Atari
Annual Report 2017

Plain-text annual report

DELIVERING VALUE THROUGH TEAM EXECUTION ATS AUTOMATION ANNUAL REPORT 2017 ORDER BOOKINGS GREW 6% IN FY2017. Performance Highlights (in millions of dollars, except per share data) Revenues Earnings from operations Adjusted earnings from operations1 EBITDA1 Net income from continuing operations Earnings per share – basic from continuing operations Adjusted earnings per share1 Order Bookings Order Backlog 1 Non-IFRS measure ATS is listed on the Toronto Stock Exchange under the symbol “ATA”. Fiscal 2017 1,010.9 71.9 97.1 106.5 35.0 0.38 0.57 1,134 681 $ $ $ $ $ $ $ $ $ Fiscal 2016 Fiscal 2015 $ $ $ $ $ $ $ $ $ 1,039.6 76.8 114.4 116.1 39.6 0.43 0.72 1,070 652 $ $ $ $ $ $ $ $ $ 936.1 67.0 109.8 107.5 38.9 0.43 0.77 981 632 STRONG BALANCE SHEET TO SUPPORT GROWTH WITH $287 MILLION IN CASH $40 MILLION AGREEMENT TO DESIGN, DELIVER AND INSTALL NEW AUTOMATED MEDICAL DEVICE TECHNOLOGY Table of Contents ATS Worldwide 2 ATS Capabilities 4 Pre-Automation 5 Automation/Integration 6 Post-Automation 8 Markets Served 10 Building Excellence in the Life Sciences Industry 12 Advancing the Future of Energy 12 Driving Transportation Automation 13 Meeting Demand for Consumer Products and Electronics 13 Letter to Shareholders 14 Management’s Discussion and Analysis 16 Management’s Responsibility for Financial Reporting 42 Independent Auditors’ Report 43 Consolidated Financial Statements 44 Notes to Consolidated Financial Statements 49 Shareholder Information 91 Board of Directors 92 ATS AUTOMATION ANNUAL REPORT 2017 1 ATS WORLDWIDE ATS’s competitive advantage begins with our people. For more than 35 years, our team of experienced professionals, leaders and highly skilled experts has delivered value by collaborating with customers to create and build some of the world’s most technologically advanced and innovative automation solutions. North America Rolling Meadows Rock Hill Wixom Cambridge Woodbridge Parsippany Lewis Center Manufacturing Facility Office Our multi-region global footprint allows us to be closer to the customer, building and delivering total turnkey solutions anywhere around the globe. It also positions us well to serve those customers looking to replicate, expand, relocate and/or repatriate automated manufacturing processes. Global Footprint Experience Our 23 manufacturing facilities and over 50 sales and service offices in North America, Europe, Southeast Asia and China deliver automation solutions anywhere in the world. We have more than 35 years of experience providing technology and innovative end-to-end automation solutions that solve customers’ most complex challenges. 2 ATS AUTOMATION ANNUAL REPORT 2017 Neuwied Ludwigshaffen Stutensee Winnenden Lutherstadt Lichtentanne-Stenn Europe Munich Inglostadt St. Georgen Manufacturing Facility Office Asia Tianjin Samutprakarn Penang Singapore Innovation Quality and Compliance ATS has a rich history of being a world leader in designing and building custom-engineered technologies and innovative automation solutions across diverse sectors. Scale Our experienced team of 3,500 employees – including almost 1,400 engineers and nearly 200 program managers – and a vast network of highly skilled partners and suppliers are our biggest competitive advantage. ATS has been registered to the ISO 9000 generation of standards for more than 15 years. We maintain a global registration to 9001 and have expanded to ISO 13485, ISO 14001 and VDA registration for several key divisions. In addition, ATS has incorporated a quality management system compliant to CSA Z299.1-85, B51 and N285 within its Cambridge Division. We also apply good manufacturing practices (GMP) to our life sciences projects. ATS AUTOMATION ANNUAL REPORT 2017 3 ATS CAPABILITIES Automation helps advance the future by fuelling the development of new products and services, improving product safety and reliability, reducing costs, increasing productivity and growing opportunities for highly skilled jobs. At ATS, we apply our extensive experience and global capabilities in delivering innovative and high-quality technology and automation solutions to help multinational customers transform their manufacturing operations. ATS offers complete end-to-end solutions, allowing customers to single-source their most complex projects. We complement our automation/integration capabilities with value-added pre-automation consulting and post-automation support services. ATS HAS UNMATCHED EXPERTISE IN ADDRESSING COMPLEX TECHNOLOGY CHALLENGES FROM DESIGN TO IMPLEMENTATION. 4 ATS AUTOMATION ANNUAL REPORT 2017 Pre-Automation Our pre-automation experts help customers clearly define their manufacturing strategy. Whether installing standard machines or building a customized solution to address a unique problem that cannot be solved with an off-the-shelf product, we work to truly understand the customer requirements and provide a comprehensive, data-driven analysis that helps guide the project forward. Discovery and Analysis We begin by working with the customer to review all factors and considerations, identify and assess options, and develop an optimal manufacturing strategy. Concept Development and Simulation The next step is to create concepts of how the project will be integrated into the customer’s manufacturing process. We then conduct simulations and testing to mitigate risks and develop confidence in the solution before the equipment is built. INNOVATION IS PART OF OUR EVERDAY LIFE AND DEFINES OUR FUTURE. ATS AUTOMATION ANNUAL REPORT 2017 5 ATS CAPABILITIES ATS DELIVERS COMPLETE MANUFACTURING SOLUTIONS FOR CUSTOMERS ON AN ENTERPRISE AND/OR PROJECT BASIS. Automation/Integration Our extensive automation/integration offerings include: Design Build Our team has the experience and knowledge to create innovative new manufacturing solutions where existing commercial options are unavailable or insufficient. Engineer and Integrate ATS combines technologies and products into complete automated manufacturing solutions. Process and Facilities Control Systems and Software Integration We build systems that provide crucial information about performance, and we can link equipment to customers’ systems for fully automated reporting and lot/batch handling. The ATS Overall Equipment Effectiveness (OEE) Toolkit is a powerful web-based tool that gives customers a real-time view of their overall equipment effectiveness, allowing them to drive improved performance. 6 ATS AUTOMATION ANNUAL REPORT 2017 ATS CAPABILITIES Product and Technology Portfolio Supply Chain Management ATS’s standard automation products offer breakthrough performance and are core to our customers’ central processes. These include Flexsys Lasers, SuperTrak modular conveyance systems, LogiTrak electrified monorail, sortimat Cleanliner handling technology, sortimat Birkman feeders, ATS SmartVision software, ATS Cortex hardware and high-speed tube filling and cartoning machines. Build to Print For customers without in-house equipment fabrication capabilities, we build advanced equipment manufacturing systems based on their specifications. We prequalify and continuously monitor our global network of best-in-class suppliers and leverage our global purchasing power to obtain the best possible pricing and lead times for each project. Commissioning and Validation ATS expertly installs equipment and ensures all critical control technologies, software and system performance attributes are tested, documented, optimized and achieved. This includes validation for regulatory compliance. ATS AUTOMATION ANNUAL REPORT 2017 7 ATS CAPABILITIES Post-Automation Our post-automation services are a true differentiator in the industry and one of our greatest growth opportunities, especially as the smart factory concept becomes a reality. Our post-automation support services help deepen, grow and sustain our customer relationships by maximizing the performance, efficiency and uptime of their automation projects. Expanding our offerings and global service network are key focus areas for us. Current post-automation offerings include: Technical, Customer and Time-Critical Support Our global footprint and experienced team of technicians provide customers with total support solutions whenever and wherever needed. This includes providing remote diagnostics, critical analysis and response in downtime situations. Connected Factory Technologies Remote support and diagnostic tools monitor performance and help production lines quickly get back up and running. Our proprietary ATS OEE Toolkit uses web-based technology that allows customers to measure their system’s overall equipment effectiveness from any connected device and take action in real time to drive improved performance. Knowledge Transfer and Training We ensure our customers’ in-house personnel have the proper skills to operate and maintain their systems safely, efficiently and effectively. Our professional instructors provide training on site or at our world-class training facility in Canada. OUR DIAGNOSTIC TECHNOLOGIES AND INTEGRATION CAPABILITIES SUPPORT THE SMART FACTORY OF THE FUTURE. 8 ATS AUTOMATION ANNUAL REPORT 2017 ATS CAPABILITIES Preventative Maintenance Upgrades, Retrofits and Moves ATS offers preventative maintenance services that identify and address issues before they cause downtime. On-site support and independent audits of personnel skills, specific stations or entire systems are among the options available. We provide engineering, design, manufacturing and installation services for customers requiring modifications to existing systems. We also have extensive experience working with our customers to relocate capital equipment. Spare Parts Documentation As a world leader in automation, we can save customers time, hassle and expense by serving as a single source for all spare parts and can leverage our global footprint to offer value to our customers. Our support options include a dedicated contact, a basic recommended spare parts list and field replaceable units. Every ATS technology and solution can be supported with a comprehensive suite of documentation that details the required knowledge necessary to maintain optimal system performance. Services also include archiving, language translation and writing functional specifications. AFTER-SALES SERVICES BOOKINGS GREW EVERY QUARTER IN FY2017. ATS AUTOMATION ANNUAL REPORT 2017 9 A LOYAL CUSTOMER BASE WITH APPROXIMATELY 90% OF BOOKINGS IN FY2017 PLACED BY REPEAT CUSTOMERS MARKETS SERVED ATS’s broad experience serving as a strategic technology partner to leading multinational customers across multiple industries is a unique competitive advantage. As a diversified automation and technology company, we are able to apply the knowledge gained from all sectors to every ATS program. When a customer has a problem that no current solution can solve, we work with the customer to understand the issue, identify success criteria and follow a structured engineering approach to design, build and implement an innovative solution. 10 ATS AUTOMATION ANNUAL REPORT 2017 STRENGTH IN LIFE SCIENCES MARKET DRIVEN BY SOLID INDUSTRY FUNDAMENTALS AND ATS TECHNOLOGY INNOVATIONS Our four key market segments include life sciences, energy, transportation, and consumer products and electronics. ATS is a single-source provider of innovative automation solutions that help customers achieve their goals, such as lower production costs, faster speed to market, safer operations and improved quality control. We offer a wide range of automation and integration services and also provide duplicate or “repeat” automation systems that leverage the engineering design completed in the original customer program. While we are well positioned to continue to address key market opportunities through technology and innovative automation solutions, we recognize that we must truly understand our customers’ needs today and in the future and continually improve the customer experience to create value for both our customers and shareholders. ATS AUTOMATION ANNUAL REPORT 2017 11 MARKETS SERVED Building Excellence in the Life Sciences Industry Advancing the Future of Energy Life sciences companies face increasing competition, pricing pressures and regulations from governing agencies. ATS works with global leaders in biotechnology, pharmaceuticals and medical devices to design and build automation solutions and services that increase the efficiency and productivity of their manufacturing processes. ATS has been a trusted automation solutions provider to the nuclear industry for more than 15 years. We also have deep experience working with chemical, oil and gas, water, wastewater and solar customers who need specialized end-to-end support to meet their production goals and regulatory requirements. The life sciences market is a great opportunity for our business because it showcases the experience our team has in using technology to solve problems. For example, during the past year, we worked with a customer on a new lifesaving medical device. The customer knew what the device needed to do, but required guidance on how to build and produce it in a high-quality and efficient manner. We collaborated with them to develop a solution that automated the device’s production in a manner that followed qualification and validation protocols, met strict regulatory requirements, improved reliability and increased production to meet the growing demand at a competitive total value. In 2016, we expanded our relationship with Bruce Power – the world’s largest operating nuclear facility – signing a master tooling agreement to build automated solutions for the nuclear power plant’s Life-Extension Program, with initial orders valued at approximately $40 million. Supporting this agreement is the knowledge ATS gained from working with Bruce Power in the past and on the development and integration of the Bruce Reactor Inspection and Maintenance System, a remotely operated automated machine that safely inspects tubing within a reactor and replaces parts, if required. OUR INNOVATIVE SOLUTIONS ARE ENABLING THE SCALABLE BUILDOUT OF A BLOCKBUSTER DRUG. 12 ATS AUTOMATION ANNUAL REPORT 2017 MARKETS SERVED Driving Transportation Automation ATS has engineered more than 6,500 assembly systems responsible for building the components that are critical to making vehicles run. We also provide heavy equipment manufacturers with accurate and cost-effective manufacturing, assembly and test systems, and integrated process controls. While our FY2017 revenues in the transportation segment were down from the previous fiscal year, we see significant opportunity in this segment as demand shifts from conventional to electric and hybrid vehicles. Our E-Motor and Lithium Ion Battery solutions support the global push for improved fuel economy. During the past year, we launched five major automation projects involving the electrification of cars. Our focus in this segment is to pursue opportunities where we can leverage our experience, expertise and innovative solutions to drive true technological advancement. Meeting Demand for Consumer Products and Electronics ATS continuously strives to be at the forefront of trends in automation technology to help leaders in consumer goods and electronics achieve success in their highly competitive markets. Our manufacturing platforms include high-volume assembly, which improves reliability and time to market, as well as packaging, dispensing and web handling. One example of how we have helped a consumer goods customer occurred when a customer selected ATS to develop a fully automated line for their product’s motor. The project required automating four different assembly stages involving glue dispensing and curing. Implementation of the solution resulted in improving the customer’s time to market by 20% and increasing production capacity to help the customer gain market share. TECHNOLOGICAL ADVANCES IN E-VEHICLES SUPPORTED BY OUR AUTOMATION SOLUTIONS ATS AUTOMATION ANNUAL REPORT 2017 13 Our goal is to drive long-term shareholder value through the generation of profitable growth, both organically and through acquisition. FELLOW SHAREHOLDERS, When joining ATS in March this year, I committed to our Board that I would delve deeply into our business to understand and assess our areas of strength and where we can improve. This included developing a clear understanding from our customers of the value we bring to their businesses and where we can expand the products and services we provide. During this period, I have visited most of our facilities, met with our business leaders from around the world and spoken with many of our 3,500 employees through town halls and several employee roundtables. I have also spent time with several customers, shareholders and stakeholders. ATS is made up of an impressive group of employees who are highly engaged, highly motivated and highly skilled. Our people are passionate and proud of the work they do as builders of innovation and technology. We have a strong operating base with the ability to deliver innovative and high-quality technology and automation solutions to our customers globally. Our customers are leaders in their markets, and they depend on ATS as a strategic technology partner that enables them to execute on their strategies. They are pleased with the quality of the work we do, the innovative manufacturing solutions we produce and our extended service programs. Our ability to innovate, our global footprint and our core technologies provide us with advantages in a market that is populated by competitors who are more closely aligned with a specific industry or region. These are advantages that I expect will serve us well as we move to the next level of performance to drive long-term shareholder value creation. Review of 2017 Performance While ATS’s automation business has been consistently profitable, there is room for improvement. This past year, our revenues decreased 3% and our adjusted earnings from operations margin was lower by 1.4 percentage points. The management team and Board are not satisfied with these recent results and I will not be satisfied with the status quo. In particular, we need to do a better job of presenting our global value to all customers, and we need to improve the utilization of our global capacity, which includes further developing our talent around the world and improving our organizational structure. Taking the right steps in each case will further strengthen our foundation. Despite slight year-over-year declines in revenues and profitability, a number of our key indicators have never been stronger. We have a record Order Backlog of $681 million entering fiscal 2018. Order Bookings for fiscal 2017 were $1.1 billion, up 6% over last year. We had several significant and strategic wins within our Order Bookings during the year. One of these key wins is a program announced in September for an industry-leading, North American–based medical device company valued at approximately $40 million, which involves the design, delivery and installation of a new manufacturing system that is based on ATS’s proprietary technology. This unique technology 14 ATS AUTOMATION ANNUAL REPORT 2017 facilitates reliable, high-volume manufacturing requirements in a compact footprint. We received a follow-on Order Booking from this customer in March. As well, we announced a multi-year master tooling agreement with Bruce Power for the supply of automated tooling systems and related services for Bruce Power’s Life-Extension Program. This is a long-term agreement with initial orders valued at approximately $40 million, and the potential for future orders. Our balance sheet is strong with $287 million of cash and $639 million of available credit at the end of fiscal 2017. We have sufficient flexibility to grow ATS both organically and through acquisition. Our approach to deploying capital will be both disciplined and strategic. Going Forward Our goal is to drive long-term shareholder value through the generation of profitable growth, both organically and through acquisition. I am working with our management team and the Board to review and build upon the Company’s strategies to drive ATS to the next level of performance. We will communicate our plans once we’ve completed the necessary work, reviewed and have approval from our Board. What I can share with you is the framework through which we will drive ATS: People, Process, Plan, Performance and Customer: • People: Making sure we have the right people in the right roles and developing our pipeline of talent throughout the organization. • Process: Aligning around a common set of policy- driven business processes that we will use to drive continuous improvement in our operations. • Plan: Delivering and driving profitable growth through a rigorous strategic planning process, led by our people, that targets incremental and continuous improvement. • Performance: Constantly and consistently measuring our performance and course correcting to ensure we meet the high expectations we set for ourselves and the high expectations that our customers, shareholders and other stakeholders have of us. • Customer: The underlying principle for each of the P’s. Customer includes both the companies that buy from us and the shareholders who own our business. Listening to, anticipating and meeting each customer’s needs will be at the core of everything we do. And for our shareholders, we will operate the Company to deliver long-term shareholder value. Each of these areas is critical and provides the basis for how we will operate and guide ATS in fiscal 2018 and in the years ahead. We will develop and drive improvement in all of these areas within ATS and I am confident that they will support the performance of our business as we grow organically and complement that growth with strategic acquisitions. Our pursuit of acquisitions will be well disciplined and our evaluation of candidates will be based on well-defined criteria that I have found to be effective in my time as a leader. Today, we have a good pipeline of prospects and will need to be prepared to act when the opportunities arise. Summary While the future of the global economy is difficult to predict, it has never been a better time for innovation, technology and automation. ATS is perfectly positioned to continue to deliver innovative and high-quality technology and automation solutions to our customers globally. In closing, I’m very excited about the opportunity ahead for ATS. This is a world-class company with a strong history of innovation and quality. Our employees are our number one asset, and they are highly engaged and proud of the work they do at ATS. Prospects in our markets are strong. Our operating foundation is solid. Our skilled and independent Board of Directors is committed, along with our management team, to build on these competitive strengths in the months and years ahead. Sincerely, Andrew Hider Chief Executive Officer ATS Automation May 18, 2017 ATS AUTOMATION ANNUAL REPORT 2017 15 MANAGEMENT’S DISCUSSION AND ANALYSIS For the Year Ended March 31, 2017 This Management’s Discussion and Analysis (“MD&A”) for the year ended March 31, 2017 (fiscal 2017) is as of May 17, 2017 and provides information on the operating activities, performance and financial position of ATS Automation Tooling Systems Inc. (“ATS” or the “Company”) and should be read in conjunction with the audited consolidated financial statements of the Company for fiscal 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and are reported in Canadian dollars. Additional information is contained in the Company’s filings with Canadian securities regulators, including its Annual Information Form, found on SEDAR at www.sedar.com and on the Company’s website at www.atsautomation.com. Notice to Reader: Non-IFRS Measures and Additional IFRS Measures Throughout this document management uses certain non-IFRS measures to evaluate the performance of the Company. These terms do not have any standardized meaning prescribed within IFRS and therefore may not be comparable to similar measures presented by other companies. The terms “operating margin”, “EBITDA”, “EBITDA margin”, “adjusted net income”, “adjusted earnings from operations”, “adjusted basic earnings per share”, “non- cash working capital”, “Order Bookings” and “Order Backlog” do not have any standardized meaning prescribed within IFRS and therefore may not be comparable to similar measures presented by other companies. Such measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. In addition, management uses “earnings from operations,” which is an additional IFRS measure, to evaluate the performance of the Company. Earnings from operations is presented on the Company’s consolidated statements of income as net income (from continuing operations) excluding income tax expense and net finance costs. Operating margin is an expression of the Company’s earnings from operations as a percentage of revenues. EBITDA is defined as earnings from operations excluding depreciation and amortization (which includes amortization of intangible assets). EBITDA margin is an expression of the Company’s EBITDA as a percentage of revenues. Adjusted earnings from operations is defined as earnings from operations before items excluded from management’s internal analysis of operating results, such as amortization expense of acquisition- related intangible assets, acquisition-related transaction and integration costs, restructuring charges, and certain other adjustments which would be non-recurring in nature (“adjustment items”). Adjusted basic earnings per share is defined as adjusted net income on a basic per share basis, where adjusted net income is defined as adjusted earnings from operations less net finance costs and income tax expense, plus tax effects of adjustment items. Non-cash working capital is defined as the sum of accounts receivable, costs and earnings in excess of billing on contracts in progress, inventories, deposits, prepaids and other assets, less accounts payable, accrued liabilities, provisions and billings in excess of costs and earnings on contracts in progress. Order Bookings represent new orders for the supply of automation systems, services and products that management believes are firm. Order Backlog is the estimated unearned portion of revenues on customer contracts that are in process and have not been completed at the specified date. 16 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Earnings from operations and EBITDA are used by the Company to evaluate the performance of its operations. Management believes earnings from operations is an important indicator in measuring the performance of the Company’s operations on a pre-tax basis and without consideration as to how the Company finances its operations. Management believes that EBITDA is an important indicator of the Company’s ability to generate operating cash flows to fund continued investment in its operations. Management believes that adjusted earnings from operations and adjusted basic earnings per share (including adjusted net income) are important