F O C USED ON TH
E F
U
N
D
A
M
E
N
T
A
L
S
2 0 1 8 A N N U A L R E P O R T
PRODUCTION FACILITIES
Cas�ng & Extrusion Technologies
Automo�ve Solu�ons
Markham, ON
Newmarket, ON
Uxbridge, ON
Chesterfield, MI
Toledo, OH
Dartmouth,
NS
Matamoros (2), MX
Wylie, TX
Queretaro (2), MX
Medellin,
COLOMBIA
Sorocaba,
BRAZIL
Sofia,
BULGARIA
Tangier,
MOROCCO
Chonburi,
THAILAND
SALES
($ millions)
NET INCOME
($ millions)
DILUTED ADJUSTED
EARNINGS PER SHARE (1)
CASH FLOW
FROM OPERATING
ACTIVITIES (2)
($ millions)
.
3
9
8
5
.
2
4
8
5
.
6
5
7
5
.
3
8
9
4
.
3
8
6
3
.
6
7
4
.
8
0
4
.
5
2
4
.
3
2
4
.
7
0
3
.
6
9
0
3 $
7
0
$
.
3
0
1
$
.
3
0
1
$
.
0
0
1
$
.
.
5
9
6
.
7
4
6
.
7
4
6
.
9
9
5
.
0
2
4
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
(1) Earnings before other income/ expense (2) Before net change in non-cash working capital.
EXCO TOOLING SOLUTIONS
®
A L C
LETTER TO SHAREHOLDERS
tangible
In fiscal 2018 Exco achieved its third-highest
annual earnings per share (EPS) in its history,
falling just shy of the record marks achieved in
each of the two prior years. While we had
anticipated our EPS would again climb to new
heights, we are nonetheless pleased with our
overall results. During the past year we made
significant
investments and garnered several
contract wins that will drive future growth,
repositioning
realized
underperforming
further
and
strengthened our balance sheet while returning
almost half our earnings to shareholders through
dividends and share repurchases. As well, we
demonstrated a positive earnings trajectory
through each successive quarter, exiting the year
with our highest Q4 earnings ever. The progress
we achieved over the last twelve months has
given us more confidence than ever that Exco is
well positioned to realize record earnings in the
year ahead.
progress
operations,
Focused on the Fundamentals
Even before Exco’s fiscal 2018 started, it was
evident that the year would be filled with many
new challenges. Despite firm global economic
conditions and the fulfilled promise of lower US
corporate tax rates, protectionist trade tones were
gaining steam. In particular, the future of the
NAFTA agreement – which impacts Exco’s most
important trading area – looked increasingly
uncertain at times. As the year progressed, the
implementation of steel and aluminum tariffs in
the US, rising fuel and other input costs, and
softening automotive production volumes made
for one of the more challenging operating
environments we’ve encountered in several years.
Through these challenges we remained focused
on the fundamentals, making the necessary
investments and decisions to grow and diversify
our operations – for the long term. Staying
focused on the fundamentals has served Exco
well over the years. This core principle has
enabled us to build a diverse collection of
leading businesses in typically niche industries
that provide our customers with
innovative,
low-cost operations.
quality solutions
Together with our preponderance of “capital-
light” businesses and exceptional financial
strength, Exco has tremendous staying power, all
of which underlies our sustainable earnings
growth and generation of significant free cash
flow.
from
the
levels,
industry and company
At
the
fundamentals for both our parts and tooling
businesses remain very sound. North American
automotive production volumes have softened
modestly from recent peaks but are widely
expected to plateau near current levels for the
next several years. Relatedly, demand for Polytech
and Neocon’s growing portfolio of innovative
storage and protection products continue to
expand apace across more vehicles and OEMs. As
well, the trend towards leather as the interior trim
surface of choice plays squarely into AFX’s sweet
spot. In Morocco, Polydesign is sailing with the
wind at its back. We established our presence
there long ago, well before other industry players
had awoken to the country’s attractive labour
market and proximity to Europe. With capacity
and inflationary pressures now building across
Eastern Europe, Morocco is seeing an influx of
quoting activity for which we are the “go-to”
supplier. Meanwhile, as it relates to all three of our
tooling businesses, demand for the aluminum
products they help create continues to grow
across many applications. This is particularly true
within the automotive industry where an acute
focus on vehicle
is on a
sustainable uptrend that will persist regardless of
how fast the electric vehicle is adopted, whether
it’s a car, truck or SUV, or who’s driving it, if anyone
at all. Aluminum, however, is mostly used across
light-weighting
EXCO TECHNOLOGIES LIMITED
1
ANNUAL REPORT 2018
the spectrum of the economy providing our
primary customer
in discussions to
improve
Extrusion and Castool groups with meaningful
program economics and has received temporary
diversification. It is worth noting that despite the
price support pending ongoing discussions.
implementation of US aluminum tariffs, overall
These measures enabled us to reduce the EPS
shipments of North American aluminum extru-
losses at ALC from $0.11 in fiscal 2017 to $0.03 in
sions have grown to record levels, contributing to
fiscal 2018, including a breakeven performance in
the solid results from each of these divisions.
