SRL

Business Context and Reporting Period

This Form 20-F is the annual report for KHD Humboldt Wedag International Ltd. (the Registrant) for the fiscal year ended December 31, 2009. The company operates in two primary segments: industrial plant technology, equipment, and services (primarily for the cement industry) and a mineral royalty interest in the Wabush iron ore mine in Canada. Following the reporting period, the company announced a plan to split into two independent entities: a mineral royalty company and an industrial plant technology company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 9.7% to $576.4 million, driven by a slowdown in business activity and the phasing of project completions, despite strong order execution.
• Profitability Improvement: Operating income increased 26.9% to $71.5 million. This was primarily due to a $17.8 million recovery of losses on previously terminated customer contracts and a $5.3 million gain on the sale of the Cologne workshop and coal/minerals operations.
• Order Intake and Backlog: New order intake plummeted 55.5% to $321.9 million due to the global economic slowdown. Consequently, the order backlog decreased 48.2% to $437.0 million, further reduced by the removal of $110.2 million in cancelled contracts and $68.0 million from the divested coal and minerals business.
• Divestitures: The company completed the sale of its coal and minerals customer group and its Cologne workshop in October 2009, allowing a strategic refocus on the cement industry.
• Restructuring: The company incurred $9.2 million in restructuring costs, primarily related to employee severance, while reducing the workforce by 490 employees compared to the end of 2008.

Guidance, Outlook, and Risks

• Corporate Restructuring: The company intends to split into two independent publicly traded companies. The first tranche of this transaction was expected to be completed by the end of Q1 2010, creating a mineral royalty company (to be renamed Terra Nova Royalty Corporation) and an industrial plant technology company.
• Market Outlook: Management expressed confidence in 2010 and 2011 based on improved new order intake in the second half of 2009. India remains a strong market, and there are tentative signs of improvement in Russia, which accounts for nearly half of the order backlog.
• Key Risks:
  • Economic Downturn: Continued global recession could further reduce demand for cement plants and iron ore royalties.
  • Contract Cancellations: Risk of further project delays or cancellations by customers facing financing constraints.
  • Counterparty Risk: Significant cash holdings ($289.8 million) are concentrated in a banking group in Austria, exposing the company to potential counterparty failure.
  • Regulatory/Geopolitical: Operations in countries designated as state sponsors of terrorism (e.g., Iran, Sudan) and exposure to political instability in emerging markets.

Investor Verification Checklist

• Split Transaction Approval: Verify shareholder approval status for the proposed split into two entities and the timeline for the distribution of shares.
• Order Backlog Quality: Assess the stability of the remaining $437 million order backlog, particularly the concentration in Russia and Eastern Europe, given the economic volatility in those regions.
• Contract Recovery Sustainability: Confirm that the $17.8 million recovery from terminated contracts is fully realized and not subject to future reversals.
• Banking Concentration: Review the creditworthiness of the Austrian banking group holding the majority of the company's cash reserves.
• Iron Ore Royalty Arbitration: Monitor the outcome of the arbitration regarding underpaid royalties from the Wabush iron ore mine operator.