measures to increase comparability of performance between periods. The adjustment items used by management to arrive at these metrics are not considered to be indicative of the business’s ongoing operating performance. Management uses the measure non-cash working capital as a percentage of revenues to evaluate the Company’s management of its investment in non-cash working capital. Management calculates non-cash working capital as a percentage of revenues using period-end non-cash working capital divided by trailing two fiscal quarter revenues annualized. Order Bookings provides an indication of the Company’s ability to secure new orders for work during a specified period, while Order Backlog provides a measure of the value of Order Bookings that have not been completed at a specified point in time. Both Order Bookings and Order Backlog are indicators of future revenues the Company expects to generate based on contracts that management believes to be firm. Management believes that ATS shareholders and potential investors in ATS use these additional IFRS measures and non-IFRS financial measures in making investment decisions and measuring operational results. EBITDA should not be construed as a substitute for net income determined in accordance with IFRS. Adjusted earnings from operations is not necessarily indicative of earnings from operations or cash flows from operations as determined under IFRS and may not be comparable to similar measures presented by other companies. A reconciliation of (i) earnings from operations and EBITDA to net income from continuing operations, and (ii) adjusted earnings from operations to earnings from operations, adjusted net income to net income and adjusted basic earnings per share to basic earnings per share, in each case for the three- and twelve-month periods ending March 31, 2017 and March 31, 2016 is contained in this MD&A (see “Reconciliation of Non-IFRS Measures to IFRS Measures”). A reconciliation of Order Bookings and Order Backlog to total Company revenues for the three- and twelve-month periods ending March 31, 2017 and March 31, 2016 is also contained in the MD&A (see “Order Backlog Continuity”). Company Profile ATS is an industry-leading automation solutions provider to many of the world’s most successful companies. ATS uses its extensive knowledge base and global capabilities in custom automation, repeat automation, automation products and value-added services, including pre-automation and after-sales services, to address the sophisticated manufacturing automation systems and service needs of multinational customers in markets such as life sciences, chemicals, consumer products, electronics, food, beverage, transportation, energy, and oil and gas. Founded in 1978, ATS employs approximately 3,500 people at 23 manufacturing facilities and over 50 offices in North America, Europe, Southeast Asia and China. ATS AUTOMATION ANNUAL REPORT 2017 17 MANAGEMENT’S DISCUSSION AND ANALYSIS CEO Appointment Effective March 6, 2017, the Board of Directors appointed Andrew Hider as Chief Executive Officer of ATS following an extensive planning and search process. Mr. Hider is uniquely qualified to lead ATS and its global team of 3,500 employees. He is an experienced executive with a track record of success founded on his ability to drive business growth and operational performance in complex business environments and across multiple industries, including transportation, advanced technology, instrumentation and industrial products. Most recently, Mr. Hider served as President and CEO of the Taylor Made Group, LLC. Prior to that, Mr. Hider served for 10 years at Danaher Corporation (NYSE: DHR) including as President of Veeder Root. Mr. Hider began his career with General Electric (NYSE: GE), serving in a number of areas over a six-year period, culminating in his appointment as General Manager of GE Tri-Remanufacturing. Mr. Hider holds a Bachelor of Science in Interdisciplinary Engineering and Management and a Masters of Business Administration, both from Clarkson University. During his career as a leader, Mr. Hider has brought focus to five key areas: • People: ensuring that the Company attracts and retains the best people in the right roles and developing the pipeline of talent in the organization • Process: aligning businesses around a common set of policy-driven processes to deliver continuous improvement • Plan: driving profitable growth through a rigorous strategic planning process that targets incremental and continuous improvement • Performance: constantly and consistently managing performance and implementing countermeasures to meet expectations • Customer: understanding, anticipating and meeting the needs of the Company’s key stakeholders, including customers and shareholders Effective May 17, 2017 Mr. Hider was appointed to the Company’s Board of Directors. Strategy Mr. Hider is working with management and the Board to review and build upon ATS’ growth strategy, with a view to driving long-term shareholder value through the generation of profitable growth, both organically and through acquisition. 18 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Business Overview ATS is an industry-leading automation solutions provider to many of the world’s most successful multinational companies. ATS has expertise in custom automation, repeat automation, automation products and value- added services including pre-automation and after-sales services. ATS serves customers in the following markets: life sciences, transportation, energy, consumer products, electronics, chemicals, food, beverage, and oil and gas. With broad and in-depth knowledge across multiple industries and technical fields, ATS delivers single-source solutions to customers that lower their production costs, accelerate delivery of their products, and improve quality control. ATS engages with customers on both greenfield programs, such as equipping new factories, and brownfield programs, such as capacity expansions, line moves, equipment upgrades, software upgrades, efficiency improvements and factory optimization. ATS and its subsidiaries engage at varying points in the customers’ automation cycle. During the pre-automation phase, ATS offers comprehensive services, including discovery and analysis, concept development, simulation and total cost of ownership modelling, all of which help to verify the feasibility of different types of automation, set objectives for factors such as line speed and yield, assess production processes for manufacturability and calculate the total cost of ownership. For customers that have decided to proceed with an automation project, ATS offers a number of automation and integration services, including engineering design, prototyping, process verification, specification writing, software and manufacturing process controls development, equipment design and build, standard automation products/platforms, third-party equipment qualification, procurement and integration, automation system installation, product line commissioning, validation and documentation. Following the installation of custom automation, ATS may supply duplicate or “repeat” automation systems to customers that leverage engineering design completed in the original customer program. For customers seeking complex equipment production or build-to-print manufacturing, ATS provides value engineering, supply chain management, integration and manufacturing capabilities, and other automation products and solutions. Post automation, ATS offers a number of services, including customer training, preventative maintenance, process optimization, emergency and on-call support, spare parts, retooling, retrofits and equipment relocation. Contract values for individual automation systems vary and are often in excess of $1 million, with some contracts for enterprise-type programs well in excess of $10 million. Due to the custom nature of customer projects, contract durations vary, with typical durations ranging from six to 12 months, and some larger contracts extending up to 18 to 24 months. Contract values for pre-automation services and post-automation services range in value and can exceed $1 million with varying durations, which can sometimes extend over a number of years. Competitive Strengths Management believes ATS has the following competitive strengths: Global presence, size and critical mass: ATS’ global presence and scale provide an advantage in serving multinational customers. The markets in which the Company operates are served primarily by competitors with narrow geographic and/or industrial market reach. ATS has manufacturing operations in Canada, the United States, Germany, China, Malaysia and Thailand. ATS can deliver localized service through a network of over 50 offices located around the world. Management believes that ATS’ scale and global footprint provide it with competitive advantages in winning large, multinational customer programs and in delivering a life-cycle- oriented service platform to customers’ global operations. ATS AUTOMATION ANNUAL REPORT 2017 19 MANAGEMENT’S DISCUSSION AND ANALYSIS Technical skills, capabilities and experience: Automation manufacturing is a knowledge-based business. ATS has designed, manufactured, assembled and serviced over 23,000 automation systems worldwide and has an extensive knowledge base and accumulated design expertise. Management believes ATS’ broad experience in many different industrial markets and with diverse technologies, its talented workforce, which includes over 1,300 engineers and over 200 program management personnel, and its ability to provide custom automation, repeat automation, automation products and value-added services, position the Company well to serve complex customer programs in a variety of markets. Product and technology portfolio: Through its history of bringing thousands of unique automation projects to market, ATS and its subsidiaries have developed an extensive product and technology portfolio. ATS has a number of standard automation platforms, including SuperTrakTM, an in-line, high-speed flexible pallet transport system; Discovery DialTM, a rotary dial indexer; JetwingTM and SpacelineTM, both synchronous indexing chassis; and OmniTrakTM, which combines the synchronous drive of the SpacelineTM chassis with asynchronous pallet movement provided by the programmable SuperTrakTM pallet transfer system, allowing for multiple process times and selective synchronization of devices. Each of these automation platforms can be tailored to a customer’s unique requirements. Other standard automation products and technologies include advanced vision systems used to ensure product or process quality, numerous material handling and feeder technologies, high-accuracy and high- precision laser processing technologies, high-performance tube filling and cartoning technologies and advanced HMI control systems. Management believes the Company’s extensive product and technology portfolio gives it an advantage in developing unique and leading solutions for customers and maintaining competitiveness. Recognized brands: Management believes ATS is well known within the global automation industry due to its long history of innovation and broad scope of operations. In addition, ATS’ subsidiaries include several strong brands: “sortimat”, which specializes in the life sciences market; “IWK”, which specializes in the packaging market; and “Process Automation Solutions” or “PA”, which provides innovative automation solutions for process and production sectors. Management believes that ATS’ brand names and global reputation improve sales prospecting, allowing the Company to be considered for a wide variety of customer programs. Trusted customer relationships: ATS serves some of the world’s largest multinational companies. Most of ATS’ customers are repeat customers and many have long-standing relationships with ATS, often spanning more than a decade. Management estimates that approximately 90% of ATS’ Order Bookings in fiscal 2017 were placed by repeat customers. Total solutions capabilities: Management believes the Company gains competitive advantages because ATS provides total turn-key solutions in automation. This allows customers to single-source their most complex projects to ATS rather than rely on multiple engineering firms and equipment builders. In addition, ATS can provide customers with other value-added services including pre-automation consulting, total cost of ownership studies, life-cycle material management, post-automation service, training and support. 20 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Overview – Operating Results Consolidated Revenues (In millions of dollars) Revenues by market Q4 2017 Q4 2016 Fiscal 2017 Fiscal 2016 Consumer products & electronics Energy Life sciences Transportation Total revenues Revenues by installation location North America Europe Asia/Other Total revenues Fourth Quarter $ $ $ $ 41.9 15.3 127.5 81.0 265.7 Q4 2017 103.0 116.2 46.5 265.7 $ $ $ $ 38.9 18.4 105.6 83.9 246.8 $ $ 137.8 173.5 415.1 284.5 160.4 74.5 435.5 369.2 $ 1,010.9 $ 1,039.6 Q4 2016 Fiscal 2017 Fiscal 2016 93.3 100.6 52.9 246.8 $ $ 365.6 406.5 238.8 456.9 394.1 188.6 $ 1,010.9 $ 1,039.6 Fiscal 2017 fourth quarter revenues were 8% higher than in the corresponding period a year ago. Higher revenues primarily reflected higher Order Backlog entering the fourth quarter of fiscal 2017 compared to a year ago. Foreign exchange rate changes negatively impacted the translation of revenues earned by foreign-based subsidiaries compared to the corresponding period a year ago, reflecting the strengthening of the Canadian dollar relative to the U.S. dollar and Euro. By market, fiscal 2017 fourth quarter revenues from consumer products & electronics increased 8% due to timing of Order Bookings. Revenues generated in the energy market decreased 17% primarily due to the enterprise program won in the fourth quarter of fiscal 2016 that was cancelled in the third quarter of fiscal 2017. Revenues in the life sciences market increased 21% primarily reflecting higher Order Backlog entering the fourth quarter of fiscal 2017. Transportation revenues decreased 3% compared to a year ago primarily due to lower activity compared to the previous year. Full Year Fiscal 2017 revenues were 3% lower than in the corresponding period a year ago, primarily reflecting the timing of project activities. Fiscal 2017 revenues were negatively impacted by the suspension and subsequent cancellation of a part of the large enterprise program won in the fourth quarter of fiscal 2016 and by revised estimates and adjustments related to certain programs that are in process or have been completed. Foreign exchange rate changes did not materially impact the translation of revenues earned in foreign currencies into Canadian dollars. By market, fiscal 2017 revenues from consumer products & electronics decreased 14%, primarily reflecting lower activity in the consumer products market. Revenues generated in the energy market increased 133%, compared to the corresponding period a year ago, primarily due to higher Order Backlog entering fiscal 2017 compared to a year ago. Revenues generated in the life sciences market decreased 5%, primarily reflecting the timing of project activities and lower Order Backlog at the end of fiscal 2016, compared to the previous year. Transportation revenues decreased 23% compared to a year ago primarily due to lower Order Backlog entering fiscal 2017, compared to a year ago. ATS AUTOMATION ANNUAL REPORT 2017 21 MANAGEMENT’S DISCUSSION AND ANALYSIS Consolidated Operating Results (In millions of dollars) Earnings from operations Amortization of acquisition-related intangible assets Share purchase allowance Restructuring charges Executive transition expenses Gain on sale of assets Adjusted earnings from operations1 Q4 2017 Q4 2016 Fiscal 2017 Fiscal 2016 $ 16.8 $ 8.1 $ 71.9 $ 76.8 4.8 2.9 – – – 5.7 – 2.3 7.1 – 20.0 2.9 2.3 – – 24.5 – 9.7 7.1 (3.7) $ 24.5 $ 23.2 $ 97.1 $ 114.4 1 See “Notice to Reader: Non-IFRS Measures and Additional IFRS Measures.” Earnings from operations Depreciation and amortization EBITDA2 Q4 2017 Q4 2016 Fiscal 2017 Fiscal 2016 $ $ 16.8 8.8 25.6 $ $ 8.1 9.6 17.7 $ $ 71.9 34.6 106.5 $ $ 76.8 39.3 116.1 2 See “Notice to Reader: Non-IFRS Measures and Additional IFRS Measures.” Fourth Quarter Fiscal 2017 fourth quarter earnings from operations were $16.8 million (6% operating margin) compared to $8.1 million (3% operating margin) in the fourth quarter of fiscal 2016. Included in fourth quarter fiscal 2017 earnings from operations was a share purchase allowance of $2.9 million, which was paid to Mr. Hider as an inducement to join the Company. The after-tax proceeds of the share purchase allowance were used to purchase shares of ATS in the public market. Fourth quarter fiscal 2017 earnings from operations also included $4.8 million related to amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat. Included in fourth quarter fiscal 2016 earnings from operations was $5.7 million related to amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat, $2.3 million of restructuring and severance costs and $7.1 million of executive transition expenses related to the transition agreement entered into between the Company and the former Chief Executive Officer of ATS. Excluding these items, fourth quarter fiscal 2017 adjusted earnings from operations were $24.5 million (9% margin), compared to adjusted earnings from operations of $23.2 million (9% margin) a year ago. Higher adjusted earnings from operations primarily reflected higher revenues, offset by increased stock compensation expenses (see “Consolidated Results: Stock-based Compensation”). Depreciation and amortization expense was $8.8 million in the fourth quarter of fiscal 2017, compared to $9.6 million a year ago. The decrease primarily reflected lower amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat compared to the fourth quarter of fiscal 2016. 22 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS EBITDA was $25.6 million (10% EBITDA margin) in the fourth quarter of fiscal 2017 compared to $17.7 million (7% EBITDA margin) in the fourth quarter of fiscal 2016. Excluding the share purchase allowance, fourth quarter fiscal 2017 EBITDA was $28.5 million (11% EBITDA margin). Comparably, excluding restructuring and severance costs and executive transition expenses, fourth quarter fiscal 2016 EBITDA was $27.1 million (11% EBITDA margin). Full Year Earnings from operations were $71.9 million (7% operating margin) in fiscal 2017, compared to $76.8 million (7% operating margin) in the corresponding period a year ago. Earnings from operations included $2.9 million for the share purchase allowance, $2.3 million of restructuring and severance costs and $20.0 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat. Fiscal 2016 earnings from operations included $24.5 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat, $9.7 million of restructuring and severance costs, $7.1 million of executive transition expenses and a gain of $3.7 million on the sale of a redundant U.S. facility. Excluding these items, adjusted earnings from operations were $97.1 million (10% margin) compared to adjusted earnings from operations of $114.4 million (11% margin) in the corresponding period a year ago. Lower adjusted earnings from operations primarily reflected lower revenues, higher selling, general and administrative expenses and increased stock compensation costs. Depreciation and amortization expense was $34.6 million in fiscal 2017, compared to $39.3 million a year ago. The decrease primarily reflected lower amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK, ATW and sortimat, compared to fiscal 2016. EBITDA was $106.5 million (11% EBITDA margin) compared to $116.1 million (11% EBITDA margin) in fiscal 2016. Excluding the share purchase allowance and restructuring costs, fiscal 2017 EBITDA was $111.7 million (11% EBITDA margin). Comparably, excluding executive transition expenses, restructuring costs and the gain on the sale of the U.S. facility, fiscal 2016 EBITDA was $129.2 million (12% EBITDA margin). Order Bookings by Quarter (In millions of dollars) Q1 Q2 Q3 Q4 Total Order Bookings Fourth Quarter Fiscal 2017 Fiscal 2016 $ $ 239 289 284 322 222 230 228 390 $ 1,134 $ 1,070 Fourth quarter fiscal 2017 Order Bookings were $322 million, a 17% decrease from the fourth quarter of fiscal 2016. By customer market, higher Order Bookings in the transportation and life sciences markets were offset by lower Order Bookings in the energy and consumer products & electronics markets. Included in fourth quarter fiscal 2016 Order Bookings was an enterprise program valued at approximately U.S. $100 million, part of which was subsequently cancelled in the third quarter of fiscal 2017. Foreign exchange rate changes negatively impacted the translation of Order Bookings from foreign-based ATS subsidiaries compared to the corresponding period a year ago. ATS AUTOMATION ANNUAL REPORT 2017 23 MANAGEMENT’S DISCUSSION AND ANALYSIS Full Year Fiscal 2017 Order Bookings were $1,134 million, a 6% increase from prior year Order Bookings of $1,070 million. By market, higher Order Bookings in the life sciences and transportation markets more than offset lower Order Bookings in energy and consumer products & electronics. Foreign exchange rate changes did not materially impact the translation of Order Bookings from foreign-based ATS subsidiaries compared to fiscal 2016. Order Backlog Continuity (In millions of dollars) Opening Order Backlog $ Revenues Order Bookings Order Backlog adjustments1 Total $ Q4 2017 Q4 2016 Fiscal 2017 Fiscal 2016 632 (266) 322 (7) 681 $ $ 546 (247) 390 (37) 652 $ 652 $ (1,011) 1,134 (94) 681 $ 632 (1,040) 1,070 (10) 652 1 Order Backlog adjustments include foreign exchange adjustments and cancellations. Order Backlog by Market (In millions of dollars) Consumer products & electronics Energy Life sciences Transportation Total $ $ $ Fiscal 2017 Fiscal 2016 54 94 355 178 681 $ $ 85 186 224 157 652 At March 31, 2017, Order Backlog was a record $681 million, 4% higher than at March 31, 2016. Higher Order Backlog in the life sciences and transportation markets was partially offset by lower Order Backlog in the consumer products & electronics and energy markets. Foreign exchange rate changes also negatively impacted the translation of Order Backlog from foreign-based ATS subsidiaries compared to fiscal 2016. 24 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Outlook The global economic environment has shown some recent signs of improvement; however, geopolitical risks remain. Economic growth in the U.S., Canadian and European economies has been slow. Economic growth in China and other parts of Asia has decelerated. A prolonged or more significant downturn in an economy where the Company operates could negatively impact Order Bookings and may add to volatility in Order Bookings. Funnel activity in life sciences has remained strong and funnel activity in the transportation market improved with an increase in opportunities in new technologies. Activity in energy markets is sporadic, but the funnel contains meaningful opportunities. Funnel activity in the consumer products & electronics market has improved; however, it remains low relative to other customer markets. Overall, the Company’s funnel remains significant; however, conversion of opportunities into Order Bookings is variable, as customers remain cautious in their approach to capital investment. The Company’s sales organization continues to work to engage customers on enterprise-type solutions. The Company expects that this will provide ATS with more strategic relationships, increased predictability, better program control and less sensitivity to macroeconomic forces. This approach to market and the timing of customer decisions on larger opportunities may cause variability in Order Bookings from quarter to quarter and, as is already the case, lengthen the performance period and revenue recognition for certain customer programs. The Company expects its Order Backlog of $681 million at the end of fiscal 2017 to partially mitigate the impact of volatile Order Bookings on revenues in the short term. In the first quarter of fiscal 2018, management expects Order Backlog conversion to be in the 35% to 40% range. The expected conversion rate is based on current programs in Order Backlog and management’s estimate of revenues from new Order Bookings in the quarter. The Company’s efforts to expand its after-sales service offering is expected to provide some balance to its exposure to the capital expenditure cycle of its customers. However, the intended ramp-up of the Company’s after-sales service revenues may not offset capital spending volatility in the short term. Management’s disciplined focus on program management, cost reductions, standardization and quality is expected to put ATS in a strong, competitive position to capitalize on opportunities. In fiscal 2017, the Company initiated the closure of a U.S.