Exco Annual Report 2016 | Quarterlytics

Plain-text annual report

LETTER TO SHAREHOLDERS Fiscal 2016 was another record-se�ng year for Exco. Aided by six months of contribu�ons from AFX Industries LLC, which we acquired on April 4, 2016, and accompanied by balanced results from our underlying opera�ons, Exco’s consolidated sales increased $90.7 million or 18% to a record $589.0 million. Consolidated net income reached a record $47.6 million or $1.12 per share compared to $40.8 million or $0.96 per share in ﬁscal 2015. Similarly, EBITDA and free cash ﬂow rose to record levels. Key Ini�a�ves in Fiscal 2016 Exco achieved these results despite inves�ng consider- able management �me and ﬁnancial resources to resolve formidable challenges in ALC’s opera�ons in South Africa and Lesotho. Speciﬁcally, we relocated produc�on out of Rosslyn, South Africa and subsequently closed those facili�es at the end of the second quarter. As well, a�er conduc�ng an assessment of the long-term viability of the remaining opera�ons in Lesotho, we saw no clear path to overcoming the opera�ng and logis�cal challenges that were hampering the results of that business. Consequently, we wound up ALC’s opera�ons in Lesotho subsequent to our year end. Going forward, ALC’s results will beneﬁt from the elimina�on of opera�ng losses that amounted to $3.5 million in ﬁscal 2016 and $5.2 million in ﬁscal 2015. In the Cas�ng and Extrusion segment, we made signiﬁcant progress at strengthening our long-term compe��ve posi�on with major machinery and equipment investments in both our Large Mould Group and the Extrusion Tooling Group. In the Large Mould Group, we undertook a $10 million investment program at our Newmarket Ontario facility which, when completed in early 2017, will posi�on it as one of the fastest and most eﬃcient large mould manufactur- ers in the world. A grant by the Government of Canada for about $4.6 million of the cost of this capital project has signiﬁcantly mi�gated associated ﬁnancial risks �mes while and is greatly appreciated. This investment program includes state-of-the-art addi�ve manufacturing equipment, which will signiﬁcantly enhance our ability to design and make superior moulds for our customers. The program will also reduce our costs and capacity, lead posi�oning us strongly to capitalize on signiﬁcant expected demand growth for aluminum structural component moulds in the coming decade. In turn, it will help alleviate current margin pressures driven by the transi�on of work towards newer programs that lack the scale - and margin proﬁle - of the established programs they are replacing. increasing our In the Extrusion Tooling Group, we embarked upon a program of integra�ng and standardizing the design and manufacturing processes among our ﬁve extrusion tooling plants. This ini�a�ve has coincided with a management succession transi�on which, when complete, will solidify this group’s posi�on as the most precise and eﬃcient manufacturer of extrusion dies in the Americas, with state-of-the-art opera�ons in Canada, the USA, Colombia and Brazil. Meanwhile, we con�nued to execute our strategy of making selec�ve acquisi�ons that leverage Exco’s core strengths. The acquisi�on of AFX, a leading �er 2 supplier of interior trim components to the North American market, has added key leather-cu�ng capa- bili�es and new products to our exis�ng suite of com- plementary businesses. This acquisi�on has been signiﬁcantly accre�ve to earnings despite requiring in excess of $1.5 million in transac�on costs during 2016. With the acquisi�on of AFX, our Automo�ve Solu�ons business has now grown to include ﬁve a�rac�ve businesses that have strong compe��ve posi�ons, good diversity of product and customers and a demon- strated ability to increase their market share over �me. These characteris�cs were evident in ﬁscal 2016 by the excep�onal performance of the segment, which recorded revenue growth of 31% while holding its EBITDA margin constant at an impressive 13.5%. EXCO TECHNOLOGIES LIMITED 1 ANNUAL REPORT 2016 LETTER TO SHAREHOLDERS Outlook As we begin ﬁscal 2017 the broader investment community appears to perceive that the automo�ve market has peaked, and that light vehicle sales will necessarily decline a�er several years of strong growth. This has caused the share price mul�ples of automo�ve component suppliers, including Exco, to contract despite con�nued growth in earnings. However, while we are quite aware that the automo�ve industry is cyclical, we also believe that industry fundamentals remain sound, which may support a con�nua�on of current volume levels for the next several years. Among the factors that give us this convic�on are low interest rates, good availability of consumer credit, con�nued job gains in the US, and the high – and rising - average age of vehicles on the road today. In any event, we believe that Exco beneﬁts from several factors that should protect its performance through the downturn of the automo�ve industry should it occur. First, regardless of vehicle produc�on levels, we see demand for large moulds increasing through the next several years due to the need for auto OEMs to comply with stringent regulatory emission requirements and fuel eﬃciency objec�ves. Second, demand for our extrusion opera�ons is mostly driven by non-automo�ve ac�vity in the broader economy, but yet also beneﬁts from the same automo�ve light-weigh�ng trend as our Large Mould business. This provides a GDP+ growth proﬁle that is magniﬁed by our ability to outpace market growth as our newer opera�ons in Texas, Brazil, Thailand and Colombia con�nue to season. Lastly, Exco’s Automo�ve Solu�ons does not depend solely on higher vehicle produc�on levels for growth. Over the past 5 years, we have gained signiﬁcant share in our market, with average content per vehicle increasing over fourfold to about $10. Yet, despite this strong growth, our content per vehicle remains rela�vely small, which means we con�nue to possess enormous opportunity for growth, both organically and through acquisi�ons. Finally, we have the ﬁnancial strength and ﬂexibility to make the most of our opportuni�es. Exco entered into a three-year $100 million credit facility during ﬁscal 2016 to help fund the acquisi�on of AFX, of which $69 million was drawn down at the close of the transac�on. Six months later, at the end of the ﬁscal year, the balance had been paid down to $47 million and net debt had been reduced to $45 million. With net debt/ EBITDA of just 0.5x and a healthy liquidity posi�on, Exco possesses signiﬁcant ﬁnancial capacity acquisi�ons. to Furthermore, we con�nue to generate sizeable free cash ﬂow a�er funding annual maintenance and growth capital expenditures as well a common dividend that has increased consistently since it was ﬁrst introduced in 2003. con�nue through grow to I would like to close by extending a sincere thank you to all of the talented and dedicated employees who have made Exco’s performance possible. With your ongoing support, I am conﬁdent we will con�nue to sustain growth for our customers and investors on the road ahead. Sincerely, Brian A. Robbins President and CEO EXCO TECHNOLOGIES LIMITED 2 ANNUAL REPORT 2016 CONTENTS 4 Management's Discussion and Analysis 18 19 23 Independent Auditors’ Report Consolidated Financial Statements Notes to Consolidated Financial Statements This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements and related notes for the year ended September 30, 2016. This MD&A has been prepared as of November 30, 2016. Additional information on Exco, including copies of its continuous disclosure materials such as its Annual Information Form, is available on its website at www.excocorp.com or through the SEDAR website at www.sedar.com . In this MD&A, reference is made to EBITDA which is not a measure of financial performance under International Financial Reporting Standards (“IFRS”). Exco calculates EBITDA as earnings before other income, interest, taxes, depreciation and amortization. EBITDA is used by management, from time to time, to facilitate period-to-period operating comparisons and we believe some investors and analysts use them as well. This measure, as calculated by Exco, may not be comparable to similarly titled measures used by other companies. CAUTIONARY STATEMENT Information in this document relating to projected growth and financial performance of the Company’s business units, contribution of our start-up business units, contribution of awarded programs yet to be launched, margin performance, financial performance of acquisitions and operating efficiencies are forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements found mainly in the Outlook section but also elsewhere throughout this document. These forward-looking statements are based on our plans, intentions or expectations which are based on, among other things, assumptions about the number of automobiles produced in North America and Europe, the number of extrusion dies required in North America and South America, the rate of economic growth in North America, Europe and emerging market countries, investment by OEMs in drivetrain architecture and other initiatives intended to reduce fuel consumption and/or the weight of automobiles, raw material prices, economic conditions, currency fluctuations, trade restrictions, our ability to close or otherwise dispose of unprofitable operations in a timely manner, our ability to integrate acquisitions and the rate at which our operations in Brazil, Texas and Thailand achieve sustained profitability. These forward-looking statements include known and unknown risks, uncertainties, assumptions and other factors which may cause actual results or achievements to be materially different from those expressed or implied. For a more extensive discussion of Exco’s risks and uncertainties see the ‘Risks and Uncertainties’ section in this Annual Report, our Annual Information Form (“AIF”) and other reports and securities filings made by the Company. This information is available at www.sedar.com. While Exco believes that the expectations expressed by such forward-looking statements are reasonable, we cannot assure that they will be correct. In evaluating forward-looking information and statements, readers should carefully consider the various factors which could cause actual results or events to differ materially from those indicated in the forward-looking information and statements. Readers are cautioned that the foregoing list of important factors is EXCO TECHNOLOGIES LIMITED 3 ANNUAL REPORT 2016 not exhaustive. Furthermore, the Company will update its disclosure upon publication of each fiscal quarter’s financial results and otherwise disclaims any obligations to update publicly or otherwise revise any such factors or any of the forward-looking information or statements contained herein to reflect subsequent information, events or developments, changes in risk factors or otherwise. MANAGEMENT’S DISCUSSION AND ANALYSIS CORE BUSINESSES Exco is a global designer, developer and manufacturer of dies, moulds, components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. The Company reports in two business segments. The Casting and Extrusion segment designs, develops and manufactures die-casting and extrusion tooling and consumable parts for both aluminum die-casting and aluminum extrusion machines. Operations are based in North America, South America and Thailand and serve automotive and industrial markets around the world. Exco is a leader in most of these markets. In die-casting and extrusion tooling markets, Exco is further entrenching itself by reducing lead times and manufacturing costs through design and process enhancements. In the die-cast tooling group a major equipment capital project is underway that is increasing capacity, reducing lead times, further improving quality and reducing costs. In the machine consumables market, Exco is leveraging its long tradition as a reliable, high-quality supplier of consumable components for the injection system of die-cast machines and aluminum extrusion presses by evaluating, coordinating and ultimately maximizing customers’ overall equipment performance and longevity. The Canadian, European, South American and United States markets are Exco’s primary focus for die-cast moulds, extrusion dies and machine consumable parts. However, with respect to the latter, we commenced operations of a new facility in Thailand in 2014 which we believe will enable us to better penetrate the Asian market for those products. The Automotive Solutions segment designs, develops and manufactures automotive interior trim components and assemblies primarily for passenger and light truck vehicles. The Polytech and Polydesign businesses manufacture synthetic net and other cargo restraint products, injection-moulded components, shift/ brake boots, related console components and assemblies. Polydesign is also a manufacturer and/or finisher of injection moulded interior trim and instrument panel components, seat covers, head rests and other cut and sew products. Automotive Leather Company is a manufacturer of leather/fabric seat covers for automobile interiors. Neocon is a supplier of soft plastic trunk trays, rigid plastic trunk organizer systems, floor mats and bumper covers. AFX Industries is a tier 2 supplier of leather and leather-like interior trim components to the North American automotive market. AFX supplies die cut leather sets for seating and many other interior trim applications as well as injection-molded, hand-sewn, machine- sewn and hand-wrapped interior trim components of all sorts. Automotive Solutions manufacturing facilities are located in Canada, the United States, Mexico, Bulgaria, and Morocco supplying the automotive markets in North America, Europe and to a lesser extent, Asia. VISION AND STRATEGY For the past few years, Exco has pursued several key strategies designed to achieve sustainable revenue and earnings growth. These include: (1) strengthening our technological leadership and competitive position in our chosen markets through automation and technology, (2) minimizing our cost structure, (3) shifting our productive capacity to low-cost jurisdictions in closer proximity to our customers’ operations, (4) diversifying our revenue base with new products and services that leverage our competitive strengths, and (5) capitalizing on organic and inorganic growth opportunities in both our existing and select developing markets. EXCO TECHNOLOGIES LIMITED 4 ANNUAL REPORT 2016 The performance of the North American automotive industry remained solid in fiscal 2016, with most OEMs and tier one suppliers having strong sales and improving credit fundamentals. Production of light vehicles continued to grow modestly from historically high levels, supported by low interest rates, low gas prices, an aging fleet and widespread introduction of new vehicle models. Automobile manufacturers continue to invest in the development and production of more innovative and fuel-efficient powertrains in response to consumer demand, as well as U.S. government-mandated Corporate Average Fuel Economy (“CAFE”) standards that require fleet average fuel economy of 54.5 miles per gallon by 2025. In Europe comparable legislation requiring co2 emissions to be reduced from 2013 levels of 127g/km to 95g/km by 2021is also driving innovation and improvement in powertrain design. These developments bode well for our large mould business creating promising new opportunities for growth. During fiscal 2016, Exco continued to solidify its technological leadership with the production of die-cast moulds for light-weight structural parts that use advanced aluminum alloys such as silafont. To date, Exco has shipped numerous such moulds and has received orders for various additional programs. Exco believes moulds for structural aluminum components will increasingly be a significant driver of growth for the foreseeable future and that this demand will occur regardless of prevailing powertrain developments. This business unit has also landed orders for nine and ten speed transmission cases and numerous four and three cylinder engine block programs which are at the vanguard of OEM efforts to improve vehicle fuel efficiency. Offsetting these positive benefits however is the maturation of certain established programs that have benefited Exco’s large mould group over the past several years. Some of these programs were long-running requiring a high number of moulds that have similar or identical configurations. Typically, programs such as these provide a larger base over which to absorb any engineering costs and also provide Exco with the opportunity to become more efficient with each successive mould produced. Recently, automotive OEM’s have increased the speed at which they alter powertrain designs in order to achieve their fuel efficiency and emission reduction goals. This provides Exco with less opportunity to leverage the efficiency measures as noted in the forgoing. In response to - and in anticipation of - these trends, Exco is currently concentrating investment in new machinery and equipment to reduce costs, increase efficiency, meet shorter lead times, further enhance the quality of its products and expand capacity. Demand for extrusion dies generally remained firm through the year as end market applications for extruded aluminum components are quite diverse and correlate well with GDP, which continues to grow modestly in North America, our largest market for extrusion dies. As well, demand for extruded aluminum components within the automotive end market continues to grow above market owing to the same light-weighting trends noted above. Moreover, anti-dumping and/or countervailing duties against Chinese