Q3 and attainment of profitability in Q4. ALC is
Tackling Our Biggest Challenges
focused on further operational improvements
and realizing a permanent price increase from its
primary customer with an objective of reaching
Perhaps our most significant achievement in fiscal
sustained profitability, failing which we will exit
2018 was the major headway we made at fixing
the business.
what was broken. Since we acquired ALC
in 2014, to say it has underperformed is an
Where we have also had significant challenges is
understatement. Over the past few years, we have
in our Casting division – but there too we have
spent considerable financial and operational
made meaningful headway. Three years ago, we
resources to improve ALC’s results only to be met
made a sizeable capital investment to radically
with more challenges along the way. These
transform the way we manufacture our large
challenges intensified in our past fiscal year as the
moulds. We knew this transition would not be
unemployment rate in Bulgaria dropped to the
easy – and we were right. But it remains evident to
lowest level in a decade, further pressuring local
us our approach was also right. The primary
area wages and causing employee turnover and
challenge has been that we vastly underestimat-
absenteeism to climb to unsustainable levels. The
ed how long it would take to bring the new
backdrop creates a difficult environment for any
process up to the required levels of capacity.
industry. However, it is downright hostile for ALC’s
Consequently, we had trouble executing on our
operations which are characterized by
labor
large order book through the past year. However,
intensive, low margin and fixed-price program
while our results have clearly been frustrating, our
economics with potentially severe financial
progress is tangible. We are now capable of
consequences for mis-execution. Given our view
producing moulds in less than half the time as our
that Bulgarian labour conditions are more likely to
old process and capacity/ reliability is improving
worsen than improve near term, it was necessary
daily. Moreover, quoting activity and order inflow
to reverse course on ALC’s growth and diversifica-
remain very strong while difficult industry pricing
tion strategy. This led to the voluntary wind-down
conditions continue to ease. Further still, we
production volumes to Polydesign in Morocco.
additive manufacturing capabilities, which
is
These efforts have hurt our results but will
greatly enhancing the quality and performance of
essentially be complete by the end of our first
our moulds beyond our competitors reach. And
quarter of fiscal 2019. At that point, ALC will be a
our lead in the area of 3D powdered metal
smaller business exclusively focused on cutting
printing is clear, having been nominated as a 2019
and sewing BMW Mini seat covers. In turn, we
finalist for the automotive industry’s prestigious
expect the streamlined operations will enable the
PACE awards. As we continue to advance against
through the next fiscal year and beyond.
Strong Financial Foundation Supports
Our Growth Expectations
Making the Most of Our Opportunities
Turning to fiscal 2019 we are pursuing several
capital investment opportunities that we expect
will have very high rates of return. Our new
Mexican extrusion plant will be operational in
early calendar 2019 to better penetrate the
domestic market there. This new facility will
benefit from the recent completion of our
harmonization initiative across our five existing
extrusion plants. This initiative has established
standardized manufacturing practices which has
greatly
increased
the overall capacity and
efficiency of the group. The new plant will add to
our stable of greenfield operations in Colombia,
Brazil, Texas and Thailand which continue to
perform extremely well with collective EBITDA
100% growth the prior year. Elsewhere in our
tooling business, Castool will further expand its
Uxbridge plant to provide additional capacity and
house its own heat-treat facility. This capital
project will not only significantly reduce costs but
will provide strategic benefits, enabling Castool to
meaningfully reduce
lead times and further
enhance the quality across
its portfolio of
innovative products. Over in our Automotive
Solutions segment, Polydesign is exploring the
potential of expanding the size of its facility in
Morocco by about 50% to roughly 330,000 square
feet in order to keep up with expected demand
As fiscal 2019 gets underway, Exco’s balance
sheet, as always, remains a pillar of strength. With
essentially no net debt and ample liquidity Exco
possesses significant financial flexibility to take
advantage of opportunities that may arise while
acting as a hedge against any external shocks.
Despite elevated levels of capital spending in
fiscal 2019 we expect to generate free cash flow
well
in excess of our dividend payments.
Acquisitions remain a focus however we are not
dependent on them for earnings growth and we
will be very selective in whatever we pursue.
In the
interim, we are entirely comfortable
padding our balance sheet with the cash flows
that we will generate and/or continuing to
buyback our shares, which we see as a bargain at
In closing, Exco’s fiscal 2018 was as a year of
consolidating on past gains and advancing our
key strategies. While we fell just short of our goal
for earnings growth, we are confident the
progress we made has positioned us to achieve
record earnings in fiscal 2019. None of this, of
course, would be possible without our dedicated
and talented workforce now totaling 6,757 strong.