-based operation to re-balance global capacity and improve the Company’s cost structure. These actions resulted in charges of $2.3 million in fiscal 2017. Over the long term, management expects that the application of its ongoing efforts to improve ATS’ cost structure, business processes, leadership and supply chain management will have a positive impact on ATS operations. The Company seeks to continue to expand its position in the global automation market organically and through acquisition. The Company’s solid foundation and strong cash flow generation capability provide the flexibility to pursue its growth strategy. ATS AUTOMATION ANNUAL REPORT 2017 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Consolidated Results Selected Fourth Quarter and Annual Information (In millions of dollars, except per share data) Q4 2017 Q4 2016 Fiscal 2017 Fiscal 2016 Fiscal 2015 Revenues Cost of revenues Selling, general and administrative Stock-based compensation Earnings from operations Net finance costs Provision for (recovery of) income taxes Net income from continuing operations Income from discontinued operations, net of tax Net income Earnings per share Basic from continuing operations Basic from discontinued operations Diluted from continuing operations $ $ $ $ $ $ $ $ $ Diluted from discontinued operations $ $ 0.08 From continuing operations: Total assets Total cash and short-term investments Total bank debt $ 265.7 $ 246.8 $ 1,010.9 $ 1,039.6 $ 201.7 45.3 1.9 16.8 6.3 2.7 185.7 53.5 (0.5) $ $ 8.1 7.9 $ $ (1.2) 760.3 171.9 6.8 71.9 25.6 11.3 $ $ 780.9 179.3 2.6 76.8 26.7 10.5 $ $ 936.1 691.1 173.7 4.3 67.0 11.9 16.2 7.8 $ 1.4 $ 35.0 $ 39.6 $ 38.9 – 7.8 0.08 – 0.08 0.08 – $ $ $ $ $ $ $ $ – 1.4 0.02 – 0.02 0.02 – 0.02 $ $ $ $ $ $ $ $ – 35.0 0.38 – 0.38 0.38 – 0.38 $ $ $ $ $ $ $ $ – 39.6 0.43 – 0.43 0.43 – 0.43 $ $ $ $ $ $ $ $ 16.2 55.1 0.43 0.18 0.61 0.42 0.18 0.60 $ 1,374.6 $ 1,367.5 $ 1,220.7 $ $ 286.7 328.7 $ $ 170.0 323.7 $ $ 106.1 291.3 Revenues. At $265.7 million, consolidated revenues for the fourth quarter of fiscal 2017 were $18.9 million, or 8% higher than the corresponding period a year ago. At $1,010.9 million, fiscal 2017 revenues were $28.7 million, or 3% lower than in the corresponding previous year (see “Overview – Operating Results”). Cost of revenues. At $201.7 million, fourth quarter fiscal 2017 cost of revenues increased compared to the corresponding period a year ago by $16.0 million, or 9%, primarily on higher revenues. Annual cost of revenues of $760.3 million decreased by $20.6 million, or 3%, primarily on lower revenues generated compared to the corresponding period last year. At 24%, gross margin in the fourth quarter of fiscal 2017 decreased 1% from the corresponding period a year ago. Lower fourth quarter gross margins primarily reflected some lower margin programs, which were bid and are being executed by the Company, and certain programs where costs exceeded budgets. Fiscal 2017 gross margin of 25% was consistent with the corresponding period a year ago. 26 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Selling, general and administrative (“SG&A”) expenses. SG&A expenses for the fourth quarter of fiscal 2017 were $45.3 million, which included $4.8 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat and $2.9 million for the share purchase allowance. SG&A expenses for the fourth quarter of fiscal 2016 were $53.5 million, which included $5.7 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat; $2.3 million of restructuring and severance costs; and $7.1 million of executive transition expenses. Excluding these costs, SG&A expenses were $37.6 million in the fourth quarter of fiscal 2017, down from $38.4 million a year ago. Lower SG&A expenses in the fourth quarter of fiscal 2017 primarily reflected foreign exchange rate changes, which reduced the translation of reported SG&A expenses of foreign- based subsidiaries due to the strengthening of the Canadian dollar relative to the U.S. dollar and Euro. Fiscal 2017 SG&A expenses were $171.9 million, which included $20.0 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat; $2.3 million of restructuring and severance costs; and $2.9 million for the share purchase allowance. Excluding these items, SG&A expenses were $146.7 million for fiscal 2017. Comparably, SG&A expenses for fiscal 2016 were $141.7 million, which excludes $24.5 million of amortization costs related to the amortization of identifiable intangible assets recorded on the acquisitions of PA, IWK and sortimat; $9.7 million of restructuring and severance costs; a gain of $3.7 million on the sale of a U.S. facility; and $7.1 million of executive transition expenses. Higher SG&A expenses in fiscal 2017 primarily reflected increased employee costs and foreign exchange rate changes, which increased the translation of reported SG&A expenses of foreign-based subsidiaries, primarily due to the weakening of the Canadian dollar relative to the U.S. dollar and Euro. Stock-based compensation. Stock-based compensation expense amounted to $1.9 million in the fourth quarter of fiscal 2017 compared to a recovery of $0.5 million in the corresponding period a year ago. Fiscal 2017 stock-based compensation expense increased to $6.8 million from $2.6 million a year ago. The increase in stock-based compensation costs is attributable to higher expenses from stock options and the revaluation of deferred stock units and restricted share units. Earnings from operations. For the three- and twelve-month periods ended March 31, 2017, consolidated earnings from operations were $16.8 million (6% operating margin) and $71.9 million (7% operating margin), respectively, compared to earnings from operations of $8.1 million (3% operating margin) and $76.8 million (7% operating margin), respectively, in the corresponding periods of fiscal 2016 (see “Overview – Operating Results”). Net finance costs. Net finance costs were $6.3 million in the fourth quarter of fiscal 2017, $1.6 million lower than in the corresponding period a year ago. Fiscal 2017 finance costs were $25.6 million, compared to $26.7 million in the corresponding period a year ago. The decrease was primarily due to the benefit of cross- currency interest swaps, which were entered into in the fourth quarter of fiscal 2016 (see “Foreign Exchange”). Income tax provision. For the three and twelve months ended March 31, 2017, the Company’s effective income tax rates of 26% and 24%, respectively, differed from the combined Canadian basic federal and provincial income tax rate of 27%, primarily due to income earned in certain jurisdictions with different statutory tax rates. The Company expects its effective tax rate to remain in the range of 25%. Net income. Fiscal 2017 fourth quarter net income was $7.8 million (8 cents per share basic and diluted) compared to $1.4 million (2 cents per share basic and diluted) for the fourth quarter of fiscal 2016. Adjusted basic earnings per share were 15 cents in the fourth quarter of fiscal 2017 compared to 14 cents for the fourth quarter of fiscal 2016 (see “Reconciliation of Non-IFRS Measures to IFRS Measures”). Fiscal 2017 net income was $35.0 million (38 cents per share basic and diluted) compared to $39.6 million (43 cents per share basic and diluted) for the corresponding period a year ago. Adjusted basic earnings per share were 57 cents in fiscal 2017, compared to 72 cents in the corresponding period a year ago (see “Reconciliation of Non-IFRS Measures to IFRS Measures”). ATS AUTOMATION ANNUAL REPORT 2017 27 MANAGEMENT’S DISCUSSION AND ANALYSIS Reconciliation of Non-IFRS Measures to IFRS Measures (In millions of dollars, except per share data) The following table reconciles EBITDA to the most directly comparable IFRS measure (net income from continuing operations): Fiscal 2017 Fiscal 2016 Fiscal 2015 EBITDA Less: depreciation and amortization expense Earnings from operations Less: net finance costs Provision for income taxes Net income from continuing operations $ $ $ 106.5 34.6 71.9 25.6 11.3 35.0 EBITDA Less: depreciation and amortization expense Earnings from operations Less: net finance costs Provision for (recovery of) income taxes Net income from continuing operations $ $ $ $ $ $ 116.1 39.3 76.8 26.7 10.5 39.6 Q4 2017 25.6 8.8 16.8 6.3 2.7 7.8 $ $ $ $ $ $ 107.5 40.5 67.0 11.9 16.2 38.9 Q4 2016 17.7 9.6 8.1 7.9 (1.2) 1.4 28 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table reconciles adjusted earnings from operations and adjusted basic earnings per share to the most directly comparable IFRS measure (net income and basic earnings per share, respectively): Three Months Ended March 31, 2017 Adjusted Three Months Ended March 31, 2016 Adjusted IFRS Adjustments (non-IFRS) IFRS Adjustments (non-IFRS) Earnings from operations $ 16.8 $ – $ 16.8 $ 8.1 $ – $ 8.1 Amortization of acquisition-related intangible assets Restructuring charges Executive transition expenses Share purchase allowance Less: net finance costs Income before income taxes Provision for (recovery of) income taxes Adjustment to provision for income taxes1 Net income Basic earnings per share – – – – $ $ 16.8 6.3 $ 10.5 $ 2.7 – 2.7 7.8 0.08 $ $ $ $ $ $ $ $ $ $ 4.8 – – 2.9 7.7 – $ $ 4.8 – – 2.9 24.5 6.3 7.7 $ 18.2 – $ 2.7 2.2 2.2 5.5 0.07 $ $ $ 2.2 4.9 13.3 0.15 $ $ $ $ $ $ $ – – – – 8.1 7.9 0.2 (1.2) – (1.2) 1.4 0.02 $ $ $ $ $ $ $ 5.7 2.3 7.1 – 15.1 – 15.1 – 4.0 4.0 11.1 0.12 $ $ $ $ $ $ $ 5.7 2.3 7.1 – 23.2 7.9 15.3 (1.2) 4.0 2.8 12.5 0.14 1 Adjustments to provision for income taxes relate to the income tax effects of adjustment items that are excluded for the purposes of calculating non-IFRS based adjusted net income. ATS AUTOMATION ANNUAL REPORT 2017 29 MANAGEMENT’S DISCUSSION AND ANALYSIS Twelve Months Ended March 31, 2017 Twelve Months Ended March 31, 2016 IFRS Adjustments (non-IFRS) IFRS Adjustments (non-IFRS) Adjusted Adjusted Earnings from operations $ 71.9 $ – $ 71.9 $ 76.8 $ – $ 76.8 Amortization of acquisition-related intangible assets Restructuring charges Gain on sale of assets Executive transition expenses Share purchase allowance Less: net finance costs Income before income taxes Provision for income taxes Adjustment to provision for income taxes1 Net income Basic earnings per share $ $ $ $ $ $ $ – – – – – 71.9 25.6 46.3 11.3 – 11.3 35.0 0.38 $ $ $ $ $ $ $ 20.0 2.3 – – 2.9 25.2 – 25.2 – 7.8 7.8 17.4 0.19 $ $ $ $ $ $ $ 20.0 2.3 – – 2.9 97.1 25.6 71.5 11.3 7.8 19.1 52.4 0.57 $ $ $ $ $ $ $ – – – – – 76.8 26.7 50.1 10.5 – 10.5 39.6 0.43 24.5 9.7 (3.7) 7.1 – 24.5 9.7 (3.7) 7.1 – $ $ $ $ $ $ $ 37.6 $ 114.4 – 37.6 – 10.7 10.7 26.9 0.29 $ $ $ $ $ $ 26.7 87.7 10.5 10.7 21.2 66.5 0.72 1 Adjustments to provision for income taxes relate to the income tax effects of adjustment items that are excluded for the purposes of calculating non-IFRS based adjusted net income. 30 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of Investments, Liquidity, Cash Flow and Financial Resources Investments (In millions of dollars) Investments – increase (decrease) Non-cash operating working capital Property, plant and equipment Acquisition of intangible assets Purchase of non-controlling interest Proceeds from disposal of assets Proceeds from sale of subsidiary Total net investments Fiscal 2017 Fiscal 2016 $ (56.5) $ 9.9 8.0 – (0.1) – $ (38.7) $ 30.8 10.1 5.6 0.1 (22.3) (2.3) 22.0 In fiscal 2017, the Company’s investment in non-cash working capital decreased $56.5 million, compared to an increase of $30.8 million a year ago. Accounts receivable decreased 15%, or $29.8 million, driven by the timing of billings on certain customer contracts. Net contracts in progress decreased 37%, or $28.3 million, compared to March 31, 2016. The Company actively manages its accounts receivable and net contracts in progress balances through billing terms on long-term contracts, collection efforts and supplier payment terms. Inventories increased 4%, or $1.8 million, primarily due to the timing of inventory purchases. Deposits and prepaid assets decreased 28%, or $6.2 million, compared to March 31, 2016 due to the timing of program execution. Accounts payable and accrued liabilities increased 3%, or $5.0 million, compared to March 31, 2016. Provisions decreased 30%, or $6.1 million, compared to March 31, 2016 due to the payment in fiscal 2017 of the executive transition provision accrued in fiscal 2016. Capital expenditures totalled $9.9 million for fiscal 2017, primarily related to computer hardware. Capital expenditures totalled $10.1 million in fiscal 2016, primarily related to computer hardware. Intangible assets expenditures for fiscal 2017 and fiscal 2016 were $8.0 million and $5.6 million, respectively, and primarily related to computer software and various internal development projects. Purchase of non-controlling interest was $0.1 million in fiscal 2016. There were no such transactions in fiscal 2017. Proceeds from disposal of assets were $0.1 million in fiscal 2017, compared to $22.3 million in fiscal 2016. The decrease primarily reflects the sale of a U.S. facility and the sale of certain other redundant assets in fiscal 2016. Proceeds from sale of subsidiary were $2.3 million in fiscal 2016, related to the sale of a Swiss subsidiary, which closed in fiscal 2016. There were no such transactions in fiscal 2017. The Company performs impairment tests on its goodwill and intangible asset balances on an annual basis or as warranted by events or circumstances. The Company conducted its annual impairment assessment in the fourth quarter of fiscal 2017 and determined there is no impairment of goodwill or intangible assets as of March 31, 2017 (fiscal 2016 – $nil). All the Company’s investments involve risks and require that the Company make judgments and estimates regarding the likelihood of recovery of the respective costs. In the event management determines that any of the Company’s investments have become permanently impaired or recovery is no longer reasonably assured, the value of the investment would be written down to its estimated net realizable value as a charge against earnings. Due to the magnitude of certain investments, such write-downs could be material. ATS AUTOMATION ANNUAL REPORT 2017 31 MANAGEMENT’S DISCUSSION AND ANALYSIS Liquidity, Cash Flow and Financial Resources (In millions of dollars, except ratios) Cash and cash equivalents Debt-to-equity ratio Cash flows provided by operating activities Fiscal 2017 Fiscal 2016 $ $ 286.7 0.52:1 127.9 $ $ 170.0 0.56:1 35.8 At March 31, 2017, the Company had cash and cash equivalents of $286.7 million compared to $170.0 million at March 31, 2016. At March 31, 2017, the Company’s debt-to-total equity ratio was 0.52:1. At March 31, 2017, the Company had $639.1 million of unutilized multipurpose credit, including letters of credit, available under existing credit facilities and an additional $2.9 million available under letter of credit facilities. In fiscal 2017, cash flows provided by operating activities were $127.9 million ($35.8 million provided by operating activities in the corresponding period a year ago). The increase in operating cash flows related primarily to the timing of investments in non-cash working capital in certain customer programs. The Company’s U.S. $250.0 million aggregate principal amount of senior notes (the “Senior Notes”) are unsecured, were issued at par, bear interest at a rate of 6.50% per annum and mature on June 15, 2023. The Company may redeem the Senior Notes, in whole, at any time or in part, from time to time, at specified redemption prices and subject to certain conditions required by the Senior Notes. If the Company experiences a change of control, the Company may be required to repurchase the Senior Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. The Senior Notes contain customary covenants that restrict, subject to certain exceptions and thresholds, some of the activities of the Company and its subsidiaries, including the Company’s ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments and engage in specified transactions with affiliates. Subject to certain exceptions, the Senior Notes are guaranteed by each of the subsidiaries of the Company that is a borrower or has guaranteed obligations under the Credit Facility. Transaction fees of $7.2 million were deferred and are being amortized over the term of the Senior Notes. The Company’s senior secured credit facility (the “Credit Facility”) provides a committed revolving credit facility of $750.0 million. The Credit Facility is secured by: (i) the Company’s assets, including real estate; (ii) assets, including certain real estate, of certain of the Company’s North American subsidiaries; and (iii) a pledge of shares of certain of the Company’s non-North American subsidiaries. Certain of the Company’s subsidiaries also provide guarantees under the Credit Facility. At March 31, 2017, the Company had utilized $115.0 million under the Credit Facility by way of letters of credit (March 31, 2016 – $115.1 million). The Credit Facility matures on August 29, 2018. The Credit Facility is available in Canadian dollars by way of prime rate advances and/or bankers’ acceptances, in U.S. dollars by way of base rate advances and/or LIBOR advances, in Swiss francs, Euros and British pounds sterling by way of LIBOR advances and by way of letters of credit for certain purposes in Canadian dollars, U.S. dollars and Euros. The interest rates applicable to the Credit Facility are determined based on a debt to EBITDA ratio as defined in the Credit Facility. For prime rate advances and base rate advances, the interest rate is equal to the bank’s prime rate or the bank’s U.S. dollar base rate in Canada, respectively, plus a margin ranging from 0.45% to 2.00%. For bankers’ acceptances and LIBOR advances, the interest rate is equal to the bankers’ acceptance fee or LIBOR, respectively, plus a margin that varies from 1.45% to 3.00%. The Company pays a fee for usage of financial letters of credit, which ranges from 1.45% to 3.00% and a fee for usage of non-financial letters of credit, which ranges from 0.97% to 2.00%. The Company pays a standby fee on the unadvanced portions of the amounts available for advance or draw-down under the Credit Facility at rates ranging from 0.29% to 0.68%. 32 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS The Credit Facility is subject to a debt to EBITDA test and an interest coverage test. Under the terms of the Credit Facility, the Company is restricted from encumbering any assets with certain permitted exceptions. The Credit Facility also limits advances to subsidiaries and partially restricts the Company from repurchasing its common shares and paying dividends. At March 31, 2017, all of the covenants were met. The Company has additional credit facilities available of $8.1 million (3.3 million Euros, 75.0 million Indian Rupees, 50.0 million Thai Baht and 1.1 million Czech Koruna). The total amount outstanding on these facilities at March 31, 2017 was $4.0 million, of which $1.4 million was classified as bank indebtedness (March 31, 2016 – $2.3 million) and $2.6 million was classified as long-term debt (March 31, 2016 – $7.1 million). The interest rates applicable to the credit facilities range from 1.66% to 9.18% per annum. A portion of the long- term debt is secured by certain assets of the Company. The 75.0 million Indian Rupees and the 50.0 million Thai Baht credit facilities are secured by letters of credit under the Credit Facility. Over the long term, the Company generally expects to continue increasing its overall investment in non-cash working capital to support the growth of its business, with fluctuations on a quarter-over-quarter basis. The Company’s goal is to maintain its investment in non-cash working capital as a percentage of annualized revenues at a level below 15%. The Company expects that continued cash flows from operations, together with cash and cash equivalents on hand and credit available under operating and long-term credit facilities, will be sufficient to fund its requirements for investments in non-cash working capital and capital assets and to fund strategic investment plans including some potential acquisitions. Significant acquisitions could result in additional debt or equity financing requirements. The Company expects to continue to use leverage to support its growth strategy. Contractual Obligations (In millions of dollars) The Company’s minimum operating lease payments (related primarily to facilities and equipment) and purchase obligations are as follows: Less than one year One – two years Two – three years Three – four years Four – five years Due in over five years Operating leases Purchase obligations $ 10.5 $ 7.7 6.9 6.1 4.9 1.3 83.5 7.4 0.1 – – – $ 37.4 $ 91.0 The Company’s off-balance sheet arrangements consist of purchase obligations and various operating lease financing arrangements related primarily to facilities and equipment that were entered into in the normal course of business. The Company’s purchase obligations consist primarily of commitments for material purchases. In accordance with industry practice, the Company is liable to customers for obligations relating to contract completion and timely delivery. In the normal conduct of its operations, the Company may provide letters of credit as security for advances received from customers pending delivery and contract performance. In addition, the Company provides letters of credit for post-retirement obligations and may provide letters of credit as security on equipment under lease and on order. At March 31, 2017, the total value of outstanding letters of credit was approximately $136.0 million (March 31, 2016 – $137.0 million). ATS AUTOMATION ANNUAL REPORT 2017 33 MANAGEMENT’S DISCUSSION AND ANALYSIS In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position. The Company is exposed to credit risk on derivative financial instruments arising from the potential for counterparties to default on their contractual obligations to the Company. The Company minimizes this risk by limiting counterparties to major financial institutions and monitoring their creditworthiness. The Company’s credit exposure to forward foreign exchange contracts is the current replacement value of contracts that are in a gain position. For further information related to the Company’s use of derivative financial instruments, refer to note 11 of the consolidated financial statements. The Company is also exposed to credit risk from its customers. Substantially all of the Company’s trade accounts receivable are due from customers in a variety of industries and, as such, are subject to normal credit risks from their respective industries. The Company regularly monitors customers for changes in credit risk. The Company does not believe that any single market or geographic region represents significant credit risk. Credit risk concentration, with respect to trade receivables, is mitigated as the Company primarily serves large, multinational customers and obtains insurance in certain instances. During fiscal 2017, 1,308,667 stock options were exercised. At May 17, 2017 the total number of shares outstanding was 93,602,026 and there were 2,274,724 stock options outstanding to acquire common shares of the Company. Normal Course Issuer Bid On November 4, 2015, the Company announced that the Toronto Stock Exchange (“TSX”) had accepted a notice filed by the Company of its intention to make a normal course issuer bid (“NCIB”). Under the NCIB, ATS had the ability to purchase, for cancellation, up to a maximum of 4,600,000 common shares, representing approximately 5% of the 92,541,582 common shares that were issued and outstanding as of October 31, 2015. During fiscal 2016, the Company purchased 481,473 common shares for $6.0 million under the NCIB. The weighted average price per share repurchased was $12.45. No subsequent purchases were made in fiscal 2017. The NCIB expired on November 5, 2016. Related Party Transactions The Company has an agreement with a shareholder, Mason Capital Management, LLC (“Mason Capital”), pursuant to which Mason Capital has agreed to provide ATS with ongoing strategic and capital markets advisory services for an annual fee of U.S. $0.5 million. As part of the agreement, a member of the Company’s Board of Directors who is associated with Mason Capital has waived any fees to which he may have otherwise been entitled for serving as a member of the Board of Directors or as a member of any committee of the Board of Directors. There were no other significant related party transactions in fiscal 2017. 34 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Foreign Exchange The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency of the Canadian dollar, through borrowings made by the Company in currencies other than its functional currency and through its investments in its foreign-based subsidiaries. The Company’s Canadian operations generate significant revenues in major foreign currencies, primarily U.S. dollars, which exceed the natural hedge provided by purchases of goods and services in those currencies. In order to manage a portion of this foreign currency exposure, the Company has entered into forward foreign exchange contracts. The timing and amount of these forward foreign exchange contract requirements are estimated based on existing customer contracts on hand or anticipated, current conditions in the Company’s markets and the Company’s past experience. Certain of the Company’s foreign subsidiaries will also enter into forward foreign exchange contracts to hedge identified balance sheet, revenue and purchase exposures. The Company’s forward foreign exchange contract hedging program is intended to mitigate movements in currency rates primarily over a four- to six-month period. The Company uses cross-currency swaps as derivative financial instruments to hedge a portion of its foreign exchange risk related to its U.S.