imports into Canada and the US on aluminum extrusions remain in place and we expect will continue to do so following completion of the current sunset review. Over the past several years Exco has expanded its footprint in the Americas to gain increased exposure to markets that the Company expects will have higher growth prospects over the longer term. These investments have included a new extrusion die production facility in Medellin, Colombia, which commenced operations in January 2012 and a new extrusion die production facility near Sao Paulo, Brazil, which commenced operations in June 2014. These investments produced mixed results in fiscal 2016 with our Colombia operations performing very strongly while our Brazilian operations remain challenged by the very weak economic environment in that country. Nonetheless, we continue to ramp up business in Brazil, albeit at a slow pace, and hone our skills and capabilities, positioning ourselves for the economic recovery when it eventually takes place. In addition to its investments in South America, Exco has expanded its presence in the North America extrusion die market to provide increased growth in a distinct market segment where proximity to customers is a key element to success. In 2013, the Company acquired and subsequently expanded an existing toolshop in Wylie Texas to better service the south-central region of the United States. Exco is now focused on harmonizing the manufacturing EXCO TECHNOLOGIES LIMITED 5 ANNUAL REPORT 2016 process of its various extrusion die plants and implementing various changes in order to improve the growth prospects and the efficiency of these operations. Our Castool business also continues to grow globally. Solid demand growth for Castool’s machine consumable parts prompted us to build a production facility in 2014 in Thailand to more efficiently serve our customers while taking advantage of lower production and shipping costs to Asia and Europe. This facility has been producing since July 2014, and despite relative softness in China, this plant is building a solid operational base for profitable growth. Strong vehicle production volumes in both North American and Europe have propelled sales and profit in the Automotive Solutions interior trim segment over the past few years as our various businesses kept pace with strong order flow. Furthermore, particularly in North America, a good proportion of the vehicles produced are refreshed or completely new models with a growing representation of SUV’s and light trucks, which have greater cabin and cargo areas. Meanwhile, we continue to expand our capabilities and broaden our product offerings. All of this helps us to increase our content per vehicle and replace older programs which have been ‘costed down’ over the years with new programs reflecting current costs and better margins. Cost inflation of raw materials has also remained muted in recent years, in keeping with commodities in general. While current North American and European automobile production volumes appear sustainable for the next few years, we believe prospects for these economies are limited by several structural trends. These include: a steadily aging population and historically high levels of consumer and government debt. As a result, it is likely that the US and the Euro zone economies will, over the long term, underperform the economies of most developing countries – particularly, in Latin and South America and Southeast Asia. Admittedly emerging economies are currently under pressure. Brazil is a case in point. However, over the long term we believe the underlying structural trends will reassert themselves. Exco remains committed to establishing a larger presence in these markets to plant the seeds of revenue and earnings growth for future years. Our focus has been traditionally on relatively low-risk opportunities in markets that are already familiar to us, and which leverage our technological leadership and existing product and service capabilities – such as South America and Asia. Exco has exported to these emerging markets for many years and we are familiar with the customers and the general business climate. We have also operated several large plants in low- cost jurisdictions such as Mexico and Morocco for many years with exceptional performance and financial results. The increasingly sophisticated customers in these emerging markets are looking for superior quality, innovative product solutions and the benefit of local sourcing, product development and service. By manufacturing locally, we also significantly reduce transportation costs and mitigate the effect of unfavorable currency trends. Notwithstanding Exco’s investment in developing markets, we also continue to look for selective acquisitions that will bolster our position and enhance profitability in North America and Europe. On March 1, 2014 we purchased Automotive Leather Company which specializes in the manufacture and export of luxury leather interior trim components to the middle and luxury automotive sector. The primary customer is BMW and its tier one supplier Faurecia although other German OEMs and their tiers are also customers. This acquisition provided us with a facility in Eastern Europe, to which European automotive manufacturing continues to migrate, and a central European technical and service centre from which we can better serve our European customers. ALC’s operations in South Africa and Lesotho were less compelling. Consequently, Exco closed its operations in South Africa in fiscal 2016 and ceased production in Lesotho in November 2016. On April 4, 2016 we acquired AFX Industries LLC for consideration of US$73.4 million excluding US$4.4 million of assumed debt. The acquisition builds on Exco’s significant leather-based interior trim stable of products while also providing new customers, suppliers, products and capabilities in a region that is very familiar to us. AFX is EXCO TECHNOLOGIES LIMITED 6 ANNUAL REPORT 2016 based in Port Huron, Michigan with manufacturing operations in Matamoros, Mexico. The company is a tier 2 supplier of leather and leather-like interior trim components to the North American automotive market. AFX supplies die-cut leather sets for seating and many other interior trim applications as well as injection-molded, hand sewn, machine-sewn and hand-wrapped interior components of all types. Looking ahead, light vehicle production in North America is projected to remain robust in 2017 despite the gradual rate of growth in the global economy. Market fundamentals remain firm with low interest rates and affordable consumer credit in both North America and Europe. There is still significant demand for new automobiles as the average age of cars on the road in the US continues to climb. At the same time, increasingly stringent mileage and co2 emission requirements are expected to keep fuelling the steady pace of new model and global platform introductions in both North America and Europe in the year ahead. These developments will continue to benefit both our Casting and Extrusion and Automotive Solutions segments. 2016 RESULTS Consolidated Results - Sales Annual sales totalled $589.0 million compared to $498.3 million last year – an increase of $90.7 million or 18% over last year. Included in the current year results was six months of sales in the amount of $66.9 million from AFX, which was acquired on April 4, 2016. Excluding sales from AFX, annual sales totalled $522.1 million – an increase of $23.8 million or 5% over last year. Over the year, the US dollar averaged 7% higher ($1.32 versus $1.24) against the Canadian dollar contributing $15.2 million in sales to the current year. Similarly, the Euro averaged 5% higher ($1.46 versus $1.41) against the Canadian dollar contributing $5.7 million to sales. Selected Annual Information The following table sets out selected financial data relating to the Company’s years ended September 30, 2016 and 2015. This financial data should be read in conjunction with the Company’s audited consolidated financial statements for these years: (in $ millions except per share amounts) Sales Net income for the year Earnings per share from net income Basic Diluted Total assets Cash dividend paid per share EBITDA Segment Sales 2016 $589.0 $47.6 $1.12 $1.11 $452.9 $0.27 $83.4 2015 $498.3 $40.8 $0.96 $0.96 $342.8 $0.23 $77.0 ● Automotive Solutions Segment Sales in this segment were $396.8 million – an increase of $93.6 million or 31% from the prior year. AFX, which was acquired in April 2016 contributed $66.9 million to sales in the current year. Excluding AFX, segment sales totalled $329.9 million – an increase of $26.8 million or 9% from the prior year. In North America, positive growth was recorded by both Polytech and Neocon helped by modest vehicle unit sales growth as well as new product EXCO TECHNOLOGIES LIMITED 7 ANNUAL REPORT 2016 launches for refreshed, redesigned and entirely new vehicle models. Similarly in Europe, sales of both Polydesign and ALC increased over the prior year driven by higher vehicle volumes and new program launches. The appreciation of the US dollar against the Canadian dollar boosted sales at Polytech and Neocon by $7.6 million compared to the prior year. Also, fluctuations in the Euro against the Canadian dollar as described above increased sales of the segment’s European operations by $5.5 million. • Casting and Extrusion Segment Sales for this segment were $192.2 million – a decrease of $2.9 million or 2% from the prior year. The slight sales decline was driven by lower revenues in the large mould group which was mostly offset by higher sales in the Company’s Castool and Extrusion groups. Large mould revenue declines reflect lower sales of moulds and maintenance work on established programs countered by an increase of “first-off” and “one-off” moulds associated with recently launched powertrain and structural part programs. These newer programs typically have a much lower level of efficiency relative to mature programs, resulting in lower throughput, which adversely impacts revenues and margins. Castool sales reflect ongoing market penetration of the group’s innovative product offerings together with reasonably good market conditions in North America, South America and Asia. Notably, sales from Castool Thailand which commenced production in the last fiscal quarter of 2014 grew 35% over fiscal 2015. The sales increase in the Extrusion group was supported by relatively stable top line results from the group’s flagship operations in Markham and Michigan and the ongoing benefit of its newer operations in Texas, Brazil and Colombia, which recorded collective revenue growth of 31% compared to the prior year. The appreciation of the US dollar against the Canadian dollar contributed $7.5 million to sales in this segment in the current year. The change of the Euro against the Canadian dollar described in ‘Consolidated Results – Sales’ above had a positive impact of $158 thousand on sales in this segment in the current year. Cost of Sales Cost of sales totalled $460.1 million – an increase of $80.6 million or 21% from the prior year. Cost of sales as a percentage of sales increased to 78% from 76% driven by a higher intensity of direct materials, which increased to 54% of sales ($318.4 million) this year compared to 51% of sales ($256.5 million) last year. The inclusion of AFX drove most of this increase with margin deterioration in the large mould business and relative mix shift between the Company’s other various businesses explaining most of the difference. Inflationary pressures remain muted for Exco’s major input materials – petroleum/natural gas based resin and plastic products in the Automotive Solutions segment and tool grade steel in the Casting and Extrusion segment, where a focus on global sourcing has also helped contain costs. The other components of cost of sales, namely direct labor and overhead, decreased slightly as a percentage of sales to a combined percentage of 24% ($141.7 million) compared to 25% ($123.0 million) last year. Selling, General and Administrative Expenses Selling, general and administrative expense in the current year increased to $45.9 million from $41.6 million last year, an increase of 10%. However, as a percentage of sales, these expenses decreased to 7.8% from 8.4% the prior year. Included in the current year were $2.5 million of selling, general and administrative expenses related to AFX as well as about $1.5 million of transaction costs required to complete the AFX acquisition. Depreciation and Amortization Consolidated depreciation in fiscal 2016 totalled $14.8 million compared to $13.5 million last year driven by higher depreciation arising from our increased investment in the Casting and Extrusion Segment in recent years as well as the acquisition of AFX in 2016. The increase in amortization expense was attributable to $43.3 million of the AFX acquisition classified as intangible assets, mostly reflecting the fair value of customer relationships. The carrying EXCO TECHNOLOGIES LIMITED 8 ANNUAL REPORT 2016 value of total intangible assets amounted to $45.6 million as at September 30, 2016. The Company expects the associated annual amortization expense will total approximately $4.0 million in fiscal 2017. With respect to segmentation, depreciation expense increased to $11.5 million in the Casting and Extrusion segment from $10.0 million last year while depreciation expense in the Automotive Solutions segment reduced to $3.2 million from $3.5 million last year despite the inclusion of AFX. Amortization of intangible assets remained stable at $0.7 million in the Casting and Extrusion segment but increased to $2.5 million from $0.9 million last year within the Automotive Solutions segment driven by the AFX acquisition and continuation of the amortization related to ALC’s intangible assets. Interest Net interest expense in the current year totalled $1.3 million compared to $0.9 million the prior year. The increase in the interest expense was mainly caused by the higher debt associated with funding the acquisition of AFX in April 2016 as well as the lower average utilization of higher cost debt at ALC’s operations. Income Taxes Exco’s effective income tax rate was 29.7% compared to an effective income tax rate of 33.0% in fiscal 2015. Included in the current year’s income tax expense was $0.9 million of withholdings taxes paid on the repatriation of surplus from a subsidiary. Included in last year results was $1.9 million for the write-off of deferred tax assets in South Africa and $0.7 million withholding tax paid on the repatriation of surplus from a subsidiary. Excluding these tax charges, Exco’s adjusted effective income tax rate in the current year would have been 28.4% compared to 28.8% in the prior year. The effective income tax rates for both years incorporate higher tax jurisdictions such as the USA and Canada (see note 14 to the 2016 Consolidated Financial Statements) and the impact of losses not being tax-affected in Brazil, South Africa and Lesotho. Net Income • Consolidated The Company reported consolidated net income of $47.6 million or basic and diluted earnings of $1.12 and $1.11 per share respectively compared to consolidated net income of $40.8 million or basic and diluted earnings of $0.96 per share – an increase of $6.8 million or 17%. The increase in consolidated net income in fiscal 2016 was assisted by a $3.4 million ($0.08 per share) gain associated with the settlement of a commercial arbitration related to the acquisition of ALC recorded in the third fiscal quarter of 2016. Without this settlement, net income would have been $44.1 million or $1.04 per share. The acquisition of AFX contributed strongly to consolidated net income while lower losses at ALC’s South African/ Lesotho operations ($3.5 million in fiscal 2016 compared to $5.2 million in fiscal 2015) also benefited results year over year. Fiscal 2015 net income was adversely impacted by the write-off of $1.9 million of deferred tax assets in South Africa consistent with the plan to cease manufacturing in this location. • Automotive Solutions Segment (Operating Earnings) The Automotive Solutions segment recorded operating earnings of $48.0 million for the year compared to $36.6 million last year – an increase of $11.5 million or 31%. The acquisition of AFX contributed strongly to the segment’s results while earnings were higher at each of Polytech, Neocon and Polydesign as these businesses continued to introduce new product launches and benefits from stable costs for metal subcomponents, resin sheet and other plastic raw material inputs. In addition, as indicated above, results at ALC’s South Africa/ Lesotho operations improved following the closure of the South African operations at the end of the second quarter of 2016. EXCO TECHNOLOGIES LIMITED 9 ANNUAL REPORT 2016 • Casting and Extrusion Segment (Operating Earnings) Casting and Extrusion operating earnings decreased to $24.7 million from $32.4 million in the prior year – a difference of $7.7 million or 24%. This decrease was primarily driven by the large mould group which faced a shift in its volume away from higher margin mature contracts towards newer lower margin “first-off” and “one-off” contracts as well as operational disruption caused by the installation of new machinery in the Newmarket facility. To a lesser extent, profitability declined in the Extrusion group owing to higher levels of depreciation in the recently expanded Texas plant, continuing challenging economic conditions in Brazil and operational changes required to harmonize manufacturing processes at the various plants of the Extrusion group, which is having a temporary adverse impact on profitability. Partially