Exco
Annual Report 2023

Plain-text annual report

BEYOND BOUNDARIES 2023 Annual Report Uxbridge, ON Newmarket, ON Markham, ON Dartmouth, NS Aldenhoven, Germany Weissenburg, Germany Brescia, Italy (2) Wylie, TX Tangier, Morocco Kenitra, Morocco Chesterfield, MI Toledo, OH Matamoros, MX (2) Queretaro, MX (3) Chonburi, Thailand Medellin, Colombia Sorocaba, Brazil Automotive Solutions PRODUCTION FACILITIES Casting & Extrusion Technologies SALES ($ millions) EBITDA(1) ($ millions) DILUTED EARNINGS PER SHARE . 3 9 1 9 6 9 8 4 . . 3 7 0 5 . 2 1 6 4 . 3 2 1 4 . 6 2 6 . 5 3 5 . 5 4 7 . 1 0 7 . 0 3 5 . 8 9 0 $ 5 6 0 $ . . 9 6 0 $ . 8 6 0 $ 9 4 0 $ . CASH FLOW FROM OPERATING ACTIVITIES (2) ($ millions) . 2 0 7 . 1 5 5 . 5 9 4 . 8 2 6 . 7 9 4 19 20 21 22 23 19 20 21 22 23 19 20 21 22 23 19 20 21 22 23 (1) Earnings before interest, taxes, depreciation and amortization. (2) Before net change in non-cash working capital. EXCO TOOLING SOLUTIONS LETTER TO STAKEHOLDERS F2023 Beyond Boundaries In F2023 Exco clearly demonstrated our aggressive growth strategy is on the right track. Despite difficult market conditions, we recorded a 26% increase in sales to a record $619.3 million, grew our EBITDA by 41% to $74.5 million and delivered $0.68 of earnings per share, a 39% improvement over last year. As well, our momen- tum remains strong. We established positive trends throughout the year, with our quarterly revenues and EBITDA showing sequential improvement, ending the year on a high note. journey ‘Beyond Boundaries’, we not only In our achieved substantial financial growth but also pushed operational excellence throughout our businesses. It is truly inspiring to see the numerous examples of innovation in both products and processes happening across Exco. Similarly, the opportunities we see to spread our reach into new geographic boundaries through both recent acquisition and greenfield investments is thoroughly exciting. Looking forward, despite macro headwinds, vehicle production volumes are expected to grow in F2024 as dealer inventories continue to be replenished and pent-up consumer demand is satisfied. Also, we are clearly gaining market share and we enter the new fiscal year with record backlog levels in our long lead-time products, such as Large Moulds. Moreover, start-up losses and operational disruption associated with our current capital investment activity should reduce while the benefits from our continuing efficiency initiatives continue to take hold. While there will no doubt be new challenges, we remain very optimistic that our earnings will again be substantially stronger in the year ahead. Sustainable Marketplace: Leading the Charge in EV Revolution A key focus for our business is to directly support the electric vehicle revolution and worldwide movement toward reducing emissions. Consequently, as the world continues to push forward with sustainability initiatives, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the principal driver of this tailwind, particularly in the automotive industry, our primary end market. As the automotive industry adapts to ever-tightening fuel efficiency standards, lightweight metals are increas- ingly displacing structural steel vehicle components to make internal combustion engine vehicles more environmentally friendly. Moreover, electric vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range. Our Casting and Extrusion segment is especially well positioned to benefit from this transition, as we are the leading producer of tools that shape lightweight metals and we do not manufacture tooling for stamped steel components. Over the next several years, significant growth is expected in the application of both extruded and die-cast components. More recently, die-cast aluminum components and associated tooling have been increasing in both size and complexity. OEMs and their tier suppliers are increasingly using so-called “giga-press” die casting machines that are much larger than those used previ- ously. This enables the casting of entire vehicle subframes from aluminum rather than assembling numerous stamped metal components, creating signifi- cant manufacturing efficiency gains. The tooling required to facilitate this process is also much larger and more complex which plays directly into our strengths and technical expertise. We anticipated this trend several years ago and have made considerable investments in our people, equipment and processes to be the leading supplier in this market segment. Our Automotive Solutions group, which manufactures products for both the interior and storage areas of passenger vehicles also stands to benefit from sustain- ability trends. Exco’s Automotive Solutions segment typically makes products that are lighter in weight than EXCO TECHNOLOGIES LIMITED 1 ANNUAL REPORT 2023 competing products and electric vehicles generally plant is ramping up slowly to ensure quality and • Halex acquisition completed May, 2022 - Halex is the components while delivering increased value to have more cabin and storage space for which our showing good traction. second largest manufacturer of aluminum extrusion our customers, directly supporting their own dies in Europe and the continent’s leading supplier sustainability goals. products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher margin accessory products as a means to enhance their own profitability and Exco is an industry leader for many of these products. To these points, we grew our content per vehicle by 14% in F2023, which was well above our historical range of 5%-10% per annum. • Castool Heat Treatment Operations – Initial opera- tions began in the Spring of 2022 and the last of the major equipment was installed in April 2023. This facility provides unmatched heat-treatment capabili- ties, particularly for larger tooling components, and enables increased vertical integration for both Castool and Large Mould. Additional benefits of this Its important to note that while both our business operation include: eliminating shipping and schedul- segments are well positioned for the automotive ing conflicts with third party suppliers; shorter lead industry’s eventual transition to electric vehicles, Exco times; increased quality control; and a significant is relatively agnostic to powertrain architecture. Should reduction in our environmental footprint. the EV revolution proceed more slowly, or even shift towards hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead. Capital Investment: Fueling Growth and Innovation US. • Castool Mexico Greenfield Facility – The building has been completed, majority of equipment has been installed and commercial production commenced October 1, 2023. This facility has increased our manu- facturing capacity and positions Castool to better penetrate markets in Latin America and the southern With regard to our various capital asset investment and growth strategies we again made great progress in F2023. I want to emphasize the sizeable negative impact these investments have had on our recent financial results. We have incurred significant front-end cash costs from the start-up of new plants, navigated through operational disruption as we installed new • Large Mould Group Equipment Additions – Included expanded additive manufacturing (3D printing) capacity, increased crane capabilities to 100 tons, and added several medium and large 5-axis milling machines to capture growing demand in the “giga” die-cast market segment. All equipment is now installed and operational. equipment and are incurring much higher levels • Extrusion Group Heat Treatment – Added new heat of depreciation associated with our conservative treatment equipment to our extrusion plant in accounting methods. Nonetheless, in F2023 we saw Mexico to eliminate outsourcing, increased heat treat clear signs that the aggregate of these investments capacity in our Texas plant, and replaced equipment has begun to not only add to our EBITDA, but is in Markham with new energy efficient equipment, all accretive to margins as well. of which is now operational. Recent and current key growth initiatives: • Automotive Solutions Group – Expanded the • Castool Morocco Greenfield Facility – This new plant officially opened in November 2021 and positions Castool to better penetrate the sizeable European die cast and extrusion consumable tooling markets. The Polytech and Neocon facilities (combined 40,000 square feet) to meet growing demand from signifi- cant program awards. The last of the equipment became operational in the second quarter of fiscal 2023. of complex extrusion dies, complementing Exco’s existing North and South American extrusion die operations. The acquisition provides Exco with well-established and high-quality operations, more extensive opportunities to better support our global customers and grow in new markets. Work continues to integrate Halex into the Extrusion Group operations and realize synergies from the sharing of best practices. In F2024 we will continue to generate efficiencies from the substantial capital we have recently deployed. As well, we plan to spend $48.5 million in capital in the year ahead to further improve our efficiency, provide additional capacity and reduce our environmental footprint. With the benefit of these investments, the launch of new programs, general market growth and also market share gains consistent with our history, we expect to achieve substantial growth. By F2026 Exco is targeting to generate annual revenue of $750 million, annual EBITDA of $120 million and generate EPS of roughly $1.50 ESG Strategic Priorities: A Responsible Future We are committed to operating in a socially conscious manner and taking great care of our people. We aim to run our facilities as safe and efficiently as possible, delivering innovative, high-quality products with less energy, fewer materials and lower waste. These requirements are also increasingly demanded by our customers as they focus on responsible production processes through their entire supply chains. • Castool manufactures and sells consumable tooling components and related capital equipment for light metal die cast machines and extrusion presses globally. Castool’s products significantly increase the productivity, safety and energy efficiency of its customers. This is particularly important as tooling becomes larger and more complex. • Neocon has been pioneering advancements in recycling methods and technologies for years. Their industrial reuse of plastics, post-consumer and post-process recycling helped make Neocon this year’s Mobius Award recipient in the large business category from Divert NS, a not-for-profit corporation championing recycling in Nova Scotia. More broadly, we remain focused on employing lean manufacturing principles to reduce and eliminate waste in our production and have begun looking to solutions that Artificial Intelligence can provide to improve our overall efficiency. Several of our initiatives are discussed in more detail in our 2023 Sustainability Report. Our People: The Core of Our Success Our journey over the past 70 years has been remarkable, with our team playing a crucial role. Their dedication to innovation, efficiency, and excellence is the driving force behind our success. As we look to the future, it's their entrepreneurial spirit and commitment to safety that will continue to propel Exco 'Beyond Boundaries.' Let me provide a few examples: Darren M. Kirk, MBA, CFA • Our fast-growing additive manufacturing business President and CEO minimizes material use for some of our tooling Beyond Boundaries In F2023 Exco clearly demonstrated our aggressive growth strategy is on the right track. Despite difficult market conditions, we recorded a 26% increase in sales to a record $619.3 million, grew our EBITDA by 41% to $74.5 million and delivered $0.68 of earnings per share, a 39% improvement over last year. As well, our momen- tum remains strong. We established positive trends throughout the year, with our quarterly revenues and EBITDA showing sequential improvement, ending the year on a high note. In our journey ‘Beyond Boundaries’, we not only achieved substantial financial growth but also pushed operational excellence throughout our businesses. It is truly inspiring to see the numerous examples of innovation in both products and processes happening across Exco. Similarly, the opportunities we see to spread our reach into new geographic boundaries through both recent acquisition and greenfield investments is thoroughly exciting. Looking forward, despite macro headwinds, vehicle production volumes are expected to grow in F2024 as dealer inventories continue to be replenished and pent-up consumer demand is satisfied. Also, we are clearly gaining market share and we enter the new fiscal year with record backlog levels in our long lead-time products, such as Large Moulds. Moreover, start-up losses and operational disruption associated with our current capital investment activity should reduce while the benefits from our continuing efficiency initiatives continue to take hold. While there will no doubt be new challenges, we remain very optimistic that our earnings will again be substantially stronger in the year ahead. Sustainable Marketplace: Leading the Charge in EV Revolution A key focus for our business is to directly support the electric vehicle revolution and worldwide movement toward reducing emissions. Consequently, as the world continues to push forward with sustainability initiatives, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the principal driver of this tailwind, particularly in the automotive industry, our primary end market. As the automotive industry adapts to ever-tightening fuel efficiency standards, lightweight metals are increas- ingly displacing structural steel vehicle components to make internal combustion engine vehicles more environmentally friendly. Moreover, electric vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range. Our Casting and Extrusion segment is especially well positioned to benefit from this transition, as we are the leading producer of tools that shape lightweight metals and we do not manufacture tooling for stamped steel components. Over the next several years, significant growth is expected in the application of both extruded and die-cast components. More recently, die-cast aluminum components and associated tooling have been increasing in both size and complexity. OEMs and their tier suppliers are increasingly using so-called “giga-press” die casting machines that are much larger than those used previ- ously. This enables the casting of entire vehicle subframes from aluminum rather than assembling numerous stamped metal components, creating signifi- cant manufacturing efficiency gains. The tooling required to facilitate this process is also much larger and more complex which plays directly into our strengths and technical expertise. We anticipated this trend several years ago and have made considerable investments in our people, equipment and processes to be the leading supplier in this market segment. Our Automotive Solutions group, which manufactures products for both the interior and storage areas of passenger vehicles also stands to benefit from sustain- ability trends. Exco’s Automotive Solutions segment typically makes products that are lighter in weight than LETTER TO STAKEHOLDERS F2023 competing products and electric vehicles generally have more cabin and storage space for which our products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher margin accessory products as a means to enhance their own profitability and Exco is an industry leader for many of these products. To these points, we grew our content per vehicle by 14% in F2023, which was well above our historical range of 5%-10% per annum. Its important to note that while both our business segments are well positioned for the automotive industry’s eventual transition to electric vehicles, Exco is relatively agnostic to powertrain architecture. Should the EV revolution proceed more slowly, or even shift towards hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead. Capital Investment: Fueling Growth and Innovation With regard to our various capital asset investment and growth strategies we again made great progress in F2023. I want to emphasize the sizeable negative impact these investments have had on our recent financial results. We have incurred significant front-end cash costs from the start-up of new plants, navigated through operational disruption as we installed new levels equipment and are of depreciation associated with our conservative accounting methods. Nonetheless, in F2023 we saw clear signs that the aggregate of these investments has begun to not only add to our EBITDA, but is accretive to margins as well. incurring much higher Recent and current key growth initiatives: • Castool Morocco Greenfield Facility – This new plant officially opened in November 2021 and positions Castool to better penetrate the sizeable European die cast and extrusion consumable tooling markets. The plant is ramping up slowly to ensure quality and showing good traction. • Halex acquisition completed May, 2022 - Halex is the components while delivering increased value to second largest manufacturer of aluminum extrusion our customers, directly supporting their own • Castool Heat Treatment Operations – Initial opera- tions began in the Spring of 2022 and the last of the major equipment was installed in April 2023. This facility provides unmatched heat-treatment capabili- ties, particularly for larger tooling components, and enables for both Castool and Large Mould. Additional benefits of this operation include: eliminating shipping and schedul- ing conflicts with third party suppliers; shorter lead times; increased quality control; and a significant reduction in our environmental footprint. increased vertical integration • Castool Mexico Greenfield Facility – The building has been completed, majority of equipment has been installed and commercial production commenced October 1, 2023. This facility has increased our manu- facturing capacity and positions Castool to better penetrate markets in Latin America and the southern US. • Large Mould Group Equipment Additions – Included expanded additive manufacturing (3D printing) capacity, increased crane capabilities to 100 tons, and added several medium and large 5-axis milling machines to capture growing demand in the “giga” die-cast market segment. All equipment is now installed and operational. • Extrusion Group Heat Treatment – Added new heat treatment equipment to our extrusion plant in Mexico to eliminate outsourcing, increased heat treat capacity in our Texas plant, and replaced equipment in Markham with new energy efficient equipment, all of which is now operational. • Automotive Solutions Group – Expanded the Polytech and Neocon facilities (combined 40,000 square feet) to meet growing demand from signifi- cant program awards. The last of the equipment became operational in the second quarter of fiscal 2023. dies in Europe and the continent’s leading supplier sustainability goals. of complex extrusion dies, complementing Exco’s existing North and South American extrusion die operations. The acquisition provides Exco with well-established and high-quality operations, more extensive opportunities to better support our global customers and grow in new markets. Work continues to integrate Halex into the Extrusion Group operations and realize synergies from the sharing of best practices. In F2024 we will continue to generate efficiencies from the substantial capital we have recently deployed. As well, we plan to spend $48.5 million in capital in the year ahead to further