Thank you for your continued efforts – and
staying focused on the fundamentals. With more
of the same, we know even greater things lie
ahead.
growth of 40% in fiscal 2018 even after realizing
current trading levels.
Back in North America, capital investment in our
other parts businesses are expected to be
relatively modest in the coming year. However, we
expect stronger overall financial performance will
be driven by several recent contract wins and the
various cost containment measures that we
Brian A. Robbins
President and CEO
of certain programs and shift of some of ALC’s
continue to differentiate ourselves with our
growth.
development of a workforce that is more reliable
our agenda, we are confident the profitability of
continue to implement.
and motivated. Importantly, ALC also engaged its
our large mould group will improve steadily
In fiscal 2018 Exco achieved its third-highest
focused on the fundamentals has served Exco
annual earnings per share (EPS) in its history,
well over the years. This core principle has
falling just shy of the record marks achieved in
enabled us to build a diverse collection of
each of the two prior years. While we had
leading businesses in typically niche industries
anticipated our EPS would again climb to new
that provide our customers with
innovative,
heights, we are nonetheless pleased with our
quality solutions
from
low-cost operations.
overall results. During the past year we made
Together with our preponderance of “capital-
significant
investments and garnered several
light” businesses and exceptional financial
contract wins that will drive future growth,
strength, Exco has tremendous staying power, all
realized
tangible
progress
repositioning
of which underlies our sustainable earnings
underperforming
operations,
and
further
growth and generation of significant free cash
strengthened our balance sheet while returning
flow.
almost half our earnings to shareholders through
dividends and share repurchases. As well, we
At
the
industry and company
levels,
the
demonstrated a positive earnings trajectory
fundamentals for both our parts and tooling
through each successive quarter, exiting the year
businesses remain very sound. North American
with our highest Q4 earnings ever. The progress
automotive production volumes have softened
we achieved over the last twelve months has
modestly from recent peaks but are widely
given us more confidence than ever that Exco is
expected to plateau near current levels for the
well positioned to realize record earnings in the
next several years. Relatedly, demand for Polytech
year ahead.
Focused on the Fundamentals
and Neocon’s growing portfolio of innovative
storage and protection products continue to
expand apace across more vehicles and OEMs. As
well, the trend towards leather as the interior trim
Even before Exco’s fiscal 2018 started, it was
surface of choice plays squarely into AFX’s sweet
evident that the year would be filled with many
spot. In Morocco, Polydesign is sailing with the
new challenges. Despite firm global economic
wind at its back. We established our presence
conditions and the fulfilled promise of lower US
there long ago, well before other industry players
corporate tax rates, protectionist trade tones were
had awoken to the country’s attractive labour
gaining steam. In particular, the future of the
market and proximity to Europe. With capacity
NAFTA agreement – which impacts Exco’s most
and inflationary pressures now building across
important trading area – looked increasingly
Eastern Europe, Morocco is seeing an influx of
uncertain at times. As the year progressed, the
quoting activity for which we are the “go-to”
implementation of steel and aluminum tariffs in
supplier. Meanwhile, as it relates to all three of our
the US, rising fuel and other input costs, and
tooling businesses, demand for the aluminum
softening automotive production volumes made
products they help create continues to grow
for one of the more challenging operating
across many applications. This is particularly true
environments we’ve encountered in several years.
within the automotive industry where an acute
focus on vehicle
light-weighting
is on a
Through these challenges we remained focused
sustainable uptrend that will persist regardless of
on the fundamentals, making the necessary
how fast the electric vehicle is adopted, whether
investments and decisions to grow and diversify
it’s a car, truck or SUV, or who’s driving it, if anyone
our operations – for the long term. Staying
at all. Aluminum, however, is mostly used across
LETTER TO SHAREHOLDERS
the spectrum of the economy providing our
Extrusion and Castool groups with meaningful
diversification. It is worth noting that despite the
implementation of US aluminum tariffs, overall
shipments of North American aluminum extru-
sions have grown to record levels, contributing to
the solid results from each of these divisions.
Tackling Our Biggest Challenges
Perhaps our most significant achievement in fiscal
2018 was the major headway we made at fixing
what was broken. Since we acquired ALC
in 2014, to say it has underperformed is an
understatement. Over the past few years, we have
spent considerable financial and operational
resources to improve ALC’s results only to be met
with more challenges along the way. These
challenges intensified in our past fiscal year as the
unemployment rate in Bulgaria dropped to the
lowest level in a decade, further pressuring local
area wages and causing employee turnover and
absenteeism to climb to unsustainable levels. The
backdrop creates a difficult environment for any
industry. However, it is downright hostile for ALC’s
operations which are characterized by
labor
intensive, low margin and fixed-price program
economics with potentially severe financial
consequences for mis-execution. Given our view
that Bulgarian labour conditions are more likely to
worsen than improve near term, it was necessary
to reverse course on ALC’s growth and diversifica-
tion strategy. This led to the voluntary wind-down
of certain programs and shift of some of ALC’s
production volumes to Polydesign in Morocco.