-dollar-denominated Senior Notes. On March 29, 2016, the Company entered into a cross-currency interest rate swap instrument to swap U.S. $150.0 million into Canadian dollars. The Company will receive interest of 6.50% U.S. per annum and pay interest of 6.501% Canadian. The terms of the hedging relationship will end on June 15, 2023. The Company manages foreign exchange risk on its Euro denominated net investments. The Company uses cross-currency swaps as derivative financial instruments to hedge a portion of the foreign exchange risk related to its Euro-denominated net investment. On March 29, 2016, the Company entered into a cross-currency interest rate swap instrument to swap 134.1 million Euros into Canadian dollars. The Company will receive interest of 6.501% Canadian per annum and pay interest of 5.094% Euros. The terms of the hedging relationship will end on June 15, 2023. As a result of the cross-currency interest rate swap instruments, the Company expects its interest expenses to be reduced by approximately U.S. $2 million per annum from the coupon rate of the Senior Notes. In addition, from time to time, the Company may hedge the foreign exchange risk arising from foreign currency debt, intercompany loans, net investments in foreign-based subsidiaries and committed acquisitions through the use of forward foreign exchange contracts or other non-derivative financial instruments. The Company uses hedging as a risk management tool, not to speculate. See note 11 to the consolidated financial statements for details on the derivative financial instruments outstanding at March 31, 2017. Year-end actual exchange rates Period average exchange rates March 31, March 31, March 31, March 31, U.S. Dollar Euro 2017 1.330 1.419 2016 1.299 1.478 % change 2.4% (4.0%) 2017 1.313 1.440 2016 1.311 1.447 % change 0.2% (0.5%) ATS AUTOMATION ANNUAL REPORT 2017 35 MANAGEMENT’S DISCUSSION AND ANALYSIS Consolidated Quarterly Results (In millions of dollars, except per share amounts) Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Revenues $ 265.7 $ 237.4 $ 242.5 $ 265.4 $ 246.8 $ 274.9 $ 263.7 $ 254.3 Earnings from operations $ 16.8 $ 15.3 $ 17.3 $ 22.6 $ 8.1 $ 26.8 $ 24.4 $ 17.5 Adjusted earnings from operations $ 24.5 $ 22.5 $ 22.3 $ 27.9 $ 23.2 $ 32.1 $ 31.7 $ 27.4 Net income $ 7.8 $ 6.6 $ 8.5 $ 12.1 $ 1.4 $ 15.5 $ 12.8 $ 9.8 Basic and diluted earnings per share Adjusted basic earnings per share Order Bookings Order Backlog $ 0.08 $ 0.07 $ 0.09 $ 0.13 $ 0.02 $ 0.16 $ 0.14 $ 0.11 $ 0.15 $ 0.12 $ 0.13 $ 0.17 $ 0.14 $ 0.21 $ 0.19 $ 0.18 $ 322.0 $ 284.0 $ 289.0 $ 239.0 $ 390.0 $ 228.0 $ 230.0 $ 222.0 $ 681.0 $ 632.0 $ 654.0 $ 610.0 $ 652.0 $ 546.0 $ 589.0 $ 590.0 Interim financial results are not necessarily indicative of annual or longer-term results because many of the individual markets served by the Company tend to be cyclical in nature. Operating performance quarter to quarter may also be affected by the timing of revenue recognition on large programs in Order Backlog, which is impacted by such factors as customer delivery schedules and the timing of third-party content, and by the timing of acquisitions. General economic trends, product life cycles and product changes may impact revenues and operating performance. ATS typically experiences some seasonality with its Order Bookings, revenues and earnings from operations due to summer plant shutdowns by its customers. Critical Accounting Estimates and Assumptions The preparation of the Company’s consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the end of the reporting period. Uncertainty about these estimates, judgments and assumptions could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The Company based its assumptions on information available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the estimates as they occur. Notes 2 and 3 to the consolidated financial statements describe the basis of accounting and the Company’s significant accounting policies. Revenue recognition and contracts in progress The nature of ATS contracts requires the use of estimates to quote new business, and most automation systems are typically sold on a fixed-price basis. Revenues on construction contracts and other long-term contracts are recognized on a percentage of completion basis as outlined in note 3(d) “Revenue Recognition – Construction contracts” to the consolidated financial statements. In applying the accounting policy on construction contracts, judgment is required in determining the estimated costs to complete a contract. These cost estimates are reviewed at each reporting period and by their nature may give rise to income volatility. If the actual costs incurred by the Company to complete a contract are significantly higher than estimated, the Company’s earnings may be negatively affected. The use of estimates involves risks, since the work to be performed requires varying degrees of technical uncertainty, including possible development work to meet the 36 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS customer’s specification, the extent of which is sometimes not determinable until after the project has been awarded. In the event the Company is unable to meet the defined performance specification for a contracted automation system, it may need to redesign and rebuild all or a portion of the system at its expense without an increase in the selling price. Certain contracts may have provisions that reduce the selling price if the Company fails to deliver or complete the contract by specified dates. These provisions may expose the Company to liabilities or adversely affect the Company’s results of operations or financial position. ATS’ contracts may be terminated by customers in the event of a default by the Company or, in some cases, for the convenience of the customer. In the event of a termination for convenience, the Company typically negotiates a payment provision reflective of the progress achieved on the contract and/or the costs incurred to the termination date. If a contract is cancelled, Order Backlog is reduced and production utilization may be negatively impacted. A complete provision, which can be significant, is made for losses on such contracts when the losses first become known. Revisions in estimates of costs and profits on contracts, which can also be significant, are recorded in the accounting period in which the relevant facts impacting the estimates become known. A portion of ATS’ revenue is recognized when earned, which is generally at the time of shipment and transfer of title to the customer, provided collection is reasonably assured. Income taxes Deferred income tax assets, disclosed in note 16 to the consolidated financial statements, are recognized to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred income tax assets that can be recognized based upon the likely timing and level of future taxable income together with future tax-planning strategies. If the assessment of the Company’s ability to utilize the deferred income tax asset changes, the Company would be required to recognize more or fewer of the deferred income tax assets, which would increase or decrease income tax expense in the period in which this is determined. The Company establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous taxation audits and differing interpretations of tax regulations by the taxable entity and the respective tax authority. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all the relevant factors. The Company reviews the adequacy of these provisions at each quarter. However, it is possible that at some future date an additional liability could result from audits by the taxation authorities. Where the final tax outcome of these matters is different from the amount initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Stock-based payment transactions The Company measures the cost of transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for stock-based payment transactions requires the determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model, including the future forfeiture rate, the expected life of the share option, weighted average risk-free interest rate, volatility and dividend yield, and formation of assumptions. The assumptions and models used for estimating fair value for stock-based payment transactions are disclosed in note 17 of the consolidated financial statements. ATS AUTOMATION ANNUAL REPORT 2017 37 MANAGEMENT’S DISCUSSION AND ANALYSIS Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value in use. The calculations involve significant estimates and assumptions. Items estimated include cash flows, discount rates and assumptions on revenue growth rates. These estimates could effect the Company’s future results if the current estimates of future performance and fair values change. Goodwill is assessed for impairment on an annual basis as described in note 9 to the consolidated financial statements. The Company performed its annual impairment test of goodwill as at March 31, 2017 and determined there was no impairment (March 31, 2016 – $nil). Provisions As described in note 3(q) to the consolidated financial statements, the Company records a provision when an obligation exists, an outflow of economic resources required to settle the obligation is probable and a reliable estimate can be made of the amount of the obligation. The Company records a provision based on the best estimate of the required economic outflow to settle the present obligation at the consolidated statement of financial position date. While management believes these estimates are reasonable, differences in actual results or changes in estimates could have a material impact on the obligations and expenses reported by the Company. Employee benefits The cost of defined benefit pension plans and the present value of the pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in their respective currency, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country. Further details about the assumptions used are provided in note 13 of the consolidated financial statements. Accounting Standards Issued but not yet Effective IFRS 15 – Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which establishes a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. Under IFRS 15, revenues are recognized to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard will supersede all current revenue recognition requirements under IFRS. The standard currently requires a full or modified retrospective application for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not anticipate early adoption and plans to adopt the standard for the annual period beginning on April 1, 2018. The Company has not yet determined the impact on its consolidated financial statements. 38 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS IFRS 16 – Leases In January 2016, the IASB issued IFRS 16 – Leases, which requires lessees to recognize assets and liabilities for most leases. There are minimal changes to the existing accounting in IAS 17 – Leases from the perspective of lessors. The new standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted provided IFRS 15 has been adopted or is adopted at the same date. The Company does not anticipate early adoption and plans to adopt the standard for the annual period beginning on April 1, 2019. The Company has not yet determined the impact on its consolidated financial statements. Controls and Procedures The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Company. The control framework used in the design of disclosure controls and procedures and internal control over financial reporting is the “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Disclosure controls and procedures An evaluation of the design and operating effectiveness of the Company’s disclosure controls and procedures was conducted as of March 31, 2017 under the supervision of the CEO and CFO as required by CSA National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings. The evaluation included documentation, review, enquiries and other procedures considered appropriate in the circumstances. Based on that evaluation, the CEO and the CFO have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information relating to the Company and its consolidated subsidiaries that is required to be disclosed in reports filed under provincial and territorial securities legislation is recorded, processed, summarized and reported to senior management, including the CEO and the CFO, so that appropriate decisions can be made by them regarding required disclosure within the time periods specified in the provincial and territorial securities legislation. Internal control over financial reporting CSA National Instrument 52-109 requires the CEO and CFO to certify that they are responsible for establishing and maintaining internal control over financial reporting for the Company, and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Management, including the CEO and CFO, does not expect that the Company’s disclosure controls or internal controls over financial reporting will prevent or detect all errors and all fraud or will be effective under all potential future conditions. A control system is subject to inherent limitations and, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The CEO and CFO have, using the framework and criteria established in “Internal Control – Integrated Framework (2013)” issued by COSO, evaluated the design and operating effectiveness of the Company’s internal controls over financial reporting and concluded that, as of March 31, 2017, internal controls over financial reporting were effective to provide reasonable assurance that information related to consolidated results and decisions to be made based on those results were appropriate. During the years ended March 31, 2017 and March 31, 2016, there have been no changes in the design of the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. ATS AUTOMATION ANNUAL REPORT 2017 39 MANAGEMENT’S DISCUSSION AND ANALYSIS Other Major Considerations and Risk Factors Any investment in ATS will be subject to risks inherent to ATS’ business. The following risk factors are discussed in the Company’s Annual Information Form, which may be found on SEDAR at www.sedar.com. • Market volatility; • Foreign exchange risk; • Strategy execution risks; • Doing business in foreign countries; • Liquidity, access to capital markets and leverage; • Availability of human resources and dependence • Restrictive covenants; • Availability of performance and other guarantees on key personnel; • Legislative compliance; from financial institutions; • Environmental compliance; • Share price volatility; • Competition; • Industry consolidation; • First-time program and production risks; • Automation systems pricing; • Corruption of Foreign Public Officials Act, United States Foreign Corrupt Practices Act and anti- bribery laws risk; • • Intellectual property protection risks; Infringement of third parties’ intellectual property rights risk; • Revenue mix risk; • Security breaches or disruptions of information • Pricing, quality, delivery and volume risks; • Product failure; • Insurance coverage; • Acquisition risks; • Expansion risks; • Availability of raw materials and other manufacturing inputs; • Customer risks; • Cumulative loss of several significant contracts; technology systems; Internal controls; Impairment of intangible assets risk; Income and other taxes and uncertain tax liabilities; • • • • Variations in quarterly results; • Litigation; • Natural disasters, pandemics, acts of war, terrorism, international conflicts or other disruptions; • Lengthy sales cycle; • Manufacturing facilities disruption; and • Lack of long-term customer commitment; • Dependence on performance of subsidiaries. • New product market acceptance, obsolescence, and commercialization risk; 40 ATS AUTOMATION ANNUAL REPORT 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS Note to Readers: Forward-Looking Statements This management’s discussion and analysis of financial conditions and results of operations of ATS contains certain statements that may constitute forward-looking information within the meaning of applicable securities laws (“forward-looking statements”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of ATS, or developments in ATS’ business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking statements include all disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. Forward-looking statements may also include, without limitation, any statement relating to future events, conditions or circumstances. ATS cautions you not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. Forward-looking statements relate to, among other things: potential impact of general economic environment, including impact on Order Bookings and volatility of Order Bookings; the expected benefits where the Company engages with customers on enterprise-type solutions and the potential impact on Order Bookings, performance period, and timing of revenue recognition; the Company’s Order Backlog partially mitigating the impact of volatile Order Bookings; the rate of completion of Order Backlog available to be completed; the Company’s efforts to expand after-sales services and the expected impact; expected impact of the Company’s focus and efforts in regards to certain management initiatives; the Company’s strategy to expand organically and through acquisition; the Company’s expectation with respect to effective tax rate; the Company’s goal with respect to non-cash working capital as a percentage of revenues; expectation in relation to meeting funding requirements for investments; expectation to use leverage to support growth strategy; the Company’s belief with respect to the outcome of certain lawsuits, claims and contingencies; and the Company’s expectation with respect to a reduction of interest expense resulting from an interest rate swap. The risks and uncertainties that may affect forward-looking statements include, among others: impact of the global economy; general market performance including capital market conditions and availability and cost of credit; performance of the markets that ATS serves; foreign currency and exchange risk; the relative strength of the Canadian dollar; impact of factors such as increased pricing pressure and possible margin compression; the regulatory and tax environment; timing of customer decisions related to large enterprise programs and potential for greater negative impact associated with any cancellations or non-performance in relation thereto; variations in the amount of Order Backlog completed in any given quarter; that revenues from after-sales services are insufficient to offset capital spending volatility; inability to successfully expand organically or through acquisition, due to an inability to grow expertise, personnel, and/or facilities at required rates or to identify, negotiate and conclude one or more acquisitions; or to raise, through debt or equity, or otherwise have available, required capital; that acquisitions made are not integrated as quickly or effectively as planned or expected and, as a result, anticipated benefits and synergies are not realized; that the effective tax rate is other than expected, due to reasons including income spread among jurisdictions being other than anticipated; non-cash working capital as a percentage of revenues operating at a level other than as expected due to reasons, including, the timing and nature of Order Bookings, the timing of payment milestones and payment terms in customer contracts, and delays in customer programs; risk that the ultimate outcome of lawsuits, claims, and contingencies give rise to material liabilities for which no provisions have been recorded; that one or more customers, or other entities with which the Company has contracted, experience insolvency or bankruptcy with resulting delays, costs or losses to the Company; political, labour or supplier disruptions; the development of superior or alternative technologies to those developed by ATS; the success of competitors with greater capital and resources in exploiting their technology; market risk for developing technologies; risks relating to legal proceedings to which ATS is or may become a party; exposure to product liability claims; risks associated with greater than anticipated tax liabilities or expenses; and other risks detailed from time to time in ATS’ filings with Canadian provincial securities regulators. Forward-looking statements are based on management’s current plans, estimates, projections, beliefs and opinions, and other than as required by applicable securities laws, ATS does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change. ATS AUTOMATION ANNUAL REPORT 2017 41 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The preparation and presentation of the Company’s consolidated financial statements is the responsibility of management. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The consolidated financial statements and other information in Management’s Discussion and Analysis and the Annual Report include amounts that are based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information presented elsewhere in Management’s Discussion and Analysis and the Annual Report is consistent with that in the consolidated financial statements, except as described further in the “Non-IFRS Measures” section of Management’s Discussion and Analysis. Management maintains appropriate systems of internal accounting and administrative controls, which are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards as further described in the “Controls and Procedures” section of Management’s Discussion and Analysis. Management’s responsibilities for financial reporting are overseen by the Board of Directors (the “Board”), which is ultimately responsible for reviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit and Finance Committee (the “Committee”). The Committee is appointed by the Board and all of its members are independent directors. The Committee meets periodically with management and the external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, to satisfy itself that each party is properly discharging its responsibilities and to review the consolidated financial statements and the external auditors’ report. The Committee has reported its findings to the Board, which has approved the consolidated financial statements and Management’s Discussion and Analysis for issuance to shareholders. The Committee also considers, for review by the Board and approval of shareholders, the engagement or reappointment of the external auditors. The consolidated financial statements have been audited on behalf of shareholders by Ernst & Young LLP, the external auditors, in accordance with Canadian generally accepted auditing standards. The external auditors have full and free access to management and the Committee. Andrew Hider Chief Executive Officer Maria Perrella Chief Financial Officer 42 ATS AUTOMATION ANNUAL REPORT 2017 INDEPENDENT AUDITORS’ REPORT To the Shareholders of ATS Automation Tooling Systems Inc. We have audited the accompanying consolidated financial statements of ATS Automation Tooling Systems Inc., which comprise the consolidated statements of financial position as at March 31, 2017 and 2016, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of ATS Automation Tooling Systems Inc. as at March 31, 2017 and 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Toronto, Canada May 17, 2017 ATS AUTOMATION ANNUAL REPORT 2017 43 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of Canadian dollars) As at ASSETS Current assets Cash and cash equivalents Accounts receivable Costs and earnings in excess of billings on contracts in progress Inventories Deposits, prepaids and other assets Non-current assets Property, plant and equipment Other assets Goodwill Intangible assets Deferred income tax assets Investment tax credit receivable Total assets LIABILITIES AND EQUITY Current liabilities Bank indebtedness Accounts payable and accrued liabilities Provisions Billings in excess of costs and earnings on contracts in progress Current portion of long-term debt Non-current liabilities Employee benefits Long-term debt Deferred income tax liabilities Total liabilities Commitments and contingencies EQUITY Share capital Contributed surplus Accumulated other comprehensive income Retained earnings Equity attributable to shareholders Non-controlling interests Total equity Total liabilities and equity On behalf of the Board: Note 14 March 31, 2017 March 31, 2016 5 5 6 7 8 9 10 16 16 $ $ 14 $ 12 5 14 13 14 16 $ 14, 18 15 $ $ 286,697 166,069 144,708 47,981 16,119 661,574 69,233 13,291 423,250 156,069 2,138 49,015 712,996 1,374,570 1,411 183,839 14,124 96,490 1,321 297,185 26,668 325,947 38,761 391,376 688,561 543,317 12,871 54,974 74,599 685,761 248 686,009 1,374,570 $ $ $ $ $ $ 170,034 195,911 202,694 46,200 22,324 637,163 71,060 4,211 431,747 177,065 2,534 43,683 730,300 1,367,463 2,319 178,826 20,267 126,127 5,259 332,798 28,252 316,120 39,740 384,112 716,910 528,184 13,201 68,319 40,634 650,338 215 650,553 1,367,463 David McAusland Director See accompanying notes to the consolidated financial statements. Neil D. Arnold Director 44 ATS AUTOMATION ANNUAL REPORT 2017 CONSOLIDATED STATEMENTS OF INCOME (in thousands of Canadian dollars, except per share amounts) Years ended March 31 Revenues Revenues from construction contracts Sale of goods Services rendered Total revenues Operating costs and expenses Cost of revenues Selling, general and administrative Stock-based compensation Earnings from operations Net finance costs Income before income taxes Income tax expense Net income Attributable to Shareholders Non-controlling interests Earnings per share attributable to shareholders Basic and diluted Note 2017 2016 $ $ $ $ $ 589,033 78,776 343,095 1,010,904 760,248 171,907 6,814 71,935 25,552 46,383 11,356 35,027 34,994 33 35,027 0.38 17 20 16 21 $ $ $ $ $ 617,487 80,153 342,000 1,039,640 780,948 179,297 2,638 76,757 26,652 50,105 10,507 39,598 39,553 45 39,598 0.43 See accompanying notes to the consolidated financial statements. ATS AUTOMATION ANNUAL REPORT 2017 45 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands of Canadian dollars) Years ended March 31 Net income Other comprehensive income (loss): Items to be reclassified subsequently to net income: 2017 35,027 $ 2016 39,598 $ Currency translation adjustment (net of income taxes of $nil) (10,978) 30,780 Net unrealized gain (loss) on derivative financial instruments designated as cash flow hedges Tax impact Loss transferred to net income for derivatives designated as cash flow hedges Tax impact Cash flow hedge reserve adjustment Tax impact Items that will not be reclassified subsequently to net income: Actuarial gains (losses) on defined benefit pension plans Tax impact Other comprehensive income (loss) Comprehensive income Attributable to Shareholders Non-controlling interests See accompanying notes to the consolidated financial statements. (2,869) 751 (287) 46 (11) 3 (569) 157 (13,757) 21,270 21,237 33 21,270 $ $ $ 1,309 (349) 4,136 (1,029) 51 (13) 1,099 (317) 35,667 75,265 75,220 45 75,265 $ $ $ 46 ATS AUTOMATION ANNUAL REPORT 2017 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands of Canadian dollars) Share Contributed earnings translation hedge comprehensive controlling capital surplus (deficit) adjustments reserve income interests Total equity Retained Currency Cash flow other Non- Year ended March 31, 2017 Total accumulated $ 528,184 $ 13,201 $ 40,634 $ 66,482 $ 1,837 $ 68,319 $ 215 $ 650,553 – – 34,994 – – – 33 35,027 Balance, as at March 31, 2016 Net income Other comprehensive loss Total comprehensive income (loss) Non-controlling interests Stock-based compensation Exercise of stock options Balance, as at – – – – – – – 2,361 15,133 (2,691) (412) (10,978) (2,367) (13,345) – (13,757) 34,582 (10,978) (2,367) (13,345) 33 21,270 (617) – – – – – – – – – – – – – – (617) 2,361 12,442 March 31, 2017 $ 543,317 $ 12,871 $ 74,599 $ 55,504 $ (530) $ 54,974 $ 248 $ 686,009 Share Contributed Retained earnings Currency Cash flow other Non- translation hedge comprehensive controlling capital surplus (deficit) adjustments reserve income interests Total equity Year ended March 31, 2016 Total accumulated Balance, as at March 31, 2015 Net income Other $ 519,118 $ 14,420 $ – – comprehensive loss Total comprehensive income Stock-based compensation Exercise of stock options Repurchase of – – – – – 1,899 11,807 (3,118) common shares (2,741) – (3,291) Balance, as at 3,590 39,553 $ 35,702 $ (2,268) $ 33,434 $ 170 – – – $ 570,732 39,598 45 782 30,780 4,105 34,885 – 35,667 40,335 30,780 4,105 34,885 45 75,265 – – – – – – – – – – – – – – 1,899 8,689 (6,032) March 31, 2016 $ 528,184 $ 13,201 $ 40,634 $ 66,482 $ 1,837 $ 68,319 $ 215 $ 650,553 See accompanying notes to the consolidated financial statements. ATS AUTOMATION ANNUAL REPORT 2017 47 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars) Years ended March 31 Operating activities Income from operations Items not involving cash Depreciation of property, plant and equipment Amortization of intangible assets Deferred income taxes Other items not involving cash Stock-based compensation Loss (gain) on disposal of property, plant and equipment Change in non-cash operating working capital Cash flows provided by operating activities Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Purchase of non-controlling interest Proceeds from disposal of property, plant and equipment Proceeds from sale of subsidiary Cash flows provided by (used in) investing activities Financing activities Bank indebtedness Repayment of long-term debt Proceeds from long-term debt Proceeds from exercise of stock options Repurchase of common shares Cash flows provided by financing activities Effect of exchange rate changes on cash and cash equivalents Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental information Cash income taxes paid Cash interest paid Note 2017 2016 $ 35,027 $ 39,598 10,492 24,070 1,900 (7,427) 6,814 483 71,359 56,541 127,900 (9,892) (8,006) – 84 – (17,814) (964) (5,081) 701 12,442 – 7,098 (521) 116,663 170,034 286,697 10,785 23,222 9,681 29,681 (232) (9,560) 2,638 (5,232) 66,574 (30,814) 35,760 (10,050) (5,611) (71) 22,323 2,274 8,865 661 (290,984) 303,670 8,689 (6,032) 16,004 2,879 63,508 106,526 170,034 10,078 16,619 $ $ $ $ $ $ $ $ 16 17 7 10 15 $ $ $ $ $ $ $ $ See accompanying notes to the consolidated financial statements. 