improve our efficiency, provide additional capacity and reduce our environmental footprint. With the benefit of these investments, the launch of new programs, general market growth and also market share gains consistent with our history, we expect to achieve substantial growth. By F2026 Exco is targeting to generate annual revenue of $750 million, annual EBITDA of $120 million and generate EPS of roughly $1.50 ESG Strategic Priorities: A Responsible Future We are committed to operating in a socially conscious manner and taking great care of our people. We aim to run our facilities as safe and efficiently as possible, delivering innovative, high-quality products with less energy, fewer materials and lower waste. These requirements are also increasingly demanded by our customers as they focus on responsible production processes through their entire supply chains. • Castool manufactures and sells consumable tooling components and related capital equipment for light metal die cast machines and extrusion presses globally. Castool’s products significantly increase the productivity, safety and energy efficiency of its customers. This is particularly important as tooling becomes larger and more complex. • Neocon has been pioneering advancements in recycling methods and technologies for years. Their industrial reuse of plastics, post-consumer and post-process recycling helped make Neocon this year’s Mobius Award recipient in the large business category from Divert NS, a not-for-profit corporation championing recycling in Nova Scotia. More broadly, we remain focused on employing lean manufacturing principles to reduce and eliminate waste in our production and have begun looking to solutions that Artificial Intelligence can provide to improve our overall efficiency. Several of our initiatives are discussed in more detail in our 2023 Sustainability Report. Our People: The Core of Our Success Our journey over the past 70 years has been remarkable, with our team playing a crucial role. Their dedication to innovation, efficiency, and excellence is the driving force behind our success. As we look to the future, it's their entrepreneurial spirit and commitment to safety that will continue to propel Exco 'Beyond Boundaries.' Let me provide a few examples: Darren M. Kirk, MBA, CFA • Our fast-growing additive manufacturing business President and CEO minimizes material use for some of our tooling EXCO TECHNOLOGIES LIMITED 2 ANNUAL REPORT 2023 Beyond Boundaries In F2023 Exco clearly demonstrated our aggressive growth strategy is on the right track. Despite difficult market conditions, we recorded a 26% increase in sales to a record $619.3 million, grew our EBITDA by 41% to $74.5 million and delivered $0.68 of earnings per share, a 39% improvement over last year. As well, our momen- tum remains strong. We established positive trends throughout the year, with our quarterly revenues and EBITDA showing sequential improvement, ending the year on a high note. In our journey ‘Beyond Boundaries’, we not only achieved substantial financial growth but also pushed operational excellence throughout our businesses. It is truly inspiring to see the numerous examples of innovation in both products and processes happening across Exco. Similarly, the opportunities we see to spread our reach into new geographic boundaries through both recent acquisition and greenfield investments is thoroughly exciting. Looking forward, despite macro headwinds, vehicle production volumes are expected to grow in F2024 as dealer inventories continue to be replenished and pent-up consumer demand is satisfied. Also, we are clearly gaining market share and we enter the new fiscal year with record backlog levels in our long lead-time products, such as Large Moulds. Moreover, start-up losses and operational disruption associated with our current capital investment activity should reduce while the benefits from our continuing efficiency initiatives continue to take hold. While there will no doubt be new challenges, we remain very optimistic that our earnings will again be substantially stronger in the year ahead. Sustainable Marketplace: Leading the Charge in EV Revolution A key focus for our business is to directly support the electric vehicle revolution and worldwide movement toward reducing emissions. Consequently, as the world continues to push forward with sustainability initiatives, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the principal driver of this tailwind, particularly in the automotive industry, our primary end market. As the automotive industry adapts to ever-tightening fuel efficiency standards, lightweight metals are increas- ingly displacing structural steel vehicle components to make internal combustion engine vehicles more environmentally friendly. Moreover, electric vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range. Our Casting and Extrusion segment is especially well positioned to benefit from this transition, as we are the leading producer of tools that shape lightweight metals and we do not manufacture tooling for stamped steel components. Over the next several years, significant growth is expected in the application of both extruded and die-cast components. More recently, die-cast aluminum components and associated tooling have been increasing in both size and complexity. OEMs and their tier suppliers are increasingly using so-called “giga-press” die casting machines that are much larger than those used previ- ously. This enables the casting of entire vehicle subframes from aluminum rather than assembling numerous stamped metal components, creating signifi- cant manufacturing efficiency gains. The tooling required to facilitate this process is also much larger and more complex which plays directly into our strengths and technical expertise. We anticipated this trend several years ago and have made considerable investments in our people, equipment and processes to be the leading supplier in this market segment. Our Automotive Solutions group, which manufactures products for both the interior and storage areas of passenger vehicles also stands to benefit from sustain- ability trends. Exco’s Automotive Solutions segment typically makes products that are lighter in weight than competing products and electric vehicles generally plant is ramping up slowly to ensure quality and have more cabin and storage space for which our showing good traction. products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher margin accessory products as a means to enhance their own profitability and Exco is an industry leader for many of these products. To these points, we grew our content per vehicle by 14% in F2023, which was well above our historical range of 5%-10% per annum. • Castool Heat Treatment Operations – Initial opera- tions began in the Spring of 2022 and the last of the major equipment was installed in April 2023. This facility provides unmatched heat-treatment capabili- ties, particularly for larger tooling components, and enables increased vertical integration for both Castool and Large Mould. Additional benefits of this Its important to note that while both our business operation include: eliminating shipping and schedul- segments are well positioned for the automotive ing conflicts with third party suppliers; shorter lead industry’s eventual transition to electric vehicles, Exco times; increased quality control; and a significant is relatively agnostic to powertrain architecture. Should reduction in our environmental footprint. the EV revolution proceed more slowly, or even shift towards hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead. Capital Investment: Fueling Growth and Innovation US. • Castool Mexico Greenfield Facility – The building has been completed, majority of equipment has been installed and commercial production commenced October 1, 2023. This facility has increased our manu- facturing capacity and positions Castool to better penetrate markets in Latin America and the southern With regard to our various capital asset investment and growth strategies we again made great progress in F2023. I want to emphasize the sizeable negative impact these investments have had on our recent financial results. We have incurred significant front-end cash costs from the start-up of new plants, navigated through operational disruption as we installed new • Large Mould Group Equipment Additions – Included expanded additive manufacturing (3D printing) capacity, increased crane capabilities to 100 tons, and added several medium and large 5-axis milling machines to capture growing demand in the “giga” die-cast market segment. All equipment is now installed and operational. equipment and are incurring much higher levels • Extrusion Group Heat Treatment – Added new heat of depreciation associated with our conservative treatment equipment to our extrusion plant in accounting methods. Nonetheless, in F2023 we saw Mexico to eliminate outsourcing, increased heat treat clear signs that the aggregate of these investments capacity in our Texas plant, and replaced equipment has begun to not only add to our EBITDA, but is in Markham with new energy efficient equipment, all accretive to margins as well. of which is now operational. Recent and current key growth initiatives: • Automotive Solutions Group – Expanded the • Castool Morocco Greenfield Facility – This new plant officially opened in November 2021 and positions Castool to better penetrate the sizeable European die cast and extrusion consumable tooling markets. The Polytech and Neocon facilities (combined 40,000 square feet) to meet growing demand from signifi- cant program awards. The last of the equipment became operational in the second quarter of fiscal 2023. LETTER TO STAKEHOLDERS F2023 • Halex acquisition completed May, 2022 - Halex is the second largest manufacturer of aluminum extrusion dies in Europe and the continent’s leading supplier of complex extrusion dies, complementing Exco’s existing North and South American extrusion die operations. The acquisition provides Exco with well-established and high-quality operations, more extensive opportunities to better support our global customers and grow in new markets. Work continues the Extrusion Group into to operations and realize synergies from the sharing of best practices. integrate Halex In F2024 we will continue to generate efficiencies from the substantial capital we have recently deployed. As well, we plan to spend $48.5 million in capital in the year ahead to further improve our efficiency, provide additional capacity and reduce our environmental footprint. With the benefit of these investments, the launch of new programs, general market growth and also market share gains consistent with our history, we expect to achieve substantial growth. By F2026 Exco is targeting to generate annual revenue of $750 million, annual EBITDA of $120 million and generate EPS of roughly $1.50 ESG Strategic Priorities: A Responsible Future We are committed to operating in a socially conscious manner and taking great care of our people. We aim to run our facilities as safe and efficiently as possible, delivering innovative, high-quality products with less energy, fewer materials and lower waste. These requirements are also increasingly demanded by our customers as they focus on responsible production processes through their entire supply chains. components while delivering increased value to our customers, directly supporting their own sustainability goals. • Castool manufactures and sells consumable tooling components and related capital equipment for light metal die cast machines and extrusion presses globally. Castool’s products significantly increase the productivity, safety and energy efficiency of its customers. This is particularly important as tooling becomes larger and more complex. • Neocon has been pioneering advancements in for years. recycling methods and technologies Their industrial reuse of plastics, post-consumer and post-process recycling helped make Neocon this year’s Mobius Award recipient in the large business category from Divert NS, a not-for-profit corporation championing recycling in Nova Scotia. More broadly, we remain focused on employing lean manufacturing principles to reduce and eliminate waste in our production and have begun looking to solutions that Artificial Intelligence can provide to improve our overall efficiency. Several of our initiatives are discussed in more detail in our 2023 Sustainability Report. Our People: The Core of Our Success Our journey over the past 70 years has been remarkable, with our team playing a crucial role. Their dedication to innovation, efficiency, and excellence is the driving force behind our success. As we look to the future, it's their entrepreneurial spirit and commitment to safety that will continue to propel Exco 'Beyond Boundaries.' Let me provide a few examples: Darren M. Kirk, MBA, CFA • Our fast-growing additive manufacturing business minimizes material use for some of our tooling President and CEO EXCO TECHNOLOGIES LIMITED 3 ANNUAL REPORT 2023 CONTENTS 5 23 27 31 Management’s Discussion and Analysis Independent Auditor’s 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 of Exco Technologies Limited (“Exco”, or “Company”) for the year ended September 30, 2023. This MD&A has been prepared as of November 29, 2023. This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators. Additional information regarding 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.sedarplus.ca. In this MD&A, reference may be made to EBITDA, EBITDA Margin, Pretax Profit, Free Cash Flow and Maintenance Fixed Asset Additions which are not defined measures of financial performance under International Financial Reporting Standards (“IFRS”). A reconciliation to these non-GAAP measures is provided within this MD&A. Exco calculates EBITDA as earnings before interest, taxes, depreciation and amortization and EBITDA Margin as EBITDA divided by sales. Exco calculates Pretax Profit as segmented earnings before other income/expense, interest and taxes. Free Cash Flow is calculated as cash provided by operating activities less interest paid and Maintenance Fixed Asset Additions. Maintenance Fixed Asset Additions represent management’s estimate of the investment in fixed assets that is required for the Company to continue operating at current capacity levels. Given the Company’s elevated planned capital spending on fixed assets for growth initiatives (including additional Greenfield locations, energy efficient heat treatment equipment and increased capacity) through the near term, the Company has modified its calculation of Free Cash Flow to include Maintenance Fixed Assets and not total fixed asset purchases. This change is meant to enable investors to better gauge the amount of generated cash flow that is available for these investments as well as acquisitions and/or returns to shareholders in the form of dividends or share buyback programs. EBITDA, EBITDA Margin, Pretax Profit and Free Cash Flow are used by management, from time to time, to facilitate period-to-period operating comparisons and we believe some investors and analysts use these measures as well when evaluating Exco’s financial performance. These measures, as calculated by Exco, do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other issuers. CAUTIONARY STATEMENT Information in this document relating to: projected light vehicle sales and production, original equipment manufacturer’s (OEM) capital investment levels, the rate and intensity of OEM development of all-electric or hybrid powertrain systems, the level of order backlog 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. We use words such as "anticipate", "may", "will", "should", "expect", "believe", "estimate", “5-year target” and similar expressions to identify forward-looking information and statements especially with respect to growth, outlook 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 EXCO TECHNOLOGIES LIMITED 4 ANNUAL REPORT 2023 performance, financial performance of acquisitions, liquidity, operating efficiencies, improvements in, expansion of and/or guidance or outlook as to future revenue, sales, production sales, margin, earnings, earnings per share, including the revised outlook for 2026. Readers are cautioned not to place undue reliance on forward-looking statements found mainly in the MD&A 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, the impact of the global semiconductor shortage on automotive production volumes, the global economic recovery from the COVID-19 pandemic and containment of any future or similar outbreak of epidemic, pandemic, or contagious diseases that may emerge in the human population, which may have a material effect on how we and our customers operate our businesses and the duration and extent to which this will impact our future operating results, the impacts of the Russian invasion of Ukraine or the Israeli/Palestine conflicts on the global financial, energy and automotive markets, including increased supply chain risks, assumptions about the number of automobiles produced in North America and Europe, production mix between passenger cars and trucks, the number of extrusion dies required in North America, South America, and Europe, 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 in response to rising climate risks, raw material prices, supply disruptions, economic conditions, inflation, currency fluctuations, trade restrictions, energy rationing in Europe, our ability to integrate acquisitions, our ability to continue increasing market share, or launch of new programs and the rate at which our current and future greenfield operations in Mexico and Morocco achieve sustained profitability, plans to address cyber security and its expected impact on Exco’s operations. 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 and other reports and securities filings made by the Company. This information is available at www.sedarplus.ca. 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 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 operating segments. The Casting and Extrusion segment designs, develops and manufactures tooling and consumable parts for both aluminum die-casting and aluminum extrusion machines. Operations are based in North America, South America, Europe, Thailand and Morocco and serve automotive and industrial markets around the world. Exco is a leader in most of its markets which principally consist of North America for die-cast tooling, Europe, North, Central and South America for extrusion tooling and globally for consumable tooling parts and related equipment. Across its markets, Exco is focused on further entrenching itself by reducing lead times and manufacturing costs through design and process enhancements. Major capital projects have been implemented in recent years to increase capacity, reduce lead EXCO TECHNOLOGIES LIMITED 5 ANNUAL REPORT 2023 times, further improve quality and reduce costs while pushing the envelope on innovation. Exco’s expansion into 3D printing tooling components in recent years is a good example of this. The Company is now a clear industry leader in the design, engineering and manufacturing of 3D printed tooling components globally. 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 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 interior trim components and assemblies. Polydesign is also a manufacturer and/or finisher of injection moulded interior trim and instrument panel components, sun visors, seat covers, head rests and other cut and sew products. 