These efforts have hurt our results but will
essentially be complete by the end of our first
quarter of fiscal 2019. At that point, ALC will be a
smaller business exclusively focused on cutting
and sewing BMW Mini seat covers. In turn, we
expect the streamlined operations will enable the
development of a workforce that is more reliable
and motivated. Importantly, ALC also engaged its
in discussions to
primary customer
improve
program economics and has received temporary
price support pending ongoing discussions.
These measures enabled us to reduce the EPS
losses at ALC from $0.11 in fiscal 2017 to $0.03 in
fiscal 2018, including a breakeven performance in
Q3 and attainment of profitability in Q4. ALC is
focused on further operational improvements
and realizing a permanent price increase from its
primary customer with an objective of reaching
sustained profitability, failing which we will exit
the business.
Where we have also had significant challenges is
in our Casting division – but there too we have
made meaningful headway. Three years ago, we
made a sizeable capital investment to radically
transform the way we manufacture our large
moulds. We knew this transition would not be
easy – and we were right. But it remains evident to
us our approach was also right. The primary
challenge has been that we vastly underestimat-
ed how long it would take to bring the new
process up to the required levels of capacity.
Consequently, we had trouble executing on our
large order book through the past year. However,
while our results have clearly been frustrating, our
progress is tangible. We are now capable of
producing moulds in less than half the time as our
old process and capacity/ reliability is improving
daily. Moreover, quoting activity and order inflow
remain very strong while difficult industry pricing
conditions continue to ease. Further still, we
continue to differentiate ourselves with our
additive manufacturing capabilities, which
is
greatly enhancing the quality and performance of
our moulds beyond our competitors reach. And
our lead in the area of 3D powdered metal
printing is clear, having been nominated as a 2019
finalist for the automotive industry’s prestigious
PACE awards. As we continue to advance against
our agenda, we are confident the profitability of
our large mould group will improve steadily
EXCO TECHNOLOGIES LIMITED
2
ANNUAL REPORT 2018
through the next fiscal year and beyond.
Strong Financial Foundation Supports
Our Growth Expectations
growth of 40% in fiscal 2018 even after realizing
current trading levels.
Making the Most of Our Opportunities
Turning to fiscal 2019 we are pursuing several
capital investment opportunities that we expect
will have very high rates of return. Our new
Mexican extrusion plant will be operational in
early calendar 2019 to better penetrate the
domestic market there. This new facility will
benefit from the recent completion of our
harmonization initiative across our five existing
extrusion plants. This initiative has established
standardized manufacturing practices which has
greatly
increased
the overall capacity and
efficiency of the group. The new plant will add to
our stable of greenfield operations in Colombia,
Brazil, Texas and Thailand which continue to
perform extremely well with collective EBITDA
100% growth the prior year. Elsewhere in our
tooling business, Castool will further expand its
Uxbridge plant to provide additional capacity and
house its own heat-treat facility. This capital
project will not only significantly reduce costs but
will provide strategic benefits, enabling Castool to
meaningfully reduce
lead times and further
enhance the quality across
its portfolio of
innovative products. Over in our Automotive
Solutions segment, Polydesign is exploring the
potential of expanding the size of its facility in
Morocco by about 50% to roughly 330,000 square
feet in order to keep up with expected demand
Back in North America, capital investment in our
other parts businesses are expected to be
relatively modest in the coming year. However, we
expect stronger overall financial performance will
be driven by several recent contract wins and the
various cost containment measures that we
continue to implement.
As fiscal 2019 gets underway, Exco’s balance
sheet, as always, remains a pillar of strength. With
essentially no net debt and ample liquidity Exco
possesses significant financial flexibility to take
advantage of opportunities that may arise while
acting as a hedge against any external shocks.
Despite elevated levels of capital spending in
fiscal 2019 we expect to generate free cash flow
well
in excess of our dividend payments.
Acquisitions remain a focus however we are not
dependent on them for earnings growth and we
will be very selective in whatever we pursue.
In the
interim, we are entirely comfortable
padding our balance sheet with the cash flows
that we will generate and/or continuing to
buyback our shares, which we see as a bargain at
In closing, Exco’s fiscal 2018 was as a year of
consolidating on past gains and advancing our
key strategies. While we fell just short of our goal
for earnings growth, we are confident the
progress we made has positioned us to achieve
record earnings in fiscal 2019. None of this, of
course, would be possible without our dedicated
and talented workforce now totaling 6,757 strong.