48 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 1. Corporate information ATS Automation Tooling Systems Inc. and its subsidiaries (collectively “ATS” or “the Company”) design and build custom-engineered turn-key automated manufacturing and test systems and provide pre-automation and post-automation services to their customers. The Company is listed on the Toronto Stock Exchange and is incorporated and domiciled in Ontario, Canada. The address of its registered office is 730 Fountain Street North, Cambridge, Ontario, Canada. The consolidated financial statements of the Company for the year ended March 31, 2017 were authorized for issue by the Board of Directors on May 17, 2017. 2. Basis of preparation These consolidated financial statements were prepared on a going concern basis under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss or other comprehensive income. All consolidated financial information is presented in Canadian dollars and has been rounded to the nearest thousand, except where otherwise stated. Statement of compliance These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). Basis of consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are those entities where the Company directly or indirectly owns the majority of the voting power or can otherwise control the activities. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Non-controlling interests in the equity and results of the Company’s subsidiaries are presented separately in the consolidated statements of income and within equity in the consolidated statements of financial position. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The Company’s material subsidiaries are: Automation Tooling Systems Enterprises Inc., and ATS Automation Tooling Systems GmbH. The  Company has a 100% voting and equity securities interest in each of these corporations. All material intercompany balances, transactions, revenues and expenses and profits or losses, including dividends resulting from intercompany transactions, have been eliminated on consolidation. ATS AUTOMATION ANNUAL REPORT 2017 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 3. Summary of significant accounting policies (a) Business combinations and goodwill: Business combinations are accounted for using the acquisition method. The cost of the acquisition is measured as the aggregate of the consideration transferred, measured at the acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Company measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs are expensed as incurred. When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes in the fair value of the contingent consideration which is deemed to be an asset or liability will be recognized in accordance with IFRS 9 – Financial Instruments (“IFRS 9”) either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of IFRS 9, it is measured in accordance with the appropriate IFRS policy. Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquiree at the date of acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to cash-generating units (“CGUs”) or groups of CGUs based on the level at which management monitors it. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the CGU retained. (b) Interest in joint arrangements: The Company has interests in joint operations, whereby the joint operators have a contractual arrangement that establishes joint control over the economic activities of the individual entity. The Company recognizes its share of the joint operation’s assets, liabilities, revenues and expenses in the consolidated financial statements. The financial statements of the joint operations are prepared for the same reporting period as the parent Company. (c) Foreign currency: Functional currency is the currency of the primary economic environment in which the subsidiary operates and is normally the currency in which the subsidiary generates and uses cash. Each subsidiary in the Company determines its own functional currency and items included in the consolidated financial statements of each subsidiary are measured using that functional currency. The Company’s functional and presentation currency is the Canadian dollar. Transactions Foreign currency transactions are initially recorded at the functional currency rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at the reporting date. All differences are recorded in the consolidated statements of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. 50 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Translation The assets and liabilities of foreign operations are translated into Canadian dollars at period-end exchange rates and their revenue and expense items are translated at exchange rates prevailing at the dates of the transactions. The resulting exchange differences are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statements of income. (d) Revenue recognition: Revenues are recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenues can be reliably measured. Revenues are measured at the fair value of the consideration received, excluding discounts, rebates and sales taxes or duties. The following specific recognition criteria must be met before revenues are recognized: Sale of goods Revenues from the sale of goods are recognized when the significant risks and rewards of ownership of the goods have transferred to the buyer, usually on the delivery of goods or transfer of title to the customer. Rendering of services Revenues from services rendered are recognized when the stage of completion can be measured reliably. Service revenues include maintenance contracts, extended warranty and other services provided. Stage of completion of the contract is determined as follows: • Revenues from time and material contracts are recognized at the contractual rates as labour hours are delivered and direct expenses are incurred. • Revenues from long-term service contracts are recognized on a percentage of completion basis over the term of the contracts, unless there is a pattern of recognition that more accurately represents the stage of completion. Construction contracts Revenues from construction contracts are recognized using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a percentage of total costs anticipated for each contract. Incentive awards, claims or penalty provisions are recognized when such amounts are likely to occur and can reasonably be estimated. When the outcome of a construction contract cannot be estimated reliably, contract revenues are recognized only to the extent of contract costs incurred that are likely to be recoverable. A complete provision is made for losses on contracts in progress when such losses first become known. Revisions in cost and profit estimates, which can be significant, are reflected in the accounting period in which the relevant facts become known. (e) Investment tax credits and government grants: Investment tax credits are accounted for as a reduction in the cost of the related asset or expense where there is reasonable assurance that such credits will be realized. Government grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions will be met. When the grant relates to an expense item, it is deducted from the cost that it is intended to compensate. When the grant relates to an asset, it is deducted from the cost of the related asset. If a grant becomes repayable, the inception to date impact of the assistance previously recognized in income is reversed immediately in the period in which the assistance becomes repayable. ATS AUTOMATION ANNUAL REPORT 2017 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) (f) Taxes: Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting date, in the countries where the Company operates and generates taxable income. Current income tax related to items recognized directly in equity is also recognized in equity and not in the consolidated statements of income. Management periodically evaluates positions taken in the tax filings with respect to situations in which applicable tax regulations are subject to interpretation, and establishes provisions where appropriate. Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset will be realized or the liability will be settled, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Deferred income taxes are recognized for all taxable temporary differences, except: • When the deferred income tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • In respect of taxable temporary differences associated with investments in subsidiaries and interests in joint operations, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences and carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized, except: • When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • In respect of deductible temporary differences associated with investments in subsidiaries and interests in joint operations, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. 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 the benefit will be recovered. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to offset current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. Deferred income tax related to items recognized outside profit or loss is also recognized outside profit or loss. Deferred income tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity. 52 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Income tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances existing at the acquisition date changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it is incurred during the measurement period or in profit or loss. Revenues, expenses and assets are recognized net of the amount of sales tax, except where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable. Receivables and payables are stated with the amount of sales tax included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of accounts receivable or accounts payable in the consolidated statements of financial position. (g) Non-current assets classified as assets held for sale: Non-current assets classified as assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets are classified as held for sale if their carrying amounts will be derecognized principally through a sale transaction rather than recovered through continuing use. This condition is regarded as being met only when the transaction is highly probable and the assets are available for immediate sale in their present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed transaction within one year from the date of classification. In the consolidated statements of income of the reporting period, and of the comparable period, revenues and expenses from discontinued operations are reported separately from revenues and expenses from continuing operations, down to the level of net income after income taxes. Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortized. (h) Property, plant and equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing component parts of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, ATS derecognizes the replaced part and recognizes the new part with its own associated useful life and depreciation. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the consolidated statements of income as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Buildings Production equipment Other equipment 25 to 40 years 3 to 10 years 3 to 10 years Leasehold improvements are amortized over the shorter of the term of the related lease or their remaining useful life on a straight-line basis. An item of property, plant and equipment or any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or eventual disposition. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statements of income when the asset is derecognized. The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate. ATS AUTOMATION ANNUAL REPORT 2017 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) (i) Leases: The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Finance leases, which transfer to ATS substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Lease payments are apportioned between finance costs and the reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are recognized in the consolidated statements of income. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that ATS will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life and the lease term. Leases where ATS does not assume substantially all of the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. (j) Borrowing costs: Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. (k) Investment property: Investment properties, which are properties held to earn rental income and/or for capital appreciation, are measured at acquisition cost less straight-line depreciation and impairment losses. The depreciation policy for investment property is consistent with the policy for owner-occupied property. (l) Intangible assets: Acquired intangible assets are primarily software, patents, customer relationships, brands, technologies and licenses. Intangible assets acquired separately are initially recorded at fair market value and subsequently at cost less accumulated amortization and impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over their useful economic lives, ranging from 1 to 20 years, on a straight-line basis. Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as a change in accounting estimate. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible assets. Intangible assets with indefinite useful lives, primarily brands, are not amortized. The Company assesses the indefinite life at each reporting date to determine if there is an indication that an intangible asset may be impaired. If any indication exists, or when annual impairment testing for the intangible asset is required, the Company estimates the recoverable amount at the CGU level to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. An asset is impaired when the recoverable amount is less than its carrying amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or its value in use. Impairment losses relating to intangible assets are evaluated for potential reversals when events or changes in circumstances warrant such consideration. 54 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized. Research and development expenditures Research costs are expensed as incurred. Development expenditures on an individual project are recognized as an intangible asset only when the following conditions are demonstrated: • The technical feasibility of completing the intangible asset so that it will be available for use or sale. • The Company’s intention to complete and its ability to use or sell the intangible asset. • How the asset will generate future economic benefits. • The availability of resources to complete the intangible asset. • The ability to measure the expenditures reliably during development. Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the  asset to be carried at cost less any accumulated amortization and accumulated impairment losses. Amortization of the asset begins when development is complete and the asset is available for use. It is amortized over the period of expected future benefit. In the event that a product program for which costs have been deferred is modified or cancelled, the Company will assess the recoverability of the deferred costs and if considered unrecoverable, will expense the costs in the period the assessment is made. (m) Financial instruments: Recognition Financial assets and financial liabilities are recognized on the consolidated statements of financial position when the Company becomes a party to the contractual provisions of the instrument. Classification The Company classifies its financial assets and financial liabilities in the following measurement categories: amortized cost, fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVTOCI”), or derivatives designated as a hedging instrument in an effective hedge. The classification of financial assets depends on the business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are measured at amortized cost where the business model is to hold the financial asset to collect its contractual cash flows. Financial liabilities are classified to be measured at amortized cost, derivatives designated as a hedging instrument in an effective hedge, or they are designated to be measured subsequently at FVTPL. For assets and liabilities measured at fair value, gains and losses are either recorded in profit or loss or other comprehensive income. The Company reclassifies financial assets when and only when its business model for managing those assets changes. Financial liabilities are not reclassified. The Company classifies and measures financial assets (excluding derivatives) on initial recognition as described below: • Cash and cash equivalents and restricted cash are classified as and measured at amortized cost. • Accounts receivable are classified as and measured at amortized cost using the effective interest rate method, less any impairment allowance. Accounts receivable are held within a hold-to-collect business model. The Company does not factor or sell any of its trade receivables. Accounts payable, bank indebtedness, and long-term debt are classified as other financial liabilities and are measured at amortized cost using the effective interest rate method. ATS AUTOMATION ANNUAL REPORT 2017 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Measurement All financial instruments are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issuance of financial instruments classified as amortized costs are included with the carrying value of such instruments. Transaction costs directly attributable to the acquisition of financial instruments classified as FVTPL are recognized immediately in profit or loss. Financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amounts outstanding, are generally measured at amortized cost at the end of the subsequent accounting periods. All other financial assets including equity investments are measured at fair value at the end of subsequent accounting periods, with changes recognized in profit or loss or other comprehensive income (irrevocable election at the time of recognition). Designation at FVTOCI is not permitted if the equity investment is held for trading. The cumulative fair value gain or loss will not be reclassified to profit or loss on the disposal of the investments. Derecognition A financial asset is derecognized when the rights to receive cash flows from the asset have expired or the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either the Company has transferred substantially all the risks and rewards of the asset, or ATS has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statements of income. Impairment The Company recognizes expected credit losses for trade receivables based on the simplified approach under IFRS 9. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk; rather, the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date from the date of the trade receivable. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Trade receivables are reviewed qualitatively on a case-by-case basis to determine whether they need to be written off. Expected credit losses are measured as the difference in the present value of the contractual cash flows that are due to the Company under the contract, and the cash flows that the Company expects to receive. The Company assesses all information available, including past due status, credit ratings, the existence of third- party insurance, and forward-looking macro-economic factors in the measurement of the expected credit losses associated with its assets carried at amortized cost. The Company measures expected credit loss by considering the risk of default over the contract period and incorporates forward-looking information into its measurement. 56 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Fair value of financial instruments The Company primarily applies the market approach for recurring fair value measurements. Three levels of inputs may be used to measure fair value: Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities Level 2 – inputs other than quoted prices included in Level 1 that are observable or can be corroborated by observable market data Level 3 – unobservable inputs that are supported by no market activity (n) Derivative financial instruments and hedge accounting: The Company may use derivative financial instruments such as forward foreign exchange contracts and cross-currency interest rate swaps to hedge its foreign currency risk. The Company designates certain derivative financial instruments as either fair value hedges, cash flow hedges or hedges of net investments in foreign operations. Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged and the type of hedge relationship designated. At the inception of the hedge relationship, the Company documents the economic relationship between the hedging instrument and the hedged item including whether the hedging instrument is expected to offset changes in cash flows of hedged items. At the inception of each hedging relationship, the Company documents its risk management objective, its strategy for undertaking various hedge transactions and how the Company will assess the hedging instrument’s effectiveness in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. The hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine whether they have actually been highly effective throughout the financial reporting periods for which they were designated. Hedges which meet the criteria for hedge accounting are accounted for as follows: Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow reserve, while any ineffective portion is recognized immediately in the consolidated statements of income. Amounts recognized in other comprehensive income and accumulated in equity are transferred to the consolidated statements of income when the hedged item is recognized in profit or loss. These earnings are included within the same line of the consolidated statements of income as the hedged item. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized in other comprehensive income are transferred at the initial carrying amount of the non-financial asset or liability. If the forecasted transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognized in equity is transferred to the consolidated statements of income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in other comprehensive income remains in other comprehensive income until the forecasted transaction or firm commitment affects profit or loss. The Company uses forward foreign exchange contracts as hedges of its exposure to foreign currency risk on anticipated revenues or costs, and cross-currency interest rate swap contracts as hedges of its exposure to foreign-currency-denominated Senior Notes. The Company may use interest rate swap contracts to reduce its exposure to floating interest rates. ATS AUTOMATION ANNUAL REPORT 2017 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Hedges of net investments Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument related to the effective portion of the hedge are recognized in other comprehensive income while any gains or losses related to the ineffective portion are recognized in the consolidated statements of income. On disposal of the foreign operation, the cumulative value of any such gains or losses recorded in equity is transferred to the consolidated statements of income. The Company uses cross-currency interest rate swap contracts as a hedge of its exposure to foreign exchange risk on its investments in foreign subsidiaries. (o) Inventories: Inventories are stated at the lower of cost and net realizable value on a first-in, first-out basis. The cost of raw materials includes purchase cost and costs incurred in bringing each product to its present location and condition. The cost of work in progress and finished goods includes cost of raw materials, labour and related manufacturing overhead, excluding borrowing costs, based on normal operating capacity. Cost of inventories includes the transfer from equity of gains and losses on qualifying cash flow hedges in respect of the purchase of raw materials. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (p) Impairment of non-financial assets: The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use. It is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 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. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses, including impairment on inventories, are recognized in the consolidated statements of income in those expense categories consistent with the function of the impaired asset. (q) Provisions: Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statements of income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Warranty provisions Provisions for warranty-related costs are recognized when the product is sold or the service provided. Initial recognition is based on historical experience and specific known risks. The initial estimate of warranty-related costs is reviewed at the end of each reporting period and adjusted to reflect the current best estimate. 58 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Restructuring provisions Restructuring provisions are only recognized when general recognition criteria for provisions are fulfilled. Additionally, the Company needs to have in place a detailed formal plan about the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs and the appropriate timeline. The people affected have a valid expectation that the restructuring is being carried out or the implementation has been initiated already. Transition expenses The Company recognizes transition expenses at the earlier of the following dates: (a) when the Company can no longer withdraw the offer of those expenses; and (b) when the Company recognizes costs for a transition that is within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and involves the payment of transition benefits. In the case of a voluntary departure, the Company can no longer withdraw an offer of transition expenses when either the employee accepts the offer, or when a restriction on the Company’s ability to withdraw the offer exists. In the case of an involuntary departure, the Company can no longer withdraw an offer of transition benefits when it has communicated to the affected employees a plan of termination. (r) Employee benefits: The Company operates pension plans in accordance with the applicable laws and regulations in the respective countries in which the Company conducts business. The pension benefits are provided through defined benefit and defined contribution plans. The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit method, pro-rated on length of service and management’s best estimate assumptions to value its pensions using a measurement date of March 31. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur in other comprehensive income. Net interest is calculated by applying the discount rate to the net defined benefit liability or asset and is recognized in the selling, general and administrative expenses in the consolidated statements of income. The past service costs are recognized immediately in profit or loss as an expense. The defined benefit asset or liability comprises the present value of the defined benefit obligation using the current interest rate at the reporting date on high quality fixed income investments with maturities that match the expected maturities of the obligation, less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Fair value is based on market price information and in the case of quoted securities it is the published bid price. The value of any defined benefit asset recognized is restricted to the sum of any past service costs and actuarial gains and losses not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. The accounting method for other long-term employee benefit plans is similar to the method used for defined benefit plans, except that all actuarial gains and losses are recognized immediately in the consolidated statements of income. (s) Stock-based payments: The Company operates both equity-settled and cash-settled stock-based compensation plans under which the entity receives services from employees as consideration for equity instruments (options) of the Company or cash payments. ATS AUTOMATION ANNUAL REPORT 2017 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) For equity-settled plans, namely the Employee Share Purchase Plan and the Stock Option Plan, the fair value determined at the grant date is expensed on a proportionate basis consistent with the vesting features of each grant and incorporates an estimate of the number of equity instruments that will ultimately vest. The total amount to be expensed is determined by reference to the fair value of the stock options granted, excluding the impact of any non-market service and performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period). At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest based on the non-market vesting conditions. The impact of the revision of the original estimates, if any, is recognized in the consolidated statements of income with a corresponding adjustment to equity. The proceeds received are credited to share capital and share premiums when the stock options are exercised. For cash-settled plans, namely the Deferred Stock Unit Plan, the Share Appreciation Rights and the Restricted Share Units, the expense is determined based on the fair value of the liability incurred at each award date and at each subsequent statement of financial position date until the award is settled. The fair value of the liability is measured by applying quoted market prices. Changes in fair value are recognized in the consolidated statements of income in stock-based compensation expense. (t) Standards issued but not yet effective: A number of new standards and amendments to standards have been issued but are not yet effective for the financial year ended March 31, 2017 and, accordingly, have not been applied in preparing these consolidated financial statements. This listing is of standards issued which the Company reasonably expects to be applicable at a future date. (i) IFRS 15 – Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which establishes a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. Under IFRS 15, revenues are recognized to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenues. The new revenue standard will supersede all current revenue recognition requirements under IFRS. The standard currently requires a full or modified retrospective application for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not anticipate early adoption and plans to adopt the standard for the annual period beginning on April 1, 2018. The Company has not yet determined the impact on its consolidated financial statements. (ii) IFRS 16 – Leases In January 2016, the IASB issued IFRS 16 – Leases, which requires lessees to recognize assets and liabilities for most leases. There are minimal changes to the existing accounting in IAS 17 – Leases from the perspective of lessors. The new standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted provided IFRS 15 has been adopted or is adopted at the same date. The Company does not anticipate early adoption and plans to adopt the standard for the annual period beginning on April 1, 2019. The Company has not yet determined the impact on its consolidated financial statements. 60 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 4. Critical accounting estimates and assumptions The preparation of the Company’s consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the end of the reporting period. However, uncertainty about these estimates, judgments and assumptions could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The Company based its estimates, judgments and assumptions on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the estimates when they occur. The following are the critical judgments, estimates and assumptions that have been made in applying the Company’s accounting policies and that have the most significant effect on the amounts in the consolidated financial statements: (a) Revenue recognition and contracts in progress: Revenues from construction contracts are recognized on a percentage of completion basis as outlined in note 3(d) “Revenue Recognition – Construction Contracts.” In applying the accounting policy on construction contracts, judgment is required in determining the expected profitability of the contract and the estimated costs to complete a contract. These factors are reviewed at each reporting period and by their nature may give rise to income volatility. (b) Income taxes: Deferred income tax assets, disclosed in note 16, are recognized to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred income tax assets that can be recognized based upon the likely timing and level of future taxable income together with future tax planning strategies. If the assessment of the Company’s ability to utilize the deferred income tax asset changes, the Company would be required to recognize more or fewer deferred income tax assets, which would increase or decrease income tax expense in the period in which this is determined. The Company establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous taxation audits and differing interpretations of tax regulations by the taxable entity and the respective tax authority. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all the relevant factors. The Company reviews the adequacy of these provisions at each quarter. However, it is possible that at some future date an additional liability could result from audits by the taxation authorities. Where the final tax outcome of these matters is different from the amount initially recorded, such differences will affect the tax provisions in the period in which such determination is made. (c) Stock-based payment transactions: The Company measures the cost of transactions with employees by reference to the fair value of the equity instruments. Estimating fair value for stock-based payment transactions requires the determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the future forfeiture rate, the expected life of the share option, weighted average risk-free interest rate, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for stock-based payment transactions are disclosed in note 17 to the consolidated financial statements. ATS AUTOMATION ANNUAL REPORT 2017 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) (d) Impairment of non-financial assets: Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. As disclosed in notes 9 and 10 to the consolidated financial statements, the calculations involve significant estimates and assumptions. Items estimated include cash flows, discount rates and assumptions on revenue growth rates. These estimates could affect the Company’s future results if the current estimates of future performance and fair values change. (e) Employee benefits: The cost of defined benefit pension plans, the cost of other long-term employee benefit plans and the present value of the pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country. Further details about the assumptions used are provided in note 13. (f) Fair value measurement: Acquisitions that meet the definition of a business combination require the Company to recognize the assets acquired and liabilities assumed at their fair value on the date of the acquisition. The calculation of fair value of the assets and liabilities may require the use of estimates and assumptions, based on discounted cash flows, market information and using independent valuations and management’s best estimates. 5. Construction contracts and inventories As at Contracts in progress: Costs incurred Estimated earnings Progress billings Disclosed as: Costs and earnings in excess of billings on contracts in progress Billings in excess of costs and earnings on contracts in progress March 31, 2017 March 31, 2016 $ 1,273,795 $ 1,338,603 440,017 1,713,812 (1,665,594) 48,218 144,708 (96,490) 48,218 415,450 1,754,053 (1,677,486) 76,567 202,694 (126,127) 76,567 $ $ $ $ $ $ 62 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) As at Inventories are summarized as follows: Raw materials Work in progress Finished goods March 31, 2017 March 31, 2016 $ $ 11,597 34,616 1,768 47,981 $ $ 11,328 32,530 2,342 46,200 The amount charged to net income and included in cost of revenues for the write-down of inventories for valuation issues during the year ended March 31, 2017 was $545 (March 31, 2016 – $233). The amount of inventories carried at net realizable value as at March 31, 2017 was $1,298 (March 31, 2016 – $1,664). 6. Deposits, prepaids and other assets As at Prepaid assets Restricted cash(i) Supplier deposits Forward foreign exchange contracts Other assets (i) Restricted cash primarily consists of cash collateralized to secure letters of credit. March 31, 2017 March 31, 2016 $ $ 8,864 426 5,768 1,051 10 7,557 443 8,842 5,453 29 $ 16,119 $ 22,324 ATS AUTOMATION ANNUAL REPORT 2017 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 7. Property, plant and equipment Buildings and leaseholds Production equipment Other equipment Land Total Cost: Balance, at March 31, 2015 $ 20,673 $ 85,458 $ 14,964 $ 35,720 $ 156,815 Additions Disposals Exchange and other adjustments – 1,453 897 (4,978) (24,381) (2,737) 7,700 (4,438) 10,050 (36,534) 924 5,090 1,051 474 7,539 Balance, at March 31, 2016 $ 16,619 $ 67,620 $ 14,175 $ 39,456 $ 137,870 Additions Disposals Exchange and other adjustments – – 2,247 (334) 713 (696) 6,932 (3,003) 9,892 (4,033) (193) (503) (220) (759) (1,675) Balance, at March 31, 2017 $ 16,426 $ 69,030 $ 13,972 $ 42,626 $ 142,054 Buildings and leaseholds Production equipment Other equipment Land Total Depreciation: Balance, at March 31, 2015 $ – $ (41,777) $ (11,390) $ (19,747) $ (72,914) Depreciation expense Disposals Exchange and other adjustments – – – (3,222) 13,091 (2,480) (885) 2,727 (838) (5,574) 3,962 (677) (9,681) 19,780 (3,995) Balance, at March 31, 2016 $ – $ (34,388) $ (10,386) $ (22,036) $ (66,810) Depreciation expense Disposals Exchange and other adjustments – – – (3,150) (1,027) 139 501 573 189 (6,315) 2,754 325 (10,492) 3,466 1,015 Balance, at March 31, 2017 $ – $ (36,898) $ (10,651) $ (25,272) $ (72,821) Net book value: At March 31, 2017 At March 31, 2016 $ $ 16,426 $ 32,132 $ 3,321 $ 17,354 $ 69,233 16,619 $ 33,232 $ 3,789 $ 17,420 $ 71,060 Included in other equipment as at March 31, 2017 is $197 (March 31, 2016 – $301) of assets which are under construction and have not been depreciated. 64 ATS AUTOMATION ANNUAL REPORT 2017 8. Other assets As at Investment property Cross-currency interest rate swap instrument(i) (i) The details of this instrument are presented in note 11 to the consolidated financial statements. Change in Investment Property Balance, at April 1 Foreign exchange adjustment Balance, at March 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) March 31, 2017 March 31, 2016 $ $ $ $ 4,043 9,248 13,291 2017 4,211 (168) 4,043 $ $ $ $ 4,211 – 4,211 2016 3,880 331 4,211 The estimated fair value of the Company’s investment property at March 31, 2017 and March 31, 2016 approximates its carrying value, based on comparable market data for similar properties. The investment property is a plot of vacant land which does not earn any rental income nor incur any direct operating expenses, including repairs and maintenance. 9. Goodwill The carrying amount of goodwill acquired through business combinations has been allocated to a group of CGUs which combine to form a single operating segment, Automation Systems Group, as follows: As at Automation Systems Group Balance, at April 1 Acquisition – PA Foreign exchange Balance, at March 31 March 31, 2017 March 31, 2016 $ 423,250 $ 431,747 2017 2016 $ 431,747 $ 405,881 – (8,497) 923 24,943 $ 423,250 $ 431,747 The Company performed its annual impairment test of goodwill as at March 31, 2017. The recoverable amount of the group of CGUs is determined based on fair value less costs to sell using a capitalized EBITDA approach. This approach requires management to estimate maintainable future EBITDA and capitalize this amount by rates of return which incorporate the specific risks and opportunities facing the business. EBITDA includes income before income taxes, net finance costs, depreciation and amortization. In determining a maintainable future EBITDA, the historical operating results for the five years ended March 31, 2017 were compared to the budgeted results for the year ending March 31, 2018, as presented to and approved by the Board of Directors. Non-recurring and unusual items have been adjusted in order to normalize past EBITDA. Management selected capitalization rates in the range of 8.3% to 12.5% for the calculation of the reasonable range of capitalized EBITDA. As a result of the analysis, management did not identify impairment for this group of CGUs. Management believes that any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the group of CGUs. ATS AUTOMATION ANNUAL REPORT 2017 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 10. Intangible assets Development projects Computer software, licenses and other Technology Customer relationships Brands Total $ 10,419 $ 36,695 $ 21,605 $ 166,088 $ 12,238 $ 247,045 2,599 3,012 – (873) – – – – – – 5,611 (873) 472 (10,502) 1,723 17,242 1,046 9,981 $ 13,490 $ 28,332 $ 23,328 $ 183,330 $ 13,284 $ 261,764 2,699 5,307 – (33) – – – – – – 8,006 (33) (346) (429) (796) (6,372) (530) (8,473) $ 15,843 $ 33,177 $ 22,532 $ 176,958 $ 12,754 $ 261,264 Development projects Computer software, licenses and other Technology Customer relationships Brands Total $ (4,124) $ (23,481) $ (7,656) $ (28,174) $ (1,512) (6,087) (2,639) (19,443) – 782 – – (64) 10,750 (640) (2,411) $ (5,700) $ (18,036) $ (10,935) $ (50,028) $ (611) (3,492) (2,535) (17,432) – 71 33 – – 306 373 2,791 $ (6,240) $ (21,189) $ (13,097) $ (64,669) $ – – – – – – – – – $ (63,435) (29,681) 782 7,635 $ (84,699) (24,070) 33 3,541 $ (105,195) Cost: Balance, at March 31, 2015 Additions Disposals Exchange and other adjustments Balance, at March 31, 2016 Additions Disposals Exchange and other adjustments Balance, at March 31, 2017 Amortization: Balance, at March 31, 2015 Amortization Disposals Exchange and other adjustments Balance, at March 31, 2016 Amortization Disposals Exchange and other adjustments Balance, at March 31, 2017 Net book value: At March 31, 2017 $ 9,603 $ 11,988 $ 9,435 $ 112,289 $ 12,754 $ 156,069 At March 31, 2016 $ 7,790 $ 10,296 $ 12,393 $ 133,302 $ 13,284 $ 177,065 66 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) As at March 31, 2017, there are no intangible assets included in computer software, licenses and other intangibles that are in development and have not been depreciated (none at March 31, 2016). Research and development costs that are not eligible for capitalization have been expensed and are recognized in cost of revenues. The Company performed its annual impairment test of indefinite-lived intangible assets as at March 31, 2017. The recoverable amount of acquired brand intangible assets was estimated based on a value-in-use calculation using the present value of the future cash flows expected to be derived by the related subsidiaries. This approach requires management to estimate cash flows which include EBIT less income taxes, depreciation and amortization and capital expenditures. In determining future cash flows, the budgeted results for the year ending March 31, 2018, as presented to and approved by the Board of Directors, were extrapolated for a five-year period. Management used pre-tax discount rates in the range of 15% to 20% to determine the present value of the future cash flows. As a result of the analysis, management did not identify an impairment of the intangible assets and any reasonable change in assumptions would not result in impairment. 11. Financial instruments and risk management (a) Summary of financial instruments (i) Categories of financial instruments: The carrying values of the Company’s financial instruments are classified into the following categories: As at Fair value through profit or loss Amortized cost Fair value through other comprehensive income Financial assets: Cash and cash equivalents $ Trade accounts receivable Financial liabilities: Bank indebtedness Trade accounts payable and accrued liabilities Long-term debt Derivative instruments: Held for trading derivatives that are not designated in hedge accounting relationships – loss(i) Derivative instruments in designated hedge accounting relationships – loss(i) Cross-currency interest rate swap – gain(ii) – – – – – (966) – – $ 286,697 $ 146,465 (1,411) (140,707) (327,268) – – – – – – – – – (740) 9,248 March 31, 2017 Total carrying value $ 286,697 146,465 (1,411) (140,707) (327,268) (966) (740) 9,248 ATS AUTOMATION ANNUAL REPORT 2017 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) As at Fair value through profit or loss Amortized cost Fair value through other comprehensive income Financial assets: Cash and cash equivalents $ Trade accounts receivable Financial liabilities: Bank indebtedness Trade accounts payable and accrued liabilities Long-term debt Derivative instruments: Held for trading derivatives that are not designated in hedge accounting relationships – gain(i) Derivative instruments in designated hedge accounting relationships – gain(i) Cross-currency interest rate swap – loss(ii) – – – – – 1,961 – – $ 170,034 $ 182,998 (2,319) (138,610) (321,379) – – – March 31, 2016 Total carrying value $ 170,034 182,998 (2,319) (138,610) (321,379) 1,961 – – – – – – 2,416 2,416 (1,197) (1,197) (i) Derivative financial instruments in a gain position are included in deposits, prepaids and other assets and derivative financial instruments in a loss position are included in accounts payable and accrued liabilities on the consolidated statements of financial position. (ii) The cross-currency interest rate swap instrument in a gain position is included in other assets on the consolidated statements of financial position. The cross-currency interest rate swap instrument in a loss position is included in accounts payable and accrued liabilities on the consolidated statements of financial position. During the years ended March 31, 2017 and March 31, 2016, there were no changes in the classification of financial assets as a result of a change in the purpose or use of those assets. 68 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) (ii) Fair value measurements: The following table summarizes the Company’s financial instruments that are carried or disclosed at fair value and indicates the fair value hierarchy that reflects the significance of the inputs used in making the measurements: As at March 31, 2017 Carrying value Level 1 Level 2 Level 3 Fair value total Measured at fair value: Held for trading derivatives that are not designated in hedge accounting relationships Derivative instruments in designated hedge accounting relationships $ (966) $ – $ (966) $ – $ (966) Cross-currency interest rate swap 9,248 – 9,248 (740) – (740) – (740) – 9,248 Disclosed at fair value: Investment property Bank indebtedness Long-term debt As at Measured at fair value: Held for trading derivatives that are not designated in hedge accounting relationships Derivative instruments in designated hedge accounting relationships Cross-currency interest rate swap Disclosed at fair value: Investment property Bank indebtedness Long-term debt 4,043 (1,411) – – – 4,043 4,043 (1,411) – (1,411) (327,268) – (327,268) – (327,268) Carrying value Level 1 Level 2 Level 3 Fair value total March 31, 2016 $ 1,961 $ – $ 1,961 $ – $ 1,961 2,416 (1,197) – 2,416 – 2,416 – (1,197) – (1,197) 4,211 (2,319) (321,379) – – – 4,211 4,211 (2,319) – (2,319) – (321,379) – (321,379) The estimated fair values of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximate their respective carrying values due to the short period to maturity. The estimated fair value of long-term debt approximates the carrying value due to interest rates approximating current market values. Derivative financial instruments are carried at fair value. The fair value of the Company’s derivative instruments is estimated using a discounted cash flow technique incorporating inputs that are observable in the market or can be derived from observable market data. The derivative contract counterparties are highly rated multinational financial institutions. During the years ended March 31, 2017 and March 31, 2016, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements. ATS AUTOMATION ANNUAL REPORT 2017 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) (b) Risks arising from financial instruments and risk management The Company manages its market risk through the use of various financial derivative instruments. The Company uses these instruments to mitigate exposure to fluctuations in foreign exchange rates. The Company’s strategy, policies and controls are designed to ensure that the risks it assumes comply with the Company’s internal objectives and its risk tolerance. The Company does not enter into derivative financial agreements for speculative purposes. As such, any change in cash flows associated with derivative instruments is designed to be offset by changes in cash flows of the relevant risk being hedged. When appropriate the Company applies hedge accounting. Hedging does not guard against all risks and is not always effective. The Company may recognize financial losses as a result of volatility in the market values of these contracts. The fair values of these instruments represent the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The fair value of these derivatives is determined using valuation techniques such as discounted cash flow analysis. The valuation technique incorporates all factors that would be considered in setting a price, including the Company’s own credit risk as well as the credit risk of the counterparty. Foreign currency risk The Company transacts business in multiple currencies, the most significant of which are the Canadian dollar, the U.S. dollar and the Euro. As a result, the Company has foreign currency exposure with respect to items denominated in foreign currencies which may have an impact on operating results and cash flows. The types of foreign exchange risk can be categorized as follows: Translation exposure Each foreign operation’s assets and liabilities are translated from the subsidiary’s functional currency into Canadian dollars using the exchange rates in effect at the consolidated statement of financial position dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in income when there has been a reduction in the net investment in the foreign operations. Foreign currency risks arising from the translation of assets and liabilities of foreign operations into the Company’s functional currency are hedged under certain circumstances. The Company has assessed the net foreign currency exposure of operations relative to their own functional currency. A fluctuation of +/- 5% in the Euro and U.S. dollar, provided as an indicative range in a volatile currency environment, would, everything else being equal, have an effect on accumulated other comprehensive income for the year ended March 31, 2017 of approximately +/- $26,190 and $9,562, respectively (2016 +/- $15,885 and $2,105) and on income before income taxes for the year ended March 31, 2017 of approximately +/- $121 and $84, respectively (2016 +/- $30 and $1,525). Foreign-currency-based earnings are translated into Canadian dollars each period at prevailing rates. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net income. Transaction exposure The Company generates significant revenues in foreign currencies, which exceed the natural hedge provided by purchases of goods and services in those currencies. The Company’s risk management objective is to reduce cash flow risk related to foreign-currency-denominated cash flows. In order to manage foreign currency exposure in subsidiaries which have transaction exposure in currencies other than the subsidiary’s functional currency, the Company enters into forward foreign exchange contracts. The timing and amount of these forward foreign exchange contracts are estimated based on existing customer contracts on hand or anticipated, current conditions in the Company’s markets and the Company’s past experience. As such, there is not a material transaction exposure. 70 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) The Company’s U.S.-dollar-denominated Senior Notes are translated into Canadian dollars at the foreign exchange rate in effect at the consolidated statement of financial position dates. As a result, the Company is exposed to foreign currency translation gains and losses. The Company uses cross-currency interest rate swaps as derivative financial instruments to hedge a portion of its foreign exchange risk related to the Senior Notes. The balance of the Senior Notes is designated as a hedge of the U.S.-dollar-denominated net investment in foreign operations. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. In relation to its debt financing, the Company is exposed to changes in interest rates, which may impact the Company’s borrowing costs. Floating rate debt exposes the Company to fluctuations in short-term interest rates. The Company manages interest rate risk on a portfolio basis and seeks financing terms in individual arrangements that are most advantageous taking into account all relevant factors, including credit margin, term and basis. The risk management objective is to minimize the potential for changes in interest rates to cause adverse changes in cash flows to the Company. As at March 31, 2017, $820 or 0.2% (March 31, 2016 – $4,802 or 1%) of the Company’s total debt is subject to movements in floating interest rates. A +/- 1% change in interest rates in effect for the fiscal year would, all things being equal, have an impact of +/- $8 on income before income taxes for the year ended March 31, 2017 (March 31, 2016 +/- $48). Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to credit risk consist mainly of cash and cash equivalents, accounts receivable and derivative financial instruments. The carrying values of these assets represent management’s assessment of the associated maximum exposure to such credit risk. Cash and cash equivalents are held by major financial institutions. Substantially all of the Company’s trade accounts receivable are due from customers in a variety of industries and, as such, are subject to normal credit risks from their respective industries. The Company regularly monitors customers for changes in credit risk. The Company does not believe that any single industry or geographic region represents significant credit risk. Credit risk concentration with respect to trade receivables is mitigated by the Company’s client base being primarily large, multinational customers and a portion of these balances being insured by a third party. Trade receivables – aged by due date as at Current 1 – 30 days 31 – 60 days 61 – 90 days Over 90 days Total March 31, 2017 March 31, 2016 $ 121,029 $ 134,778 11,868 4,721 4,768 5,838 33,322 6,178 3,267 7,986 $ 148,224 $ 185,531 The movement in the Company’s allowance for doubtful accounts for the years ended March 31 was as follows: Balance, at April 1 Provisions and revisions Foreign exchange Balance, at March 31 2017 2,533 (757) (17) $ 2016 2,289 315 (71) 1,759 $ 2,533 $ $ ATS AUTOMATION ANNUAL REPORT 2017 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) The Company minimizes credit risk associated with derivative financial instruments by only entering into derivative transactions with highly rated multinational financial institutions, in order to reduce the risk of counterparty default. The Company reviews counterparty credit ratings on a regular basis and sets credit limits when deemed necessary. Liquidity risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. The Company’s process for managing liquidity risk includes ensuring, to the extent possible, that it will have sufficient liquidity to meet its liabilities when they become due. The Company requires authorizations for expenditures on projects and prepares annual capital expenditure budgets to assist with the management of capital. The Company’s accounts payable primarily have contractual maturities of less than 90 days, and the contractual cash flows equal their carrying value. Trade payables – aged by due date as at 0 – 30 days 31 – 60 days 61 – 90 days Over 90 days Total March 31, 2017 March 31, 2016 $ 47,768 $ 40,300 8,663 1,959 1,163 7,751 2,696 4,221 $ 59,553 $ 54,968 As at March 31, 2017, the Company was holding cash and cash equivalents of $286,697 (March 31, 2016 – $170,034) and had unutilized lines of credit of $639,050 (March 31, 2016 – $638,712). On June 17, 2015, the Company completed a private placement of U.S. $250,000 aggregate principal amount of senior notes as described in note 14 to the consolidated financial statements. The Company expects that continued cash flows from operations in fiscal 2018, together with cash and cash equivalents on hand and available credit facilities, will be more than sufficient to fund its requirements for investments in working capital, property, plant and equipment and strategic investments including some potential acquisitions, and that the Company’s credit ratings provide reasonable access to capital markets to facilitate future debt issuance. The Company’s long-term debt obligations and scheduled interest payments are presented in note 14 to the consolidated financial statements. (c) Hedge accounting and risk management contracts Cash flow hedges – foreign currency risk of forecasted purchases and sales The Company manages foreign exchange risk on its highly probable forecasted revenue and purchase transactions denominated in various foreign currencies. The Company has identified foreign exchange fluctuation risk as the hedged risk. To mitigate the risk, forward currency contracts are designated as the hedging instrument and are entered into to hedge a portion of the purchases and sales. The forward currency contracts limit the risk of variability in cash flows arising from foreign currency fluctuations. The Company has established a hedge ratio of 1:1 for all of its hedging relationships. The Company has identified counterparty credit risk as the only potential source of hedge ineffectiveness. Cash flow hedges – foreign currency risk on foreign-currency-denominated Senior Notes The Company uses cross-currency interest rate swaps as derivative financial instruments to hedge a portion of its foreign exchange risk related to its U.S.-dollar-denominated Senior Notes. On March 29, 2016, the Company entered into a cross-currency interest rate swap instrument to swap U.S. $150,000 into Canadian dollars. The Company will receive interest of 6.50% U.S. per annum and pay interest of 6.501% Canadian. The terms of the hedging relationship will end on June 15, 2023. The Company has established a hedge ratio of 1:1 for all of its hedging relationships. The Company has identified counterparty credit risk as the only potential source of hedge ineffectiveness. 72 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) During the years ended March 31, 2017 and March 31, 2016 there were no unrealized gains or losses recognized in selling, general and administrative expenses for the ineffective portion of cash flow hedges. Hedge of Euro-denominated net investment in foreign operations The Company manages foreign exchange risk on its Euro-denominated net investments. The Company uses a cross-currency interest rate swap as derivative financial instruments to hedge a portion of the foreign exchange risk related to its Euro-denominated net investment. On March 29, 2016, the Company entered into a cross- currency interest rate swap instrument to swap 134,084 Euros into Canadian dollars. The Company will receive interest of 6.501% Canadian per annum and pay interest of 5.094% Euro. The terms of the hedging relationship will end on June 15, 2023. The Company has established a hedge ratio of 1:1 for all of its hedging relationships. The Company has identified counterparty credit risk as the only potential source of hedge ineffectiveness. The following table summarizes the Company’s outstanding cash flow hedge positions to buy and sell foreign currencies under forward foreign exchange contracts and cross-currency interest rate swaps: As at March 31, 2017 Currency sold Currency bought Carrying amount Hedging instrument Hedged item Cash flow hedge reserves Nominal amount (in CAD dollars) Assets Liabilities Changes in fair value used for calculating hedge ineffectiveness Changes in fair value used for calculating hedge ineffectiveness For continuing hedges For discontinued hedges Derivative hedging instruments(i) U.S. dollars U.S. dollars U.S. dollars Euros Euros British pounds Cross-currency interest rate swap instruments(ii) Canadian dollars 46,757 Euros Turkish lira U.S. dollars Canadian dollars Canadian dollars 1,631 321 5,618 5,803 33 – – 6 65 55 – U.S. dollars Canadian dollars Canadian dollars Euros 199,500 190,239 40 9,208 817 45 – – – 4 – – 817 45 6 65 55 4 817 817 45 6 65 55 4 45 6 65 55 4 40 9,208 40 9,208 40 9,208 – – – – – – – – As at March 31, 2016 Currency sold Currency bought Carrying amount Hedging instrument Hedged item Cash flow hedge reserves Nominal amount (in CAD dollars) Assets Liabilities Changes in fair value used for calculating hedge ineffectiveness Changes in fair value used for calculating hedge ineffectiveness For continuing hedges For discontinued hedges Derivative hedging instruments(i) U.S. dollars U.S. dollars Euros Euros Chinese renminbi British pounds Canadian dollars Canadian dollars Euros U.S. dollars Canadian dollars Canadian dollars Canadian dollars Euros 47,110 3,441 591 697 241 552 813 Cross-currency interest rate swap instruments(ii) U.S. dollars Canadian dollars Canadian dollars Euros 194,805 198,136 2,236 79 – 68 5 9 38 51 – – – 19 – – – – – 1,248 2,236 2,236 2,236 79 19 68 5 9 38 51 – 79 19 68 5 9 38 51 – 79 19 68 5 9 38 51 – – – – – – – – – – (i) Derivative hedging instruments in a gain position are included in deposits, prepaids and other assets and derivative hedging instruments in a loss position are included in accounts payable and accrued liabilities on the consolidated statements of financial position. (ii) The cross-currency interest rate swap instrument in a gain position is included in other assets on the consolidated statements of financial position. The cross-currency interest rate swap instrument in a loss position is included in accounts payable and accrued liabilities on the consolidated statements of financial position. ATS AUTOMATION ANNUAL REPORT 2017 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) As at March 31, 2017, the Company is holding the following forward foreign exchange contracts to hedge the exposure on its revenues and purchases: As at March 31, 2017 Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months Currency sold bought amount hedged rate amount hedged rate amount hedged rate amount hedged rate Currency Nominal Average Nominal Average Nominal Average Nominal Average Canadian dollars 16,459 Euros 1,100 Turkish lira U.S. dollars 1.282 1.102 34.980 1.078 1.309 1.408 1.060 1.841 18,500 157 128 57 812 – 1.303 1.128 35.000 1.064 1.308 – 16,652 374 – 177 – – 1.326 1.096 – 1.070 – – 3,857 1.312 – – – – – – – – – – 1,703 1.065 1,703 1.071 1,703 1.078 – – – – – – 193 958 7,898 5,803 1,703 33 U.S. dollars Canadian dollars Euros Euros Canadian dollars U.S. dollars British pounds Canadian dollars Less than 3 months 3 to 6 months 6 to 9 months 9 to 12 months 1 to 2 years Average Average Average Average Average Currency Nominal hedged Nominal hedged Nominal hedged Nominal hedged Nominal hedged bought amount rate amount rate amount rate amount rate amount rate March 31, 2016 Revenue hedges U.S. dollars U.S. dollars U.S. dollars Euros Purchase hedges As at Currency sold Revenue hedges U.S. dollars U.S. dollars Euros Euros 1.317 0.903 1.104 – 0.205 1.830 1.361 6,883 1,900 – 901 – 121 – 1.345 0.893 – 1.509 – 1.835 – 7,792 559 – 37 – 121 – 1.394 0.891 – 1.689 – 1.838 – 7,013 1.408 10,390 1.374 – – – – – – – – 106 – 1.839 – – – – – 37 – – – – – 1.841 – Canadian dollars 15,032 Euros U.S. dollars Canadian dollars 982 591 – 241 Chinese renminbi Canadian dollars Purchase hedges British pounds Canadian dollars 166 Euros Canadian dollars 1,054 74 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) The following summarizes the Company’s amounts included in other comprehensive income that relate to hedge accounting: As at March 31, 2017 Change in the value of the hedging Amount reclassified Hedge from the cash Line item affected instrument ineffectiveness flow hedge reserve in profit or loss recognized in OCI recognized in to profit or loss because of the Cash flow hedges gain/(loss) profit or loss gain/(loss) reclassification Foreign exchange risk: Revenue hedges Purchase hedges Senior Notes hedge (3,300) 144 3,130 Euro net investment hedge 10,445 As at – – – – (413) 126 – – Revenues Cost of revenues Selling, general and administrative Net finance costs March 31, 2016 Change in the value of from the cash Line item affected Cash flow hedges in OCI gain/(loss) instrument recognized recognized in profit or loss profit or loss gain/(loss) the hedging Hedge ineffectiveness flow hedge reserve to in profit or loss because of the reclassification Amount reclassified Foreign exchange risk: Revenue hedges Purchase hedges Senior Notes hedge 5,588 (143) (1,970) Euro net investment hedge (1,197) Instruments not subject to hedge accounting – – – – 4,170 (33) – – Revenues Cost of revenues Selling, general and administrative Net finance costs As part of the Company’s risk management strategy, forward contract derivative financial instruments are used to manage foreign currency exposure related to the translation of foreign currency net assets to the subsidiary’s functional currency. As these instruments have not been designated as hedges, the change in fair value is recorded in selling, general and administrative expenses in the consolidated statements of income. For the year ended March 31, 2017, the Company recorded risk management gains of $4,970 (gains of $3,765 for the year ended March 31, 2016) on foreign currency risk management forward contracts in the consolidated statements of income. Included in these amounts were unrealized gains of $1,044 (gains of $1,961 during the year ended March 31, 2016) representing the change in fair value. In addition, during the year ended March 31, 2017, the Company realized gains in foreign exchange of $3,926 (gains of $1,804 during the year ended March 31, 2016), which were settled. ATS AUTOMATION ANNUAL REPORT 2017 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 12. Provisions Warranty Restructuring Executive transition expenses Other Total $ 7,702 $ 1,419 $ – $ 1,298 $ 10,419 6,292 (2,108) (3,962) 9,681 – (9,251) 295 220 4,976 11,516 – – – – (7,822) 32,465 (2,108) (21,035) 11 526 $ 8,219 $ 2,069 $ 4,976 $ 5,003 $ 4,662 (1,969) (2,620) 2,337 – (3,424) – – (4,976) 6,371 – (6,412) 20,267 13,370 (1,969) (17,432) (117) (4) $ 8,175 $ 978 $ – – 9 (112) $ 4,971 $ 14,124 Balance, at March 31, 2015 Provisions made Provisions reversed Provisions used Exchange adjustments Balance, at March 31, 2016 Provisions made Provisions reversed Provisions used Exchange adjustments Balance, at March 31, 2017 Warranty provisions Warranty provisions are related to sales of products and are based on experience reflecting statistical trends of warranty costs. Restructuring Restructuring charges are recognized in the period incurred and when the criteria for provisions are fulfilled. Termination benefits are recognized as a liability and an expense when the Company is demonstrably committed through a formal restructuring plan. Executive transition expenses Further details of the executive transition expenses are provided in note 23. 76 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 13. Employee benefits The Company operates pension plans for certain of its employees through defined contribution plans, defined benefit plans and other long-term employee benefit plans. The costs associated with defined contribution plans are expensed as incurred. The most recent actuarial valuations of the defined benefit plans and other long- term employee benefit plans were completed as at March 31, 2017. The next valuations are scheduled to be as at March 31, 2018. The changes in the fair value of assets, the employee benefit obligation and the funded status were as follows: As at Accrued benefit obligations: Opening balance Interest cost Service cost Assumption changes Transfers and benefits paid Executive transition expenses(i) Foreign exchange Accrued benefit obligations, ending balance Plan assets: Opening balance Interest income included in net interest expense Company contributions Foreign exchange Plan assets, ending balance Employee benefits liability March 31, 2017 March 31, 2016 $ 30,739 $ 26,868 742 1,171 (1,573) (797) – (710) 29,572 2,487 177 305 (65) 2,904 26,668 $ $ $ $ 601 1,571 (1,211) (797) 2,089 1,618 30,739 2,091 70 206 120 2,487 28,252 $ $ $ $ (i) Further details of the executive transition expenses are provided in note 23. Amounts recognized in the consolidated statements of comprehensive income (before tax) were: As at Total actuarial gains (losses) recognized in OCI March 31, 2017 March 31, 2016 $ (569) $ 1,099 The significant weighted average annual actuarial assumptions used in measuring the accrued benefit obligation were: Discount rate Rate of compensation increase March 31, 2017 March 31, 2016 2.5% 1.3% 2.5% 2.5% ATS AUTOMATION ANNUAL REPORT 2017 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Sensitivity analysis Significant actuarial assumptions for the determination of the defined obligation are the discount rate and life expectancy. The sensitivity analyses have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. As at March 31, 2017, the following quantitative analysis shows changes to the significant actuarial assumptions and the corresponding impact to the accrued benefit obligations: Discount rate Life expectancy 1% increase 1% decrease Increase by 1 year Decrease by 1 year Accrued benefit obligations $ (3,710) $ 4,641 $ 962 $ (950) The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. The weighted average allocations of plan assets were: As at Other March 31, 2017 March 31, 2016 100.0% 100.0% No plan assets were directly invested in the Company’s securities. The net employee benefits expense included the following components: Years ended Defined benefit plans Service cost Interest cost Executive transition expenses Defined contribution plans Net employee benefits expense March 31, 2017 March 31, 2016 $ 1,171 $ 742 – 1,913 3,282 5,195 $ $ 1,571 601 2,089 4,261 3,513 7,774 The Company expects to contribute $305 to its defined benefit plans during the year ended March 31, 2018. The cumulative actuarial losses, net of income taxes, recognized in retained earnings as at March 31, 2017 was $5,288 (March 31, 2016 – $4,876). 78 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 14. Bank indebtedness and long-term debt On June 17, 2015, the Company completed a private placement of U.S. $250,000 aggregate principal amount of senior notes (the “Senior Notes”). Transaction fees of $7,200 were deferred and are being amortized over the term of the Senior Notes. The Senior Notes are unsecured, were issued at par, bear interest at a rate of 6.50% per annum and mature on June 15, 2023. ATS used the majority of net proceeds from the Senior Notes to repay amounts outstanding under its senior secured credit facility, with the balance to be used for general corporate purposes. The Company may redeem the Senior Notes, in whole at any time or in part from time to time, at specified redemption prices and subject to certain conditions required by the Senior Notes. If the Company experiences a change of control, the Company may be required to repurchase the Senior Notes, in whole or in part, at a purchase price equal to 101% of the aggregate principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. The Senior Notes contain customary covenants that restrict, subject to certain exceptions and thresholds, some of the activities of the Company and its subsidiaries, including the Company’s ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, and engage in specified transactions with affiliates. Subject to certain exceptions, the Senior Notes are guaranteed by each of the subsidiaries of the Company that is a borrower or has guaranteed obligations under the Credit Facility. On March 29, 2016, the Company entered into a cross-currency interest rate swap instrument to swap U.S. $150,000 into Canadian dollars to hedge a portion of its foreign exchange risk related to its U.S.-dollar-denominated Senior Notes. The Company will receive interest of 6.50% U.S. per annum and pay interest of 6.501% Canadian. On March 29, 2016, the Company entered into a cross-currency interest rate swap instrument to swap 134,084 Euros into Canadian dollars to hedge a portion of the foreign exchange risk related to its Euro-denominated net investment. The Company will receive interest of 6.501% Canadian per annum and pay interest of 5.094% Euros. The terms of the hedging relationships will end on June 15, 2023. The details of this instrument are presented in note 11 to the consolidated financial statements. The Company’s senior secured credit facility (the “Credit Facility”) provides a committed revolving credit facility of $750,000. The Credit Facility is secured by (i) the Company’s assets, including real estate; (ii) assets, including certain real estate, of certain of the Company’s North American subsidiaries; and (iii) a pledge of shares of certain of the Company’s non-North American subsidiaries. Certain of the Company’s subsidiaries also provide guarantees under the Credit Facility. At March 31, 2017, the Company had utilized $115,034 under the Credit Facility, by way of letters of credit (March 31, 2016 – $115,053). The Credit Facility matures on August 29, 2018. The Credit Facility is available in Canadian dollars by way of prime rate advances and/or bankers’ acceptances, in U.S. dollars by way of base rate advances and/or LIBOR advances, in Swiss francs, Euros and British pounds sterling by way of LIBOR advances and by way of letters of credit for certain purposes in Canadian dollars, U.S. dollars and Euros. The interest rates applicable to the Credit Facility are determined based on a debt to EBITDA ratio as defined in the Credit Facility. For prime rate advances and base rate advances, the interest rate is equal to the bank’s prime rate or the bank’s U.S. dollar base rate in Canada, respectively, plus a margin ranging from 0.45% to 2.00%. For bankers’ acceptances and LIBOR advances, the interest rate is equal to the bankers’ acceptance fee or the LIBOR, respectively, plus a margin that varies from 1.45% to 3.00%. The Company pays a fee for usage of financial letters of credit which ranges from 1.45% to 3.00% and a fee for usage of non-financial letters of credit which ranges from 0.97% to 2.00%. The Company pays a standby fee on the unadvanced portions of the amounts available for advance or draw-down under the Credit Facility at rates ranging from 0.29% to 0.68%. ATS AUTOMATION ANNUAL REPORT 2017 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) The Credit Facility is subject to a debt to EBITDA test and an interest coverage test. Under the terms of the Credit Facility, the Company is restricted from encumbering any assets with certain permitted exceptions. The Credit Facility also limits advances to subsidiaries and partially restricts the Company from repurchasing its common shares and paying dividends. At March 31, 2017, all of the covenants were met. The Company has additional credit facilities available of $8,116 (3,326 Euros, 75,000 Indian Rupees, 50,000 Thai Baht and 1,145 Czech Koruna). The total amount outstanding on these facilities was $4,030, of which $1,411 was classified as bank indebtedness (March 31, 2016 – $2,319) and $2,619 was classified as long-term debt (March 31, 2016 – $7,077). The interest rates applicable to the credit facilities range from 1.66% to 9.18% per annum. A portion of the long-term debt is secured by certain assets of the Company. The 75,000 Indian Rupees and the 50,000 Thai Baht credit facilities are secured by letters of credit under the Credit Facility. (i) Bank indebtedness As at Other facilities (ii) Long-term debt As at Senior Notes Other facilities Issuance costs Less: current portion March 31, 2017 March 31, 2016 $ 1,411 $ 2,319 March 31, 2017 March 31, 2016 $ 332,500 $ 324,675 2,619 (7,851) 327,268 1,321 7,077 (10,373) 321,379 5,259 $ 325,947 $ 316,120 Scheduled principal repayments and interest payments on long-term debt as at March 31, 2017 are as follows: Principal Interest $ 1,321 $ 432 434 239 107 332,586 335,119 $ 21,684 21,684 21,662 21,640 21,626 27,020 $ 135,316 Less than one year One – two years Two – three years Three – four years Four – five years Thereafter 80 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 15. Share capital Authorized share capital of the Company consists of an unlimited number of common shares, without par value, for unlimited consideration. On November 4, 2015, the Company announced its intention to implement a normal course issuer bid (“NCIB”) to purchase, for cancellation, up to 4,600,000 common shares before November 5, 2016. During fiscal 2016, the Company purchased 481,473 common shares for $6,032 under the NCIB program. All purchases are made in accordance with the bid at prevalent market prices plus brokerage fees, or such other prices that may be permitted by the Toronto Stock Exchange, with consideration allocated to share capital up to the average carrying amount of the shares, and any excess allocated to retained earnings. The weighted average price per share repurchased in the year ended March 31, 2016 was $12.45. No shares were repurchased in the year ended March 31, 2017. The NCIB expired on November 5, 2016. The changes in the common shares issued, repurchased and outstanding during the period presented were as follows: Balance, at March 31, 2015 Exercise of stock options Repurchase of common shares Balance, at March 31, 2016 Exercise of stock options Balance, at March 31, 2017 Number of common shares Share capital 91,629,665 $ 519,118 1,145,167 (481,473) 92,293,359 1,308,667 93,602,026 11,807 (2,741) 528,184 15,133 543,317 $ $ ATS AUTOMATION ANNUAL REPORT 2017 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 16. Taxation (i) Reconciliation of income taxes: Income tax expense differs from the amounts which would be obtained by applying the combined Canadian basic federal and provincial income tax rate to income before income taxes. These differences result from the following items: Years ended March 31, 2017 March 31, 2016 Income before income taxes and non-controlling interest Combined Canadian basic federal and provincial income tax rate Income tax expense based on combined Canadian basic federal and provincial income tax rate Increase (decrease) in income taxes resulting from: Adjustments in respect to current income tax of previous periods Non-taxable income net of non-deductible expenses Recognition/use of previously unrecognized assets Income taxed at different rates and statutory rate changes Manufacturing and processing allowance and all other items At the effective income tax rate of 24% (2016 – 21%) Income tax expense reported in the consolidated statements of income: Current tax expense Deferred tax expense Deferred tax related to items charged or credited directly to equity: Net gain (loss) on revaluation of cash flow hedges Other items recognized through equity Income tax charged directly to equity $ $ $ $ $ $ $ $ $ 46,383 26.50% 12,291 1,036 (5,591) 3,866 89 (335) 50,105 26.50% 13,278 941 (1,166) (1,502) (677) (367) 11,356 $ 10,507 9,456 1,900 11,356 800 1,739 2,539 $ $ $ $ 10,739 (232) 10,507 (1,391) (3,389) (4,780) (ii) Components of deferred income tax assets and liabilities: Deferred income taxes are provided for the differences between accounting and tax bases of assets and liabilities. Deferred income tax assets and liabilities are comprised of the following: As at March 31, 2017 March 31, 2016 Accounting income not currently taxable $ Intangibles Investment tax credits taxable in future years when utilized Loss available for offset against future taxable income Property, plant and equipment Scientific research and experimental development expenditures available for offset against future taxable income Other $ (20,556) (32,282) (9,845) 4,611 (1,576) 13,821 9,204 (27,363) (34,873) (9,111) 7,007 (1,546) 22,328 6,352 Net deferred income tax liability $ (36,623) $ (37,206) 82 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Presented as: Deferred income tax assets Deferred income tax liabilities Net deferred income tax liability March 31, 2017 March 31, 2016 $ $ 2,138 (38,761) (36,623) $ $ 2,534 (39,740) (37,206) Unrecognized deferred income tax assets: Deferred income tax assets have not been recognized in respect of the following items (gross amount): As at Deductible temporary differences Loss available for offset against future taxable income March 31, 2017 March 31, 2016 $ $ 451 60,972 61,423 $ $ 541 56,173 56,714 Loss carryforwards: As at March 31, 2017, the Company has the following net operating loss carryforwards which are scheduled to expire in the following years: Year of expiry 2020 – 2024 2025 – 2029 2030 – 2037 No expiry Non-Canadian Canadian $ 9,087 $ 702 – 17,292 27,081 $ – 6,233 44,697 – $ 50,930 In addition, the Company has U.S. Federal and State capital loss carryforwards of U.S. $13,456 (March 31, 2016 – U.S. $13,456) and Canadian capital loss carryforwards of $289,345 (March 31, 2016 – $282,720) which do not expire. Investment tax credits: As at March 31, 2017, the Company has investment tax credits available to be applied against future taxes payable in Canada of approximately $51,749 and in foreign jurisdictions of approximately $17,061. The investment tax credits are scheduled to expire as follows: Year of expiry 2025 – 2029 2030 – 2034 2035 – 2037 Gross ITC balance $ $ 23,608 22,629 22,573 68,810 The benefit of $49,015 (March 31, 2016 – $43,683) of these investment tax credits have been recognized in the consolidated financial statements. Unrecognized investment tax credits are scheduled to expire between 2028 and 2037. (iii) The Company has determined that as of the reporting date, undistributed profits of its subsidiaries will not be distributed in the foreseeable future. (iv) There are temporary differences of $79,183 associated with investments in subsidiaries for which no deferred income tax liability has been recognized. (v) There are no income tax consequences attached to the payment of dividends in either 2017 or 2016 by the Company to its shareholders. ATS AUTOMATION ANNUAL REPORT 2017 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 17. Stock-based compensation Employee Share Purchase Plan: Under the terms of the Company’s Employee Share Purchase Plan, qualifying employees of the Company may set aside funds through payroll deductions for an amount up to a maximum of 10% of their base salary or $10,000 in any one calendar year. Subject to the member not making withdrawals from the plan, the Company makes contributions to the plan equal to 20% of a member’s contribution to the plan during the year, up to a maximum of 1% of the member’s salary or $2,000. Shares for the plan may be issued from treasury or purchased in the market as determined by the Company’s Board of Directors. During the years ended March 31, 2017 and March 31, 2016, no shares were issued from treasury related to the plan. Deferred Stock Unit Plan: The Company offers a Deferred Stock Unit Plan (“DSU Plan”) for members of the Board of Directors. Under the DSU Plan, each non-employee director may elect to receive all or a portion of his or her annual compensation in the form of notional common shares of the Company called deferred stock units (“DSUs”). The issue and redemption prices of each DSU are based on a five-day volume weighted average trading price of the Company’s common shares for the five trading days prior to issuance or redemption. Under the terms of the DSU Plan, directors are not entitled to convert DSUs into cash until retirement from the Board of Directors. The value of each DSU, when converted to cash, will be equal to the market value of a common share of the Company at the time the conversion takes place. As at March 31, 2017, the value of the outstanding liability related to the DSUs was $6,303 (2016 – $3,932). The DSU liability is revalued at each reporting date based on the change in the Company’s stock price. The change in the value of the DSU liability is included in the consolidated statements of income in the period of the change. Stock Option Plan: The Company uses a stock option plan to attract and retain key employees, officers and directors. Under the Company’s 1995 Stock Option plan (the “1995 Plan”), the shareholders have approved a maximum of 5,991,839 common shares for issuance, with the maximum reserved for issuance to any one person at 5% of the common shares outstanding at the time of the grant. Time vested stock options vest over four-year periods. Performance-based stock options vest based on the Company’s stock trading at or above a threshold for a specified number of minimum trading days in a fiscal quarter. For time vested stock options, the exercise price is the price of the Company’s common shares on the Toronto Stock Exchange at closing for the day prior to the date of the grant. For performance-based stock options, the exercise price is either the price of the Company’s common shares on the Toronto Stock Exchange at closing for the day prior to the date of the grant or the five-day volume weighted average price of the Company’s common shares on the Toronto Stock Exchange prior to the date of the grant. Stock options granted under the 1995 Plan may be exercised during periods not exceeding seven years from the date of grant, subject to earlier termination upon the option holder ceasing to be a director, officer or employee of the Company. Stock options issued under the 1995 Plan are non- transferable. Any stock option granted which is cancelled or terminated for any reason prior to exercise is returned to the pool and becomes available for future stock option grants. In the event that the stock option would otherwise expire during a restricted trading period, the expiry date of the stock option is extended to the 10th business day following the date of expiry of such period. In addition, the 1995 Plan restricts the grant of stock options to insiders that may be under the 1995 Plan. Under the Company’s 2006 Stock Option Plan (the “2006 Plan”), the shareholders have approved a maximum of 5,159,000 common shares for issuance. The terms of the 2006 Plan are identical to those of the 1995 Plan, except that the maximum number of common shares to be issued pursuant to the issue of options under the 2006 Plan is 5,159,000 common shares. As at March 31, 2017, there are a total of 2,274,724 common shares remaining for future stock option grants under both plans (March 31, 2016 – 2,834,199). 84 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Years ended March 31 2017 Weighted average exercise price Number of stock options Number of stock options Stock options outstanding, beginning of year 3,433,866 $ 11.68 4,221,283 $ Granted Exercised(i) Forfeited 294,000 10.46 793,500 (1,308,667) 9.51 (1,145,167) (144,475) 14.34 (435,750) Stock options outstanding, end of year 2,274,724 $ 12.60 3,433,866 $ 2016 Weighted average exercise price 10.10 15.63 7.59 14.28 11.68 Stock options exercisable, end of year, time vested options Stock options exercisable, end of year, performance-based options 959,163 $ 12.41 776,925 $ 9.88 391,499 $ 11.44 1,305,791 $ 10.25 (i) For the year ended March 31, 2017, the weighted average share price at the date of exercise was $12.61 (March 31, 2016 – $14.76). As at March 31, 2017 Stock options outstanding Stock options exercisable Range of Exercise prices $6.34 – $10.00 $10.01 – $12.50 $12.51 – $14.50 $14.51 – $15.83 $6.34 – $15.83 Weighted average remaining contractual life Number outstanding 264,250 1.68 years $ 701,833 4.43 years 677,266 4.18 years 631,375 5.23 years Weighted average exercise price 8.10 10.57 13.66 15.83 Number exercisable 264,250 $ 354,333 493,516 238,563 2,274,724 4.26 years $ 12.66 1,350,662 $ Weighted average exercise price 8.10 10.62 13.58 15.83 12.13 The expense associated with the Company’s performance-based stock options is recognized in income over the estimated assumed vesting period at the time the stock options are granted. Upon the Company’s stock price trading at or above a stock price performance threshold for a specified minimum number of trading days, the options vest. When the performance-based stock options vest, the Company is required to recognize all previously unrecognized expenses associated with the vested stock options in the period in which they vest. The fair values of the Company’s stock options issued during the periods presented were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions. Expected stock price volatility was determined at the time of the grant by considering historical share price volatility. Expected stock option grant life was determined at the time of the grant by considering the average of the grant vesting period and the grant exercise period. ATS AUTOMATION ANNUAL REPORT 2017 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) Years ended March 31 Weighted average risk-free interest rate Dividend yield Weighted average expected volatility Weighted average expected life Number of stock options granted: Time vested Weighted average exercise price per option Weighted average value per option: Time vested Share Appreciation Rights 2017 0.90% 0% 30% 2016 0.90% 0% 29% 4.75 years 4.75 years 294,000 10.46 2.88 $ $ 793,500 15.63 4.05 $ $ During the year ended March 31, 2017, the Company did not grant any share appreciation rights (“SARs”) (none in the year ended March 31, 2016). The Company has recorded a liability of $44 as at March 31, 2017 (March 31, 2016 – $200) based on the fair value of the vested SARs. The market value of a common share of the Company as at March 31, 2017 was $13.57 (March 31, 2016 – $10.59). During the year ended March 31, 2017, 39,375 SARs vested (39,375 in the year ended March 31, 2016). Restricted Share Unit Plan During the year ended March 31, 2017, the Company granted 157,639 time vesting restricted share units (“RSUs”) (89,250 in the year ended March 31, 2016). The RSUs give the employee the right to receive a cash payment equal to the market value of a common share of the Company. During the year ended March 31, 2017, the Company granted 128,785 performance-based RSUs (103,000 in the year ended March 31, 2016). The performance-based RSUs vest upon successful achievement of certain operational and share price targets. The performance-based RSUs give the employee the right to receive a cash payment based on the market value of a common share of the Company. The weighted average remaining vesting period for the time vesting RSUs and performance-based RSUs is 1.3 years. The RSU liability is recognized quarterly based on the expired portion of the vesting period and the change in the Company’s stock price. At March 31, 2017, the value of the outstanding liability related to the RSU plan was $2,722 (March 31, 2016 – $1,572). 86 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 18. Commitments and contingencies The minimum operating lease payments, related primarily to facilities and equipment, and purchase obligations are as follows: Less than one year One – two years Two – three years Three – four years Four – five years Due in over five years Operating leases $ 10,522 $ 7,714 6,889 6,069 4,907 1,343 Purchase obligations 83,505 7,369 144 40 – – $ 37,444 $ 91,058 The Company’s off-balance sheet arrangements consist of purchase obligations and various operating lease financing arrangements related primarily to facilities and equipment which have been entered into in the normal course of business. The Company’s purchase obligations consist primarily of commitments for materials purchases. In accordance with industry practice, the Company is liable to customers for obligations relating to contract completion and timely delivery. In the normal conduct of its operations, the Company may provide letters of credit as security for advances received from customers pending delivery and contract performance. In addition, the Company provides letters of credit for post-retirement obligations and may provide letters of credit as security on equipment under lease and on order. As at March 31, 2017, the total value of outstanding letters of credit was approximately $136,021 (March 31, 2016 – $136,991). In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position. ATS AUTOMATION ANNUAL REPORT 2017 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 19. Segmented disclosure The Company’s operations are reported as one operating segment, Automation Systems, which plans, allocates resources, builds capabilities and implements best practices on a global basis. Geographic segmentation of revenues is determined based on the customer’s installation site. Non-current assets represent property, plant and equipment and intangible assets that are attributable to individual geographic segments, based on location of the respective operations. As at Canada United States Germany China Malaysia Other Europe Asia-Pacific and other Total Company As at Canada United States Germany China Malaysia Other Europe Asia-Pacific and other Total Company Property, plant and equipment $ 22,866 16,287 25,671 944 1,773 1,160 532 March 31, 2017 Intangible assets $ 10,454 22,942 121,918 45 101 471 138 $ 69,233 $ 156,069 Property, plant and equipment $ 23,087 17,434 26,192 1,082 1,784 712 769 March 31, 2016 $ Intangible assets 9,000 25,703 141,730 54 72 312 194 $ 71,060 $ 177,065 Revenues from external customers for the years ended March 31, 2017 March 31, 2016 Canada United States and Mexico Germany China Malaysia Other Europe Asia-Pacific and other Total Company $ 34,261 331,335 196,777 70,202 120,915 209,734 47,680 $ 76,498 380,455 204,292 105,895 37,619 189,800 45,081 $ 1,010,904 $ 1,039,640 For the year ended March 31, 2017, the Company had revenues from one customer that were 13.9% of its total revenues (March 31, 2016 – none). 88 ATS AUTOMATION ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) 20. Net finance costs Years ended Interest expense Interest income March 31, 2017 March 31, 2016 $ $ 26,208 (656) 25,552 $ $ 26,835 (183) 26,652 21. Earnings per share Years ended Weighted average number of common shares outstanding Dilutive effect of stock option conversion Diluted weighted average number of common shares outstanding March 31, 2017 March 31, 2016 92,571,163 235,946 92,807,109 92,184,870 478,441 92,663,311 For the year ended March 31, 2017, stock options to purchase 1,602,641 common shares are excluded from the weighted average number of common shares in the calculation of diluted earnings per share as they are anti-dilutive (1,276,200 common shares were excluded for the year ended March 31, 2016). 22. Capital management The Company’s capital management framework is designed to ensure the Company has adequate liquidity, financial resources and borrowing capacity to allow financial flexibility and to provide an adequate return to shareholders. The Company defines capital as the aggregate of equity (excluding accumulated other comprehensive income), bank indebtedness, long-term debt and cash and cash equivalents. The Company monitors capital using the ratio of total debt to equity. Total debt includes bank indebtedness, and long-term debt as shown on the consolidated statements of financial position. Net debt consists of cash and cash equivalents less total debt. Equity includes all components of equity, less accumulated other comprehensive income. This is unchanged from the previous year. The Company also monitors an externally imposed covenant of debt to EBITDA of not greater than 3 to 1. EBITDA includes income before income taxes, less net finance costs, depreciation and amortization. For the years ended March 31, 2017 and March 31, 2016, the Company operated with a ratio below the externally imposed covenant. The Company is prepared to increase the total debt to equity ratio and net debt to EBITDA ratio if appropriate opportunities arise. ATS AUTOMATION ANNUAL REPORT 2017 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands of Canadian dollars, except per share amounts) The capital management criteria can be illustrated as follows: As at March 31, 2017 March 31, 2016 Equity excluding accumulated other comprehensive income $ Long-term debt Bank indebtedness Cash and cash equivalents Capital under management Debt to equity ratio 631,035 327,268 1,411 (286,697) $ 582,234 321,379 2,319 (170,034) $ 673,017 $ 735,898 0.52:1 0.56:1 23. Related party disclosure On April 1, 2014, the Company entered into an agreement with a shareholder, Mason Capital Management, LLC (“Mason Capital”), pursuant to which Mason Capital agreed to provide ATS with ongoing strategic and capital markets advisory services for an annual fee of U.S. $500. As part of the agreement, a member of the Company’s Board of Directors who is associated with Mason Capital has waived any fees to which he may have otherwise been entitled for serving as a member of the Board of Directors or as a member of any committee of the Board of Directors. The remuneration of the Board of Directors and key management personnel is determined by the Board of Directors on recommendation from the Human Resources Committee of the Board: As at Short-term employee benefits Fees Stock-based compensation Post-employment benefits Other long-term benefits(i) Executive transition expenses(ii) Total remuneration March 31, 2017 March 31, 2016 $ 2,294 $ 3,053 657 (707) 980 2,910 – $ 6,134 $ 655 593 986 – 7,065 12,352 Stock-based compensation represents the remuneration of the Board of Directors and of key management personnel and is reported in the consolidated statements of income as stock-based compensation expense. (i) In March 2017, Andrew Hider was appointed as Chief Executive Officer of ATS. In connection with Mr. Hider’s appointment, and as an inducement to join ATS, the Company paid Mr. Hider a share purchase allowance (“SP Allowance”) in the amount of $2,910. The after-tax proceeds of the SP Allowance were used to purchase shares of the Company in the public market (“Purchased ATS Shares”) and are subject to certain minimum shareholding requirements. The Purchased ATS Shares are subject to forfeiture if Mr. Hider’s employment is terminated for cause or through resignation within two years of his commencement date, or 50% forfeited if such termination takes place after two years and before three years from his commencement date. (ii) In March 2016, the Company announced that Anthony Caputo, the Chief Executive Officer of the Company, was leaving the Company in February 2017. In connection with this, Mr. Caputo and the Company entered into a transition agreement in accordance with which Mr. Caputo received a lump sum payment of $4,976, which encompassed a bonus entitlement for fiscal 2017, and the Company incurred $2,089 of post-employment benefit expenses related to an additional two years of credited service towards Mr. Caputo’s pension entitlement. 90 ATS AUTOMATION ANNUAL REPORT 2017 SHAREHOLDER INFORMATION Senior management Andrew Hider Chief Executive Officer Maria Perrella Chief Financial Officer Charles Gyles Corporate Vice-President, Organizational Effectiveness Stewart McCuaig Corporate Vice-President, General Counsel Corporate headquarters 730 Fountain Street North Cambridge, Ontario Canada N3H 4R7 Tel: 1-519-653-6500 Investor relations contact Maria Perrella Tel: 1-519-653-6500 Email: investor@atsautomation.com Stock exchange listing Toronto Stock Exchange: “ATA” Registrar and transfer agent Computershare Trust Company of Canada 100 University Avenue, 8th Floor Toronto, Ontario Canada M5J 2Y1 Website www.atsautomation.com Shareholders’ annual meeting Thursday, August 17, 2017 10:00 a.m. Eastern Time TMX Broadcast Centre The Exchange Tower 130 King Street West Toronto, Ontario ATS AUTOMATION ANNUAL REPORT 2017 91 BOARD OF DIRECTORS Neil D. Arnold(1)(3) Mr. Arnold has over 35 years of experience in public company finance and general management. Most recently, he served as Executive Chairman of the Board of Directors of WHX Corp., a public holding company for primary industrial businesses. He also served as Group Finance Director of Lucas Varity, PLC, a public company providing components and systems to the global aerospace and automotive industries with revenues in excess of $7 billion. Prior to that, Mr. Arnold was Chief Financial Officer of Varity Corporation (previously Massey-Ferguson Ltd.). He has served as a director of Lucas Varity, and WHX Corp. At present, Mr. Arnold is a Trustee of Pembroke College Foundation of North America Inc. and a Trustee of The Summit Center Foundation, Inc., both charitable organizations. Mr. Arnold earned a Bachelor of Arts in Engineering Science from Pembroke College, Oxford University and is a Fellow of the Chartered Institute of Management Accountants (U.K.). Andrew Hider Mr. Hider is the Chief Executive Officer of ATS Automation Tooling Systems Inc. He is an experienced executive with a track record of success founded on his ability to drive business growth and operational performance in complex business environments and across multiple industries, including transportation, advanced technology, instrumentation and industrial products. Most recently, Mr. Hider served as President and CEO of the Taylor Made Group, LLC, a diversified global leader in the supply of innovative products and systems for marine, transportation, agriculture and construction markets, a position he held from May 2016 through to February 2017. Prior to that, Mr. Hider served for 10 years at Danaher Corporation, a global science and technology company, initially joining Danaher as General Manager and Director of Dover and most recently serving as President of Veeder Root. Mr. Hider began his career with General Electric, serving in a number of areas over a six-year period, including manufacturing, project management, procurement and finance, culminating in his appointment as General Manager of GE Tri-Remanufacturing. Mr. Hider holds a Bachelor of Science in Interdisciplinary Engineering and Management, and a Master of Business Administration, both from Clarkson University. Michael E. Martino(2)(3) Mr. Martino is a founder and principal of Mason Capital Management LLC. Mr. Martino began his investment career at Oppenheimer & Company, where he was responsible for risk arbitrage research; he ended his tenure at Oppenheimer as Executive Director, Risk Arbitrage. He began his business career at GE Capital Corporation, where he held positions in information systems and business analysis. He was formerly a director of Spar Aerospace Limited, a publicly traded aerospace company. Mr. Martino graduated from Fairfield University with a degree in political science and earned a Master of Business Administration in Finance from New York University’s Stern School of Business. David McAusland(3) Mr. McAusland, the Chairman of the Board of Directors, is a corporate advisor, lawyer, and experienced corporate director and senior executive. Mr. McAusland is a partner in the law firm McCarthy Tétrault and was previously Executive Vice-President, Corporate Development, and Chief Legal Officer of Alcan Inc., where he provided leadership on its worldwide mergers, growth strategies, major transactions and capital investments. Mr. McAusland currently acts as director of Cogeco Inc., Cogeco Cable Inc. and Cascades Inc. Mr. McAusland is also involved with several not-for-profit organizations and private companies. Mr. McAusland received his B.C.L. in 1976 and his LL.B. in 1977, both from McGill University. 92 ATS AUTOMATION ANNUAL REPORT 2017 BOARD OF DIRECTORS Gordon Presher (1)(2) Mr. Presher is a uniquely qualified entrepreneur and technologist, possessing expertise and experience in both the automation technology and solar industries. He is currently engaged in technology and business consulting services for small to mid-sized companies. He was the Co-founder, Chairman and Chief Executive Officer of Solar Sentry Corp., a seed-stage developer of innovative monitoring equipment for the solar energy industry that ceased operations in December of 2016. Prior to Solar Sentry, Mr. Presher was Chairman and Chief Executive Officer of Ormec Systems Corp., a factory automation firm specializing in precise motion control that has continued operations based in Rochester, New York. He began his career as an automation- controls engineer at Eastman Kodak Company, progressing to project leader on two key corporate automation projects. Mr. Presher holds a Bachelor of Science in Physics and Math from Houghton College, and a Bachelor of Science in Electrical Engineering from the University of Rochester. Ivan Ross(1)(2) Mr. Ross has over 25 years of experience in the financial industry. Currently, he is working at Ardea Partners, a financial advisory firm, which he co-founded in 2016. From 2011 through March of 2016, Mr. Ross was a research analyst at Mason Capital Management LLC. From 1992 to 2011, he worked at Goldman Sachs (promoted to partner in 2002) principally in the Investment Banking Division’s Corporate Finance and New Products Department, which he ran for many years. Mr. Ross began his career in 1986 as a tax lawyer at Skadden, Arps in New York, where he advised and structured complex merger and financing transactions. He holds a Bachelor of Science in Economics from the Wharton School, University of Pennsylvania (1983), and a JD from New York University School of Law (1986), where he was a member of the Order of the Coif and the Annual Survey of American Law. Mr. Ross currently serves on the Board of Directors of Mimeo.com, a private business to business print and document services business headquartered in New York. He also serves as a member of the Boards of Overseers at each of the Jacobson Leadership Program in Law and Business at New York University School of Law and the Katz Center for Advanced Judaic Studies at the University of Pennsylvania. Daryl C.F. Wilson(2)(3) Mr. Wilson is the President, CEO and director of Hydrogenics Corporation, a Canadian public company and hydrogen technology provider. Prior to joining Hydrogenics, he was VP of Manufacturing and Operations with Royal Group Technologies and Zenon Environmental Inc. Preceding that, he served on the senior management team of Toyota Motor Manufacturing Canada. Mr. Wilson has been National Chair of the Environmental Quality Committee of the CMA. Mr. Wilson holds a Master of Business Administration in Operations Management/ Management Science from McMaster University; a Bachelor of Science in Chemical Engineering from the University of Toronto; and has obtained a Chartered Director designation (C.Dir.). (1) Member of Audit and Finance Committee. (2) Member of Human Resources Committee. (3) Member of the Corporate Governance and Nominating Committee. ATS AUTOMATION ANNUAL REPORT 2017 93 WWW.ATSAUTOMATION.COM ATS Automation Tooling Systems Inc. 730 Fountain Street North Cambridge, Ontario Canada, N3H 4R7 

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