005 Skyview Drive, Suite 202,<br />
Burlington, Ontario, L7P 5B1. The Company’s consolidated financial statements as at January<br />
1, 2012 have been filed under National Instrument 51-102-Continuous Disclosure Obligations in<br />
reliance on the report of Deloitte & Touche LLP, which is independent in accordance with its<br />
rules of professional conduct in Ontario.<br />
14. CODE OF CONDUCT<br />
The Company has established a Code of Conduct applicable to all employees, officers and<br />
directors which has been filed on the Company’s public record at www.sedar.com. The Code of<br />
Business Conduct is available without charge by contacting the Company at 150 Savannah Oaks<br />
Drive, Brantford, Ontario, N3T 5L8, or by email to corp.secretary@<strong>wescast</strong>.com.<br />
15. ADDITIONAL INFORMATION<br />
Additional information about Wescast is available on the Company’s web site at<br />
www.<strong>wescast</strong>.com, and on SEDAR (System for Electronic Document Analysis and Retrieval) at<br />
www.sedar.com.<br />
Additional information with respect to Wescast, <strong>inc</strong>luding directors’ and officers’ remuneration<br />
and indebtedness, pr<strong>inc</strong>ipal holders of Wescast’s securities and securities authorized for issuance<br />
under equity compensation plans, where applicable, is contained in Wescast’s management<br />
information circular for its most recent annual meeting of shareholders that involved the election<br />
of directors.<br />
Additional financial information is provided in the Company’s comparative audited consolidated<br />
financial statements and MD&A in the 2011 Annual Report of Wescast for Fiscal 2011.<br />
Copies of the AIF, as well as copies of the most recent annual report of Wescast and the most<br />
recent management information circular may be obtained from:<br />
Wescast Industries Inc.<br />
150 Savannah Oaks Drive<br />
Brantford Ontario Canada N3T 5L8<br />
Telephone: 519-750-0000<br />
Fax: 519-720-1629<br />
Email: corp.secretary@<strong>wescast</strong>.com<br />
Annual Information Form Page 37
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
Additional Information Prescribed by Form 52-110F1<br />
1. Audit Committee Charter<br />
See Appendix “A” attached hereto<br />
2. Composition of the Audit Committee<br />
During Fiscal 2011, the Audit Committee of the Company was composed of the following four<br />
members: Gerald A. Hooper, Hugh W. Sloan, Jr., J. Dwane Baumgardner, and James R. Barton.<br />
The responsibilities and duties of the Committee are set out in the Committee’s charter, the text<br />
of which is set forth in Appendix A to this AIF.<br />
3. Financial Literacy<br />
The Board of Directors believes that the composition of the Audit Committee reflects an<br />
appropriate level of financial literacy and expertise. Each member of the Audit Committee has<br />
been determined by the Board to be “independent” and “financially literate” as such terms are<br />
defined under National Instrument 52-110 - Audit Committees.<br />
Mr. Hooper has over 30 years of financial experience. He is a Chartered Accountant and<br />
member of the Institute of Chartered Accountants of Ontario and was a partner with KPMG<br />
LLP’s predecessor, Thorne Riddell. He was a financial executive for many years, and recently<br />
retired as Executive Vice President, Maple Leaf Foods. Mr. Hooper is also a past lecturer in<br />
advanced accounting at Wilfrid Laurier University.<br />
Mr. Sloan joined the Woodbridge Group of companies in 1985 and retired as Deputy Chairman<br />
of the Board of Directors of Woodbridge Foam Corporation. He is also a director of Manulife<br />
Financial Corporation. Mr. Sloan is also a director of Spartan Motors Inc.<br />
Mr. Baumgardner served as President & Chief Operating Officer of Donnelly Corporation in<br />
1980 and was named Chairman of the Board and Chief Executive Officer in 1986. Magna<br />
Corporation acquired Donnelly Corporation in 2002. Mr. Baumgardner retired as Vice<br />
Chairman and President, Magna Donnelly in October 2003.<br />
Mr. Barton joined DuPont Canada Inc. in 1970 and retired in 2004 as Chief Operating Officer<br />
with accountability for the performance of the company in all aspects <strong>inc</strong>luding the preparation<br />
and evaluation of financial statements. He was also a member of DuPont’s corporate pension<br />
management team.<br />
4. Audit Committee – Pre-Approval Policies and Procedures<br />
The Company’s Audit Committee is responsible for overseeing the work of the independent<br />