Thank you for your continued efforts – and
staying focused on the fundamentals. With more
of the same, we know even greater things lie
Brian A. Robbins
President and CEO
growth.
ahead.
In fiscal 2018 Exco achieved its third-highest
focused on the fundamentals has served Exco
the spectrum of the economy providing our
primary customer
in discussions to
improve
through the next fiscal year and beyond.
annual earnings per share (EPS) in its history,
well over the years. This core principle has
Extrusion and Castool groups with meaningful
program economics and has received temporary
falling just shy of the record marks achieved in
enabled us to build a diverse collection of
diversification. It is worth noting that despite the
price support pending ongoing discussions.
Making the Most of Our Opportunities
LETTER TO SHAREHOLDERS
each of the two prior years. While we had
leading businesses in typically niche industries
implementation of US aluminum tariffs, overall
These measures enabled us to reduce the EPS
anticipated our EPS would again climb to new
that provide our customers with
innovative,
shipments of North American aluminum extru-
losses at ALC from $0.11 in fiscal 2017 to $0.03 in
heights, we are nonetheless pleased with our
quality solutions
from
low-cost operations.
sions have grown to record levels, contributing to
fiscal 2018, including a breakeven performance in
overall results. During the past year we made
Together with our preponderance of “capital-
the solid results from each of these divisions.
Q3 and attainment of profitability in Q4. ALC is
significant
investments and garnered several
light” businesses and exceptional financial
contract wins that will drive future growth,
strength, Exco has tremendous staying power, all
realized
tangible
progress
repositioning
of which underlies our sustainable earnings
Tackling Our Biggest Challenges
focused on further operational improvements
and realizing a permanent price increase from its
primary customer with an objective of reaching
underperforming
operations,
and
further
growth and generation of significant free cash
Perhaps our most significant achievement in fiscal
sustained profitability, failing which we will exit
strengthened our balance sheet while returning
flow.
almost half our earnings to shareholders through
2018 was the major headway we made at fixing
the business.
what was broken. Since we acquired ALC
dividends and share repurchases. As well, we
At
the
industry and company
levels,
the
in 2014, to say it has underperformed is an
Where we have also had significant challenges is
demonstrated a positive earnings trajectory
fundamentals for both our parts and tooling
understatement. Over the past few years, we have
in our Casting division – but there too we have
through each successive quarter, exiting the year
businesses remain very sound. North American
spent considerable financial and operational
made meaningful headway. Three years ago, we
with our highest Q4 earnings ever. The progress
automotive production volumes have softened
resources to improve ALC’s results only to be met
made a sizeable capital investment to radically
we achieved over the last twelve months has
modestly from recent peaks but are widely
with more challenges along the way. These
transform the way we manufacture our large
given us more confidence than ever that Exco is
expected to plateau near current levels for the
challenges intensified in our past fiscal year as the
moulds. We knew this transition would not be
well positioned to realize record earnings in the
next several years. Relatedly, demand for Polytech
unemployment rate in Bulgaria dropped to the
easy – and we were right. But it remains evident to
year ahead.
Focused on the Fundamentals
and Neocon’s growing portfolio of innovative
storage and protection products continue to
expand apace across more vehicles and OEMs. As
well, the trend towards leather as the interior trim
lowest level in a decade, further pressuring local
us our approach was also right. The primary
area wages and causing employee turnover and
challenge has been that we vastly underestimat-
absenteeism to climb to unsustainable levels. The
ed how long it would take to bring the new
backdrop creates a difficult environment for any
process up to the required levels of capacity.
Even before Exco’s fiscal 2018 started, it was
surface of choice plays squarely into AFX’s sweet
industry. However, it is downright hostile for ALC’s
Consequently, we had trouble executing on our
evident that the year would be filled with many
spot. In Morocco, Polydesign is sailing with the
operations which are characterized by
labor
large order book through the past year. However,
new challenges. Despite firm global economic
wind at its back. We established our presence
intensive, low margin and fixed-price program
while our results have clearly been frustrating, our
conditions and the fulfilled promise of lower US
there long ago, well before other industry players
economics with potentially severe financial
progress is tangible. We are now capable of
corporate tax rates, protectionist trade tones were
had awoken to the country’s attractive labour
consequences for mis-execution. Given our view
producing moulds in less than half the time as our
gaining steam. In particular, the future of the
market and proximity to Europe. With capacity
that Bulgarian labour conditions are more likely to
old process and capacity/ reliability is improving
NAFTA agreement – which impacts Exco’s most
and inflationary pressures now building across
worsen than improve near term, it was necessary
daily. Moreover, quoting activity and order inflow
important trading area – looked increasingly
Eastern Europe, Morocco is seeing an influx of
to reverse course on ALC’s growth and diversifica-
remain very strong while difficult industry pricing
uncertain at times. As the year progressed, the
quoting activity for which we are the “go-to”
tion strategy. This led to the voluntary wind-down
conditions continue to ease. Further still, we
implementation of steel and aluminum tariffs in
supplier. Meanwhile, as it relates to all three of our
of certain programs and shift of some of ALC’s
continue to differentiate ourselves with our
the US, rising fuel and other input costs, and
tooling businesses, demand for the aluminum
production volumes to Polydesign in Morocco.
