SRL

Business Context and Reporting Period

This Form 20-F is the annual report for KHD Humboldt Wedag International Ltd. (KHD) for the fiscal year ended December 31, 2008. KHD is a Canadian corporation incorporated in British Columbia, operating primarily in the industrial plant engineering and equipment supply business for the cement, coal, and minerals industries, as well as holding a royalty interest in the Wabush iron ore mine. The reporting period was significantly impacted by the global financial crisis, which led to project cancellations, postponements, and a strategic shift from growth to cost minimization and liquidity preservation.

Key Financial Metrics

Note: Financial data is presented in accordance with Canadian GAAP. Under U.S. GAAP, the 2008 net loss was $4.9 million.

Material Changes vs. Prior Period

• Revenue Growth vs. Profit Collapse: While revenues increased 10% year-over-year due to the completion of contracts from prior periods, the company reported a net loss of $7.0 million compared to a net income of $42.1 million in 2007. Diluted earnings per share dropped 114%.
• Order Intake Decline: Order intake fell 25% to $622.5 million, driven by the cancellation of $100.2 million in contracts and the postponement of $18.0 million in orders due to the financial crisis.
• Significant Non-Operating Losses:
  • Contract Termination Losses: A $32.0 million reduction in gross profit was recognized due to terminated customer contracts, including provisions for supplier commitments and inventory write-downs.
  • Investment Impairment: A fair value loss of $55.1 million was recognized on the investment in preferred shares of Mass Financial Corp. and a former subsidiary, attributed to the global credit market weakness.
• Backlog Reduction: Order backlog decreased 8% to $842.8 million. Approximately $159.2 million of the backlog was identified as "at risk" as of year-end.

Guidance, Outlook, and Management Commentary

• Restructuring Plan: Management has initiated a restructuring program estimated to cost between $25.0 million and $30.0 million, with the majority of costs expected in 2009. This includes a workforce reduction of approximately 50% over 18 months and the closure of a manufacturing facility in Germany.
• Divestiture Strategy: The company plans to divest its coal and minerals customer group in 2009 to focus on its core cement business, which historically represents over 90% of revenues.
• Outlook: Management anticipates 2009 revenues will be lower than 2008, with 2010 revenues expected to be lower still. Due to poor visibility in credit markets, the company is not providing specific financial guidance for 2009.
• Liquidity: Despite the losses, the company maintains a strong liquidity position with $409.1 million in cash and a current ratio of 1.65. Management believes cash reserves are adequate to meet operating and restructuring requirements without adding debt.
• Risks: Key risks include further customer contract cancellations, customer liquidity issues affecting payments, and the uncertainty of the global economic recovery.

Investor Verification Checklist

• Contract Risk Exposure: Verify the status of the $159.2 million in backlog identified as "at risk" and the potential for further cancellations beyond the $100.2 million already removed.
• Mass Financial Settlement: Monitor negotiations with Mass Financial Corp. regarding the redemption of preferred shares, as the $55.1 million impairment was based on a discounted cash flow model with a 30% discount rate, and the final settlement amount may differ.
• Restructuring Execution: Track the implementation of the 50% workforce reduction and the divestiture of the coal and minerals segment to assess the timeline and cost of the $25-$30 million restructuring plan.
• Order Intake Trends: Monitor quarterly order intake to determine if the 25% decline in 2008 stabilizes or worsens in 2009, given the expectation of lower capital expenditures by customers.
• Wabush Royalty Income: Review the impact of falling iron ore prices and reduced production forecasts on the royalty income from the Wabush iron ore mine, which contributed $27.2 million to 2008 results.