offsetting these factors was strong performance from both our Colombian extrusion operations and Castool group as well as a favorable raw material pricing environment – particularly for steel as described in the ‘Cost of Sales’ section above. The weak Canadian dollar also favorably impacted this segment by increasing the value of US dollar denominated earnings from US operations. This segment’s three plants in Canada also benefited from the weaker Canadian dollar by increasing the value of US dollar denominated sales – for greater discussion of foreign exchange see ‘Segment Sales – Casting and Extrusion Segment’ above. Corporate Segment (Operating Expense) • Corporate expense in the current year amounted to $7.3 million compared to $7.1 million in the prior year. Corporate expenses in fiscal 2016 included $1.5 million of transaction costs associated with the AFX acquisition and $0.5 million of non-cash stock option expense, which was partially offset by the reversal of accruals in the amount of $0.8 million related to the plant closure in South Africa and foreign exchange translation gains of $0.3 million. Corporate expenses in fiscal 2015 included $1 million of non-cash stock option expense and $0.8 million of accruals related to the plant closure in South Africa offset by foreign exchange translation gains totalling $0.8 million. EBITDA EBITDA in the current year amounted to $83.4 compared to $77.0 million in the prior year – an increase of $6.4 million or 8%. EBITDA as a percentage of sales decreased to 14.2% compared to 15.4% last year. This deterioration in EBITDA margin is attributable to the Casting and Extrusion segment where the EBITDA margin declined to 19.2% from 22.1% last year as well as the change in relative contributions between the Company’s two segments. The Automotive Solution segment EBITDA margin remained constant at 13.5% while Corporate expenses declined to 1.2% of sales compared to 1.4% the prior year. Quarterly Results The following table sets out financial information for each of the eight fiscal quarters through to the fiscal year ended September 30, 2016: ($ thousands except per share amounts) September 30, 2016 Sales Net income Earnings per share Basic Diluted $163,034 $10,514 $0.25 $0.25 June 30, 2016 $161,671 $16,226 $0.38 $0.38 March 31, 2016 $133,383 $8,989 December 31, 2015 $130,901 $11,828 $0.21 $0.21 $0.28 $0.28 EXCO TECHNOLOGIES LIMITED 10 ANNUAL REPORT 2016 ($ thousands except per share amounts) September 30, 2015 Sales Net income Earnings per share Basic Diluted $130,984 $10,293 $0.24 $0.24 June 30, 2015 $121,930 $9,956 $0.24 $0.23 March 31, 2015 $125,484 $10,872 December 31, 2014 $119,897 $9,638 $0.26 $0.26 $0.23 $0.23 Exco typically experiences softer sales and profit in the first quarter, which coincides with our customers’ plant shutdowns in North America during the Christmas season. Exco also experiences a slowdown in the fourth quarter as North American customers typically schedule summer plant shutdowns and Exco’s European customers typically curtail releases during the month of August to accommodate vacations. However, in the current year, Exco’s North American customers tended to work through the summer to meet surging demand. The situation this year in Europe continued to generally follow the typical pattern described above. Fourth Quarter In the fourth quarter, consolidated sales were $163.0 million – an increase of $32.0 million or 24% from the prior year. The acquisition of AFX closed April 4, 2016 and added $35.9 million to sales in the quarter. Over the quarter the average USD/CAD exchange rate was 1% lower ($1.31 versus $1.32 last year) reducing sales by $0.6 million. The average EUR/ CAD exchange rate was nominally lower ($1.46 versus $1.47 last year) reducing sales by $0.2 million. The Automotive Solutions segment experienced a 50% increase in sales from $78.5 million last year to $117.7 million in the fourth quarter of 2016 driven primarily by the acquisition of AFX. Excluding AFX, the Automotive Solutions segment’s sales were $81.8 million – an increase of $3.3 million or 4% over the same quarter last year. Contributing to this improvement were higher sales at ALC, Polydesign and Neocon partially offset by modestly lower sales at Polytech. The Casting and Extrusion segment recorded sales of $45.3 million compared to $52.5 million last year – a decrease of 14%, driven mostly by lower sales in the large mould segment and to a lesser extent lower sales in the extrusion group. The Company’s fourth quarter consolidated net income increased to $10.5 million or earnings of $0.25 per share compared to $10.3 million or earnings of $0.24 per share in the same quarter last year – an EPS increase of 4%. In the fourth quarter of fiscal 2016 consolidated net income was reduced by withholding taxes of $0.9 million ($0.02 per share) as described in ‘Income Taxes’ above and an additional $0.3 million of amortization related to an adjustment of AFX’s intangible assets. Last years consolidated net income was negatively impacted by the write-off of $1.9 million ($0.05 per share) in deferred tax assets. Fourth quarter pretax earnings in the Automotive Solutions segment totalled $14.4 million, an increase of $4.3 million or 43% over the same quarter last year. This improvement was driven primarily by the acquisition of AFX and stronger performance at ALC’s South African/Lesotho operations where earnings improved to a modest income position aided by a $0.6 million asset disposal gain compared to operating losses of $2.0 million last year. ALC’s Bulgarian operations however experienced weaker performance in the current quarter compared to the prior year. Included in the segment results was a combined increase in depreciation and amortization expenses of $2.2 million compared to $1.0 million last year, with the increase attributable to the amortization of AFX’s intangible assets. Fourth quarter pretax earnings fell in the Casting and Extrusion segment by $5.7 million or 59% over the same quarter last year. The earnings decrease was due to lower sales and reduced absorption of fixed costs in the large EXCO TECHNOLOGIES LIMITED 11 ANNUAL REPORT 2016 mould business, operational disruption caused by the installation of new equipment in the Newmarket facility, margin compression in the extrusion business due to front end investments associated with harmonizing the production processes of the various facilities, partially offset by stronger results in the Castool group. Casting and Extrusion depreciation and amortization expenses totalled $3.3 million in the fourth quarter of 2016 compared to $3.1 million last year. The Corporate segment in the fourth quarter recorded expenses of $1.6 million compared to $1.8 million last year. As a result of the forgoing, EBITDA in the quarter increased to $22.2 million (13.6% of sales) compared to $21.9 million (16.7% of sales) last year. FINANCIAL RESOURCES, LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities Operating cash flow before net changes in non-cash working capital increased by $9.6 million, or 16% to $69.5 million from $59.9 million in fiscal 2015. This increase is primarily the result of a 17% increase in Net Income and 18% increase in depreciation and amortization as explained in the ‘Net Income’ and ‘Depreciation and Amortization’ sections above. Other factors included a $0.5 million increase in deferred income taxes and $0.5 million reduction in stock based compensation, which is a non-cash expense linked to the valuation of outstanding stock options and deferred stock units. Net change in non-cash working capital was $4.1 million cash used compared to $17.8 million cash used last year. The improvement year over year primarily reflects the faster collection of accounts receivables and more efficient use of working capital generally. Nonetheless, a modest amount of cash was used consistent with the organic growth in sales during the year. Consequently, cash provided by operating activities rose 56% to $65.5 million compared to $42.1 million last year. Cash Flows from Financing Activities Cash provided by financing activities amounted to $32.3 million compared to a use of $22.7 million in fiscal 2015. The variance year over year is mainly attributable to the use of debt to partially fund the acquisition of AFX in fiscal 2016 compared to a reduction in bank indebtedness in fiscal 2015. The Company also paid higher dividends of $11.5 million in 2016 compared to $9.7 million last year. The issuance of share capital remained constant year over year at $0.9 million. In addition to the obligations disclosed on its consolidated statements of financial position, Exco also enters into operating lease arrangements from time to time. Exco owns 13 of its 18 manufacturing facilities and most of its production equipment. Leased facilities consist of ALC’s operations in Lesotho and Bulgaria and AFX’s operations in Mexico. The Company also leases a sales and support center in Troy, Michigan and Munich Germany and a warehouse in Brownsville, Texas. The following table summarizes the Company’s significant short-term and long- term commitments on an undiscounted basis: EXCO TECHNOLOGIES LIMITED 12 ANNUAL REPORT 2016 Bank indebtedness Trade accounts payable Long-term debt Operating leases Capital expenditures Total < 1 year 1-3 years Over 3 years $13,469 64,948 58,687 5,549 2,175 $144,828 $13,469 64,948 4,173 1,604 2,175 $86,369 $- - 54,514 3,115 - $57,629 $- - - 830 - $830 ∗ Exco leases facilities, automotive, material handling vehicles and other miscellaneous office equipment. It is not Exco’s policy to purchase these assets at the expiry of their terms but occasionally it may purchase the assets at the end of the lease terms when the purchase options are favorable. Exco does not expect any material liquidity or capital resource impacts from these possible purchases. Cash Flows from Investing Activities - Capital Expenditures Cash used in investing activities in the current year totalled $104.9 million compared to $20.0 million last year. Included this year was $82.0 million cash paid for the acquisition of AFX compared to no such expenditures in 2015. This accounts for the major part of the investing activities reduction. Capital spending in the current year was $23.9 million compared to $20.6 million last year. Capital spending in the current year included $5.5 million for new equipment related to our machinery upgrade project in the large mould facility in Newmarket Ontario, net of Government grants of $2.9 million. Prior year expenditures included $0.9 million to complete the Castool Thailand greenfield facility, $1.1 million to complete the Extrusion Brazil greenfield facility and $6.3 million for the construction of a new production facility for Extrusion Texas. The balance of the capital spending is mostly related to machinery and equipment needed to maintain or upgrade our production capacity. In fiscal 2017, Exco plans to invest approximately $22.0 million in capital expenditures of which $0.5 million is for major equipment upgrade in the large mould business (net of remaining expected Government grants) and approximately $6 million is for building capacity additions in the Automotive Solutions segment. The remainder of the spending will be on machinery and equipment to maintain or upgrade capacity at Exco’s existing plants in both segments. We expect that in fiscal 2017 our cash flow from operations will exceed anticipated capital expenditures and, accordingly, our cash deposits and our credit lines will be more than sufficient to meet our operating and capital requirements. Financial Position and Cash Balance Exco’s financial position and liquidity remains strong. The Company’s conservative financial policies have served it well throughout the years and has allowed it to take advantage of acquisition opportunities and further organic growth as circumstances permit. Exco’s net debt totalled $44.6 million as at September 30, 2016 after spending $82.0 million to acquire AFX and $23.9 million on capital expenditures during the year. This compared to a net cash position of $24.5 million as at September 30, 215. In addition to its cash balances of $27.5 million, Exco retains access to $52.6 million of its $100.0 million committed credit facility, which matures February 2019. Pursuant to the terms of the credit facility, Exco is required to maintain compliance with certain financial covenants. The Company was in compliance with these covenants as at September 30, 2016. EXCO TECHNOLOGIES LIMITED 13 ANNUAL REPORT 2016 Outstanding Share Capital As at September 30, 2016, the Company had 42,568,175 common shares outstanding. In addition, as at September 30, 2016, the Company had outstanding stock options for the purchase of up to 626,657 common shares. CRITICAL ACCOUNTING POLICIES The preparation of Exco’s financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amount of revenue and expenses during the reporting period. Exco recognizes revenue upon percentage of completion of long-term contracts in the large die-cast moulds business and upon product completion for all other businesses. For short-term contracts in the large die-cast moulds business and all contracts in the extrusion and other tooling products and the Automotive Solutions segment products, completion is defined as shipment to customers. Management estimates and expenses the fair value of stock-based compensation granted after January 1, 2002. This fair value is amortized to earnings over the remaining vesting period using the Black-Scholes option pricing model. The Company believes that the estimate of stock-based compensation is a “critical accounting estimate” because management is required to make significant forward-looking assumptions including expected stock volatility, the change in expected dividend yields and the expected option term. Currently the compensation expense is recorded in the selling, general and administration category in the consolidated statements of income and comprehensive income. We evaluate property, plant and equipment and other long-lived assets for impairment whenever indicators of impairment exist. Indicators of impairment include prolonged operating losses or a decision to dispose of, or otherwise change the use of, an existing fixed or other long-lived asset. We believe that accounting estimates related to goodwill, property, plant and equipment and other long-lived asset impairment assessments are “critical accounting estimates” because: (i) they are subject to a significant measurement uncertainty and are susceptible to changes as management is required to make forward-looking assumptions regarding the impact of improvement plans on current operations, in-sourcing and other new business opportunities, program price and cost assumptions on current and future business, the timing of new program launches and future forecasted production volumes; and (ii) any resulting impairment loss could have a material impact on our consolidated net income and on the amount of assets reported on our consolidated statements of financial position. RECENT ACCOUNTING CHANGES AND EFFECTIVE DATES Refer to Note 2 to the consolidated financial statements for information pertaining to the accounting changes and issued accounting pronouncements effective in 2016 and future years. DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, together with other members of management, after evaluating the effectiveness of the Company’s disclosure controls and procedures, have EXCO TECHNOLOGIES LIMITED 14 ANNUAL REPORT 2016 concluded that the Company’s disclosure controls and procedures are adequate and effective in ensuring that material information relating to the Company and its consolidated subsidiaries would have been known to them. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer, together with other members of management, after having designed internal controls over financial reporting and conducted an evaluation of its effectiveness based on the integrated framework issued by the Committee of Sponsoring Organization of the Treadway Commission to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with generally accepted accounting principles, have not identified any changes to the Company’s internal control over financial reporting which would materially affect, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. RISKS AND UNCERTAINTIES The Casting and Extrusion segment is a capital goods business. Interest rates, exchange rates, corporate capital spending, the general economic climate, business confidence and our customer’s financial strength affect the demand for Exco’s dies, moulds and consumable parts for die-cast and extrusion machines. Abrupt changes in these factors often bring about dramatic changes in demand and pricing. Exco believes that its broad product line, geographic diversification and leadership position in its niche markets mitigate against this risk but some risk remains. Exco’s Automotive Solutions segment services automotive component suppliers (and Tier 1 suppliers) around the world. The results of this segment depend on demand for automobiles and the level of automobile production, which can fluctuate significantly with consumer confidence, general economic conditions, the cost and/or availability of consumer credit and gasoline, as well as, the market share of individual OEM customers. Contraction and slowing GDP growth in emerging economies, North America and Europe may also have a dampening effect on consumer demand for automobiles in these regions. Exco sells to its automotive customers pursuant to purchase orders which typically sets out price per unit but not volumes or fixed terms. These purchase orders may be terminated at any time with limited recourse for compensation or damages and pricing is typically adjusted downward from time to time in the form of ‘cost downs’. Termination of purchase orders and ‘cost downs’ may impact Exco’s margin and overall earnings if not contemporaneously offset by new business at better margin or cost reductions. Furthermore, in any given year, any number of programs will be expiring. While Exco is constantly quoting on replacement programs or new programs, there is no assurance that these will be awarded or that if awarded, the pricing and margin will be comparable to those of programs ending. Exco has in 2010, 2011, 2013, 2014 and 2016 made five acquisitions (Allper AG, Exco Colombia, Extrusion Texas, Automotive Leather Company and AFX Industries) and may make others in the future. Acquisitions inherently involve risk. While Exco has concluded many acquisitions that have been very successful, there have been several disappointing acquisitions which have adversely impacted earnings regardless of the size of the acquisition or the maturity of the business acquired. Exco’s Canadian operations negotiate sales contracts with customers in both Canadian and U.S. dollars and Euro. We also purchase, where we can, raw material in these currencies. U.S. dollar and Euro purchases provide a natural hedge against U.S. dollar and Euro sales of Exco’s Canadian operations. As for the remaining foreign exchange exposure not naturally hedged, Exco does not enter into forward contracts but prefers to incur U.S. dollar or Euro EXCO TECHNOLOGIES LIMITED 15 ANNUAL REPORT 2016 debt, from time to time as appropriate. Despite these measures, Exco is structurally a net seller of U.S. dollars and, to a lesser extent Euro, with foreign exchange losses increasing as the U.S. dollar and Euro decline in value against the Canadian dollar. While Exco has made considerable progress in reducing its reliance on U.S. dollar sales, markets which Exco currently services may experience rising competition from imports which have become more competitive as a result of foreign exchange movements. Exco’s U.S. operations earn profits in U.S. dollars. A stronger Canadian dollar results in lower Canadian dollar profit on translation. This does not, however, affect the competitiveness of our US operations within the U.S. market or other U.S. dollar-denominated markets. For fiscal 2017, it is estimated that Exco’s U.S. operations will be exposed to foreign exchange risk on the translation of pre-tax profit of about US$32.4 million. If the Canadian dollar were to strengthen or weaken by $0.01 in fiscal 2017, it is estimated that pre-tax profit would change by about $337 thousand or about $236 thousand after tax. These estimates are based on historical norms and may be materially different in 2017 if customers deviate from their past practices. During fiscal 2016 on average, the Canadian dollar depreciated by about 7% relative to the US dollar compared to fiscal 2015. Although this was favorable to Exco in 2016 there can be no assurance that in future years the exchange rate will not reverse and be unfavorable to Exco. To mitigate this risk we are focused on a number of initiatives. Wherever possible, throughout its Canadian operations, the Company is attempting to sell in Canadian dollars and source inputs and equipment in U.S. dollars, thereby improving its natural hedge. It is very difficult to dislodge the dominance of U.S. dollars as the commercial currency of choice. In addition, pricing in Canadian dollars may make the Company’s products uncompetitive and result in lost business. For further discussion of exchange rate impacts see Note 9 to the Consolidated Financial Statements. For fiscal 2017, we estimate our Canadian operations will be exposed to fluctuation in the value of the Canadian dollar relative to the U.S. dollar on about US$68.2 million of sales less purchases. If the Canadian dollar were to strengthen or weaken by $0.01 in fiscal 2017, we estimate pre-tax profit would change by $710 thousand or about $533 thousand after tax. These estimates are based on historical norms and may be materially different in fiscal 2017 if customers deviate from their past practices. Exco is a global manufacturer which has organized its global production and logistics footprint based on, among other things, the extent of duties/levies imposed on the import/export of our products and raw material inputs. As a general rule governments have been encouraging greater trade and more liberal access to their markets by reducing or eliminating tariffs. This has benefited Exco over the years. In the event that governments opt for more protectionist trade practises with respect to automotive components or their raw materials or subassemblies, Exco may be prejudiced. In some cases, OEMs can decide to design the Company’s products out of the automobile (“de-contented”) or reduce the trim level on which the Company’s products are installed for either aesthetic, cost or product redesign reasons. While Exco believes its focus on evolving from component supplier to a designer and integrator of small assemblies and sub-assemblies used in automotive and trunk interiors reduces the risk of de-contenting and trimming down decisions, some of Automotive Solutions products are not critical components and may still be de- contented. OEMs or their tiers may have excess production capacity or collective agreements which preclude efficient capacity reduction during times of declining sales. In these cases OEMs and/or their tiers may choose to fill their excess capacity by taking production from their suppliers and manufacturing the parts themselves. This process of ‘in- sourcing’ may have the impact of reducing the amount of business available to suppliers such as Exco. EXCO TECHNOLOGIES LIMITED 16 ANNUAL REPORT 2016 Exco has manufacturing facilities in Mexico, Colombia, Brazil, Thailand and Bulgaria and Morocco. Some of these operations incur labor costs and often other operating expenses in local currency. In several of these countries, sales contracts and major purchases such as material and equipment are negotiated in U.S. dollars or Euro. In other countries, sales contracts and major purchases are negotiated in local functional currencies as well. Major long-term fluctuations in the value of the local currencies against the U.S. dollar and Euro have the potential to affect Exco’s operating results. Exco may enter into forward contracts or ‘collar’ contracts from time to time in order to protect itself from currency fluctuations. These contracts are derivative instruments which, depending on their structure, may not qualify for hedge accounting treatment and accordingly may be ‘marked to market’ each quarter and expensed if necessary. It is difficult to anticipate fluctuations in these local currencies in the event of major economic, fiscal or political instability in these countries. The cost of manufacturing our products is a critical factor in determining our success over the long term. Manufacturing has generally expanded to developing countries where competing technologies and lower labor-cost structures exist. Exco must compete against companies doing business in these developing countries. Exco has met this challenge by manufacturing some labour-intensive products in Mexico, Thailand, Bulgaria and Morocco; however, many of our operations based in Canada and the U.S. must compete with products manufactured in lower- cost environments. With the acquisition of Extrusion Colombia, Automotive Leather Company, AFX Industries, the greenfields in Brazil and Thailand and the operation of numerous subsidiaries in US, Europe, Mexico and Morocco, Exco is increasingly conducting business in diverse countries and in diverse functional currencies. Given the size and persistence of global trade imbalances, sovereign debt concerns and political instability, various currencies in which Exco and its subsidiaries carry on business may experience high volatility from time to time. This may materially impact Exco’s earnings, retained earnings and the value of its investment in these countries. A significant portion of Exco’s receivables are with automotive customers. These customers have varying degrees of financial strength. These receivables are subject to varying degrees of collectability. The majority of these receivables are with U.S. entities that can avail themselves of Chapter 11 protection from creditors in certain circumstances and avoid payment of the Company’s receivables that are over 20 days from the date of the Chapter 11 filing. Exco’s receivables may also be with highly leveraged customers that may have recently merged or chosen to leverage their balance sheet for tax purposes or otherwise increase their investment yield. Doing business with such customers typically increases the risk of default and filing for bankruptcy protection. The Company uses its best efforts to collect accounts receivable under 60 days but in some cases the terms may be notably longer and often in other currencies thereby requiring Exco to bear the exchange rate risk. The Company often has the benefit of statutory or common law liens on its products, however, it is not uncommon for significant receivables to be outstanding for considerable periods, particularly in the large mould business. EXCO TECHNOLOGIES LIMITED 17 ANNUAL REPORT 2016 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Exco Technologies Limited Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Exco Technologies Limited, which comprise the consolidated statements of financial position as at September 30, 2016 and 2015, and the consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for the years then ended and a summary of significant accounting policies and other explanatory information. Management's responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Exco Technologies Limited as at September 30, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Toronto, Canada November 30, 2016 EXCO TECHNOLOGIES LIMITED 18 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION $ (000)'s As at September 30, 2016 September 30, 2015 As at ASSETS Current Cash and cash equivalents Accounts receivable (note 9) Unbilled revenue (note 8) Inventories (note 10) Prepaid expenses and deposits Income taxes recoverable Total current assets Property, plant and equipment, net (notes 5 and 17) Intangible assets, net (notes 6 and 17) Goodwill (notes 6 and 17) Deferred tax assets (note 14) Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness (notes 4 and 9) Trade accounts payable (note 9) Accrued payroll liabilities Other accrued liabilities Derivative instruments (note 9) Provisions (note 7) Income taxes payable Customer advance payments Long-term debt - current portion (notes 4, 9 and 17) Total current liabilities Long-term debt - long-term portion (notes 4, 9 and 17) Deferred tax liabilities (note 14) Total liabilities Shareholders' equity Share capital (note 3) Contributed surplus (note 3) Accumulated other comprehensive income (note 3) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $27,509 107,900 19,214 67,192 3,352 1,601 226,768 114,695 45,586 64,071 1,821 $452,941 $13,469 64,948 13,275 8,690 4,158 1,382 - 1,654 4,173 111,749 54,514 7,273 173,536 51,366 3,566 11,190 213,283 279,405 $452,941 $34,996 98,823 17,293 55,401 2,397 - 208,910 104,251 3,769 23,852 2,034 $342,816 $9,973 46,421 9,083 12,484 2,486 1,810 6,559 3,013 119 91,948 409 5,538 97,895 50,060 3,283 14,369 177,209 244,921 $342,816 The accompanying notes are an integral part of these consolidated financial statements. On behalf of the Board: Brian A. Robbins Director, President and Chief Executive Officer Laurie T.F. Bennett Director, Chairman of the Board EXCO TECHNOLOGIES LIMITED 19 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME $ (000)'s except for income per common share Sales (notes 8 and 12(A)) Cost of sales Selling, general and administrative expenses (notes 3 and 12(B)) Depreciation (note 5) Amortization (note 6) Loss (gain) on disposal of property, plant and equipment (note 5) Interest expense, net (note 18) Other income (note 19 ) Income before income taxes Provision for income taxes (note 14) Current Deferred Net income for the year Other comprehensive income (loss) Items that may be reclassified to net income in subsequent periods: Net unrealized loss on derivatives designated as cash flow hedges (notes 3 and 9) Unrealized gain (loss) from foreign currency translation (note 3) Comprehensive income Income per common share Basic Diluted Weighted average number of common shares outstanding (note 13) Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. Years ended September 30 2015 $498,295 379,500 41,638 13,523 1,621 199 939 - 437,420 2016 $588,989 460,119 45,864 14,787 3,150 (389) 1,289 (3,440) 521,380 67,609 60,875 17,420 2,632 20,052 $47,557 (1,173) (2,006) (3,179) $44,378 $1.12 $1.11 42,497 42,693 18,266 1,850 20,116 $40,759 (1,357) 11,089 9,732 $50,491 $0.96 $0.96 42,285 42,615 EXCO TECHNOLOGIES LIMITED 20 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY $ (000)'s Share capital $48,788 - - - 1,272 - 50,060 - - - 1,306 - $51,366 Contributed surplus $3,138 - - 521 (376) - 3,283 - - 682 (399) - $3,566 Retained earnings $146,183 40,759 (9,733) - - - 177,209 47,557 (11,483) - - - $213,283 Accumulated other comprehensive income (loss) Total Unrealized gain accumulated (loss) on other foreign comprehensive currency income (loss) translation $4,637 $5,124 - - - - - - - - 9,732 11,089 14,369 16,213 - - - - - - - - (3,179) (2,006) $11,190 $14,207 Net unrealized loss on derivatives designated as cash flow hedges ($487) - - - - (1,357) (1,844) - - - - (1,173) ($3,017) Total shareholders' equity $202,746 40,759 (9,733) 521 896 9,732 244,921 47,557 (11,483) 682 907 (3,179) $279,405 Balance, October 1, 2014 Net income for the year Dividends paid (note 3) Stock option grants (note 3) Issuance of share capital (note 3) Other comprehensive (loss) income (note 3) Balance, September 30, 2015 Net income for the year Dividends paid (note 3) Stock option grants (note 3) Issuance of share capital (note 3) Other comprehensive loss (note 3) Balance, September 30, 2016 The accompanying notes are an integral part of these consolidated financial statements. EXCO TECHNOLOGIES LIMITED 21 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS $ (000)'s OPERATING ACTIVITIES: Net income for the year Add (deduct) items not involving a current outlay of cash Depreciation (note 5) Amortization (note 6) Stock-based compensation expense (note 3) Deferred income taxes (note 14) Net interest expense Loss (gain) on disposal of property, plant and equipment Net change in non-cash working capital (note 15) Cash provided by operating activities FINANCING ACTIVITIES: Increase (decrease) in bank indebtedness Financing from long-term debt (note 4) Repayment of long-term debt (note 4) Interest paid, net Dividends paid (note 3) Issuance of share capital (note 3) Cash provided by (used in) financing activities INVESTING ACTIVITIES: Business acquisition, net of cash acquired (note 17) Purchase of property, plant and equipment (note 5) Purchase of intangible assets (note 6) Proceeds on disposal of property, plant and equipment Cash used in investing activities Years ended September 30 2015 2016 $47,557 $40,759 14,787 3,150 504 2,632 1,289 (389) 69,530 (4,060) 65,470 113 69,000 (24,941) (1,289) (11,483) 907 32,307 (82,024) (22,654) (1,292) 1,066 (104,904) 13,523 1,621 1,023 1,850 939 199 59,914 (17,847) 42,067 (11,310) 107 (1,698) (939) (9,733) 896 (22,677) - (19,989) (605) 587 (20,007) Effect of exchange rate changes on cash (360) 4,378 Net increase (decrease) in cash during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (7,487) 34,996 $27,509 3,761 31,235 $34,996 The accompanying notes are an integral part of these consolidated financial statements. EXCO TECHNOLOGIES LIMITED 22 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts 1. CORPORATE INFORMATION Exco Technologies Limited (the “Company”) is a global designer, developer and manufacturer of dies, moulds, components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. Through 16 strategic locations in 9 countries, the Company services a diverse and broad customer base. The Company is incorporated and domiciled in Canada. The registered office is located at 130 Spy Court, Markham, Ontario, Canada. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company’s significant accounting policies are outlined below: Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements and accompanying notes as at and for the year ended September 30, 2016 were authorized for issue by the Board of Directors on November 30, 2016. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company, its subsidiaries. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if and only if the Company has all of the following: power over the investee; exposure or rights to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect its returns. The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. All intercompany transactions and balances have been eliminated on consolidation. Functional and presentation currency Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Canadian dollars, which is the parent company’s functional currency. Transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange at the consolidated statement of financial position dates. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss in the consolidated statements of income and comprehensive income. Translation of foreign operations The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:  Assets and liabilities for each statement of financial position presented are translated at the closing rate at the  date of the consolidated statement of financial position; and Income and expenses for each statement of income and comprehensive income are translated at the exchange rates prevailing at the dates of the transactions. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are recorded in other comprehensive income. EXCO TECHNOLOGIES LIMITED 23 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts When a foreign operation is sold, exchange differences that were recorded in accumulated other comprehensive income (loss) are recognized in the consolidated statements of income and comprehensive income as part of the gain or loss on sale. Segment reporting Management has determined the operating segments based on the information regularly reviewed for the purposes of decision making, allocating resources and assessing performance by the Company’s chief operating decision maker, which is the chief executive officer. Factors used to identify reportable segments include product categories, customers served and geographical region of operations. The chief operating decision maker evaluates the financial performance of its operating segments primarily based on net income before interest, income taxes, depreciation and amortization. Interest in joint arrangement The Company has an interest in a joint operation, whereby the joint operators have a contractual arrangement that establishes joint control over the economic activities of the individual entity. The Company recognized its share of the joint operation’s assets, liabilities, revenues and expenses in the consolidated financial statements. The financial statements of the joint operation are prepared for the same reporting period as the parent Company. Business combinations Business combinations are accounted for using the acquisition method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets acquired and liabilities incurred or assumed. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, Business Combinations, are recognized at their net fair values at the acquisition date. Acquisition costs are expensed as incurred. Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. If the Company’s interest in the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognized immediately in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the groups of cash-generating units (“CGU”) that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of under this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the CGU retained. Revenue recognition Revenue is recognized when it can be measured reliably, the significant risks and rewards of ownership are transferred to the customer, and it is probable that future economic benefits will flow to the Company. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, sales taxes and duties.   Revenue from short-term casting contracts, extrusion and other tooling, and Automotive Solutions segment products is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually upon shipment or acceptance by customers. Revenue from long-term large die-cast mould contracts is recognized using the percentage of completion method according to IAS 11, Construction Contracts, under which: EXCO TECHNOLOGIES LIMITED 24 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts - When the outcome of a contract can be reliably estimated, revenue and costs associated with a contract are recognized as revenue and expenses, respectively, by reference to the stage of completion of the contract at the consolidated statement of financial position dates. The stage of completion is determined by the percentage of the costs incurred to date to the total estimated cost. - When the outcome of a contract cannot be reliably estimated, revenue is recognized only to the extent of contract costs incurred. When the uncertainties that prevented reliable estimation of the outcome of a contract no longer exist, contract revenue and expenses are recognized using the percentage of completion method. - - If the expected outcome of a contract is a loss, it is recognized immediately regardless of whether or not work has commenced on the contract. For contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed progress billings, a gross amount due from customers for contract work is recognized as unbilled revenue − an asset in the consolidated statements of financial position. For all contracts in progress for which progress billings exceed costs incurred plus recognized profits (less recognized losses), a gross amount due to customers for contract work is recognized as customer advance payments − a liability in the consolidated statements of financial position. Share-based payments The Company grants stock options to buy common shares of the Company to officers and employees. The Board of Directors grants such options for periods of up to 10 years, with vesting periods determined at its sole discretion and at prices equal to the average closing market prices for the five days preceding the date on which the options were granted. The Company follows the fair value based method of accounting for stock-based compensation. The fair value of the options is recognized as compensation expense in selling, general and administrative expenses in the consolidated statements of income and comprehensive income over the vesting period with a corresponding increase to contributed surplus. The contributed surplus balance is reduced as the options are exercised and the amount initially recorded for the options in contributed surplus is credited to share capital, along with the proceeds received on exercise. On November 18, 2005, the Board of Directors adopted a Deferred Share Unit (“DSU”) plan for Independent Directors. The DSU plan replaces the past practice of granting eligible directors stock options under the Stock Option Plan. Under the DSU plan, quarterly remuneration of a director is credited to the director’s DSU account in the form of deferred share units on the last business day of the quarter. The number of DSUs credited to the director’s account is determined by dividing a director’s quarterly remuneration by the weighted average price of the common share value traded in the last five business days of the quarter. DSUs are fully vested upon being credited to a director’s DSU account. The DSUs will be redeemed by the Company in cash payable 60 days after the Independent Director departs from the Board of Directors at the fair market value at the payment date. The Company uses the fair value based method of accounting for DSUs. The fair value of DSUs is recognized as compensation expense in selling, general and administrative expenses in the consolidated statements of income and comprehensive income with the corresponding credit or debit to other accrued liabilities. Income taxes Income tax expense consists of current and deferred income taxes. Income tax expense is recognized in the consolidated statements of income and comprehensive income. Current income tax expense is the expected income taxes payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end, adjusted for amendments to income taxes payable with regards to previous years. Deferred income taxes are recorded using the statement of financial position liability method. Under the statement of financial position liability method, deferred tax assets and liabilities are recognized for future tax consequences EXCO TECHNOLOGIES LIMITED 25 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable income will be available against which deductible timing differences can be utilized. Deferred income taxes are charged or credited in the consolidated statements of income and comprehensive income, except when they relate to items credited or charged directly to equity, in which case the deferred income taxes are also recorded in equity. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that all or part of the deferred income tax asset will be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that the benefit will be recovered. Other comprehensive income Other comprehensive income is the change in the Company’s net assets that results from translations, events and circumstances from sources other than the Company’s shareholders and includes items that would not normally be included in net income, such as foreign currency gains or losses on the translation of the financial statements of foreign operations and foreign exchange gains or losses on the fair valuation of foreign exchange contracts designated as cash flow hedges. The Company’s other comprehensive income, components of other comprehensive income and cumulative translation adjustments are presented in the consolidated statements of income and comprehensive income and the consolidated statements of changes in shareholders’ equity. Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with remaining maturities at their acquisition date of three months or less. Property, plant and equipment (i) Machinery and equipment Machinery and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. All direct costs related to the acquisition and installation of machinery and equipment are capitalized until the properties to which they are related are capable of carrying out their intended use. Machinery and equipment are depreciated using the diminishing balance method based on their estimated useful lives, which range from 4 to 20 years. (ii) Other assets Other assets are recorded at cost less accumulated depreciation and accumulated impairment losses and are depreciated using the straight-line method based on estimated useful lives of the assets, which generally range from 3 to 10 years, with the exception of buildings, which have estimated useful lives of 30 years. Land is not depreciated. Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures, are capitalized. Directly attributable expenses incurred for major capital projects are capitalized and no depreciation is recorded until the asset is brought to a working condition for its intended use. The costs of day-to-day servicing are expensed as incurred. These costs are more commonly referred to as “maintenance and repairs”. EXCO TECHNOLOGIES LIMITED 26 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The depreciation methods and useful lives are assessed annually or when critical events occur that may affect the useful lives and expected pattern of consumption of economic benefits embodied in the asset. (iii) Subsequent costs The cost of replacing part of an item within property, plant and equipment is capitalized when the cost is incurred or if it is probable that the future economic benefits will flow to the business unit and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other costs are expensed as incurred. Intangible assets An intangible asset is defined as being identifiable, able to bring future economic benefits to the Company and controlled by it. Intangible assets are recorded initially at cost and relate primarily to computer software, production and technology rights and customer relationships. An intangible asset is recognized when it is probable that the expected future economic benefits attributable to the asset will flow to the Company and the cost of the asset can be measured reliably. Intangible assets with finite lives are amortized over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization is provided based on the following estimated useful lives using the straight-line method: - - - - Customer relationships: 5 to 15 years Computer software and production and technology rights: 2 to 4 years Non-compete agreements: 5 years Trade Name: 7 years Intangible assets acquired in a business acquisition are primarily customer relationships and are initially recorded at fair value and subsequently at cost less amortization and impairment losses. Other intangible assets are comprised of computer software and production and technology rights. Identifiable intangible assets are recognized separately from goodwill. Impairment of long-lived assets and goodwill Impairment of long-lived assets (i) The Company’s property, plant and equipment and intangible assets are reviewed for indicators of impairment as at each consolidated statement of financial position date. If indication of impairment exists, the asset’s recoverable amount is estimated and an impairment loss is recognized when the carrying amount of an asset, or its CGU, exceeds its recoverable amount. Impairment loss is recognized in income or loss for the period. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU on a pro rata basis. The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. In determining fair value less costs to sell, recent market transactions are taken into account, if available. The Company bases its impairment calculation on detailed budgets that are prepared for each of the CGUs and generally cover a period of three years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the third year. An impairment loss is reversed if there is an indication that there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. EXCO TECHNOLOGIES LIMITED 27 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts (ii) Impairment of goodwill Goodwill is allocated to a CGU or a group of CGUs for the purpose of impairment testing based on the level at which it is monitored by management. The Company manages its goodwill at the level of its two operating segments, Automotive Solutions and Casting and Extrusion. Goodwill is tested for impairment annually during the fourth quarter of the year or whenever there is an indicator that the CGU group in which it resides may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU group to which the goodwill relates. Where the recoverable amount of the CGU group is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. The recoverable amounts of the CGU groups are determined based on the greater of fair value less costs to sell or value in use. Inventories Inventories, comprising raw materials, work in process, finished goods and production supplies, are valued at the lower of cost and net realizable value. Cost is determined substantially on a first-in, first-out basis and an appropriate portion of normal overhead expenditure and labour. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Obsolete, redundant and slow-moving stock is identified and written down. When circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-down previously recorded is reversed. Determination of fair value The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interests. A fair value measurement on a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Government grants Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, the cost of the asset is reduced by the amount of the grant and the grant is recognized as income in equal amounts over the expected useful life of the related asset. Financial instruments As defined under IAS 39, Financial Instruments, financial assets and liabilities are recognized in the Company’s consolidated statements of financial position when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the Company no longer has the rights to such cash flows, the risks and rewards of ownership or control of the asset. Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or expired. Financial instruments recognized in the consolidated statements of financial position comprise cash, trade accounts receivable, trade accounts payable, bank indebtedness, other accrued liabilities, customer advance payments, derivative financial instruments and long-term debt. Financial instruments are measured at their fair values on initial recognition. After initial recognition, financial instruments are measured at their fair values, except for financial assets classified as held-to- maturity or financial liabilities classified as loans and receivables and other financial liabilities, which are measured at amortized cost using the effective interest rate method. EXCO TECHNOLOGIES LIMITED 28 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Changes in fair value are included in the consolidated statements of income and comprehensive income unless the instrument is included in a cash flow hedge. If the instruments are included in a cash flow hedging relationship, that is effective, changes in value are recorded in other comprehensive income. When the hedged forecast transaction occurs, amounts previously recorded in other comprehensive income are recognized in the consolidated statements of income and comprehensive income. Amounts recognized as other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast purchase occurs. Accounts receivable are initially recognized at the transaction value and subsequently carried at amortized cost less impairment losses. The impairment loss of accounts receivable is based on a review of all outstanding amounts at year-end. Bad debts are written off during the period in which they are identified. Trade accounts payable and customer advance payments are initially recognized at the transaction value and subsequently carried at amortized cost. The Company uses derivative financial instruments, such as forward foreign currency exchange contracts in the form of put and call option contracts (“Collars”), to hedge cash outflows anticipated to be made in Mexican peso denominated payments against foreign currency fluctuations between US dollars and Mexican pesos. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognized immediately to profit or loss. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in other comprehensive income is transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss. Forward foreign exchange contracts have been entered into with JP Morgan Chase with a long-term debt rating of A+ as determined by Standard & Poor’s. The Company does not anticipate non-performance by JP Morgan Chase. The Company’s financial assets and liabilities recorded at fair value in the consolidated statements of financial position have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included in Level I is determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that are not based on observable market data. Transaction costs are expensed as incurred for financial instruments classified or designated as a derivative or held for trading. Transaction costs for financial assets classified as available for sale are added to the value of the instruments at the acquisition date. Transaction costs related to other financial liabilities are added to the value of the instrument at the acquisition date and recorded in income using the effective interest rate method. EXCO TECHNOLOGIES LIMITED 29 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Provisions As required under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the consolidated statement of financial position dates, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Leases As required under IAS 17, Leases, assets held under finance leases are recognized as assets of the Company at the lower of the fair value at the inception of the lease or the present value of the minimum lease payments. The corresponding amount is recognized as a finance lease liability. The finance lease liability is reduced by lease payments less finance charges, which are expensed as part of interest expense in the consolidated statements of income and comprehensive income. Under operating leases, payments are recognized as an expense over the term of the relevant leases. Employee future benefits Leave pay (i) Employee entitlements to annual leave are recognized as they are earned by the employees. A provision, stated at current cost, is made for the estimated liability at year-end. (ii) Termination benefits The Company is subject to Mexican statutory laws and regulations governing employee termination benefits. Employee future benefits include statutorily mandated accrued benefits payable to employees in the event of termination in certain circumstances. Termination benefits are recognized as an expense and an associated liability at the discounted value of the expected future payments. Critical judgments and use of estimates The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, revenue and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods. Significant accounts that require estimates as the basis for determining the stated amounts include accounting for doubtful accounts receivable, unbilled revenue, inventories, property, plant and equipment, contingent liabilities, income taxes, fair value of financial instruments and stock option valuation. Measurement for doubtful accounts receivable requires management to make estimates and assumptions based on prior experience and assessment of current financial conditions of customers, as well as the general economic environment and industry sectors in which they operate. Several divisions engage in the construction of custom-order large die-cast moulds. Such activities fall into the scope of IAS 11, Construction Contracts, where revenue is recognized using the percentage of completion method. EXCO TECHNOLOGIES LIMITED 30 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Under this method, at every reporting date, management is required to estimate the expected outcome on all outstanding contracts as well as measurement of their progress achieved towards their completion. The estimation requires management to make certain assumptions and judgments. These assumptions and judgments are continuously reviewed and updated. If different assumptions are used, it is possible that different amounts would be recognized in the consolidated financial statements. Net realizable value of inventories is dependent upon the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses based on prior experience and assessment of current market conditions. Depreciation and amortization of property, plant and equipment and intangible assets are dependent upon estimates of useful lives, which are determined with the exercise of judgment. The assessment of any impairment of property, plant and equipment and intangible assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets. The estimated useful lives of property, plant and equipment and intangible assets are reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of property, plant and equipment and intangible assets requires judgment and is based on currently available information. Property, plant and equipment and intangible assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Changes in circumstances, such as technological advances and changes to business strategy, can result in actual useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of property, plant and equipment and intangible assets or future cash flows constitute a change in accounting estimates and are applied prospectively. Income taxes are determined based on estimates of the Company’s current income taxes and estimates of deferred income taxes resulting from temporary differences. Deferred tax assets are assessed to determine the likelihood that they will be realized from future taxable income before they expire. Impairment of non-financial assets – Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of the fair value less costs of disposal and its value in use. The fair value less costs of disposal is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow (“DCF”) model. The cash flows are derived from the budget for the next three years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the CGUs, including a sensitivity analysis are disclosed and further explained in note 6. Accounting standards issued but not yet applied The following standards are not yet effective for the year ended September 30, 2016. The Company is in the process of reviewing the standards to determine the impact on its consolidated financial statements. IFRS 9, Financial Instruments ("IFRS 9") IFRS 9, as issued in 2014, introduces new requirements for the classification and measurement of financial instruments, a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting, with enhanced disclosures about risk management activity. IFRS 9 also removes the volatility in profit or loss that was caused by changes in an entity’s own credit risk for liabilities selected to be measured at fair value. The Company is in the process of reviewing the standard to determine the impact on its consolidated financial statements. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, which will be October 1, 2018 for the Company. Earlier application is permitted. EXCO TECHNOLOGIES LIMITED 31 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts IFRS 15, Revenue from Contracts with Customers ("IFRS 15") In May 2014, the IASB issued IFRS 15, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. On July 22, 2015, the IASB confirmed a one-year deferral of the effective date of the revenue standard to January 1, 2018, which will be October 1, 2018 for the Company. Earlier application is permitted. The Company is in the process of reviewing the standard to determine the impact on its consolidated financial statements. IFRS 16, Leases ("IFRS 16") In January 2016, the IASB issued IFRS 16, which requires lessees to recognize assets and liabilities for most leases. Lessees will have a single accounting model for all leases, with certain exemptions and lessor accounting is substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, which will be October 1, 2019 for the Company. Earlier application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company is in the process of reviewing the standard to determine the impact on its consolidated financial statements. 3. SHARE CAPITAL Authorized The Company’s authorized share capital consists of an unlimited number of common shares, an unlimited number of non-voting preference shares issuable in one or more series and 275 special shares. None of these shares have par value. Issued The Company has not issued any non-voting preference shares or special shares. Changes to the issued common shares are shown in the following table: Issued and outstanding as at October 1, 2014 Issued for cash under Stock Option Plan Contributed surplus on stock options exercised Issued and outstanding as at September 30, 2015 Issued for cash under Stock Option Plan Contributed surplus on stock options exercised Issued and outstanding as at September 30, 2016 Common Shares Number of Shares 42,145,749 221,158 - 42,366,907 201,268 - 42,568,175 Stated Value $48,788 896 376 50,060 907 399 $51,366 Accumulated other comprehensive income Included in accumulated other comprehensive income in shareholders’ equity are gains and losses arising from the translation of the Company’s foreign subsidiaries, net gain and loss on derivatives designated as cash flow hedges and reclassification to income of net gain (loss) on cash flow hedges as summarized in the following table. EXCO TECHNOLOGIES LIMITED 32 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Opening balance, October 1 Net unrealized loss on derivatives designated as cash flow hedges (1) Unrealized gain (loss) on currency translation adjustments Total other comprehensive income for the year Closing balance, September 30 (1) Net of income tax recovery of $409 (2015 - recovery of $471). 2016 $14,369 (1,173) (2,006) (3,179) $11,190 2015 $4,637 (1,357) 11,089 9,732 $14,369 Cash dividends During the year, the Company paid four quarterly cash dividends totaling $11,483 (2015 - $9,733). The dividend rate per quarter increased in the second quarter of the year from $0.06 to $0.07 per common share. Stock Option Plan The Company has a Stock Option Plan under which common shares may be acquired by employees and officers of the Company. The following table shows the changes to the number of stock options outstanding during the year: Balance, beginning of year Granted during the year Exercised during the year Expired during the year Balance, end of year 2016 2015 Number of Options 879,275 25,000 (201,268) (76,350) 626,657 Weighted Average Exercise Price $8.92 $14.44 $4.50 $7.72 $10.70 Number of Options 738,812 365,000 (221,158) (3,379) 879,275 Weighted Average Exercise Price $5.10 $13.68 $4.06 $7.15 $8.92 The following table summarizes information about stock options outstanding and exercisable as at September 30, 2016: Range of Exercise Prices $1.52 - $5.00 $5.01 - $10.00 $10.01 - $14.58 Number Outstanding 55,625 211,382 359,650 Weighted Average Remaining Contractual Life Options Outstanding Weighted Average Exercise Price $3.32 $7.35 $13.81 years years years 0.96 2.83 4.25 Options Exercisable Weighted Average Exercise Price $3.24 $7.41 $13.85 Number Exercisable 41,625 55,001 64,850 $1.52 - $14.58 626,657 3.48 years $10.70 161,476 $8.92 The number of common shares available for future issuance of options as at September 30, 2016 is 1,671,688 (2015 - 1,620,338). The number of options outstanding together with those available for future issuance totals 2,298,345 (2015 - 2,499,613) or 5.4% (2015 - 5.9%) of the issued and outstanding common shares. The options are granted for a term of 5 to 10 years and the options vest at 20% at each anniversary date from the date of grant. Stock-based compensation Stock-based compensation resulting from applying the Black-Scholes option pricing model to the Company’s Stock Option Plan was $682 for the year ended September 30, 2016 (2015 - $521). All stock-based compensation has been recorded in selling, general and administrative expenses. The weighted average assumptions used to measure the EXCO TECHNOLOGIES LIMITED 33 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts fair value of stock options and the weighted average fair value of options granted during the years ended September 30, 2016 and 2015 are as follows: Risk free interest rates Expected dividend yield Expected volatility Expected time until exercise Weighted average fair value of the options granted 2016 0.88% 1.63% 33.37% 5.50 years $3.83 2015 1.00% 1.67% 36.03% 5.50 years $3.86 DSU Plan The Company has a DSU plan under which members of the Company's Board of Directors who are not management receive a portion of their annual retainers and fees in the form of DSUs, which are classified as other accrued liabilities. The DSUs vest on the date they are granted and are settled in cash upon termination of Board service. This is a cash-settled compensation arrangement. During the year ended September 30, 2016, the Company granted 6,510 DSUs (2015 - 6,624 DSUs) and redeemed no DSUs. During the year ended September 30, 2016 the Company recorded stock-based compensation income of $178 (2015 - $502 expense) related to awards under the DSU plan with a corresponding credit to other accrued liabilities. As at September 30, 2016, 108,393 DSUs were outstanding with a carrying value of $1,305 recorded in other accrued liabilities. Contributed surplus Contributed surplus consists of accumulated stock option expense less the fair value of the options at the grant date that have been exercised and reclassified to share capital. The following is a continuity schedule of contributed surplus: Balance, beginning of year Stock option expense Exercise of stock options Balance, end of year 2016 $3,283 682 (399) $3,566 2015 $3,138 521 (376) $3,283 4. BANK INDEBTEDNESS AND LONG-TERM DEBT The operating lines are available in U.S. dollars, Canadian dollars, euros and South African rand at variable rates ranging from prime minus 0.5% to prime plus 0.5%. The Company’s North American credit facilities are collateralized by a general security agreement over its North American assets. The Bulgarian credit facilities are collateralized by a security interest over the Company’s Bulgarian assets. The South African credit facilities are collateralized by a security interest over the Company’s South African current assets. JP Morgan, credit facility (Canada, U.S.A.) JP Morgan London, operating line (Europe) Nedbank operating lines (South Africa) DSK Bank operating lines (Bulgaria) Facilities $100,000 2,211 5,255 8,122 $115,588 Utilizations $47,363 733 3,247 8,122 Unused and Available $52,637 1,478 2,008 - $59,465 $56,123 EXCO TECHNOLOGIES LIMITED 34 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Prime rate in Canada Prime rate in U.S.A. Prime rate in Eurozone Prime rate in South Africa 2016 2.70% 3.50% 0.00% 10.50% 2015 2.70% 3.25% 0.05% 9.50% In addition to the above credit facilities, the Company also has a long-term debt facility of $582, of which $18 is currently utilized, for its capital investment in South Africa at a variable rate of South African prime minus 0.5%. This facility is collateralized by the underlining financed assets. Further, in the U.S.A., the Company also has a long-term promissory note payable over five years and collateralized by a parcel of land purchased as a factory location. The note bears interest of 6%. The interest and principal are forgivable over a five year period, subject to the Company meeting certain performance criteria for the specific factory location. As at September 30, 2016 there are no unfulfilled conditions or contingencies attached to this loan. On February 18, 2016, the Company closed an agreement for a new CAD $100,000 Committed Revolving Credit Facility with JP Morgan Chase Bank N.A., of which CAD $47,363 was used as at September 30, 2016. The utilization is comprised of long-term debt in the amount of $46,000 and $1,363 of bank indebtedness. The facility has a three year term and is secured by a general security agreement covering all assets of the Company and its Canadian and US subsidiaries with the exception of real property. The Credit Facility is available to fund working capital, capital expenditures and other general corporate purposes of the Company and its subsidiaries, including acquisitions. Interest rates vary based on prime, bankers’ acceptance, CDOR or LIBOR base rates plus a relevant margin depending on the level of the Company’s net leverage ratio. Pursuant to the terms of the credit agreement, the Company is required to maintain compliance with a net worth covenant. The Company was in compliance with these covenants as at September 30, 2016. Additionally, the Company maintains a credit facility with JP Morgan Chase Bank N.A. London Branch related to any needs for Euro currency. The facility totals CAD $2,211 (EUR 1.5 million) and bears interest based on LIBOR. The Company had utilized CAD $733 as at September 30, 2016. On April 4, 2016, the Company entered into promissory Term Notes amounting to US$9,307 in conjunction with the acquisition of AFX Industries (see note 17). The Term Notes bear interest at a rate equal to the mid-term Applicable Federal Rate in the United States, compounded annually. The principal and interest is payable in three annual payments on the anniversary date of the AFX acquisition. The components of long-term debt are as follows: Bank debt Term notes Finance leases Promissory note Less: current portion Long-term debt, long-term portion Long-term debt Less: current portion Long-term debt, long-term portion September 30, 2016 $46,000 12,210 18 459 (4,173) $54,514 September 30, 2015 $- - 67 461 (119) $409 2016 $58,687 4,173 $54,514 EXCO TECHNOLOGIES LIMITED 35 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts 5. PROPERTY, PLANT AND EQUIPMENT Cost Balance as at September 30, 2014 Additions Assets acquired Reclassification Less: disposals Foreign exchange movement Balance as at September 30, 2015 Additions Assets acquired Assets acquired from business acquisition ( note 17 ) Reclassification Less: disposals Foreign exchange movement Balance as at September 30, 2016 Machinery and Equipment Tools Buildings Land Assets under Construction Total $164,932 $18,364 $57,318 $8,976 $5,965 $255,555 2,496 11,668 (4,879) 6,118 1,474 1,000 (878) 1,319 708 362 (12) 2,111 467 - - 121 14,844 19,989 (13,030) (323) (117) - (6,092) 9,552 180,335 21,279 60,487 9,564 7,339 279,004 3,325 664 567 2,738 13,649 (13,311) (472) 101 755 (1,634) (162) 67 6,845 (176) (50) - - 78 - 29 18,098 22,654 - (21,327) - (72) 2,906 - (15,121) (727) $186,264 $21,003 $67,740 $9,671 $4,038 $288,716 Accumulated depreciation and impairment losses Balance as at September 30, 2014 Depreciation for the year Less: disposals Foreign exchange movement Balance as at September 30, 2015 Depreciation for the year Less: disposals Foreign exchange movement Balance as at September 30, 2016 Carrying amounts As at September 30, 2015 As at September 30, 2016 Machinery and Equipment Tools Buildings Land Assets under Construction Total $120,677 9,510 (4,624) 4,966 130,529 10,477 (12,749) (738) $13,483 1,754 (679) 1,174 15,732 1,799 (1,521) (134) $24,731 2,259 (2) 1,504 28,492 2,511 (175) (202) $- - - - - - - - $- - - - - - - - $158,891 13,523 (5,305) 7,644 174,753 14,787 (14,445) (1,074) $127,519 $15,876 $30,626 $- $- $174,021 $49,806 $58,745 $5,547 $5,127 $31,995 $37,114 $9,564 $9,671 $7,339 $4,038 $104,251 $114,695 EXCO TECHNOLOGIES LIMITED 36 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts As at September 30, 2016, the Company had deposits for machinery and equipment and buildings under construction totalling $4,038 (2015 - $7,339). These assets are not being depreciated because they are under construction and not in use. As at September 30, 2016, the Company had recorded government grants totaling $2,948 as a contribution to reduce the cost of certain machinery and equipment specified by the grant. 