auditors and considering whether the provision of services, other than audit services, is<br />
compatible with maintaining the auditors’ independence. The Company has adopted a policy<br />
Annual Information Form Page 38
<strong>wescast</strong> <strong>industries</strong> <strong>inc</strong>.<br />
regarding the Audit Committee’s pre-approval of all audit and permissible non-audit services<br />
provided by the independent auditors. The Audit Committee determines, at least once a year,<br />
which audit services, audit-related services, tax services and other permissible non-audit services<br />
to pre-approve and creates a list of such pre-approved services, some with pre-approved fee<br />
thresholds.<br />
At each regularly scheduled Audit Committee meeting, senior management provides the Audit<br />
Committee with the following:<br />
A report summarizing the services, or grouping of related services,<br />
<strong>inc</strong>luding fees, provided by the independent auditor; and<br />
An updated projection for the current fiscal year, presented in a manner<br />
consistent with the proxy disclosure requirements, of the estimated annual<br />
fees to be paid to the independent auditor.<br />
All fees paid to Wescast’s external auditors in Fiscal 2011 were approved by Wescast’s Audit<br />
Committee.<br />
5. Auditors’ Service Fees<br />
Deloitte & Touche LLP has been the Company’s auditor s<strong>inc</strong>e February 26, 2003. The<br />
approximate fees billed for professional services rendered by Deloitte & Touche LLP, Wescast’s<br />
pr<strong>inc</strong>ipal auditor for Fiscal 2011 and Fiscal 2010, are set out below:<br />
Audit Fees (1)<br />
Audit Related Fees (2)<br />
Tax Fees (3)<br />
Fees billed by Deloitte &<br />
Touche LLP in Fiscal 2011 ($)<br />
Fees billed by Deloitte &<br />
Touche LLP in Fiscal 2010 ($)<br />
365,229 370,781<br />
108,122 83,000<br />
272,427 313,593<br />
All Other Fees (4) 217,315 1,060<br />
Total 963,093 768,434<br />
(1) For the audit of Wescast’s annual financial statements and services normally provided by the pr<strong>inc</strong>ipal auditor in<br />
connection with Wescast’s statutory and regulatory filings.<br />
(2) For assurance and related services that are reasonably related to the performance of the audit and are not reported<br />
under Audit Fees, <strong>inc</strong>luding services in connection with IFRS audit procedures, internal controls extended audit<br />
services, accounting and various agreed upon procedures.<br />
(3) For tax compliance and advice, planning and return preparation and for services related to the submission and<br />
receipt of investment tax credits earned from Scientific Research and Experimental Development (SR&ED)<br />
qualifying expenditures. These fees <strong>inc</strong>lude administration charges and out-of-pocket costs.<br />
(4) All Other Fees <strong>inc</strong>ludes fees related to the Board’s review of strategic alternatives.<br />
Annual Information Form Page 39
Appendix A<br />
AUDIT COMMITTEE CHARTER<br />
By appropriate resolution of the Board of Directors of Wescast Industries Inc. (the<br />
“Board”), the Audit Committee (the “Committee”) has been established as a standing<br />
committee of the Board with the terms of reference set forth below. Unless the context<br />
requires otherwise, the term “Company” refers to Wescast Industries Inc. and its<br />
subsidiaries and the term “internal auditor” refers to the Director of Audit Services of the<br />
Company.<br />
1. PURPOSE<br />
1.1 The Committee’s purpose is to:<br />
(a) assist Board oversight of:<br />
(i) the integrity of the Company’s financial statements, Management’s<br />
Discussion and Analysis of Operating Performance (“MD&A”)<br />
and other financial reporting;<br />
(ii) the Company’s compliance with legal and regulatory requirements;<br />
(iii) the external auditor’s qualifications, independence and<br />
performance;<br />
(iv) the performance of the Company’s internal audit function and<br />
internal auditor;<br />
(v) the communication among the external auditor, the internal<br />
auditor, management and the Board;<br />
(vi) the review and approval of any related party transactions; and<br />
(vii) any other matters as defined by the Board; and<br />
(b) prepare and/or approve any report that is required by law or regulation to<br />
be <strong>inc</strong>luded in any of the Company’s public disclosure documents relating<br />
to the Committee.<br />
2. COMMITTEE MEMBERSHIP<br />
2.1 Number of Members – The Committee shall consist of not fewer than three<br />
members.<br />