additive manufacturing capabilities, which
is
softening automotive production volumes made
products they help create continues to grow
These efforts have hurt our results but will
greatly enhancing the quality and performance of
for one of the more challenging operating
across many applications. This is particularly true
essentially be complete by the end of our first
our moulds beyond our competitors reach. And
environments we’ve encountered in several years.
within the automotive industry where an acute
quarter of fiscal 2019. At that point, ALC will be a
our lead in the area of 3D powdered metal
focus on vehicle
light-weighting
is on a
smaller business exclusively focused on cutting
printing is clear, having been nominated as a 2019
Through these challenges we remained focused
sustainable uptrend that will persist regardless of
and sewing BMW Mini seat covers. In turn, we
finalist for the automotive industry’s prestigious
on the fundamentals, making the necessary
how fast the electric vehicle is adopted, whether
expect the streamlined operations will enable the
PACE awards. As we continue to advance against
investments and decisions to grow and diversify
it’s a car, truck or SUV, or who’s driving it, if anyone
development of a workforce that is more reliable
our agenda, we are confident the profitability of
our operations – for the long term. Staying
at all. Aluminum, however, is mostly used across
and motivated. Importantly, ALC also engaged its
our large mould group will improve steadily
increased
Turning to fiscal 2019 we are pursuing several
capital investment opportunities that we expect
will have very high rates of return. Our new
Mexican extrusion plant will be operational in
early calendar 2019 to better penetrate the
domestic market there. This new facility will
benefit from the recent completion of our
harmonization initiative across our five existing
extrusion plants. This initiative has established
standardized manufacturing practices which has
greatly
the overall capacity and
efficiency of the group. The new plant will add to
our stable of greenfield operations in Colombia,
Brazil, Texas and Thailand which continue to
perform extremely well with collective EBITDA
growth of 40% in fiscal 2018 even after realizing
100% growth the prior year. Elsewhere in our
tooling business, Castool will further expand its
Uxbridge plant to provide additional capacity and
house its own heat-treat facility. This capital
project will not only significantly reduce costs but
will provide strategic benefits, enabling Castool to
lead times and further
meaningfully reduce
enhance the quality across
its portfolio of
innovative products. Over in our Automotive
Solutions segment, Polydesign is exploring the
potential of expanding the size of its facility in
Morocco by about 50% to roughly 330,000 square
feet in order to keep up with expected demand
growth.
Back in North America, capital investment in our
other parts businesses are expected to be
relatively modest in the coming year. However, we
expect stronger overall financial performance will
be driven by several recent contract wins and the
various cost containment measures that we
continue to implement.
Strong Financial Foundation Supports
Our Growth Expectations
As fiscal 2019 gets underway, Exco’s balance
sheet, as always, remains a pillar of strength. With
essentially no net debt and ample liquidity Exco
possesses significant financial flexibility to take
advantage of opportunities that may arise while
acting as a hedge against any external shocks.
Despite elevated levels of capital spending in
fiscal 2019 we expect to generate free cash flow
well
in excess of our dividend payments.
Acquisitions remain a focus however we are not
dependent on them for earnings growth and we
will be very selective in whatever we pursue.
In the
interim, we are entirely comfortable
padding our balance sheet with the cash flows
that we will generate and/or continuing to
buyback our shares, which we see as a bargain at
current trading levels.
In closing, Exco’s fiscal 2018 was as a year of
consolidating on past gains and advancing our
key strategies. While we fell just short of our goal
for earnings growth, we are confident the
progress we made has positioned us to achieve
record earnings in fiscal 2019. None of this, of
course, would be possible without our dedicated
and talented workforce now totaling 6,757 strong.
Thank you for your continued efforts – and
staying focused on the fundamentals. With more
of the same, we know even greater things lie
ahead.
Brian A. Robbins
President and CEO
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
CONTENTS
5
Management's Discussion and Analysis
20
21
25
Independent Auditors’ Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be
read in conjunction with the consolidated financial statements and related notes of Exco Technologies Limited
(“Exco”, or “Company”) for the year ended September 30, 2018. This MD&A has been prepared as of November
26, 2018.
Additional information on Exco, including copies of its continuous disclosure materials such as its Annual Information
Form, is available on its website at www.excocorp.com or through the SEDAR website at www.sedar.com .