6. INTANGIBLE ASSETS AND GOODWILL Computer Software and Other Acquisition Intangibles** Assets under Construction (Software) Total Intangible Assets Goodwill Cost Balance as at September 30, 2014 Additions Assets acquired Less: disposals Foreign exchange movement Balance as at September 30, 2015 Additions Assets acquired Assets acquired from business acquisition (note 17) Reclassifications Less: disposals Foreign exchange movement Balance as at September 30, 2016 $23,384 $3,500 605 (40) 263 24,212 658 356 252 (5,618) (27) $19,833 - - - 3,500 - 42,898 - - 430 $46,828 $- - - - - 634 - (252) - - $382 $26,884 $23,892 605 (40) 263 27,712 1,292 43,254 - (5,618) 403 - - (40) 23,852 - 39,811 - - 408 $67,043 $64,071 Accumulated amortization and impairment losses Balance as at September 30, 2014 Amortization for the year Less: disposals Foreign exchange movement Balance as at September 30, 2015 Amortization for the year Less: disposals Foreign exchange movement Balance as at September 30, 2016 Carrying amounts As at September 30, 2015 Computer Software and Other Acquisition Intangibles** Assets under Construction (Software) Total Intangible Assets Goodwill $21,699 915 (40) 255 22,829 863 (5,618) (30) $18,044 $408 706 - - 1,114 2,287 - 12 $3,413 $- - - - - - - - $- $22,107 1,621 (40) 255 23,943 3,150 (5,618) (18) $21,457 $- - - - - - - - $- $1,383 $2,386 $- $3,769 $23,852 As at September 30, 2016 $64,071 $1,789 **Acquisition intangibles is comprised of customer relationships and trade names resulting from business acquisitions and the purchase price allocation thereof. $43,415 $45,586 $382 EXCO TECHNOLOGIES LIMITED 37 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Of the total goodwill disclosed above, $63,779 is allocated to the Automotive Solutions segment and the remainder to the Casting and Extrusion segment. Of the customer relationships, $3,500 is amortized over 5 years and $38,891 is amortized over 15 years. Impairment testing of goodwill The Company performed the annual impairment test of goodwill allocated to the Automotive Solutions segment as at September 30, 2016. The recoverable amount of the segment has been determined based on a value-in-use calculation using cash flow projections from financial budgets approved by senior management covering a three-year period. Cash flow beyond the three-year period was extrapolated using a 1% growth rate, which represents the expected growth in the Canadian economy. The pre-tax discount rate applied to future cash flows was 6.6%. As a result of the analysis, management determined there was no impairment for this CGU. Key assumptions to value-in-use calculations The calculation of the value-in-use for the Automotive Solutions segment is most sensitive to the following assumptions: -Discount rates -Growth rate to extrapolate cash flows beyond the budget period -Revenue and margin growth rates during budget period The discount rate used represents the current market assessment of the risks specific to the Automotive Solutions segment, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate is derived from the CGU’s weighted average cost of capital, taking into account both debt and equity. The cost of equity is derived from the expected return on investment by the Company’s shareholders. The cost of debt is based on the interest-bearing borrowing the Company is obliged to service. Segment-specific risk is incorporated by applying different debt to equity ratios. Sensitivity to changes in assumptions Management believes that within reason, possible changes to any of the above key assumptions, recoverable amounts exceed carrying values. 7. PROVISIONS The following table outlines the provisions at the dates of the consolidated statements of financial position and changes to the provisions during the reporting periods. Severance Warranties Claims and litigation September 30, 2016 $1,205 153 24 $1,382 September 30, 2015 $1,753 33 24 $1,810 The fair value of the above provisions is management’s best estimate based on information available. The ultimate amounts of the payments approximate the provision amounts and the timing of payments is expected to be within the next twelve months. There is no reimbursement expected for any of these provisions. EXCO TECHNOLOGIES LIMITED 38 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The movement in the provision accounts is as follows: Closing balance, as at September 30, 2014 Additions Utilized Reversals Foreign exchange differences Closing balance, as at September 30, 2015 Additions Acquired through business acquisition Utilized Reversals Foreign exchange differences Closing balance, as at September 30, 2016 8. TOOL CONSTRUCTION CONTRACTS Severance $1,681 934 (862) (36) 36 $1,753 1,003 557 (1,682) (293) (133) Warranties $28 - - - 5 $33 120 - - - - Claims and Litigation $24 - - (5) 5 $24 - - - - - Total $1,733 934 (862) (41) 46 $1,810 1,123 557 (1,682) (293) (133) $1,205 $153 $24 $1,382 Contract revenue recognized under the percentage of completion method during the year amounted to $52,126 (2015 - $65,259). For contracts in progress, the following table summarizes the aggregate amount of costs incurred, profits recognized, progress billings from customers for the related contracts and retentions being held to date. September 30, 2016 September 30, 2015 Contracts in progress: Aggregate amount of costs incurred to date Add: profits recognized to date Gross: unbilled revenue Less: progress billings Net unbilled revenue Due from customers Due to customers 9. FINANCIAL INSTRUMENTS $17,393 5,409 22,802 (3,588) $19,214 $19,773 ($559) $13,984 7,021 21,005 (3,712) $17,293 $18,508 ($1,215) The Company classifies its financial instruments as follows: Cash Trade accounts receivable* Prepaid expenses and deposits Trade accounts payable Bank indebtedness Customer advance payments Accrued liabilities Derivative instruments Long-term debt *Recorded net of allowance for doubtful accounts. Financial assets – held for trading measured at fair value Financial assets – measured at amortized cost Financial assets – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – financial liabilities measured at amortized cost Financial liabilities – financial liabilities measured at amortized cost Financial liabilities – held for trading measured at fair value Financial liabilities – measured at amortized cost EXCO TECHNOLOGIES LIMITED 39 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Foreign exchange contracts The Company entered into a series of Collars extending through to September 6, 2018 and designated them as cash flow hedges against Mexican payroll and other local Mexican costs. The total amount of these Collars is 384.0 million Mexican pesos (September 30, 2015 - 252.0 million Mexican pesos). The selling price ranges from 13.90 to 18.33 Mexican pesos to each US dollar. Management estimates that a cumulative loss of $4,158 (September 30, 2015 - loss of $2,486) would be realized if these Collars were terminated on September 30, 2016. Net of income tax recovery of $1,141, the cumulative loss of $3,017 is recorded in other comprehensive income. During the year, the estimated fair value loss of $1,173, net of income tax recovery of $409 (2015 - loss of $1,357 net of income tax recovery of $471) has been included in other comprehensive income and the cumulative loss of $4,158 is recorded in the consolidated statements of financial position under the caption derivative instruments. Financial risk management The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measurement of the risks and how they are managed: a) Credit risk Credit risk is the risk of an unexpected loss if a customer or third party fails to meet its contractual obligations. The Company’s primary credit risk is its outstanding trade accounts receivable. The carrying amount of its outstanding trade accounts receivable represents the Company’s estimate of its maximum credit exposure. The Company regularly monitors its credit risk exposure and takes steps such as credit approval procedures, establishing credit limits, utilizing credit assessments and monitoring practices to mitigate the likelihood of these exposures from resulting in an actual loss. The carrying amount of the trade accounts receivable disclosed in the consolidated statements of financial position is net of allowance for doubtful accounts, estimated by the Company’s management, based on prior experience and assessment of current financial conditions of customers as well as the general economic environment. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of income and comprehensive income. As at September 30, 2016, the accounts receivable balance (net of allowance for doubtful accounts) is $107,900 (2015 - $98,823) and the Company’s five largest trade debtors accounted for 34.6% of the total accounts receivable balance (2015 - 50.1%). As at September 30, 2016, accounts receivable of $637 (2015 - $976) are insured against default. The following table presents a breakdown of the Company’s accounts receivable balances: Trade accounts receivable Employee receivable Sales tax receivable Other Less: allowance for doubtful accounts Total accounts receivable, net September 30, 2016 September 30, 2015 $100,471 $94,421 203 3,595 4,197 (566) 183 4,081 710 (572) $107,900 $98,823 EXCO TECHNOLOGIES LIMITED 40 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The aging of trade accounts receivable balances is as follows: Not past due Past due 1-30 days Past due 31-60 days Past due 61-90 days Past due over 90 days Less: allowance for doubtful accounts Total trade accounts receivable, net The movement in the allowance for doubtful accounts is as follows: Opening balance Additions Utilized Reversal Exchange differences Closing balance September 30, 2016 September 30, 2015 $87,537 10,116 884 850 1,084 (566) $81,425 9,924 1,343 574 1,155 (572) $99,905 $93,849 September 30, 2016 $572 274 (121) (153) (6) $566 September 30, 2015 $445 214 (49) (66) 28 $572 b) Liquidity risk Liquidity risk refers to the possibility that the Company may not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by minimizing its financial leverage and arranging credit facilities in order to ensure sufficient funds are available to meet its financial obligations. This is achieved by continuously monitoring cash flows from its operating, investing and financing activities. The Company does not carry excess credit facilities due to the stand-by costs charged by its lenders. As at September 30, 2016, the Company has a net debt balance of $44,647 (2015 - $24,495 net cash) and unused credit facilities of $56,123 (2015 - $23,921). In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following tables summarize the Company’s significant commitments on an undiscounted basis and corresponding maturities: Bank indebtedness Trade accounts payable Long-term debt Operating leases Capital expenditures Total $13,469 64,948 58,687 5,549 2,175 $144,828 September 30, 2016 < 1 Year $13,469 64,948 4,173 1,604 2,175 $86,369 1-3 Years $- - 54,514 3,115 - $57,629 over 3 Years $- - - 830 - $830 EXCO TECHNOLOGIES LIMITED 41 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Bank indebtedness Trade accounts payable Long-term debt Operating leases Capital expenditures Total $9,973 46,421 528 3,326 6,106 $66,354 September 30, 2015 < 1 year $9,973 46,421 119 1,982 6,106 $64,601 1-3 years $- - 409 1,339 - $1,748 over 3 years $- - - 5 - $5 c) Foreign exchange risk The Company’s functional and reporting currency is the Canadian dollar. It operates in Canada with subsidiaries located in the United States, Mexico, Colombia, Brazil, Thailand, Germany, Bulgaria, Morocco, South Africa and Lesotho. It is exposed to foreign exchange transaction and translation risk through its operating activities. Unfavourable changes in the exchange rates may affect the operating results and shareholders’ equity of the Company. In order to mitigate the foreign currency exposure, the Company reduces part of its foreign exchange risk by sourcing a significant portion of its manufacturing inputs in the currency that its sales are denominated in. In addition to the above natural hedge, the Company also uses Collars to hedge cash outflows for the Mexican payroll and other local Mexican costs. These Collars are designated as cash flow hedges. The resulting gain or loss on the valuation of these financial instruments is recognized in the consolidated statements of income and comprehensive income. The Company does not mitigate the translation risk exposure of its foreign operations due to the fact that these investments are considered to be long-term in nature. With all other variables held constant, the following tables outline the Company’s annual foreign exchange exposure at one percent fluctuation between various currencies compared with the average annual exchange rate. Income before income taxes Other comprehensive income Income before income taxes Other comprehensive income 1 % Fluctuation USD vs. CAD 1 % Fluctuation EUR vs. CAD 1 % Fluctuation MXP vs. CAD +/- 1,248 +/- 1,018 +/- 48 +/- 324 +/- 1 +/- 39 1 % Fluctuation COP vs. CAD 1 % Fluctuation BRL vs. CAD 1 % Fluctuation ZAR vs. CAD +/- 9 +/- 72 +/- 18 +/- 331 +/- 1 +/- 64 d) Interest rate risk The Company’s exposure to interest rate risk relates to its net cash position, variable rate credit facilities and variable rate long-term debt. The Company mitigates its interest rate risk exposure by reducing or eliminating its overall debt position. Net earnings or loss is sensitive to the impact of a change in interest rates on the average balance of interest bearing financial liabilities during the year. As at September 30, 2016, the Company has a net debt position of $44,647 (2015 - $24,495 net cash). e) Fair value Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Presented below is a comparison of the fair value of each financial instrument to its carrying value. Due to their short-term nature, the fair value of cash and short-term deposits, trade accounts receivable, trade accounts payable and customer advance payments is assumed to approximate their carrying value. EXCO TECHNOLOGIES LIMITED 42 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The fair value of derivative instruments that are not traded in an active market such as over-the-counter foreign exchange options and Collars, is determined using quoted forward exchange rates as at the consolidated statement of financial position dates and are Level 2 instruments. During the year ended September 30, 2016 there were no transfers between Level 1 and Level 2 fair value measurements. The fair value of bank indebtedness and long term debt were determined using the discounted cash flow method, a generally accepted valuation technique. The discounted factor is based on market rates for debt with similar terms and remaining maturities and based on the Company’s credit risk. The valuation is determined using Level 2 inputs, which are observable inputs or inputs that can be corroborated by observable market data for substantially the full term of the asset or liability. The carrying value and fair value of all financial instruments are as follows: September 30, 2016 September 30, 2015 Carrying Amount of Asset (Liability) $27,509 107,900 3,352 (64,948) (13,469) (1,654) (21,965) (4,158) ($58,687) Fair Value of Asset (Liability) $27,509 107,900 3,352 (64,948) (13,469) (1,654) (21,965) (4,158) ($58,687) Carrying Amount of Asset (Liability) $34,996 98,823 2,397 (46,421) (9,973) (3,013) (21,567) (2,486) ($528) Fair Value of Asset (Liability) $34,996 98,823 2,397 (46,421) (9,973) (3,013) (21,567) (2,486) ($528) September 30, 2016 $43,525 9,309 14,401 3,273 (3,316) September 30, 2015 $31,479 10,295 14,219 1,832 (2,424) $67,192 $55,401 September 30, 2016 $2,424 1,880 416 (1,258) (135) (11) $3,316 September 30, 2015 $2,146 786 - (596) (64) 152 $2,424 The movement in the obsolescence provision accounts is as follows: Opening balance Additions Acquired through business acquisition Utilized Reversals Exchange differences Closing balance EXCO TECHNOLOGIES LIMITED 43 ANNUAL REPORT 2016 Cash Total accounts receivable Prepaid expenses and deposits Trade accounts payable Bank indebtedness Customer advance payments Accrued liabilities Derivative instruments Long-term debt 10. INVENTORIES Raw materials Work in process Finished goods Production supplies Less: obsolescence provision EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts During the year, inventories of $318,413 (2015 - $256,454) were expensed, of which $1,745 was from the write- downs of inventories (2015 - $722), net of $135 reversal of write-downs (2015 - $64). 