2.2 Independence of Members – Each member of the Committee shall:<br />
(a) be a member of the Board;<br />
(b) not be an officer or employee of the Company or any of its affiliates;<br />
Annual Information Form Page 40
(c) satisfy the independence requirements applicable to members of audit<br />
committees under Multilateral Instrument 52-110 – Audit Committees of<br />
the <strong>Canadian</strong> Securities Administrators (“MI 52-110”), and other<br />
applicable laws and regulations; and<br />
(d) not have participated in the preparation of the financial statements of the<br />
Company or any current subsidiary at any time during the past three years.<br />
2.3 Financial Literacy – Each member of the Committee shall satisfy the financial<br />
literacy requirements or definitions applicable to members of audit committees under MI<br />
52-110 and other applicable laws and regulations.<br />
2.4 Annual Appointment of Members - The Committee and its Chair shall be<br />
appointed annually by the Board and each member of the Committee shall serve at the<br />
pleasure of the Board until he or she resigns, is removed or ceases to be a Director of the<br />
Company.<br />
3. COMMITTEE MEETINGS<br />
3.1 Time and Place of Meetings - The time and place of the meetings of the<br />
Committee and the calling of meetings and the procedure in all things at such meetings<br />
shall be determined by the Committee; provided, however, that the Committee shall meet<br />
at least quarterly, a majority of the members of the Committee shall constitute a quorum,<br />
and the Committee shall maintain minutes or other records of its meetings and activities.<br />
3.2 In Camera Meetings - As part of each quarterly meeting of the Committee, and at<br />
such other times as the Committee deems appropriate, the Committee shall meet<br />
separately with each of the persons set forth below to discuss and review specific issues<br />
as appropriate:<br />
(a) management;<br />
(b) the external auditor; and<br />
(c) the internal auditor.<br />
4. COMMITTEE AUTHORITY AND RESOURCES<br />
4.1 Direct Channels of Communication - The Committee shall have direct channels of<br />
communication with the Company’s internal and external auditors to discuss and review<br />
specific issues as appropriate.<br />
4.2 Retaining and Compensating Advisors – The Committee, or any member of the<br />
Committee with the approval of the Committee, may retain at the expense of the<br />
Company such independent legal, accounting (other than the external auditor) or other<br />
advisors on such terms as the Committee may consider appropriate and shall not be<br />
required to obtain the approval of the Board in order to retain or compensate any such<br />
advisors.<br />
Annual Information Form Page 41
4.3 Funding – The Company shall provide for appropriate funding, as determined by<br />
the Committee, for payment of compensation of the external auditor and any advisor<br />
retained by the Committee under Section 4.2 of this Charter and for ordinary<br />
administrative expenses of the Committee that are necessary or appropriate in carrying<br />
out its duties.<br />
4.4 Investigations – The Committee shall have unrestricted access to Company<br />
personnel and documents and shall be provided with the resources necessary to carry out<br />
its responsibilities.<br />
5. REMUNERATION OF COMMITTEE MEMBERS<br />
5.1 Director Fees Only - No member of the Committee may accept, directly or<br />
indirectly, fees from the Company or any of its subsidiaries other than remuneration for<br />
acting as a member of the Committee, the Board, any other committee of the Board or a<br />
part-time chair or vice-chair of the Board or any committee of the Board.<br />
5.2 Other Payments - For greater certainty, no member of the Committee shall accept<br />
any consulting, advisory or other compensatory fee from the Company (other than the<br />
receipt of fixed amounts of compensation under a retirement plan (<strong>inc</strong>luding deferred<br />
compensation for prior service within the Company if the compensation is not contingent<br />
in any way on continued service). For purposes of Section 5.1, the indirect acceptance by<br />
a member of the Committee of any fee <strong>inc</strong>ludes acceptance of a fee by an individual’s<br />
spouse, minor child or stepchild, or child or stepchild who shares the individual’s home,<br />
or if the member is a partner of, member of, an officer such as a managing director<br />
occupying a comparable position or executive officer of, or a person who occupies a<br />