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National
Instrument 51-102 “Continuous Disclosure Obligations” (“NI 51-102”) of the Canadian Securities Administrators.
Additional information regarding Exco, including copies of its continuous disclosure materials such as its annual
information form, is available on its website at www.excocorp.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference may be made to EBITDA, EBITDA Margin, adjusted EPS and free cash flow which are not
measures of financial performance under International Financial Reporting Standards (“IFRS”). Exco calculates
EBITDA as earnings before other income/expense, interest, taxes, depreciation and amortization and EBITDA Margin
as EBITDA divided by sales. Exco calculates adjusted EPS as earnings before other income/expense. It calculates
free cash flow as cash provided by operating activities less interest paid less investment in fixed assets net of proceeds
of disposal. EBITDA, EBITDA Margin, adjusted EPS and free cash flow are used by management, from time to time,
to facilitate period-to-period operating comparisons and we believe some investors and analysts use these measures
as well when evaluating Exco’s financial performance. These measures, as calculated by Exco, do not have any
standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other
issuers.
CAUTIONARY STATEMENT
Information in this document relating to: projected North American light vehicle sales and production, original
equipment manufacturer’s (OEM) capital investment levels, the rate and intensity of OEM development of all-electric
or hybrid powertrain systems, the level of order backlog of the company’s business units, contribution of our start-up
business units, contribution of awarded programs yet to be launched, margin performance, financial performance of
acquisitions and operating efficiencies are forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements found mainly in the MD&A section
but also elsewhere throughout this document. These forward-looking statements are based on our plans, intentions or
expectations which are based on, among other things, assumptions about the number of automobiles produced in North
America and Europe, the number of extrusion dies required in North America and South America, the rate of economic
growth in North America, Europe and emerging market countries, investment by OEMs in drivetrain architecture and
other initiatives intended to reduce fuel consumption and/or the weight of automobiles, raw material prices, economic
conditions, currency fluctuations, trade restrictions, our ability to integrate acquisitions and the rate at which our
operations in Brazil and Bulgaria achieve sustained profitability. These forward-looking statements include known
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
and unknown risks, uncertainties, assumptions and other factors which may cause actual results or achievements to be
materially different from those expressed or implied. For a more extensive discussion of Exco’s risks and uncertainties
see the ‘Risks and Uncertainties’ section in this Annual Report, our Annual Information Form (“AIF”) and other
reports and securities filings made by the Company. This information is available at www.sedar.com.
While Exco believes that the expectations expressed by such forward-looking statements are reasonable, we cannot
assure that they will be correct. In evaluating forward-looking information and statements, readers should carefully
consider the various factors which could cause actual results or events to differ materially from those indicated in the
forward-looking information and statements. Readers are cautioned that the foregoing list of important factors is not
exhaustive. Furthermore, the Company will update its disclosure upon publication of each fiscal quarter’s financial
results and otherwise disclaims any obligations to update publicly or otherwise revise any such factors or any of the
forward-looking information or statements contained herein to reflect subsequent information, events or
developments, changes in risk factors or otherwise.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CORE BUSINESSES
Exco is a global designer, developer and manufacturer of dies, moulds, components and assemblies, and consumable
equipment for the die-cast, extrusion and automotive industries. The Company reports in two business segments.
The Casting and Extrusion segment designs, develops and manufactures die-casting and extrusion tooling and
consumable parts for both aluminum die-casting and aluminum extrusion machines. Operations are based in North
America, South America and Thailand and serve automotive and industrial markets around the world. Exco is a leader
in most of these markets. In the die-casting and extrusion tooling markets, Exco is further entrenching itself by
reducing lead times and manufacturing costs through design and process enhancements. In the die-cast tooling group
a major equipment capital project has been implemented to increase capacity, reduce lead times, further improve
quality and reduce costs. In the machine consumables market, Exco is leveraging its long tradition as a reliable, high-
quality supplier of consumable components for the injection system of die-cast machines and aluminum extrusion
presses by evaluating, coordinating and ultimately maximizing customers’ overall equipment performance and
longevity. The Canadian, European, South American and United States markets are Exco’s primary focus for die-cast
moulds, extrusion dies and machine consumable parts. However, with respect to the latter, we commenced operations
of a new facility in Thailand in 2014 to better penetrate the European and Asian market for those products.
The Automotive Solutions segment designs, develops and manufactures automotive interior trim components and
assemblies primarily for passenger and light truck vehicles. The Polytech and Polydesign businesses manufacture
synthetic net and other cargo restraint products, injection-moulded components, shift/ brake boots, related interior trim
components and assemblies. Polydesign is also a manufacturer and/or finisher of injection moulded interior trim and
instrument panel components, sun visors, seat covers, head rests and other cut and sew products. Automotive Leather
Company is a manufacturer of leather/fabric seat covers for automobile interiors and other wrap and sew components.