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 also 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, and Morocco supplying the automotive markets in North America, Europe and to a lesser extent, Asia. VISION AND STRATEGY The Company’s vision is “to be the benchmark for innovation, efficiency and quality in the industries we serve.” The Company’s mission is to “enhance the look and functionality of passenger vehicles and tool up light metal industries for superior performance.” Exco has pursued several key strategies to achieve sustainable revenue and earnings growth. These include: (1) strengthening our leadership and competitive position in our chosen markets through automation and technology, (2) minimizing our cost structure, (3) maintaining the bulk of our productive capacity in lower-cost jurisdictions and in close 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 – see “Marketplace opportunities and efficiency initiatives”, below. Exco was founded on a commitment to excellence and a culture of entrepreneurship and dedication to ethical business practices. We encourage continuance of these traits by providing incentives for our managers to grow their business and giving our employees the latitude to push the envelope on innovation while adhering to our Code of Conduct. MARKETPLACE OPPORTUNITIES AND EFFICIENCY INITIATIVES In the automotive sector, Original Equipment Manufacturers (OEMs) continue to move towards electric or hybrid vehicles and to reduce vehicle weight in all passenger vehicles to improve fuel efficiency. Exco’s products form an integral part of this industry transformation. Lightweight metals such as aluminum are increasingly displacing steel in order to make conventional (internal combustion engine) vehicles more environmentally friendly. As well, electric and hybrid vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range and performance. Exco’s Casting and Extrusion segment, which comprises 47% of total revenues, is especially well positioned to benefit from this ongoing transition. EXCO TECHNOLOGIES LIMITED 6 ANNUAL REPORT 2023 More recently, die-cast aluminum components and associated tooling has been increasing significantly in both size and complexity. Tesla has pushed the envelope in this regard, using die-casting machines that are much larger than those used previously. This enables Tesla to cast entire subframes of the vehicle rather than assembling numerous stamped metal components in the body shop, creating significant manufacturing efficiency gains. Other traditional OEMs and tier foundries are following Tesla’s lead in using these larger die-cast machines (giga presses), and Exco expects there will be significant growth in this part of the market over the next several years.” Accordingly, we are making sizeable additional investments in our people, equipment and processes to remain a leading supplier in this market. Our customers are also increasingly focused on improving their own productivity and our products are actively helping in this regard. For example, we design and incorporate 3D printed components into our moulds which greatly enhances the overall quality and performance of the die-cast process while reducing the use of steel, energy and transportation costs. Similarly, Castool has evolved their products and systems to provide less expensive, longer lasting, more energy efficient and safer products. The group focuses on making components and accessories that will increase the customers’ tooling life while ensuring less scrap and energy consumption. In doing so, we promote a higher energy and material efficiency in the value chain of production, while better service is being delivered to the end-consumer. Our Automotive Solutions group, which manufactures various products for the interior passenger compartments and trunks of vehicles, is also a contributor to vehicle lightweighting trends. Exco’s Automotive Solutions segment typically makes products that are lighter in weight than competing products. For example, Neocon offers lightweight material options that are an ideal fit for vehicles regardless of powertrain. By incorporating a foaming additive during the extrusion process and creating air voids in the base layer, Neocon created a thermoplastic rubber (TPR) product that is 45% lighter than a traditional thermoplastic elastomer (TPE) injection molded alternative. Exco is committed to running its facilities as efficiently as possible, delivering the same innovative, high-quality products to our customers with less energy, fewer materials and lower waste. In this regard, several of our businesses have achieved ISO 14001 certification, the international standard that specifies requirements for an effective environmental management system. More broadly, we remain focused on employing lean manufacturing principles to reduce and eliminate waste while also making substantial investments in new, energy efficient equipment. As well, our multi-plant footprint with standardized manufacturing processes provides superior capacity utilization and gives proximity to market which reduces carbon emissions through reduced transportation requirements. Several other innovative technological advancements and initiatives are being employed throughout the organization to help achieve our goals. FISCAL 2023 OVERVIEW Sales, Earnings and Strategic Investments Fiscal 2023 consolidated sales were up 26% compared to the prior year driven by a 24% increase in the Casting and Extrusion segment and a 29% increase in the Automotive Solutions segment. Casting and Extrusion segment sales increased on the strength of demand for die-cast products (Large Mould and Castool) and a full-year sales inclusion from Halex compared to a 5-month sales inclusion in fiscal 2022. Automotive Solutions segment sales growth reflects the impact of new product launches, the full-year impact of products launched in fiscal 2022, and the improvement of global production volumes as the impact of semi-conductor shortages reduced, dealer inventories continue to be replenished and pent-up consumer demand is satisfied. Strong sales were also supported by the Company’s various strategic growth initiatives. These initiatives are primarily driven by the increased adoption of electric and hybrid vehicles, the lightweighting of all passenger motor vehicles EXCO TECHNOLOGIES LIMITED 7 ANNUAL REPORT 2023 generally, the broader global environmental sustainability movement and the adoption of advanced die-cast and extrusion tooling to meet these global changes to manufacturing. Earnings per share were $0.68 in fiscal 2023 compared to $0.49 in fiscal 2022 – a 39% increase. Pre-tax profits were up in both segments resulting from higher sales, more predictable volumes, improved labour and production efficiencies, and a focus on higher margin products. Higher pre-tax profits were partially offset by ongoing start-up losses at new operations, disruption to existing operations associated with installing new equipment and upgrading capabilities, and inflationary pressure on wages and materials generally. During the year, the Company made significant investments in capital assets ($37.8 million), non-cash working capital ($9.1 million), human resources and training, and other resources to satisfy this growth. The impact of these investments – as well as sizeable start-up losses at newer operations – is suppressing near term profitability. But Exco expects these investments will provide meaningful profits over a multi-year horizon as operations season and increased scale is achieved. Below is the status of our key growth initiatives: • Castool Morocco Greenfield Facility – This new plant officially opened in November 2021 and positions Castool to better penetrate the European die cast and extrusion consumable tooling markets. The plant is ramping up slowly to ensure top quality and showing good traction in markets that have sizeable opportunities. • Castool Heat Treatment Operations (located within our existing Newmarket Large Mould facility) – Initial operations began in the Spring of 2022 and the last of the major equipment was installed in April 2023. This facility provides unmatched heat treating capabilities, particularly for larger tooling components, and enables the vertical integration for both Castool and Large Mould products. Additional benefits of this operation include: eliminating shipping and scheduling conflicts with third party suppliers; shorter lead times; increased quality control; and a significant reduction in the Company’s environmental footprint. • Castool Mexico Greenfield Facility – The building has been completed and equipment installation continues. Opening ceremonies for this facility were in October 2023. This facility will increase manufacturing capacity and position Castool to better penetrate markets in Latin America and the southern US. • Large Mould Group Equipment Additions – Include expanded additive manufacturing (3D printing) capacity, increased crane capabilities to 100 tons, and added several medium and large 5-axis milling machines to capture growing demand in the “giga” die-cast market segment. All equipment is now installed and operational. • Extrusion Group Heat Treatment – Added new heat treatment equipment to our extrusion plant in Mexico to eliminate outsourcing, increased heat treat capacity in our Texas plant, and replaced equipment in Markham with new energy efficient heat treat equipment. All equipment is now operational. • Automotive Solutions Group – Expanded the Polytech and Neocon facilities (combined 40,000 square feet) to meet growing demand from significant program awards. The last of the equipment became operational in the second quarter of fiscal 2023. • Halex acquisition completed May 2, 2022 - Halex is the second largest manufacturer of aluminum extrusion dies in Europe and the continent’s leading supplier of complex extrusion dies and complements Exco’s existing North and South American extrusion die operations. The acquisition provides Exco with well-established and high- quality operations, more extensive opportunities to better support our global customers and grow in new markets. Work continues to integrate Halex into the Extrusion Group operations and realize synergies from the sharing of best practices. Outlook In late fiscal 2021, Exco announced it was targeting a compounded average annual growth rate (excluding acquisitions) of approximately 10% for revenues and slightly higher levels for EBITDA and Net Income through fiscal 2026, which was anticipated to produce approximately $750 million in annual Revenue, $120 million in annual EXCO TECHNOLOGIES LIMITED 8 ANNUAL REPORT 2023 EBITDA and an annual EPS of roughly $1.90 by the end of this timeframe. Exco has made significant progress towards achieving these targets since they were announced and continues to believe its Revenue and EBITDA targets remain obtainable. However, Exco revised its EPS target lower – to approximately $1.50 – to reflect the significant rise in interest rates as well as elevated levels of depreciation due to higher than planned capital expenditures associated with future growth initiatives. These Revenue, EBITDA and revised EPS targets are expected to be achieved through the launch of new programs, general market growth, and also market share gains consistent with the Company’s operating history. Capital expenditures are expected to be approximately $48 million for fiscal 2024. Despite current macro-economic challenges, including tightening monetary conditions and strike-related production shut-downs in some North American OEM plants, the overall outlook is very favorable across Exco’s segments into the medium term. Consumer demand for automotive vehicles remains robust in most markets, despite supply constraints by strike-related activity in the US, a worldwide shortage of semiconductor chips and, to a lesser extent, availability of other raw materials, components and labour. Dealer inventory levels have been improving, but remain below historical norms, while average transaction prices for both new and used vehicles are near record highs and the average age of the broader fleet has continued to increase to an all-time high. This bodes well for higher levels of future vehicle production and the sales opportunity of Exco’s various automotive components and accessories as supply chains normalize. In addition, OEM’s are increasingly looking to the sale of higher margin accessory products as a means to enhance their own levels of profitability. Exco’s Automotive Solutions segment derives a significant amount of activity from such products and is a leader in the prototyping, development and marketing of the same. Moreover, the rapid movement towards an electrified and hybrid fleet for both passenger and commercial vehicles is enticing new market entrants into the automotive market while causing traditional OEM incumbents to further differentiate their product offerings, all of which is driving above average opportunities for Exco. With respect to Exco’s Casting and Extrusion segment, the intensifying global focus on environmental sustainability has created significant growth drivers that are expected to persist through at least the next decade. Automotive OEMs are utilizing light-weight metals such as aluminum, in particular, to reduce vehicle weight and reduce carbon dioxide emissions. This trend is evident regardless of powertrain design - whether internal combustion engines, electric vehicles or hybrids. As well, a renewed focus on the efficiency of OEMs in their own manufacturing process is creating higher demand for advanced tooling that can enhance their profitability and sustainability goals. Certain OEM manufacturers have begun utilizing much larger die cast machines to cast entire vehicle sub-frames using aluminum- based alloy rather than stamping, welding, and assembling separate pieces of ferrous metal. Exco is in discussions with several traditional OEMs and their tier providers who appear likely to follow this trend. Exco is positioning its operations to capitalize on these changes accordingly. Beyond the automotive industry, Exco’s extrusion tooling supports diverse industrial end markets which are also seeing increased demand for aluminum driven by environmental trends, including energy efficient buildings, solar panels, etc. On the cost side, inflationary pressures have intensified post COVID while prompt availability of various input materials, components and labour has become more challenging, though the intensity of these dynamics have generally moderated in fiscal 2023. We are offsetting these dynamics through various efficiency initiatives and taking pricing action where possible although there is typically several quarters of lag before the counter measures yield results. The Russian invasion of Ukraine and the Israeli/Palestine conflict have added additional uncertainty to the global economy. And while Exco has essentially no direct exposure to these countries, Ukraine does feed into the European automotive market and Europe has traditionally depended on Russia for its energy needs. Similarly, the conflict in the Middle East creates the potential for a renewed rise in the price of oil and other commodities and could weigh on consumer sentiment. Exco itself is also looking inwards with respect to ESG and sustainability trends to ensure its operations are EXCO TECHNOLOGIES LIMITED 9 ANNUAL REPORT 2023 sustainable. We are investing significant capital to improve the efficiency and capacity of our operations while is available on our corporate website at: lowering our carbon footprint. Our Sustainability Report www.excocorp.com/leadership/sustainability/. RESULTS Consolidated Results - Sales Annual sales totalled $619.3 million compared to $489.9 million last year – an increase of $129.4 million or 26%. The increase reflects twelve months sales from Halex, strong demand for our die-cast products (Large Mould and Castool) and higher sales in the Automotive Solutions segment as automotive production volumes continued to increase and program launches generated higher content per vehicle for the Company. The US dollar averaged 5% higher ($1.35 versus $1.28) against the Canadian dollar over the year increasing sales by $22.1 million. The Euro averaged 4% higher ($1.44 versus $1.38) against the Canadian dollar over the year increasing sales by $5.9 million. Excluding the impact of foreign exchange gains, consolidated sales increased $101.4 million or 21%. Selected Annual Information The following table sets out selected financial data relating to the Company’s years ended September 30, 2023 and 2022. 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 and diluted Purchase Capital Assets Total assets Cash dividend paid per share EBITDA Segment Sales 2023 $619.3 $26.3 $0.68 $39.0 $611.4 $0.42 $74.5 2022 $489.9 $19.0 $0.49 $53.5 $581.6 $0.42 $53.0 ● Automotive Solutions Segment Sales in this segment were $327.1 million – an increase of $73.2 million or 29% from the prior year. The net effect of exchange rate changes (Euro, US, and Canadian dollar) increased sales $15.6 million compared to the prior year. This strong level of organic sales increase was driven by the continued ramp up of newer programs, higher vehicle production volumes in North America and Europe, select pricing actions to compensate for inflationary pressures as well as favorable vehicle and product mix. The United Autoworkers Union’s (“UAW”) strike action, which began in mid September, had virtually no impact to the segment’s sales for fiscal 2023. This is due to the escalating strike methodology used by the UAW whereby limited OEM locations were impacted. Prior to the strike, there remained consistent customer demand for new vehicles and dealer inventory levels continued to be replenished. While the semiconductor chip shortages and other supply chain constraints continue to improve, industry growth may be tempered by recent strike actions, rising interest rates and emerging indicators of a global recession. EXCO TECHNOLOGIES LIMITED 10 ANNUAL REPORT 2023 During the year, overall industry vehicle production volumes increased by roughly 8% in North America and Europe on a combined basis. Overall the Automotive Solutions segment’s 23% increase in sales (excluding foreign exchange movements) was much stronger than the industry due to sales mix and new program launches, representing sizeable growth in content per vehicle. The segment’s four businesses continue to focus their efforts on launching substantial programs, quoting significant new opportunities on all vehicle types (EV, hybrid and ICE) from both tradition OEMs and new market entrants, further broadening customer diversification and targeting higher margin activity. Management sees significant opportunity for future growth supported by recent program wins and quoting activity for new programs in both North America and Europe and also continues to focus on pricing to protect margins. We expect the impact of the UAW strike in Q1 fiscal 2024 will be muted and we believe there is ample opportunity to achieve our targeted growth objectives. • Casting and Extrusion Segment Sales in this segment were $292.2 million – an increase of $56.2 million or 24% from the prior year. Excluding the impact of foreign exchange, segment sales increased $43.9 million or 19% compared to fiscal 2022. The full year impact of the Halex acquisition contributed $33.1 million and the launch of Castool 90 (Morocco) provided incremental growth compared to fiscal 2022. In the die-cast market, which primarily serves the automotive industry, demand for new moulds, consumable tooling (shot sleeves, rods, rings, tips, etc.), rebuild work and additive printed tooling has continued to improve strongly as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine/transmission