similar position with, an entity that provides accounting, consulting, legal, investment<br />
banking or financial advisory services to the Company or any of its subsidiaries, other<br />
than limited partners, non-managing members and those occupying similar positions<br />
who, in each case, have no active role in providing services to the entity.<br />
6. DUTIES AND RESPONSIBILITIES OF THE COMMITTEE<br />
6.1 Overview - The Committee’s pr<strong>inc</strong>ipal responsibility is one of oversight. The<br />
Company’s management is responsible for preparing the Company’s financial statements<br />
and the external auditor is responsible for auditing those financial statements.<br />
The Committee’s specific duties and responsibilities are as follows:<br />
(a) Financial and Related Information -<br />
(i) Annual Financial Statements - The Committee shall review and<br />
discuss with management and the external auditor the Company’s<br />
annual financial statements, related MD&A and related earnings<br />
press release and report thereon to the Board before the Board<br />
approves such statements and MD&A;<br />
(ii) Interim Financial Statements – The Committee shall review and<br />
discuss with management and the external auditor the Company’s<br />
Annual Information Form Page 42
interim financial statements, related MD&A and related earnings<br />
press release and report thereon to the Board before the Board<br />
approves such statements and MD&A;<br />
(iii) Forward Oriented Information and other Documents - The<br />
Committee shall review and discuss with management and the<br />
external auditor forward oriented information and other documents<br />
prior to its public release or filing and, if requested by the Board,<br />
report thereon to the Board;<br />
(iv) Prospectuses – The Committee shall review and discuss with<br />
management and the external auditor any prospectus and report<br />
thereon to the Board before the Board approves any such<br />
prospectus;<br />
(v) Accounting Treatment - The Committee shall review the selection<br />
of accounting policies and assess managements’ determination of<br />
significant judgments and estimates.<br />
(vi) Disclosure of Other Financial Information – The Committee shall<br />
satisfy itself that adequate procedures are in place for the review of<br />
the Company’s disclosure of financial information extracted or<br />
derived from the Company’s financial statements, other than the<br />
Company’s financial statements, MD&A and earnings press<br />
releases, and shall periodically assess the adequacy of those<br />
procedures.<br />
(vii) Risk and Internal Control – The Committee shall assess<br />
managements’ programs and procedures for identifying and<br />
managing corporate risk, <strong>inc</strong>luding control practices.<br />
(b) External Auditor -<br />
(i) Authority with Respect to External Auditor - As representative of<br />
the Company’s shareholders and as a committee of the Board, the<br />
Committee shall be directly responsible for the appointment,<br />
compensation, retention, termination and oversight of the work of<br />
the external auditor (<strong>inc</strong>luding, without limitation, resolution of<br />
disagreements between management and the auditor regarding<br />
financial reporting) for the purpose of preparing or issuing an audit<br />
report or performing other audit, review or attest services for the<br />
Company. In this capacity, the Committee shall have sole<br />
authority for recommending to the Board the person to be proposed<br />
to the Company’s shareholders for appointment as external auditor,<br />
whether at any time the <strong>inc</strong>umbent external auditor should be<br />
removed from office, and the compensation of the external auditor.<br />
The Committee shall require the external auditor to confirm in an<br />
engagement letter to the Committee each year that the external<br />
auditor is accountable to the Board and the Committee as<br />
Annual Information Form Page 43
epresentatives of shareholders and that it will report directly to the<br />
Committee.<br />
(ii) Approval of Audit Plan - The Committee shall approve, prior to<br />
the external auditor’s audit, the external auditor’s audit plan<br />
(<strong>inc</strong>luding, without limitation, staffing), the scope of the external<br />
auditor’s review and all related fees.<br />
(iii) Independence - The Committee shall satisfy itself as to the<br />
independence of the external auditor. As part of this process:<br />
(A) The Committee shall require the external auditor to submit<br />