11. CAPITAL MANAGEMENT The Company defines capital as net debt and shareholders’ equity. As at September 30, 2016, total managed capital amounted to $324,052 (2015 - $244,921), consisting of net debt of $44,647 (2015 - nil) and shareholders’ equity of $279,405 (2015 - $244,921). The Company’s objectives when managing capital are to:  utilize short-term funding sources to manage its working capital requirements and fund capital expenditures required to execute its operating and strategic plans; and  maintain low overall debt levels relative to shareholders’ equity with a strong bias for short-term debt in order to minimize the cost of capital and allow maximum flexibility to respond to current and future industry, market and economic risks and opportunities. The following ratios are used by the Company to monitor its capital: Net debt to equity ratio Current ratio September 30, 2016 September 30, 2015 0.16:1 2.03:1 0.00:1 2.12:1 The following table details the net debt calculation used in the net debt to equity ratio as at the years ended as indicated: Bank indebtedness Less: cash and short-term deposits Net debt September 30, 2016 $72,156 September 30, 2015 $10,501 (27,509) 44,647 (34,996) nil The current ratio is calculated by dividing current assets (excluding cash and short-term deposits) by current liabilities (excluding bank indebtedness). Based on the current funds available and the expected cash flow from operations, management believes that the Company has sufficient funds to meet its liquidity requirements. The Company is not subject to any capital requirement imposed by regulators; however, the Company must adhere to a net worth covenant related to the terms of its bank credit facility. As at September 30, 2016, the Company was in compliance with the required financial covenants. As at As at 12. OTHER INFORMATION A. SEGMENTED INFORMATION Business segments The Company operates in two business segments: Casting and Extrusion and Automotive Solutions. The accounting policies followed in the operating segments are consistent with those outlined in note 2 to the consolidated financial statements. EXCO TECHNOLOGIES LIMITED 44 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The Casting and Extrusion segment designs and engineers tooling and other manufacturing equipment. Its operations are substantially for automotive and other industrial markets in North America. The Automotive Solutions segment produces automotive interior components and assemblies primarily for seating, cargo storage and restraint for sale to automotive manufacturers and Tier 1 suppliers (suppliers to automakers). The Company evaluates the performance of its operating segments primarily based on net income before interest and income tax expense. The Corporate segment involves administrative expenses that are not directly related to the business activities of the above two operating segments. Sales Intercompany sales Net sales Depreciation Amortization Segment income (loss) before interest and income taxes Non-operating income Net interest expense Income before income taxes Property, plant and equipment additions Property, plant and equipment acquired through business acquisition Property, plant and equipment, net Intangible asset additions Intangibles acquired through business acquisition Intangible assets, net Goodwill acquired through business acquisition Goodwill, net Total assets Total liabilities Casting and Extrusion Automotive Solutions Corporate Total 2016 $197,942 (5,722) 192,220 11,543 696 24,705 - $397,697 (928) 396,769 3,217 2,454 48,012 3,440 20,057 2,382 - 92,644 977 - 1,729 - 292 181,019 $26,104 2,906 20,772 309 43,254 43,851 39,811 63,779 269,233 $76,948 $- $595,639 (6,650) - 588,989 - 14,787 27 3,150 - 65,458 (7,259) 3,440 - (1,289) 67,609 22,654 215 - 1,279 6 - 6 - - 2,689 2,906 114,695 1,292 43,254 45,586 39,811 64,071 452,941 $70,484 $173,536 EXCO TECHNOLOGIES LIMITED 45 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Casting and Extrusion Automotive Solutions Corporate Total 2015 Sales Intercompany sales Net sales Depreciation Amortization Segment income (loss) before interest and income taxes Net interest expense Income before income taxes Property, plant and equipment additions Property, plant and equipment, net Intangible asset additions Intangible assets, net Goodwill, net Total assets Total liabilities $204,144 (8,992) 195,152 10,020 726 32,398 18,181 83,784 573 1,201 282 188,825 $25,817 Geographic and customer information Sales Canada United States Europe Mexico South America Asia Other $303,825 (682) 303,143 3,481 895 36,550 1,758 19,374 32 2,568 23,570 152,645 $60,424 2016 $22,549 288,853 208,531 49,008 7,883 7,060 5,105 $588,989 $- $507,969 (9,674) - 498,295 - 13,523 22 1,621 - 61,814 (7,134) (939) 60,875 19,989 104,251 605 3,769 23,852 342,816 $97,895 50 1,093 - - - 1,346 $11,654 2015 $21,221 243,886 190,624 24,883 6,368 6,400 4,913 $498,295 In 2016, the Company’s largest 2 customers were from the Automotive Solutions segment (2015 - the Company’s largest 2 customers were from the Automotive Solutions segment). The total billings to these customers accounted for 24.4% (2015 - 30.6%) of total sales. The account receivable pertaining to these customers was $17,611 at year- end (2015 - $21,693). The allocation of sales to the geographic categories is based upon the customer location where the product is shipped. Property, plant and equipment, net Canada United States Mexico South America Thailand Europe Morocco South Africa September 30, 2016 $40,667 34,084 7,885 11,866 9,318 3,508 6,963 404 September 30, 2015 $36,536 29,288 5,501 11,370 10,063 3,968 6,699 826 $114,695 $104,251 EXCO TECHNOLOGIES LIMITED 46 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Property, plant and equipment are attributed to the country in which they are located. Intangible assets, net Canada United States Mexico South America Thailand Europe Morocco South Africa B. RESTRUCTURING COST September 30, 2016 $1,386 42,207 59 88 67 1,750 27 2 September 30, 2015 $697 246 47 127 105 2,468 18 61 $45,586 $3,769 During the year, the Company recorded severance expense of $710 (2015 - $898) in selling, general and administrative expenses on the consolidated statements of income and comprehensive income relating to staffing reductions throughout its operations. C. EMPLOYEE FUTURE BENEFITS The Company accrues employee future benefits for all of its Mexican employees. These benefits consist of a one- time payment equivalent to 12 days of wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to vesting of their seniority premium benefit. Under Mexican labour laws, the Company also provides statutorily mandated severance benefits to its employees terminated under certain circumstances. Such benefits consist of a one-time payment of three months’ wages upon involuntary termination without just cause. The liability associated with the seniority and termination benefits is calculated as the present value of expected future payments and amounted to $794 as at September 30, 2016 (2015 - $465) and is recorded under the caption other accrued liabilities on the consolidated statements of financial position. In determining the expected future payments, assumptions regarding employee turnover rates, inflation, minimum wage increases and expected salary levels are required and are subject to review and change. D. COMPENSATION OF KEY MANAGEMENT PERSONNEL The remuneration of directors and other members of key management personnel during the years ended September 30, 2016 and 2015 were as follows: Salaries and cash incentives (i) Directors’ fees Share-based awards (ii) September 30, 2016 September 30, 2015 $5,009 327 90 $5,426 $4,668 316 326 $5,310 i) Key management personnel were not paid post-employment benefits, termination benefits, or other long-term benefits during the years ended September 30, 2016 and 2015. ii) Share-based payments are director share units granted to directors and the fair value of stock options granted to key management personnel. EXCO TECHNOLOGIES LIMITED 47 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts 13. INCOME PER COMMON SHARE Income per common share is calculated using net income and the monthly weighted average number of common shares outstanding of 42,497,182 (2015 - 42,284,538). Any potential common shares for which the effect is anti- dilutive have not been reflected in the calculation of diluted income per share. There was a dilution effect of 195,863 shares from the outstanding stock options on diluted weighted average number of common shares outstanding for 2016 (2015 - 330,088). 14. INCOME TAXES Income before income taxes Income tax expense at Canadian statutory rates Manufacturing and processing deduction Foreign rate differential Non-taxable income net of non-deductible expenses Withholding tax on dividend Losses not tax effected Other Reported income tax expense Income before income taxes Income tax expense at Canadian statutory rates Manufacturing and processing deduction Foreign rate differential Non-taxable income net of non-deductible expenses Withholding tax on dividend Losses not tax effected Other Reported income tax expense The major components of income tax expense are as follows: Current income tax expense Based on taxable income for the year Withholding tax on dividend Deferred income tax expense Origination, reversal of temporary differences and losses not recognized Reported income tax expense 2016 $67,607 100.0% 17,713 (139) 4,011 (3,377) 853 266 725 26.2% (0.2%) 5.9% (5.0%) 1.3% 0.4% 1.1% $20,052 29.7% $60,875 16,515 (262) 1,230 (1,531) 694 2,848 622 2015 100.0% 27.1% (0.4%) 2.0% (2.5%) 1.1% 4.7% 1.0% $20,116 33.0% 2016 2015 $16,567 853 17,420 $17,572 694 18,266 2,632 1,850 $20,052 $20,116 EXCO TECHNOLOGIES LIMITED 48 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts Deferred income tax assets and liabilities consist of the following temporary differences: 2016 2015 Deferred tax assets Tax benefit of loss carry forward Items not currently deductible for income tax purposes Unrealized foreign exchange losses Deferred tax liabilities Tax depreciation in excess of book depreciation Unrealized revenue and foreign exchange Investment in subsidiaries Net deferred income tax liabilities 15. CONSOLIDATED STATEMENTS OF CASH FLOW $1,239 582 - 1,821 (4,910) (1,090) (1,271) (7,273) ($5,452) Net change in non-cash working capital The net change in non-cash working capital balances related to operations consists of the following: Accounts receivable Unbilled revenue Inventories Prepaid expenses and deposits Trade accounts payable Accrued payroll liabilities Other accrued liabilities Provisions Customer advance payments Income taxes payable 2016 $9,106 (2,093) (475) (2,388) 2,984 3,307 (4,550) (428) (1,336) (8,187) ($4,060) $1,261 773 - 2,034 (3,060) (477) (2,001) (5,538) ($3,504) 2015 ($25,945) (5,905) (9,600) 3,840 8,491 1,678 2,214 77 2,029 5,274 ($17,847) 16. CONTINGENT LIABILITIES In the ordinary course of business, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. On an ongoing basis, the Company assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable costs and losses, and a determination of the provision required, if any, for these contingencies is made after analysis of each individual issue. Other than amounts already provided for in the consolidated financial statements, there are no material contingent liabilities as at September 30, 2016 (2015 - nil). EXCO TECHNOLOGIES LIMITED 49 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts 17. BUSINESS ACQUISITION The Company accounts for acquisitions using the acquisition method of accounting with the results of operations included in the Company’s consolidated financial statements from the respective date of the acquisition. On April 4, 2016, the Company completed the acquisition of 100% of the ownership interest in AFX Industries L.L.C. (“AFX”) for consideration of US$73,390 (CAD $95,334) excluding US$4,420 (CAD $5,742) of assumed debt. A portion of the consideration amounting to US$9,307 (CAD $12,090) is deferred and payable over three years. Subsequent to closing, the acquisition price was reduced by US$1.07 (CAD $1.39) million to reflect changes in the AFX balance sheet in accordance with the acquisition agreement. AFX is based in Port Huron, Michigan with manufacturing operations in Matamoros, Mexico. AFX is a Tier 2 supplier of leather and leather-like interior trim components to the North American automotive market. AFX supplies die cut leather sets for seating and many other interior trim applications as well as injection-molded, hand-sewn, machine-sewn and hand-wrapped interior components of all types. The AFX operations are complementary to the Company's existing automotive interior trim business and will provide the Company with new production capabilities and customer relationships. The purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. The Company determined the fair values based on discounted cash flows, market information, and using independent valuations and management’s best estimates. The preliminary allocation of the purchase price at fair value is as follows: Trade accounts receivable and other Inventories Property, plant and equipment Bank indebtedness Trade accounts payable, accrued liabilities and other Long-term debt Net identifiable assets Intangible assets Residual purchase price allocation to goodwill Non-monetary net assets acquired Cash acquired Acquisition funded as follows: Cash Term Notes, payable over three years $20,078 12,124 2,906 (3,383) (18,666) (2,010) 11,049 43,254 39,811 94,114 180 $94,294 $82,024 12,090 $94,114 Costs related to the AFX acquisition amounted to $1.5 million and were expensed under selling, general and administrative expenses on the consolidated statements of income and comprehensive income. The fair value of the trade accounts receivable equals the gross amount of the trade accounts receivable less allowance for bad debts and amounts to $19,226. The net contractual amount was considered collectible at the date of acquisition. AFX’s investment in a joint operation has been accounted for in accordance with the joint arrangement accounting policy; see note 2. EXCO TECHNOLOGIES LIMITED 50 ANNUAL REPORT 2016 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)'s except per share amounts The primary factors that contributed to the residual purchase price allocation and resulted in the recognition of goodwill are: the existing AFX business; the acquired workforce; access to growth opportunities with existing customers; and the combined strategic value to the Company’s growth plan. The impact of AFX on the Company’s consolidated statements of income and comprehensive income for the year ended September 30, 2016 is such that the consolidated sales excluding AFX would amount to $522,100 and the consolidated pre-tax income excluding AFX would amount to $60,854. 18. INTEREST EXPENSE (INCOME) The following table outlines the interest expense (income) incurred during the year: As at September 30, 2016 September 30, 2015 Interest expense on bank indebtedness and long-term debt Interest income on deposits Net interest expense 19. OTHER INCOME $1,391 (102) $1,289 $1,031 (92) $939 On April 7, 2016, the Company concluded a commercial arbitration that it initiated in 2015. As a result, the Company received compensation of $3.44 million during the third quarter of this fiscal year. EXCO TECHNOLOGIES LIMITED 51 ANNUAL REPORT 2016 CORPORATE INFORMATION Board of Directors Transfer Agent and Registrar Laurie T.F. Bennett, CPA, CA Corporate Director Edward H. Kernaghan, MSc Executive Vice President Kernaghan & Partners Ltd. Nicole A. Kirk, BA, MBA Corporate Director Robert B. Magee, PEng Chairman Woodbridge Group TSX Trust Company 200 University Avenue, Suite 300 Toronto, Ontario M5H 4H1 Phone: 416.361.0152 www.tsxtrust.com ______________________________ Auditors Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants ______________________________ Philip B. Matthews, MA, CPA, CA Corporate Director Stock Listing Brian A. Robbins, PEng President and CEO of the Company Peter van Schaik Founder and Chairman Van Rob Inc. ______________________________ Corporate Officers Brian A. Robbins, PEng President and CEO Paul E. Riganelli, MA, MBA, LLB Senior Vice President and COO R. Drew Knight, CPA, CA Chief Financial Officer & VP Finance Secretary Darren M. Kirk, CFA Executive Vice President Toronto Stock Exchange (XTC) ______________________________ Corporate Office Exco Technologies Limited 130 Spy Court, 2nd Floor Markham, Ontario L3R 5H6 Phone: 905.477.3065 www.excocorp.com ______________________________ 2016 Annual Meeting The 2016 Annual Meeting for the Shareholders will be held at Magna Golf Club, 14780 Leslie St., Aurora on Wednesday, February 1, 2017 at 4:30 pm.

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