platforms are launched. Also, customer inventory levels increased as expectations for vehicle production volumes improve. Our die-cast products are highly innovative and clearly gaining market share, particularly for tooling that is larger and more complex, which is the fastest growing portion of the die-cast market. Sales in the year were also aided by price increases, which were implemented to recover margins eroded by higher input costs. Quoting activity within the die-cast end market remains extremely robust while our backlog levels are at record highs, which is expected to bode well for sales into fiscal 2024. Demand for our consumable extrusion tooling (i.e. dies, dummy blocks, stems, etc.) and associated capital equipment (die ovens, containers, etc.) remained relatively firm as the ultimate end markets for these products are extremely diverse and the application for extrusions in the automotive market is seeing robust growth. As well, Exco benefited from ongoing market share gains and access to new market territories associated with its various growth initiatives. Nonetheless, market demand within certain end markets, such as building and construction softened through the year due to rising interest rates and slowing macroeconomic conditions. In addition to its capital asset growth agenda, Management remains focused on standardizing manufacturing processes, enhancing engineering depth and centralizing some support functions across its various plants. These initiatives have reduced lead times, enhanced product quality, expanded product breadth, increased capacity, and provided access to new geographies, all of which have supported market share gains. Cost of Sales On a consolidated basis, cost of sales totalled $488.7 million – an increase of $96.0 million or 24% from the prior year. Cost of sales as a percentage of sales was 79% compared to 80% in fiscal 2022. Prices for raw materials including petroleum/natural gas-based resins, leather goods, plastic products, and tool grade steel increased due to inflationary and macro economic pressures. The rate of inflation appeared to peak during the year and stabilized at most of the Company’s divisions in the second half. Management took pricing actions through the year such as negotiating price increases and implementing surcharges to partially offset the impact of cost increases. The success of these actions varied based on the type and length of the contract and the extent of the cost increases incurred. Direct labour wage increases were partially offset by manufacturing improvements and strategic fixed asset purchases to improve productivity which enabled direct labour as a percentage of sales to remain constant. Overhead costs EXCO TECHNOLOGIES LIMITED 11 ANNUAL REPORT 2023 increased with higher sales volume and inflationary conditions, including increased indirect wages, benefits, transportation and energy costs. However, as a percentage of sales, overhead costs decreased as the Company successfully improved manufacturing efficiencies at higher volumes. Selling, General and Administrative Expenses Selling, general and administrative expense in the current year increased to $56.3 million from $44.4 million last year, an increase of 27%. As a percentage of sales, selling, general and administrative costs remain consistent at 9%. Current year Selling, General and Administrative expenses increased due to higher sales commissions, tradeshows and related travel costs, increased compensation including incentive bonus expenses, 12-months of Halex costs, and $1 million of costs associated with second quarter cyber incident for administrative, legal and monitoring costs, which are not expected to recur in future. Depreciation and Amortization Consolidated depreciation expense was $27.2 million compared to $21.4 million the prior year. Depreciation expense within the Casting and Extrusion segment totalled $23.1 million in fiscal 2023 versus $18.2 million in fiscal 2022 and depreciation expense within the Automotive Solutions segment totalled $4.0 million versus $3.1 million last year. Amortization expense of $4.7 million in fiscal 2023 increased from $3.9 million from 2022. The carrying value of total intangible assets amounted to $30.6 million as at September 30, 2023 – down from $34.4 million a year ago. There were essentially no additions to intangible assets in fiscal 2023. The Company expects the annual amortization and depreciation expense will total approximately $4.6 million and $30.0 million respectively in fiscal 2024. Depreciation expense is anticipated to increase due to the launch of our Castool facility in Mexico, the full year impact of our Newmarket Heat treatment installation and other capital asset initiatives upgrading equipment across the Company. Interest Net interest expense in the current year totalled $8.1 million compared to $2.4 million in fiscal 2022. The increase is due to higher interest rates and the Company drawing on its committed credit facility compared to average cash balances in fiscal 2022. The increased debt is the result of the fiscal 2022 Halex acquisition, the build-up of Castool Mexico, the increased capital asset purchases and increases to the Company’s working capital to support the 26% increase in sales during the year. Income Taxes Exco’s effective income tax rate was 23.8% in fiscal 2023 compared to an effective income tax rate of 24.7% in fiscal 2022. The change in income tax rate is due to geographic distribution, foreign tax rate differentials and a shift in the proportion of earnings from jurisdictions with higher tax rates or minimum tax requirements. Net Income • Consolidated The Company reported consolidated net income of $26.7 million or basic and diluted earnings of $0.68 per share in fiscal 2023, compared to consolidated net income of $19.0 million or basic and diluted earnings of $0.49 per share the prior year. EXCO TECHNOLOGIES LIMITED 12 ANNUAL REPORT 2023 • Automotive Solutions Segment - Pretax profit The Automotive Solutions segment recorded Pretax profit of $34.9 million for the year compared to $20.9 million last year – an increase of $13.9 million or 67%. The increase in pretax profit is attributable to higher sales, better absorption of overheads, and select pricing actions. This improvement was partially offset by inefficiencies caused by launch costs from new programs throughout the year, erratic OEM vehicle production, as well as higher labour costs and unfavorable foreign exchange rate movements, particularly in Mexico. Industry vehicle production volumes remain below pre-pandemic levels and ongoing supply chain challenges continue to influence production volumes, but these challenges lessened in the year while cost increases related to raw materials, wages, and transportation also moderated. Apart from the impact of the recent UAW strike, management is optimistic that its overall cost structure will return to targeted levels in the future as scheduling and predictability improves with strengthening volumes. Pricing discipline remains a focus and action is being taken on current programs where possible, though there is typically a lag of a few quarters before the benefit is realized. As well, new program awards are priced to reflect management’s expectations for higher future costs. • Casting and Extrusion Segment - Pretax profit Casting and Extrusion Pretax profit was $15.1 million for the year compared to $12.0 million last year – an increase of $3.1 million or 26%. Increased overhead absorption and production efficiencies due to stronger sales in the die- cast market (including new moulds, rebuilds, consumable tooling and additive printed tooling) and improvements at Castool’s new operations in Morocco contributed positively to the results in the year. These positive contributions were moderately offset by a general slowdown in the extrusion die market driven primarily by higher interest rates negatively affecting the building and construction markets. Other offsetting factors were $5.5 million of higher depreciation, start-up costs at Castool’s Mexico facility and Heat Treat operations in Newmarket, as well as higher raw material, energy, freight and labour costs. Pre-tax profit was also impacted by roughly $0.6 million of one-time expenses recorded in the segment due to lost production time in the Large Mould group arising from the January 2023 cyber incident. Management expects to temper many of these costs over the coming quarters through efficiency improvements and pricing action, where possible. Margins will also benefit as newer operations mature and achieve greater scale and as utilization of new equipment that facilitates the manufacturing of large-scale die-cast tooling improves. The higher depreciation relates to the acquisition of Halex and the Company’s investment in new capital that will improve operations and provide access to new geographies to increase our market share. Castool’s new Mexican operation opened in October 2023. This operation is expected to ramp up quickly contributing to increased market share gains in both the die-cast and extrusion tooling markets in Mexico, Latin America and the Southern US. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expects such activities together with its sales efforts to continue improving segment profitability over time. Corporate Segment – Pretax loss • Corporate expense in the current year amounted to $7.4 million compared to $5.2 million in the prior year. The year over year increase was primarily driven by foreign exchange gains realized in fiscal 2022, higher incentive bonus and stock option expenses, and $1.0 million of legal and monitoring costs associated with the second quarter cyber incident which are not expected to continue in future years. EBITDA EBITDA in the current year amounted to $74.5 million compared to $53.0 million the prior year – an increase of $21.5 million or 41.0%. EBITDA margin increased to 12.0% compared to 10.8% from the prior year. EBITDA in the Casting and Extrusion segment was $39.6 million, which was $8.7 million higher or 28.0% than fiscal 2022. Casting and Extrusion segment EBITDA margin increased to 13.5% from 13.1% in the prior year. The Automotive Solution segment EBITDA was $42.2 million, which was higher by $15.0 million, or 55.0% compared to fiscal 2022. The Automotive Solution segment EBITDA margin increased to 12.9% in fiscal 2023 compared to 10.7% the prior year. EXCO TECHNOLOGIES LIMITED 13 ANNUAL REPORT 2023 Quarterly Results The following table sets out financial information for each of the eight fiscal quarters through to the fiscal year ended September 30, 2023: ($ thousands except per share amounts) September 30, 2023 Sales Net income Earnings per share Basic Diluted $160,152 $9,210 $0.24 $0.24 ($ thousands except per share amounts) September 30, 2022 Sales Net income Earnings per share Basic Diluted $140,411 $5,569 $0.14 $0.14 June 30, 2023 $164,551 $6,263 $0.16 $0.16 June 30, 2022 $129,250 $5,563 $0.14 $0.14 March 31, 2023 $155,507 $6,228 December 31, 2022 $139,093 $4,523 $0.16 $0.16 $0.12 $0.12 March 31, 2022 $119,303 $5,098 December 31, 2021 $100,979 $2,736 $0.13 $0.13 $0.07 $0.07 Exco typically experiences softer sales and profits in the first and fourth fiscal quarters, which coincides with our customers’ plant shutdowns during the holiday season and summer months. Since June 30, 2022, the quarterly results reflect the purchase of Halex and improvements in automotive production as supply chain disruptions (including global semi-conductor shortages) ease, partially offset by negative impacts from the Russian invasion of the Ukraine. Net income and Earnings per share were negatively impacted by higher depreciation, inflationary pressures, and interest costs associated with the Company’s strategic investments. Fourth Quarter In the fourth quarter, consolidated sales were $160.2 million – an increase of $19.7 million or 14% from the prior year. Foreign exchange rate movements increased sales by $4.8 million in the quarter. The Automotive Solutions segment experienced a 33% increase in sales, or an increase of $21.6 million, to $87.6 million from $66.0 million in the fourth quarter of 2022. Excluding the impact of foreign exchange, segment sales increased $19.2 million, or 30%. Sales increased at all four of the segment’s operations. The sales increase was primarily driven by new program launches and to a lesser extent higher vehicle production volumes. North American vehicle production was up 9% compared to a year ago and European vehicle production was up 6%. During the fourth quarter, there was virtually no impact of the UAW strike action which started in mid September before being resolved by late October. Exco expects a muted impact from these strikes in its first quarter results in F2024. In the midterm, industry growth may be tempered by rising interest rates and emerging indicators of a global recession. Exco will nonetheless benefit from recent and future program launches that are expected to provide ongoing growth in our content per vehicle. Quoting activity remains encouraging and we believe there is ample opportunity to achieve our targeted growth objectives. The Casting and Extrusion segment recorded sales of $72.6 million in the fourth quarter compared to $74.4 million last year – a decrease of $1.8 million or 2%. Excluding the impact of foreign exchange movements, the segment’s EXCO TECHNOLOGIES LIMITED 14 ANNUAL REPORT 2023 sales were down 6% for the quarter. Demand for our extrusion tooling was lower in the fourth quarter as the impact of higher interest rates and potential for a global recession reduced orders, mainly from the building and construction markets. Demand for extrusion tooling for automotive and sustainable energy markets remains strong and growing, but the building and construction market is the largest driver of extrusion tooling. Management remains focused on standardizing manufacturing processes, enhancing engineering depth and centralizing critical support functions across its various plants. These initiatives have reduced lead times, enhanced product quality, expanded product breadth and increased capacity, all of which position the extrusion group favourably in the future. In the die-cast market, which primarily serves the automotive industry, demand and order flow for new moulds, associated consumable tooling (shot sleeves, rods, rings, tips, etc.) and rebuild work continued to pick up as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine/transmission platforms are launched. In addition, demand for Exco’s industry leading additive (3D printed) tooling has continued to gain significant traction as customers focus on greater efficiency with the size and complexity of die-cast tooling continuing to increase. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. Also impacting revenue during the quarter was the considerable period over period variance to the recognition of revenue from some of the larger new-build moulds, which have high price points relative to other products in the segment. Quoting activity remains very robust and our backlogs remain at record levels, which is expected to bode well for sales into fiscal 2024. The Company’s fourth quarter consolidated net income increased to $9.2 million or earnings of $0.24 per share compared to $5.6 million or earnings of $0.14 per share in the same quarter last year. The effective income tax rate was 25% in the current quarter compared 26% in the same quarter last year. The change in income tax rate in the quarter was impacted by geographic distribution and foreign tax rate differentials. Fourth quarter pre-tax earnings in the Automotive Solutions segment totalled $10.0 million, an increase of $3.5 million or 54% over the same quarter last year. Although production volumes continue to experience some challenges with semiconductor and supply chain constraints, the impact of these factors has reduced considerably. This has allowed all four businesses to benefit from improved efficiencies and absorption of fixed costs to offset the higher raw material and labour costs experienced in recent years. In addition, the stabilized production volumes mean improvements to scheduling and managing labour downtime, fewer expedited shipping and overtime costs experienced by this segment. Apart from UAW strike-related impacts, Management is cautiously optimistic that its cost structures have improved to relatively normal levels such that margins should improve with strengthening and stabilizing volumes. Fourth quarter pre-tax earnings in the Casting and Extrusion segment totalled $5.3 million, an increase of $2.8 million or 108% over the same quarter last year. The pretax profit improvement is due to improved efficiency in the Extrusion die business, including improvements at Halex and the elimination of fiscal 2022 one-time costs associated with outsourcing due to the extrusion heat treatment implementation. As well, there was improved absorption and efficiencies as Castool’s heat treatment operation ramps up, stabilizing raw material and labour costs, and lower Castool Morocco start up costs. Program pricing and mix has also improved in the Large Mould group as demand has picked up in recent quarters while efficiency initiatives continue to take hold. Offsetting these reduced costs is a $0.5 million increase in depreciation costs associated with the increased capital expenditures and start-up losses at Castool’s new operations in Mexico. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expects such activities together with its sales efforts should lead to improved segment profitability over time. The Corporate segment in the fourth quarter recorded expenses of $0.8 million compared to $0.1 million last year due to higher compensation expenses in the current quarter and higher foreign exchange gains in fiscal 2022. As a result of the foregoing, consolidated EBITDA in the quarter was $22.9 million (14.3% of sales) compared to $16.5 million (11.8% of sales) last year. EXCO TECHNOLOGIES LIMITED 15 ANNUAL REPORT 2023 FINANCIAL RESOURCES, LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities Operating cash flow before net changes in non-cash working capital was $70.2 million in fiscal 2023 compared to $49.7 million in fiscal 2022. The $20.5 million year over year increase was driven by higher net income, interest, deferred income tax, depreciation and amortization expenses in fiscal 2023. Net change in non-cash working capital was $12.1 million cash used in fiscal 2023 compared to $26.2 million cash used last year. Cash used for working capital was driven by higher accounts receivable associated with higher fourth quarter sales, increased inventory reflecting the strength of our backlog and ramping up new facilities, partially offset by increases in customer advance payments and income taxes payable. After adjusting for non-cash working capital, Cash provided by operating activities increased to $58.2 million in fiscal 2023 compared to $23.5 million in the prior year. Cash Flows from Financing Activities Cash used in financing activities amounted to $21.8 million compared to cash provided by $80.0 million in fiscal 2022. The Company paid $8.1 million in interest, $16.3 million in dividends, partially offset by debt increasing by $2.6 million. The prior year $80.0 million cash provided reflected the $95.0 million increase in long-term debt associated with the Company’s purchase of Halex and strategic capital asset purchases, offset by dividends, share buy- backs and interest payments. Exco enters into lease arrangements from time to time. Exco owns 20 of its 21 manufacturing facilities and materially all of its production equipment. The Company also leases sales and support centers in Troy and Port Huron, Michigan, a warehouse in Brownsville, Texas, and the operating facility in Weissenburg Germany. The following table summarizes the Company’s significant short-term and long-term commitments on an undiscounted basis: (000’s) Bank indebtedness Trade accounts payable Long-term debt Lease commitments Purchase commitments Capital expenditures Total $4,964 54,043 105,000 8,217 44,498 8,743 < 1 year $4,964 54,043 - 696 44,498 8,743 1-3 years - - 105,000 1,201 - - Over 3 years - - - 6,320 - - $225,465 $112,944 $106,201 $6,320 ∗ 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 $37.8 million compared to $110.4 million last year. The decrease reflects the $39.0 million investment in capital assets in fiscal 2023 compared to $53.5 million in the prior year and the Company’s $57.6 million purchase of Halex in fiscal 2022. The decrease in capital asset purchases reflect the completion of our Castool Mexico facility, the heat treatment facility in Newmarket, and various other capital improvement projects across the Company to support growth initiatives. Many of these initiatives began in fiscal 2022 and continued into fiscal 2023. EXCO TECHNOLOGIES LIMITED 16 ANNUAL REPORT 2023 In fiscal 2024, Exco plans to invest approximately $48.5 million in capital expenditures of which roughly $24.4 million is for growth capital expenditures and $24.1 million is for Maintenance Fixed Asset Additions. Major initiatives in fiscal 2024 include replacing the inefficient existing heat treatment furnaces with high efficiency vacuum equipment in our Michigan facility, new additive equipment within our Large Mould business to meet customer demand, additional multi-axis milling equipment in several locations and new equipment in our Automotive Solutions segment to support anticipated sales growth. Included in the 2024 estimate is $7.2 million in carryforward projects including completion of the heat treat installations in Newmarket, new machinery for Halex in Europe, and equipment for our Castool facility in Mexico. Financial Position and Cash Balance The Company’s conservative financial policies have served it well throughout the years and have allowed it to take advantage of acquisition opportunities and make strategic organic growth investments proactively to meet market changes. Exco’s net debt was $94.2 million on September 30, 2023 compared to $90.3 million the prior year. The Company generated Free Cash Flow of $35.4 million, paid dividends of $16.3 million and made growth capital expenditures of $23.1 million resulting in a modest increase in net debt of $3.9 million. As at September 30, 2023, Exco retained access to $43.0 million of its $153 million committed banking facility. 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 of September 30, 2023. Non-IFRS Measures The following tables reconcile EBITDA, EBITDA margin and Free Cash Flow for the periods to the Company’s IRFS measures, cash provided by operating activities to free cash flow, and segment EBITDA disclosures: Net income Provision for income tax Income before income taxes Depreciation Amortization Net interest expense EBITDA Sales EBITDA margin Cash provided by operating activities Interest expense, net Maintenance fixed asset additions Free Cash Flow EXCO TECHNOLOGIES LIMITED 17 ANNUAL REPORT 2023 Twelve Months ended September 30 (in $ thousands) 2023 2022 $26,284 8,221 $18,966 6,233 34,505 25,199 27,231 4,686 8,068 74,490 21,445 3,927 2,446 53,017 $619,303 $489,943 12.0% 10.8% $58,169 (8,068) (14,681) $35,420 $23,473 (2,446) (13,625) $7,402 Segment EBITDA disclosure Pretax Profit Depreciation Amortization EBITDA Sales EBITDA Margin Outstanding Share Capital Casting and Extrusion Twelve Months ended September 30 2022 $11,970 18,216 721 $30,907 $236,034 13.1% 2023 $15,142 23,141 1,305 $39,588 $292,193 13.5% Automotive Solutions Twelve Months ended September 30 2022 $20,904 3,135 3,206 $27,245 $253,909 10.7% 2023 $34,851 4,006 3,381 $42,238 $327,110 12.9% As of September 30, 2023, the Company had 38,912,464 common shares issued and outstanding and stock options outstanding to purchase up to 1,106,500 common shares at exercise prices ranging from $7.97 to $9.87 per share. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies”, to the consolidated financial statements included in this Report. The preparation of Exco’s Consolidated 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. Management estimates and expenses the fair value of stock-based compensation. This fair value (as determined by the Black-Scholes option pricing model) is charged to earnings over the remaining vesting period. 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 reductions in profitability, budget shortfalls, 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. EXCO TECHNOLOGIES LIMITED 18 ANNUAL REPORT 2023 RECENT ACCOUNTING CHANGES AND EFFECTIVE DATES There were no accounting policy changes during the year ended September 30, 2023 that have a material impact to the Company’s reporting. Refer to Note 2 to the consolidated financial statements for information pertaining to the accounting changes and issued accounting pronouncements effective in future years. DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer, together with other members of management, after evaluating the effectiveness of the Company’s disclosure controls and procedures, have concluded that the Company’s disclosure controls and procedures are adequate and effective as of September 30, 2023 in ensuring that material information relating to the Company and its consolidated subsidiaries would have been known to them. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING During the most recent period, there have been no changes in the Company’s existing policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Chief Executive Officer and Chief Financial Officer, together with other members of management, have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Company’s financial reporting and its compliance with the integrated framework issued by the Committee of Sponsoring Organization of the Treadway Commission. The CEO and the CFO have supervised management in the evaluation of the design and effectiveness of the Company’s internal controls over financial reporting as at September 30, 2023 and believe the design and effectiveness of the internal controls to be effective. RISKS AND UNCERTAINTIES As automotive production has become more reliant on global suppliers for components, the impact that critical components can have on global vehicle production volumes can disrupt worldwide production. In recent years the semiconductor chip shortage disrupted every OEM and automotive supplier to various degrees. Although the global semiconductor supply chain has improved in fiscal 2023, the industry remains vulnerable that other materials or parts can negatively impact global vehicle production. The impact to the industry may include: unplanned shutdowns of production lines and/or plants; reductions in their vehicle production plans; and changes to their product mix. These responses can result in a number of consequences at Exco such as: lower sales; production inefficiencies due to production lines being stopped/restarted unexpectedly based on OEMs' production priorities; premium freight costs to expedite shipments; and/or other unrecoverable costs. Furthermore, Tier 1 and 2 suppliers such as Exco may face price increases from suppliers. Over time we expect to recover some of the lost production volumes, however, it remains unclear what the next critical component will be and difficult to predict the full impact of these items. Geopolitical risk and international conflict (such as the conflicts between Russia and Ukraine or Israeli and Palestine) have the potential to exacerbate a number of risks described elsewhere in these Risk Factors, including: disruption of vehicle production and supply chains; worsening the current critical supply chain components (like semiconductor chips since Russia and Ukraine are global suppliers of neon gas and palladium used in chip production); exacerbating energy shortages and driving energy prices higher (particularly oil and natural gas); constraining the supply of aluminum, palladium or other commodity metals required in automotive production; and increased cybersecurity threats. In response to these conflicts, a number of countries, including the U.S. and European Union member states, EXCO TECHNOLOGIES LIMITED 19 ANNUAL REPORT 2023 have taken actions such as: imposition of sanctions on regions and leaders and other individuals; restrictions on banking and international trade; and other measures, with further restrictions likely as these conflicts continue. Exco does not have manufacturing operations in these regions. However, Exco’s global footprint creates the opportunity that our operations may be impacted by these sanctions or other side effects of these conflicts. There is a greater risk of inflationary price increases as economic activity rebounds in our primary production markets and supply chains. In recent years, we witnessed increasing commodity costs for steel, aluminum and resin. Tight labour markets, low unemployment rates, and increasing collective bargaining pressures may drive wage pressures up which will increase the risk for inflationary pressure in certain markets. These trends are expected to continue in coming quarters and could expand to other areas. In some cases inputs may not be available in a timely manner. The inability to offset inflationary price increases through continuous improvement actions, price increases or adjustments on our own products or otherwise, could have an adverse effect on our earnings. Global pandemics caused by viruses or other diseases (such as COVID-19) create continued risk of further disruptions to the automotive and manufacturing industry, including additional mandatory stay-at-home orders or other restrictions. These orders may: restrict consumers' ability to purchase vehicles; restrict production; cause elevated employee absenteeism; and lead to supply chain disruptions. Over the medium- to long-term, the pandemic may result in societal changes that impact the automotive industry, positively or negatively, including as a result of expanded work-from-home practices that reduce consumers' reliance on vehicles; and/or increased reluctance by people to utilize modes of public transit and/or shared mobility. 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, the type of automobiles (which demand has been shifting away from passenger cars towards SUV/ CUV’s in North America), the rate at which the electric vehicle is more widely adopted and the level of automobile production. These factors 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. A significant portion of Exco’s receivables are with automotive customers. These customers have varying degrees of financial strength which could ultimately impact the collectability of the respective receivable. 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. 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. EXCO TECHNOLOGIES LIMITED 20 ANNUAL REPORT 2023 OEMs or their suppliers 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 suppliers 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 has a significant number of employees worldwide and accordingly availability of labour is critical and wages are a major manufacturing input cost. In Mexico particularly, where Exco has approximately half its employees at five production facilities, all of which are represented by national labor unions, real wage increases may materially impact the Company’s financial performance. 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 new programs will be awarded or that if awarded, the pricing and margin will be comparable to those of programs ending. The Casting and Extrusion segment is a capital goods business. Interest rates, exchange rates, corporate capital spending, the general economic climate, business confidence and the financial strength of our customers 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 this risk. 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. Generally, 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. Governments have postured with a more protectionist tone. Furthermore, USA/China trade negotiations have taken longer and appear more contentious than originally expected and are currently ongoing. If governments pursue protectionist trade practises with respect to automotive components or their raw materials or subassemblies, Exco may be prejudiced. Exco has made six acquisitions in the last 13 years (Allper AG, Exco Colombia, Extrusion Texas, Automotive Leather Company, AFX Industries and Halex) and may make others in the future. Acquisitions inherently involve risk. While Exco has concluded many acquisitions that have been very successful, there have also been disappointing acquisitions which have adversely impacted earnings. Integration of acquired companies may not be effective or timely especially with respect to operations in countries where Exco has not previously done business. 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 partial hedge against U.S. dollar and Euro sales of Exco’s Canadian operations. As for the remaining foreign exchange exposure in these currencies not naturally hedged, Exco does not enter into forward contracts but prefers to incur U.S. dollar or Euro 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 increasing adverse financial impact 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 TECHNOLOGIES LIMITED 21 ANNUAL REPORT 2023 Exco’s U.S. operations earn profits in U.S. dollars while our Canadian operations are exposed to fluctuations in the value of the Canadian dollar relative to the U.S. dollar on U.S. dollar sales less purchases. For fiscal 2024, it is estimated that Exco’s total corresponding U.S. dollar foreign exchange risk exposure before tax will amount to approximately US$80.1 million. Therefore, if the Canadian dollar were to strengthen or weaken by $0.01 in fiscal 2024 from a baseline level of $1.30 USD/CAD, it is estimated that pre-tax profit would change by about $978 thousand or about $763 thousand after tax. These estimates are based on historical norms and may be materially different in 2024 if customers deviate from their past practices. Exco’s has five manufacturing operations in Mexico and accordingly incurs a portion of its labour and other expenses in Mexican pesos. In turn, these Mexican pesos expenses are incurred to mainly support US dollar denominated sales. Consequently, any strengthening of the Mexican pesos against the US dollar reduces our profitability, all other things equal. In recognition of this risk, Exco hedges a portion of its Mexican pesos/ US dollar exposure with various foreign exchange contacts and options. For fiscal 2024, we estimate our pesos exposure net of hedges and pesos denominated sales to be approximately 337 million pesos. If the Mexican pesos were to strengthen or weaken by 1% versus the US dollar from a baseline USD/MEX rate of 17.6:1, and further assuming the Canadian dollar strengthens or weakens against the US dollar also by 1% from a baseline USD/CAD rate of 1.30, we estimate pre-tax profit would change by $509 thousand or about $330 thousand after tax. These estimates are based on historical norms and may be materially different in fiscal 2024 if customers deviate from their past practices. Exco also has manufacturing facilities in Colombia, Brazil, Thailand, Morocco and Europe and Exco’s presence in jurisdictions such as these has generally been increasing in recent years. 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, retained earnings and value of its investment in these countries. 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 and Morocco; however, many of our operations based in Canada, U.S. and Europe must compete with products manufactured in lower-cost environments. Although we have established and continue to enhance security controls intended to protect our IT systems and infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical access or cyber attacks. A significant breach of our IT systems could: result in theft of funds; cause disruptions in our manufacturing operations; lead to the loss, destruction or inappropriate use of sensitive data; or result in theft of our, our customers’ or our suppliers’ intellectual property or confidential information. The occurrence of any of the foregoing could adversely affect our operations and/or reputation and could lead to claims against us that could have a material adverse effect on our profitability. EXCO TECHNOLOGIES LIMITED 22 ANNUAL REPORT 2023 Independent auditor’s report To the Shareholders of Exco Technologies Limited Opinion We have audited the consolidated financial statements of Exco Technologies Limited and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position as at September 30, 2023 and 2022, and the consolidated statements of income and comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at September 30, 2023 and 2022 and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For the matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to this matter. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying consolidated financial statements. EXCO TECHNOLOGIES LIMITED 23 ANNUAL REPORT 2023 Key Audit Matter Goodwill impairment As described in Note 6 to the consolidated financial statements, the Group has a goodwill balance of $91.3 million as at September 30, 2023, of which $63.5 million was allocated to the group of cash generating units (“CGUs”) comprising the Automotive Solutions operating segment and $27.8 million to the Extrusion group of CGUs. The Group assesses at least annually, or more frequently if an indicator of impairment exists, whether there has been an impairment in the carrying value of goodwill. An impairment is recognized if the recoverable amount is less than the carrying amount of the group of CGUs to which goodwill is allocated. The Group also disclosed in Note 6 that no impairment was recorded. For all impairment tests, the Group determines the recoverable amount using a value in use approach. Auditing the Group’s impairment tests was complex, given the degree of subjectivity in evaluating the Group’s estimates and assumptions in determining the various recoverable amounts. Significant assumptions included forecasted revenues and profit margins, terminal growth rate, and the discount rate all of which are affected by expectations about future market and economic conditions. How our audit addressed the key audit matter To test the estimated recoverable amounts in the impairment tests, we performed the following procedures, among others: • We assessed the reasonableness of forecasted revenues and profit margins by comparing to supporting documentation such as customer contracts where available, approved budgets and historical performance. • We assessed the historical accuracy of estimates of forecasted revenue and profit margins to actual performance. • We evaluated the terminal growth rate by comparing to long term inflation expectations with the assistance of our valuation specialists. • We involved our valuation specialists to assess the appropriateness of the Group’s model and valuation methodology applied. They also assessed the various inputs utilized in determining the discount rate by referencing current industry, economic, and comparable company capital structures, as well as Group and cash-flow specific risk premiums. • We assessed the adequacy of the disclosures included in Note 6 of the consolidated financial statements in relation to this matter. Other information Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis and Annual Report prior to the date of this auditor’s report. If based on the work we have performed, we conclude that there is a misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. EXCO TECHNOLOGIES LIMITED 24 ANNUAL REPORT 2023 Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. EXCO TECHNOLOGIES LIMITED 25 ANNUAL REPORT 2023 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Mark Vrooman. Toronto, Canada November 29, 2023 EXCO TECHNOLOGIES LIMITED 26 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION $(000)'s ASSETS Current Cash and cash equivalents Accounts receivable (note 8) Inventories (note 9) Prepaid expenses and deposits Derivative instruments (note 8) Income taxes recoverable (note 13) Total current assets Property, plant and equipment, net (note 5) Intangible assets, net (note 6) Goodwill (note 6) Deferred tax assets (note 13) Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness (notes 4 and 8) Trade accounts payable (note 8) Accrued payroll liabilities (note 8) Other accrued liabilities (notes 5 and 8) Provisions (note 7) Customer advance payments (note 8) Total current liabilities Lease liabilities - long-term portion (note 8) Long-term debt (notes 4 and 8) Deferred tax liabilities (note 13) 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 As at As at September 30, 2023 September 30, 2022 (note 2) $15,796 128,449 111,166 4,660 5,401 711 266,183 222,429 30,601 91,330 1,528 $612,071 $4,964 54,043 17,823 18,061 7,191 5,152 107,234 6,396 105,000 22,421 241,051 48,767 5,791 16,829 299,633 371,020 $612,071 $17,024 119,261 97,962 4,322 2,066 9,114 249,749 207,103 34,446 88,699 1,640 $581,637 $12,363 51,359 15,859 24,003 6,445 3,169 113,198 6,650 95,000 18,280 233,128 48,767 5,431 4,618 289,693 348,509 $581,637 The accompanying notes are an integral part of these consolidated financial statements. On behalf of the Board: Darren M. Kirk President and Chief Executive Officer Brian A. Robbins Director, Executive Chairman EXCO TECHNOLOGIES LIMITED 27 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME $(000)'s except for income per common share Sales (note 11(A)) Cost of sales Selling, general and administrative expenses (note 3) Depreciation (note 5) Amortization (note 6) Gain on disposal of property, plant and equipment Interest expense, net (note 16) Income before income taxes Provision for income taxes (note 13) Current Deferred Net income for the year Other comprehensive income Items that may be reclassified to net income in subsequent periods: Net unrealized gain on derivatives designated as cash flow hedges (notes 3 and 8) Unrealized gain on foreign currency translation (note 3) Comprehensive income Income per common share Basic Diluted Weighted average number of common shares outstanding (note 12) Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. Years ended September 30 2022 $489,943 392,673 44,432 21,445 3,927 (179) 2,446 464,744 2023 $619,303 488,709 56,271 27,231 4,686 (167) 8,068 584,798 34,505 25,199 5,127 3,094 8,221 $26,284 2,458 9,753 12,211 $38,495 $0.68 $0.68 38,912 38,912 3,448 2,785 6,233 $18,966 1,119 2,383 3,502 $22,468 $0.49 $0.49 39,085 39,089 EXCO TECHNOLOGIES LIMITED 28 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY $(000)'s Balance, September 30, 2021 Net income for the year Dividends paid (note 3) Stock option expense (note 3) Issuance of share capital (note 3) Repurchase of share capital (note 3) Other comprehensive income (note 3) Balance, September 30, 2022 Net income for the year Dividends paid (note 3) Stock option expense (note 3) Other comprehensive income (note 3) Balance, September 30, 2023 Share capital $48,983 - - - 264 (480) - 48,767 - - - - $48,767 Contributed surplus $5,087 - - 384 (40) - - 5,431 - - 360 - $5,791 Retained earnings $289,872 18,966 (16,204) - - (2,941) - 289,693 26,284 (16,344) - - $299,633 The accompanying notes are an integral part of these consolidated financial statements. Unrealized gain Accumulated other comprehensive income Net unrealized gain on derivatives designated as cash flow hedges $401 - - - - on foreign currency translation Total accumulated other comprehensive income $1,116 - - - - - 3,502 4,618 - - - 12,211 $16,829 Total shareholders' equity $345,058 $18,966 ($16,204) $384 $224 ($3,421) $3,502 348,509 26,284 (16,344) 360 12,211 $371,020 $715 - - - - - 2,383 3,098 - - - 9,753 $12,851 1,119 1,520 - - - 2,458 $3,978 EXCO TECHNOLOGIES LIMITED 29 ANNUAL REPORT 2023 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 Deferred income tax expense (note 13) Net interest expense (note 16) Gain on disposal of property, plant and equipment Net change in non-cash working capital (note 14) Cash provided by operating activities FINANCING ACTIVITIES: Increase (decrease) in bank indebtedness Financing from long-term debt (note 4) Interest paid, net Dividends paid (note 3) Repurchase of share capital (note 3) Exercise of stock options (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 2022 2023 $26,284 $18,966 27,231 4,686 684 3,462 8,068 (167) 70,248 (12,079) 58,169 (7,399) 10,000 (8,068) (16,344) - - (21,811) - (38,449) (534) 1,192 (37,791) 21,445 3,927 352 2,759 2,446 (179) 49,716 (26,243) 23,473 6,823 95,000 (2,446) (16,204) (3,421) 224 79,976 (57,616) (52,112) (1,393) 765 (110,356) Effect of exchange rate changes on cash 205 (167) Decrease in cash during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (1,228) 17,024 $15,796 (7,074) 24,098 $17,024 The accompanying notes are an integral part of these consolidated financial statements. EXCO TECHNOLOGIES LIMITED 30 ANNUAL REPORT 2023 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 21 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”). Certain comparative figures have been reclassified to conform to the current year’s presentation. The consolidated financial statements and accompanying notes as at and for the year ended September 30, 2023 were authorized for issue by the Board of Directors on November 29, 2023. 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 subsidiaries 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 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 statements 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 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 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 statements 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 EXCO TECHNOLOGIES LIMITED 31 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts recorded in other comprehensive income. When a foreign operation is sold, exchange differences that were recorded in accumulated other comprehensive income 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, other income (expense) and income tax expense. 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 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 net fair value of the identifiable assets, liabilities and contingent liabilities recognized. If 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. Where goodwill has been allocated to a Cash-Generating Unit (“CGU”) or group of CGUs 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 group of CGU retained. 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. Significant accounts that require estimates as the basis for determining the stated amounts include accounting for inventories, property, plant and equipment, contingent liabilities, income taxes, fair value of financial instruments and stock option valuation. Property, plant and equipment and intangible assets (including goodwill) are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and, in the case of goodwill, on an annual basis. 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. Impairment of non-financial assets exists when the carrying value of an asset, CGU or group of CGUs 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 EXCO TECHNOLOGIES LIMITED 32 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts enhance the asset’s performance of the CGU or group of CGUs 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 terminal growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount, including a sensitivity analysis, are disclosed and further explained in note 6. 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. In a business combination, substantially all identifiable assets, liabilities and contingent liabilities acquired are recorded at the date of acquisition at their respective fair values. One of the most significant areas of judgement and estimation relates to the determination of the fair value of these assets and liabilities. The estimate of fair value of customer relationships is based on future cash flows derived from expectations of revenue, margins and attrition of acquired customer relationships. The Company’s critical accounting estimates are affected as a result of the various ongoing economic, geopolitical and social impacts, including the global pandemic, Russian invasion of Ukraine and recessionary conditions. There continues to be significant uncertainty as to the likely effects these items which may, among other things, impact our employees, suppliers, and customers. It is not possible to predict the impact these items will have on the Company, its financial position and the results of operations in the future. The Company is monitoring the impact of all these items on all aspects of its business. Each reporting period, management carries out this assessment for indications that goodwill and other long-lived assets may be impaired. As required, management will continue to assess these assumptions as the situation changes. 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. Revenue recognition The Company recognizes revenue primarily from two categories of goods: production contracts (including finished production parts and assemblies, short-term die cast tooling contracts, extrusion and other tooling) and long-term large die cast mould contracts. Revenue for production contracts is recognized at the point in time control of the goods is transferred to the customer. Control of finished production parts, assemblies and tooling transfers when the goods are shipped from the Company’s manufacturing facilities to the customer. Revenue for long-term large die cast mould contracts are also recognized at the point in time control of the goods is transferred to the customer. Point in time recognition is used since these contracts do not contain an enforceable right to payment that includes a reasonable profit margin. A receivable is recognized when control of the goods transfer to the customer, as indicated above, and consideration is unconditional. Payment terms are generally based on the customers’ payment schedules, which typically range from 30 to 90 days from invoice date. A customer advance payment is recognized if a payment is received or payment is due (whichever is earlier) from a customer before the Company transfers control of the production parts or large die cast moulds. 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 EXCO TECHNOLOGIES LIMITED 33 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 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. The Company has a Deferred Share Unit (“DSU”) plan for Independent Directors. Under the DSU plan, a portion of the 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 the portion of a director’s quarterly remuneration allocated to DSUs 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. Changes in 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 Provision for income tax consists of current and deferred income taxes. Provision for 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 liability method. Under the liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the 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 realized. 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 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 relate are capable of carrying out their intended use. Machinery and equipment are depreciated using the declining balance method based on their estimated useful lives, which range from 4 to 20 years. 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. EXCO TECHNOLOGIES LIMITED 34 ANNUAL REPORT 2023 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. Subsequent costs 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. 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 when the cost is incurred and 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. The costs of day-to-day servicing are expensed as incurred. These costs are more commonly referred to as “maintenance and repairs”. 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 Trade names: 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. 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 recoverable amount of the asset is calculated in order to determine if an impairment loss is required. If it is not possible to estimate the recoverable amount of the individual asset, assets are grouped at the CGU level for the purpose of assessing the recoverable amount. An impairment loss is recognized for any excess of the carrying amount of the CGU over its recoverable amount. Impairment losses are recorded in the consolidated statements of income and comprehensive income in the period in which they occur. 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 or CGUs fair value less costs of disposal 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 of disposal, 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. A long-term growth rate is calculated and applied to project future cash flows after the third year. A previous impairment loss is reversed if there is an indication that there has been a change in the estimates EXCO TECHNOLOGIES LIMITED 35 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 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. The amount of the reversal is limited to the difference between the current carrying amount and the amount which would been the carrying amount had the earlier impairment not been recognized and amortization of that carrying amount had continued. The impairment reversal is allocated on a pro-rata basis to the existing long-lived assets of the CGU based on their carrying amounts. Impairment reversals are recorded in the consolidated statements of income and comprehensive income in the period in which they occur. (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 performs a goodwill impairment test annually as at September 30 or more frequently when there is an indicator that the goodwill may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU group to which the goodwill is allocated. 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. 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 are 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. Financial instruments The Company recognizes financial assets and financial liabilities initially at fair value and subsequently measures these at either fair value or amortized cost based on their classification under IFRS 9, financial instruments (“IFRS 9”) as described below: Amortized cost: The Company classifies financial assets held to collect contractual cash flows at amortized cost, including trade and other receivables. The Company initially recognizes the carrying amount of such assets on the consolidated statements of financial position at fair value plus directly attributable transaction costs, and subsequently measures these at amortized cost using the effective interest rate method, less any impairment losses. EXCO TECHNOLOGIES LIMITED 36 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Fair value through profit or loss (“FVTPL”): Financial assets and financial liabilities purchased or incurred, respectively, with the intention of generating earnings in the near term, and derivatives other than cash flow hedges, are classified as FVTPL. This category includes cash and cash equivalents, and derivative assets and derivative liabilities that do not qualify for hedge accounting. For items classified as FVTPL, the Company initially recognizes such financial assets and liabilities on the consolidated statements of financial position at fair value and recognizes subsequent changes in the consolidated statements of income and comprehensive income. Transaction costs incurred are expensed in the consolidated statements of income and comprehensive income. Loans and borrowings: The Company initially recognizes the carrying amount of such liabilities on the consolidated statements of financial position at fair value net of directly attributable transaction costs. After initial recognition, they are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the effective interest rate method amortization process. Impairment of financial assets: The Company uses an “expected credit loss” (“ECL”) model in determining the allowance for doubtful accounts as it relates to trade and other receivables. The Company’s ECL model aligns with the simplified approach under IFRS 9, which measures lifetime ECL and forward-looking information. The Company’s allowance is determined by historical experiences, and considers factors including, the aging of the balances, the customer’s credit worthiness, and updates based on the current economic conditions, expectation of bankruptcies, and the political and economic volatility in the markets/location of customers. Hedge accounting: The Company designates the change in fair value of the entire forward contract in the Company’s cash flow hedge relationship in other comprehensive income (loss) to the extent the hedge continues to be highly effective. The related other comprehensive income (loss) amounts are allocated to the consolidated statements of income in the same period in which the hedged item affects earnings. Provisions As required under IAS 37, Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”), 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 statements 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 At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether the contract: involves the use of an identified asset; provides the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and provides the right to direct the use of the asset. A right-of-use asset and lease liability are recorded on the date that the underlying asset is available for use, representing the commencement date. EXCO TECHNOLOGIES LIMITED 37 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: • • • • • fixed payments, including in-substance fixed payments; variable lease payments that are tied to an index or rate defined in the contract; amounts expected to be payable under a residual value guarantee; the exercise price under a purchase option that the Company is reasonably likely to exercise; and ease payments under an optional extension if the Company is reasonably certain to exercise the extension option, and early termination penalties required under a termination of a lease unless the Company is reasonably certain not to terminate early. The lease liability is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether or not it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or to profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The right-of-use asset is initially measured at cost, consisting of: • • • • the initial measurement of the lease liability, adjusted for any lease payments made at or before the commencement date; any initial direct costs incurred; and an estimate of costs to dismantle and remove the underlying asset or restore the site on which it is located; less any lease incentives received. The right-of-use asset is subsequently depreciated on a straight-line basis from the commencement date to the earlier of the end of the useful life of the asset or the end of the lease term. The lease term consists of the non-cancellable period of the lease; periods covered by options to extend the lease, when the Company is reasonably certain to exercise the option to extend; and periods covered by options to terminate the lease, when the Company is reasonably certain not to exercise the option. The right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability as described above. 