on a periodic basis to the Committee a formal written<br />
statement confirming its independence under applicable<br />
laws and regulations and delineating all relationships<br />
between the auditor and the Company.<br />
(B) In accordance with applicable laws and good practice, the<br />
Committee will have a Policy respecting non-audit services<br />
provided by the External Auditor (Schedule A).<br />
(C) The Committee shall establish a policy setting out the<br />
restrictions on the Company hiring employees and former<br />
employees of the Company’s external auditor or former<br />
external auditor.<br />
(iv) Regulatory Matters - The Committee shall discuss with the<br />
external auditor the matters required to be discussed by Statement<br />
on Auditing Standards No. 61 and Section 5741 of the CICA<br />
Handbook – Assurance relating to the conduct of the audit.<br />
(c) Internal Audit Function - Controls –<br />
(i) Regular Reporting - The internal auditor shall report quarterly to<br />
the Committee.<br />
(ii) Oversight of Internal Controls - The Committee shall oversee<br />
management’s design and implementation of and reporting on the<br />
Company’s internal controls and review the adequacy and<br />
effectiveness of management’s financial information systems and<br />
internal controls. The Committee shall annually review and<br />
approve the mandate, plan, budget and staffing of the internal audit<br />
department. The Committee shall direct management to make any<br />
changes it deems advisable in respect of the internal audit function.<br />
(iii) Review of Audit Problems - The Committee shall review with the<br />
internal auditor: any problem or difficulties the internal auditor<br />
may have encountered; and any significant reports to management<br />
Annual Information Form Page 44
prepared by the internal auditing department and management’s<br />
responses thereto.<br />
(iv) Review of Internal Auditor - The Committee shall review the<br />
appointment, performance and replacement of the senior internal<br />
auditing executives and the activities, organization structure and<br />
qualifications of the persons responsible for the internal audit<br />
function.<br />
(d) Whistle Blowing - The Committee shall establish procedures for:<br />
(i) the receipt, retention and treatment of complaints received by the<br />
Company regarding accounting, internal accounting controls or<br />
auditing matters; and<br />
(ii) the confidential, anonymous submission by employees of the<br />
Company of concerns regarding questionable accounting or<br />
auditing matters.<br />
(e) Related Party Transactions – The Committee shall review and approve any<br />
transaction between the Company and a related party and any transaction<br />
involving the Company and another party in which the parties’<br />
relationship could enable the negotiation of terms on other than an<br />
independent, arms’ length basis.<br />
(f) Liaison – The Committee shall review and ensure that appropriate liaison<br />
and co-operation exist between the external auditor and the internal<br />
auditor and provide a direct channel of communication between the<br />
external and internal auditors and the Committee.<br />
(g) Public Reports - The Committee shall prepare and/or approve any report<br />
that is required by law or regulation to be <strong>inc</strong>luded in any of the<br />
Company’s public disclosure documents relating to the Committee.<br />
(h) Other Matters – The Committee may, in addition to the foregoing, perform<br />
such other functions as may be necessary or appropriate for the<br />
performance of its oversight function.<br />
7. EVALUATION OF CHARTER<br />
7.1 Amendments to Charter –<br />
(a) Review by Audit Committee - On at least an annual basis, the Committee<br />
shall review and discuss the adequacy of this Charter and recommend any<br />
proposed changes to the Nominating & Corporate Governance Committee.<br />
(b) Review by Board – The Board will review and reassess the adequacy and<br />
any changes to the Charter on an annual basis and at such other times as it<br />
considers appropriate.<br />
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8. LEGISLATIVE AND REGULATORY REQUIREMENTS<br />
8.1 Compliance – It is the Board’s intention that this mandate shall reflect all<br />
legislative and regulatory requirements applicable to the Committee.<br />
9. CURRENCY OF CHARTER<br />
9.1 Currency of Charter<br />
This charter was last reviewed by the Audit Committee and Board of Directors in 2011.<br />
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