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 each period end. (ii) Termination benefits The Company is subject to Mexican statutory laws and regulations governing Mexican 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. Accounting standards adopted in the current year IAS 37, Provisions, Contingent Liabilities, and Contingent Assets (“IAS 37”) Effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2022 the IASB issued amendments to IAS 37 to clarify costs to be included when determining if a contract is onerous. As the Company does not have any significant onerous contracts the standard did not have an impact on adoption. EXCO TECHNOLOGIES LIMITED 38 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Accounting standards issued but not yet adopted All pronouncements will be adopted in the Company’s accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Company’s consolidated financial statements is provided below. Certain other new standards, amendments and interpretations to existing standards may have been issued but are not expected to have a material impact to the Company’s consolidated financial statements. IFRS 1, Presentation of Financial Statements (“IFRS 1”), IFRS 8 Definition of Accounting Estimates (“IFRS 8”) Effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2023 the IASB issued amendments to IFRS 1 to allow a more general approach in classification of liabilities as current and non- current and IFRS 8 to distinguish between accounting policies and accounting estimates. The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements. Amendments to IAS 1, Classification of Liabilities as Current or Non-current (“IAS 1”) The amendments to paragraphs 69 to 76 of IAS 1 specify the requirements for classifying liabilities as current or non- current. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and must be applied retrospectively. The Company is currently assessing the impact the amendments will have on its consolidated financial statements. Amendments to IAS 12, Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (“IAS 12”) The amendment narrowed the scope of certain recognition exemptions so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. An entity applies the amendments to transactions that occur on or after the beginning of the earliest comparative period presented. It also, at the beginning of the earliest comparative period presented, recognizes deferred tax for all temporary differences related to leases and decommissioning obligations and recognizes the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date. The amendment is effective for annual periods beginning on or after January 1, 2023 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements. Amendments to IAS 12, International Tax Reform-Pillar Two Model Rules (“IAS 12”) In May 2023, the IASB issued narrow-scope amendments to IAS 12 that aim to provide temporary relief from the requirement to recognize and disclose deferred taxes arising from enacted or substantively enacted tax law that implements the Pillar Two model rules published by the Organization for Economic Co-operation and Development (“OECD”), including tax law that implements qualified domestic minimum top-up taxes described in those rules. The amendments also introduce targeted disclosure requirements for affected companies, and they require entities to disclose: • The fact that they have applied the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes; Their current tax expense (if any) related to the Pillar Two income taxes; and • • During the period between the legislation being enacted or substantially enacted and the legislation becoming effective, entities will be required to disclose known or reasonably estimable information that would help users of financial statements to understand an entity’s exposure to Pillar Two income taxes arising from that legislation. If this information is not known or reasonably estimable, entities are instead required to disclose a statement to that effect and information about their progress in assessing the exposure. The amendments to IAS 12 are required to be applied immediately (subject to any local endorsement processes) and retrospectively in accordance with IAS 8, including the requirement to disclose the fact that the exception has been applied if the entity’s income taxes will be affected by enacted or substantively enacted tax law that implements the OECD’s Pillar Two model rules. The disclosures relating to the known or reasonably estimable exposure to Pillar Two income taxes are required for annual reporting periods beginning on or after January 1, 2023, but they are not required EXCO TECHNOLOGIES LIMITED 39 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts to be disclosed in interim financial reports for any interim period ending on or before December 31, 2023. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements. 3. SHAREHOLDERS’ EQUITY 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, 2021 Purchased and cancelled pursuant to normal course issuer bid Exercise of stock options Issued and outstanding as at September 30, 2022 Issued and outstanding as at September 30, 2023 Common Shares Number of Shares 39,270,497 (385,033) 27,000 38,912,464 38,912,464 Stated Value $48,983 (480) 264 48,767 $48,767 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 gains and losses on derivatives designated as cash flow hedges and reclassification to income of net gains and losses on cash flow hedges as summarized in the following table: Opening balance Net unrealized gain on derivatives designated as cash flow hedges (1) Unrealized gain (loss) on currency translation adjustments Total other comprehensive income (loss) for the year Closing balance (1) Net of deferred taxes of $877 (2022 – $399). 2023 $4,618 2,458 9,753 12,211 $16,829 2022 $1,116 1,119 2,383 3,502 $4,618 Cash dividends During the year, the Company paid four quarterly cash dividends totaling $16,344 (2022 – $16,204). The dividend rate per quarter was $0.105 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: EXCO TECHNOLOGIES LIMITED 40 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 2023 2022 Number of Options 1,046,500 200,000 - (140,000) 1,106,500 Weighted Average Exercise Price $9.16 $7.97 - $10.15 $8.82 Number of Options 1,006,000 242,500 (27,000) (175,000) 1,046,500 Weighted Average Exercise Price $9.22 $9.78 $8.31 $10.48 $9.16 Balance, beginning of year Granted Exercised Expired Balance, end of year The following table summarizes information about stock options outstanding and exercisable as at September 30, 2023: Range of Exercise Prices $7.97 - $8.50 $8.51 - $9.00 $9.01 - $9.87 Number Outstanding 455,000 269,000 382,500 Weighted Average Remaining Contractual Life Options Outstanding Weighted Average Exercise Price $8.15 $8.56 $9.81 years years years 3.54 1.66 2.59 Options Exercisable Weighted Average Exercise Price $8.29 $8.56 $9.84 Number Exercisable 87,000 160,000 160,500 $7.97 - $9.87 1,106,500 2.75 years $8.82 407,500 $9.01 The number of common shares available for future issuance of options as at September 30, 2023 is 940,338 (2022 – 1,000,338). The number of options outstanding together with those available for future issuance totals 2,046,838 (2022 – 2,046,838) or 5.3% (2022 – 5.3%) 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 $360 for the year ended September 30, 2023 (2022 – $384). All stock-based compensation has been recorded in selling, general and administrative expenses. The weighted average assumptions used to measure the fair value of stock options and the weighted average fair value of options granted during the years ended September 30, 2023 and 2022 are as follows: Risk-free interest rates Expected dividend yield Expected volatility Expected time until exercise Weighted average fair value of the options granted 2023 2.92% 5.483% 30.30% 5.50 years $1.35 2022 1.28% 4.09% 30.48% 5.50 years $1.76 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, 2023, the Company granted 29,033 DSUs (2022 – 23,134 DSUs) and redeemed EXCO TECHNOLOGIES LIMITED 41 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 8,563 (2022 – no DSUs). During the year ended September 30, 2023 the Company recorded stock-based compensation expense of $168 (2022 – $32 income) related to awards under the DSU plan with a corresponding adjustment to other accrued liabilities. As at September 30, 2023, 137,465 DSUs were outstanding with a carrying value of $1,013 recorded in other accrued liabilities (2022 – 116,995 and $904). Contributed surplus Contributed surplus consists of accumulated stock option expense less the carrying amount of the options 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 2023 $5,431 360 - $5,791 2022 $5,087 384 (40) $5,431 Normal course issuer bid In each of February 2023, 2022 and 2021, the Company received approval from the Toronto Stock Exchange for a normal course issuer bid for the following 12-month period. The Company’s Board of Directors authorized the purchase of up to 1,785,000, 1,955,000 and 1,960,000 common shares under each of these normal course issuer bids, respectively, which represented approximately 5% of the Company’s outstanding common shares at each approval date. During the year, no common shares were re-purchased under these normal course issuer bids. (2022– 385,033 shares at cost of $3,421). 4. BANK INDEBTEDNESS AND LONG-TERM DEBT The operating lines are available in Canadian dollars and Euros at variable rates ranging from prime minus 0.5% to prime plus 0.75%. The Company’s JP Morgan credit facilities are collateralized by a general security agreement over its North American assets. Utilizations Facilities Current Long-Term Unused and Available JP Morgan, credit facility (Canada, U.S.A.) $150,000 $4,964 $105,000 JP Morgan, operating line (Europe) 2,575 - - $152,575 $4,964 $105,000 Prime rate in Canada Prime rate in USA Prime rate in Eurozone 2023 7.2% 8.5% 4.5% $40,036 $2,575 $42,611 2022 5.45% 6.25% 1.25% Effective November 7, 2022, the Company closed an amendment to increase the Committed Revolving Credit Facility (“Credit Facility”) with JP Morgan Chase Bank N.A. to $150,000, of which $109,964 was utilized as at September 30, 2023 (2022 – $106,828). The Credit Facility has a three-year term and there are no specific repayment terms prior to maturity. The Credit Facility is collateralized by a general security agreement covering all assets of the Company’s Canadian and US subsidiaries with the exception of real property. EXCO TECHNOLOGIES LIMITED 42 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 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 Euribor 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 net worth and net leverage ratio covenants. The Company was in compliance with these covenants as at September 30, 2023. Additionally, the Company maintains an operating line facility of EUR 1.8 million with JP Morgan Chase Bank N.A. London Branch related to any needs for Euro currency. The facility totals $2,575 (EUR 1.8 million) and bears interest based on Euribor. The Company had no utilization as at September 30, 2023 (2022 – $535). The components of long-term debt are as follows: Bank debt Less: current portion Long-term debt, long-term portion 5. PROPERTY, PLANT AND EQUIPMENT September 30, 2023 $105,000 - $105,000 September 30, 2022 $95,000 - $95,000 Cost Balance as at September 30, 2021 Additions Acquisition (note 17) Reclassification Less: disposals Foreign exchange movement Balance as at September 30, 2022 Additions Reclassification Less: disposals Foreign exchange movement Balance as at September 30, 2023 Machinery and Equipment $216,433 4,527 10,615 29,330 (5,629) 5,048 260,324 4,530 29,419 (6,950) 3,734 Tools Buildings Land Assets under Construction Right of Use Assets Total $23,181 1,398 606 862 (1,897) 674 24,824 1,856 536 (1,120) 399 $79,073 887 5,938 6,005 (44) 1,336 93,195 1,879 9,109 (224) 1,696 $12,385 186 1,678 - - 268 14,517 - - (77) 384 $22,004 44,867 - (36,197) - (813) $1,600 $354,676 52,112 25,729 - (7,770) 6,525 247 6,892 - (200) 12 29,861 29,453 (39,064) - 459 8,551 731 - (958) 389 431,272 38,449 - (9,329) 7,061 $291,057 $26,495 $105,655 $14,824 $20,709 $8,713 $467,453 EXCO TECHNOLOGIES LIMITED 43 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Accumulated depreciation and impairment losses Balance as at September 30, 2021 Depreciation for the year Less: disposals Foreign exchange movement Balance as at September 30, 2022 Depreciation for the year Less: disposals Foreign exchange movement Balance as at September 30, 2023 Carrying amounts As at September 30, 2022 As at September 30, 2023 Machinery and Equipment Tools Buildings Land Assets under Construction Right of Use Assets Total $145,441 15,374 (5,203) 3,298 $17,230 2,266 (1,829) 639 158,910 19,926 (6,691) 1,242 18,306 2,509 (1,088) 326 $41,744 3,230 (35) 721 45,660 4,029 (186) 349 $173,387 $20,053 $49,852 $- - - - - - - - $- $- - - - - - - - $787 575 (117) 48 1,293 767 (340) 12 $205,202 21,445 (7,184) 4,706 224,169 27,231 (8,305) 1,929 $- $1,732 $245,024 $101,414 $117,670 $6,518 $6,442 $47,535 $14,517 $55,803 $14,824 $29,861 $20,709 $7,258 $207,103 $6,981 $222,429 As at September 30, 2023, the Company had deposits for machinery and equipment and buildings under construction totaling $20,709 (2022 – $29,861). These assets are not being depreciated because they are under construction and not available for use. ROU assets are primarily comprised of Building leases. The current portion of lease liabilities $688 (2022 – $712) is included in Other accrued liabilities in the consolidated statement of financial position. 6. INTANGIBLE ASSETS AND GOODWILL Cost Balance as at September 30, 2021 Additions Acquisitions (note 17) Less: disposals Reclassifications Foreign exchange movement Balance as at September 30, 2022 Additions Less: disposals Reclassification Foreign exchange movement Balance as at September 30, 2023 Computer Software and Other Acquisition Intangibles** Assets under Construction (Software) Total Intangible Assets Goodwill $8,238 597 159 (319) 781 129 9,585 444 (831) 33 104 $9,335 $45,573 - 9,490 - - 3,100 58,163 - - - (1) $58,162 $10 796 - - (781) (1) 24 90 - (33) 2 $83 $53,821 1,393 9,649 (319) - 3,228 67,772 534 (831) - 105 $67,580 $61,861 - 29,773 - - (2,935) 88,699 - - - 2,631 $91,330 EXCO TECHNOLOGIES LIMITED 44 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Accumulated amortization and impairment losses Balance as at September 30, 2021 Amortization for the year Less: disposals Foreign exchange movement Balance as at September 30, 2022 Amortization for the year Less: disposals Foreign exchange movement Balance as at September 30, 2023 Carrying amounts As at September 30, 2022 As at September 30, 2023 Computer Software and Other Acquisition Intangibles** Assets under Construction (Software) Total Intangible Assets Goodwill $7,464 544 (318) 162 7,852 751 (831) 1 $7,773 $20,574 3,383 - 1,517 25,474 3,935 - (203) $29,206 $- - - - - - - - $- $28,038 3,927 (318) 1,679 33,326 4,686 (831) (202) $36,979 $- - - - - - - - $- $1,733 $1,562 $32,689 $28,956 $24 $83 $34,446 $30,601 $88,699 $91,330 **Acquisition intangibles are comprised of customer relationships and trade names resulting from business acquisitions and the purchase price allocation thereof. Impairment testing The total goodwill of $91.3 million as at September 30, 2023 is allocated as $27.8 million to the Extrusion group of CGUs and $63.5 million to the Automotive Solutions operating segment. The Company performed its annual impairment test on September 30 and determined that the recoverable amounts for the Extrusion group of CGUs and the Automotive Solutions operating segment exceed their carrying amounts and, as a result, no impairment was recorded. Key assumptions to value-in-use calculations The recoverable amounts have been determined based on a value-in-use calculation using cash flow projections from financial budgets approved by senior management. Cash flow beyond the budget period was extrapolated using a 2% terminal growth rate, which represents the expected growth in the global economy. The discount rate applied to future cash flows was 8.0%. The calculation of the value-in-use is most sensitive to the following assumptions: - Discount rates - Terminal growth rate to extrapolate cash flows beyond the budget period - Forecasted revenue and profit margins during the 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 group of 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. CGU specific risk is incorporated by applying different debt to equity ratios. Sensitivity to changes in assumptions Management has performed sensitivities on the assumptions used in the value-in-use calculations, and the recoverable amount still exceeds the carrying values. EXCO TECHNOLOGIES LIMITED 45 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 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 September 30, 2023 $7,091 100 $7,191 September 30, 2022 $6,309 136 $6,445 The carrying values of the above provisions are 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. The movement in the provision accounts is as follows: Closing balance, as at September 30, 2021 Additions Acquisition Utilized Reversals Foreign exchange differences Closing balance, as at September 30, 2022 Additions Utilized Reversals Foreign exchange differences Closing balance, as at September 30, 2023 Severance $3,492 2,406 2,300 (1,901) (69) 81 $6,309 1,997 (1,261) (288) 334 $7,091 Warranties $444 62 - - (371) 1 $136 28 - (64) - $100 Total $3,936 2,468 2,300 (1,901) (440) 82 $6,445 2,025 (1,261) (352) 334 $7,191 8. FINANCIAL INSTRUMENTS The Company classifies its financial instruments as follows: Cash and cash equivalents Accounts receivable Trade accounts payable Bank indebtedness Customer advance payments Accrued liabilities Derivative instruments Long-term debt Financial assets – held for trading measured at fair value Financial assets – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – measured at amortized cost Financial liabilities – held for trading measured at fair value Financial liabilities – measured at amortized cost Foreign exchange contracts The Company entered into a series of collars extending through to September 9, 2025 and designated them as cash flow hedges against Mexican payroll and other local Mexican costs. The total amount of these collars is 408.0 million EXCO TECHNOLOGIES LIMITED 46 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Mexican pesos (2022 – 624.0 million Mexican pesos). The selling price ranges from 22.31 to 24.15 Mexican pesos to each US dollar. Management estimates that a cumulative gain of $5,401 (2022 – $2,066) would be realized if these collars were terminated on September 30, 2023. Net of deferred taxes of $1,423, the cumulative gain of $3,978 is recorded in other comprehensive income. During the year, the estimated fair value gain of $2,458, net of deferred taxes of $877 (2022 – gain of $1,119, net of deferred taxes of $399) has been included in other comprehensive income, and the cumulative gain of $5,401 is recorded in the consolidated statements of financial position under the caption derivative instruments. Risks and uncertainties 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 cash and cash equivalents, trade accounts receivable and foreign exchange forward contracts with positive fair values. Cash and cash equivalents are only invested in bank term deposits and bank commercial paper with an investment grade credit rating. Credit risk is further reduced by limiting the amount which is invested in certain major financial institutions. The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts. The Company mitigates this credit risk by dealing with counterparties who are major financial institutions that the Company anticipates will satisfy their obligations under the contracts. The carrying amount of its 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. Allowance for doubtful accounts is estimated using the expected credit loss model. The Company uses historical experience, and considers factors including, the aging of balances, the customer’s credit worthiness, updates based on the current economic conditions, expectations of bankruptcies, and the political and economic volatility in the markets/locations of customers to estimate the allowance. 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, 2023, the accounts receivable balance (net of allowance for doubtful accounts) is $128,449 (2022 – $119,261) and the Company’s five largest trade debtors accounted for 31.8% of the total accounts receivable balance (2022 – 30.1%). 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, 2023 $124,919 130 2,982 2,484 (2,066) September 30, 2022 $110,770 202 3,850 6,513 (2,074) $128,449 $119,261 EXCO TECHNOLOGIES LIMITED 47 ANNUAL REPORT 2023 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 September 30, 2023 $103,768 14,712 2,250 1,600 2,589 (2,066) September 30, 2022 $95,164 10,514 2,215 563 2,314 (2,074) $122,853 $108,696 The movement in the allowance for doubtful accounts is as follows: Opening balance Additions Acquisition Utilized Reversal Exchange differences Closing balance September 30, 2023 $2,074 280 - (261) (58) 31 $2,066 September 30, 2022 $1,398 728 210 (40) (254) 32 $2,074 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. As at September 30, 2023, the Company has a net debt balance of $94,168 (2022 –$90,339) and unused credit facilities of $42,611 (2022 – $20,046). 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 Leases Purchase commitments Capital expenditures Total $4,964 54,043 105,000 8,217 44,498 8,743 $225,465 September 30, 2023 < 1 Year $4,964 54,043 - 696 44,498 8,743 $112,944 1-3 Years $ - - 105,000 1,201 $106,201 Over 3 Years $- - - 6,320 $6,320 EXCO TECHNOLOGIES LIMITED 48 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Bank indebtedness Trade accounts payable Long-term debt Leases Purchase commitments Capital expenditures Total $12,363 51,359 95,000 7,435 51,311 5,060 $222,528 September 30, 2022 < 1 Year $12,363 51,359 - 718 51,311 5,060 $120,811 1-3 Years $- - 95,000 918 - - $95,918 Over 3 Years $- - - 5,799 - - $5,799 c) Foreign exchange risk The Company operates in Canada with subsidiaries located in the United States, Mexico, Colombia, Brazil, Thailand, Germany, Italy and Morocco. 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 other 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 +/- $1,625 +/- $3,420 +/- $18 +/- $743 +/- $12 +/- $362 1% Fluctuation COP vs. CAD 1% Fluctuation BRL vs. CAD +/- $13 +/- $83 +/- $2 +/- $48 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 income 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. 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 cash equivalents, accounts receivable, trade accounts payable and customer advance payments are assumed to approximate their carrying value. EXCO TECHNOLOGIES LIMITED 49 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts The fair values of derivative instruments that are not traded in an active market, such as over-the-counter foreign exchange options and Collars, are determined using quoted forward exchange rates as at the consolidated statements of financial position dates and are Level 2 instruments. The estimated fair value of long-term debt approximates its carrying value as the instruments’ terms and interest rate are market based. During the year ended September 30, 2023, there were no transfers between Level 1 and Level 2 fair value measurements. The carrying value and fair value of all financial instruments are as follows: September 30, 2023 Carrying Amount of Asset (Liability) $15,796 128,449 (54,043) (4,964) (5,152) (35,884) 5,401 ($105,000) Fair Value of Asset (Liability) $15,796 128,449 (54,043) (4,964) (5,152) (35,884) 5,401 ($105,000) September 30, 2022 Carrying Amount of Asset (Liability) $17,024 119,261 (51,359) (12,363) (3,169) (39,862) 2,066 ($95,000) Fair Value of Asset (Liability) $17,024 119,261 (51,359) (12,363) (3,169) (39,862) 2,066 ($95,000) Cash and cash equivalents Accounts receivable Trade accounts payable Bank indebtedness Customer advance payments Accrued liabilities Derivative instruments Long-term debt 9. INVENTORIES Raw materials Work in process Finished goods Production supplies Less: obsolescence provision September 30, 2023 $54,378 31,619 20,051 10,049 (4,931) $111,166 September 30, 2022 $52,213 25,748 16,973 7,898 (4,870) $97,962 September 30, 2023 $4,870 1,187 (1,035) (153) 62 $4,931 September 30, 2022 $3,817 1,750 (376) (372) 51 $4,870 The movement in the obsolescence provision accounts is as follows: Opening balance Additions Utilized Reversals Exchange differences Closing balance During the year, inventories of $277,152 (2022 – $217,473) were expensed, of which $1,187 was from the write-downs EXCO TECHNOLOGIES LIMITED 50 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts of inventories (2022 – $1,750), with reversal of write-downs of $153 (2022 – $372). 10. CAPITAL MANAGEMENT The Company defines capital as net debt and shareholders’ equity. As at September 30, 2023, total managed capital amounted to $465,563 (2022 – $438,848), consisting of net debt of $94,168 (2022 – $90,339) and shareholders’ equity of $371,395 (2022 – $348,509). 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 Net debt to EBITDA ratio September 30, 2023 September 30, 2022 0.25:1 1.26:1 0.26:1 1.71:1 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 and long-term debt Less: cash and cash equivalents Net debt September 30, 2023 $109,964 September 30, 2022 $107,363 (15,796) $94,168 (17,024) $90,339 The net debt to EBITDA ratio is calculated by dividing the net debt by EBITDA, and the Company calculates EBITDA as earnings before other income/(expense), interest, taxes, depreciation and amortization. Based on the current funds available and the expected cash flows 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, 2023, the Company was in compliance with the required financial covenants. 11. OTHER INFORMATION A. SEGMENTED INFORMATION Operating segments The Company has two operating 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 51 ANNUAL REPORT 2023 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, other income (expense) 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 pre-tax income (loss) before interest Net interest expense Income before income taxes Property, plant and equipment additions Property, plant and equipment, net Intangible asset additions Intangible assets, net Goodwill Total assets Total liabilities Casting and Extrusion $321,567 (29,374) 292,193 23,141 1,305 15,142 31,980 186,273 444 10,487 27,844 391,920 66,801 2023 Automotive Solutions Corporate Total $329,767 (2,657) 327,110 4,006 3,381 34,851 6,455 34,879 90 20,114 63,486 235,567 68,074 $- - - 84 - (7,420) 14 1,277 - - - (15,416) 106,176 $651,334 (32,031) 619,303 27,231 4,686 42,573 (8,068) 34,505 38,449 222,429 534 30,601 91,330 612,071 241,051 EXCO TECHNOLOGIES LIMITED 52 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Sales Intercompany sales Net sales Depreciation Amortization Segment pre-tax income (loss) before interest Net interest expense Income before income taxes Property, plant and equipment additions Property, plant and equipment additions from business acquisition Property, plant and equipment, net Intangible asset additions Intangible asset additions from business acquisition Intangible assets, net Goodwill Total assets Total liabilities Geographic and customer information Sales Canada United States Europe Mexico South America Asia Other 2022 Corporate Total Casting and Extrusion $253,500 (17,466) 236,034 18,216 721 11,970 Automotive Solutions $256,056 (2,147) 253,909 3,135 3,206 20,904 $- - - 94 - (5,229) $509,556 (19,613) 489,943 21,445 3,927 27,645 (2,446) 25,199 52,112 25,729 207,103 1,393 9,649 34,446 88,699 576,316 227,807 2022 $35,587 290,175 81,126 52,552 14,767 9,899 5,837 $489,943 40,422 11,487 203 25,729 173,730 1,249 9,649 10,713 26,051 357,708 63,340 - 32,025 144 - 23,733 62,648 231,966 59,809 - 1,348 - - - - (13,358) 104,658 2023 $47,055 365,533 125,829 49,461 14,435 9,764 7,226 $619,303 In 2023 the total revenue to the Company’s largest 2 customers accounted for 5.8% and 5.4% (2022 – 5.3% and 5.1%) of total sales. The accounts receivable pertaining to these customers were $6,274 and $7,322 at year-end (2022 – $5,404 and $7,533). The allocation of sales to the geographic categories is based upon the customer location where the product is shipped. In 2023, the Company’s largest 2 customers were from the Automotive Solutions segment and the Casting and Extrusion segment (2022 – the Company’s largest 2 customers were from the Automotive Solutions segment and the Casting and Extrusion segment). EXCO TECHNOLOGIES LIMITED 53 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Property, plant and equipment, net Canada United States Mexico South America Europe Thailand Morocco September 30, 2023 $89,330 32,249 43,395 6,745 26,796 5,559 18,355 September 30, 2022 $86,436 32,142 32,142 6,665 26,080 5,709 17,929 $222,429 $207,103 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 September 30, 2023 $1,083 20,096 26 13 - 9,230 153 September 30, 2022 $1,220 23,849 3 52 2 9,231 89 $30,601 $34,446 Intangible assets are attributed to the country in which they are located. B. EMPLOYEE FUTURE BENEFITS The Company accrues employee future benefits for its Mexican, Thailand and Italian employees. In Mexico 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. In Thailand the severance benefit varies from 1 to 10 months dependent on length of service. In Italy the termination benefit is a portion of employee wages that are deferred until termination. The liability associated with the seniority and termination benefits is calculated as the present value of expected future payments and amounted to $6,838 as at September 30, 2023 (2022 – $5,392) 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. C. COMPENSATION OF KEY MANAGEMENT PERSONNEL The remuneration of directors and other members of key management personnel during the years ended September 30, 2023 and 2022 were as follows: EXCO TECHNOLOGIES LIMITED 54 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Salaries and cash incentives (i) Directors’ fees Share-based awards (ii) September 30, 2023 September 30, 2022 $4,601 160 715 $5,476 $3,463 233 204 $3,900 i) Key management personnel were not paid post-employment benefits, termination benefits, or other long-term benefits during the years ended September 30, 2023 and 2022. ii) Share-based payments are director share units granted to directors and restricted share units and performance share units granted to CEO. 12. INCOME PER COMMON SHARE Income per common share is calculated using net income and the monthly weighted average number of common shares outstanding of 38,912,464 (2022 – 39,084,977). Any potential common shares for which the effect is anti-dilutive have not been reflected in the calculation of diluted income per share. The dilution effect from the outstanding stock options on diluted weighted average number of common shares outstanding for 2023 is zero (2022 – 4,040). 13. INCOME TAXES The consolidated effective income tax rate for 2023 was 23.8% (2022 – 24.7%) per the following tables. The change in income tax rate is due to geographic distribution, foreign tax rate differentials and a shift in the proportion of earnings from jurisdictions with higher tax rates or minimum tax requirements. 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 Prior period taxes in current year Losses not tax effected Other Reported income tax expense 2023 $34,505 100.0% 27.3% (0.7%) (1.7%) (8.6%) 0.7% 2.8% 4.0% 23.8% 9,434 (237) (585) (2,984) 251 964 1,378 $8,221 2022 Income before income taxes $25,199 100.0% Income tax expense at Canadian statutory rates Manufacturing and processing deduction Foreign rate differential Non-taxable income net of non-deductible expenses Losses not tax effected Other Reported income tax expense 6,857 (198) 107 (1,855) 661 661 $6,233 27.2% (0.8%) 0.4% (7.4%) 2.6% 2.6% 24.7% EXCO TECHNOLOGIES LIMITED 55 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts The major components of income tax expense are as follows: Current income tax expense Based on taxable income for the year Deferred income tax expense Origination, reversal of temporary differences and losses not recognized Reported income tax expense Deferred income tax assets and liabilities consist of the following temporary differences: Deferred tax assets Tax benefit of loss carry forward Items not currently deductible for income tax purposes 2023 2022 $5,127 $3,448 3,094 $8,221 2,785 $6,233 2023 2022 $613 915 1,528 $848 792 1,640 Deferred tax liabilities Tax depreciation in excess of book depreciation (17,186) (13,231) Unrealized revenue and foreign exchange Investment in subsidiaries Net deferred income tax liabilities 51 (5,286) (22,421) 26 (5,075) (18,280) ($20,893) ($16,640) 14. CONSOLIDATED STATEMENTS OF CASH FLOWS 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 Inventories Prepaid expenses and deposits Trade accounts payable Accrued payroll liabilities Other accrued liabilities Provisions Customer advance payments Income taxes recoverable 2023 ($7,445) (11,745) (252) 1,640 1,710 (6,921) 746 1,872 8,316 ($12,079) 2022 ($18,453) (13,165) (708) 10,204 (1,013) 4,161 209 (1,776) (5,702) ($26,243) EXCO TECHNOLOGIES LIMITED 56 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts 15. 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. During 2018, the Company agreed with a customer (the “Customer”) to utilize a government-sponsored third party (the “Third Party”) tool financing program (the “Program”). The Program allows the Company to receive payment from the Third Party in advance (the “Advance Payments”) of either tool delivery or the Customer’s receipt of payment from the Original Equipment Manufacturer (the “OEM”). The Customer is obligated to pay all costs of the Program including principal and interest. The Third Party retains recourse against the Company if the Customer fails to repay the Advance Payments to the Third Party within 24 months of the Advance Payment. As at September 30, 2023 no repayments were overdue (2022 – nil). The Company has been indemnified by the Customer in this regard and expects recourse against it to be extinguished in the normal course of business upon the Customer’s receipt of payment from the OEM. The Advance Payments paid to the Company under this Program for the year ended September 30, 2023 were nil (2022 – $2,892). Related liabilities and receivables are recorded on the Company’s consolidated statements of financial position in accounts receivable and other accrued liabilities. Repayments made in the current year amounted to $3,102 (2022 – $3,442). As at September 30, 2023 the balance outstanding under the Program was $2,078 (2022 – $5,321). 16. INTEREST EXPENSE The following table outlines the interest expense (income) incurred (earned) during the year: Interest expense on bank indebtedness and long-term debt Interest income on deposits Net interest expense 17. ACQUISITION September 30, 2023 September 30, 2022 $8,112 (44) $8,068 $2,475 (29) $2,446 On May 2, 2022 the Company completed the acquisition of 100% of the shares of the Halex extrusion operations (“Halex”) for consideration of $60.2 million. Halex operates four key manufacturing locations – two in Germany and two in Italy. Management determined that the assets and processes comprised a business and therefore accounted for the transaction as a business combination using the acquisition method of accounting with the results of operations included in the Company’s consolidated financial statements from the date of acquisition. The results of Halex are reported within the Casting and Extrusion segment. Assets acquired and liabilities assumed have been recorded at their estimated fair value at the date of acquisition as follows: Cash and cash equivalents Accounts receivable Inventories Other current assets Property, plant and equipment Intangible assets $2,592 10,750 5,198 153 25,729 9,649 EXCO TECHNOLOGIES LIMITED 57 ANNUAL REPORT 2023 EXCO TECHNOLOGIES LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS $(000)’s except per share amounts Current liabilities Lease liabilities – long-term portion Deferred tax liability Net identifiable assets Residual purchase price allocated to goodwill Acquisition funded as follows: Cash (13,722) (6,650) (3,264) 30,435 29,773 $60,208 $60,208 $60,208 The Company incurred acquisition related costs of $584 which were expensed under selling, general and administrative expenses on the consolidated statements of income and comprehensive income. The fair value of accounts receivable equals the gross amount of the trade accounts receivable less allowance for doubtful accounts and amounts to $9,871. The net contractual amount was considered collectible at the date of acquisition. The primary factors that contributed to the recognition of goodwill are: the existing Halex business; the acquired workforce; and the combined strategic value to the Company’s growth plan. EXCO TECHNOLOGIES LIMITED 58 ANNUAL REPORT 2023 CORPORATE INFORMATION Board of Directors Transfer Agent and Registrar Edward H. Kernaghan, MSc Executive Vice President Kernaghan & Partners Ltd. Darren M. Kirk, MBA, CFA President and CEO of the Company Robert B. Magee, PEng Chairman Woodbridge Group Colleen M. McMorrow, FCPA, FCA, ICD.D Corporate Director Paul E. Riganelli, MA, MBA, LLB Executive Vice President of the Company Brian A. Robbins, PEng Executive Chairman of the Company TSX Trust Company 301 – 100 Adelaide Street West Toronto, Ontario M5H 4H1 Phone: 416.361.0930 www.tsxtrust.com ______________________________ Auditors Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants ______________________________ Stock Listings TSX: XTC ______________________________ ______________________________ Corporate Officers Brian A. Robbins, PEng Executive Chairman Darren M. Kirk, MBA, CFA President and CEO Matthew Posno, CPA, CA, MBA Chief Financial Officer & VP Finance Secretary Paul E. Riganelli, MA, MBA, LLB Executive Vice President Corporate Office Exco Technologies Limited 130 Spy Court, 2nd Floor Markham, Ontario L3R 5H6 Phone: 905.477.3065 www.excocorp.com ______________________________ F2023 Annual General Meeting of Shareholders Wednesday, January 24, 2024 at 4:30 pm. (Toronto Time) Virtual Meeting: Live Webcast https://virtual-meetings.tsxtrust.com/1559 B E Y O N D B O U N D A R I E S w w w . e x c o c o r p . c o m T S X :X T C 

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