Neocon is a supplier of soft plastic trunk trays, rigid plastic trunk organizer systems, floor mats and bumper covers.
AFX Industries is a tier 2 supplier of leather and leather-like interior trim components to the North American
automotive market. AFX also supplies die cut leather sets for seating and many other interior trim applications as well
as injection-molded, hand-sewn, machine-sewn and hand-wrapped interior trim components of all sorts. Automotive
Solutions manufacturing facilities are located in Canada, the United States, Mexico, Bulgaria, and Morocco supplying
the automotive markets in North America, Europe and to a lesser extent, Asia.
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ANNUAL REPORT 2018
VISION AND STRATEGY
For the past few years, Exco has pursued several key strategies designed to achieve sustainable revenue and earnings
growth. These include: (1) strengthening our technological leadership and competitive position in our chosen markets
through automation and technology, (2) minimizing our cost structure, (3) shifting our productive capacity to low-
cost jurisdictions in closer proximity to our customers’ operations, (4) diversifying our revenue base with new products
and services that leverage our competitive strengths, and (5) capitalizing on organic and inorganic growth
opportunities in both our existing and select developing markets.
The North American automotive industry remained generally solid in fiscal 2018, with most OEMs and tier one
suppliers having strong sales and firm credit fundamentals. Production of light vehicles however appears to have
plateaued and there continues to be an increasing separation of trends between passenger cars and light trucks
(including sport utility and crossover vehicles) whereby demand for the former has been declining and demand for the
latter is holding fairly steady or growing slightly. Nonetheless, overall vehicle sales volumes remain near historical
highs supported by low interest rates, moderate gas prices, an aging fleet and widespread introduction of new vehicle
models. As well, automobile manufacturers continue to invest in the development and production of more innovative
and fuel-efficient powertrains in response to consumer demand, as well as U.S. government-mandated Corporate
Average Fuel Economy (“CAFE”) standards, although these standards are under review in the 2021 to 2025
timeframe. In Europe comparable legislation requiring co2 emissions to be reduced is similarly driving innovation to
reduce vehicle weight and improvement in powertrain design. These developments provide meaningful growth
opportunities for our tooling businesses, but also for some of our interior trim businesses, which often sell components
that are generally lighter in weight than the products they aim to displace.
During fiscal 2018, Exco continued to solidify its technological leadership with the production of die-cast moulds for
light-weight structural parts that use advanced aluminum alloys such as silafont. To date, Exco has shipped numerous
such moulds. As well, quoting activity and new order flow for various additional structural part programs is ongoing,
although the pace of such activities has lagged our earlier expectations. Exco believes moulds for structural aluminum
components will be a significant driver of growth in the medium term and that this demand will occur regardless of
prevailing powertrain developments. To point, reducing weight in an electric vehicle is critical to extend the range of
the battery. This business unit has also landed orders for nine and ten speed transmission cases and numerous four and
three cylinder engine block programs which are at the vanguard of OEM efforts to improve vehicle fuel efficiency.
Offsetting these positive benefits however is the maturation of certain established programs that have benefited Exco’s
large mould group over the past several years. Some of these programs were long-running requiring a high number of
moulds that have similar or identical configurations. Typically, programs such as these provide a larger base over
which to absorb any engineering/ development costs and also provide Exco with the opportunity to become more
efficient with each successive mould produced. Recently, automotive OEM’s have increased the speed at which they
alter powertrain designs in order to achieve their fuel efficiency and emission reduction goals. This provides Exco
with less opportunity to leverage the efficiency measures as noted in the forgoing. In response to and in anticipation
of these trends continuing, Exco has invested significant capital in new machinery and equipment to reduce costs,
increase efficiency, meet shorter lead times, further enhance the quality of its products and expand capacity.
Demand for extrusion dies remains very firm as end market applications for extruded aluminum components are quite
diverse and correlate well with GDP, which is growing firmly in North America – our largest market for extrusion
dies. As well, demand for extruded aluminum components within the automotive end market continues to grow above
market rates owing to the same light-weighting trends noted above. Moreover, anti-dumping and/or countervailing
duties against Chinese imports into Canada and the US on aluminum extrusions remain in place following completion
of the 2016 sunset review.
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ANNUAL REPORT 2018
Over the past several years Exco has expanded its footprint in the Americas to gain increased exposure to markets that
the Company expects will have higher growth prospects over the longer term. These investments have included a new
extrusion die production facility in Medellin, Colombia, which commenced operations in January 2012 and a new
extrusion die production facility near Sao Paulo, Brazil, which commenced operations in June 2014. These
investments produced mixed results in fiscal 2018 with our Colombia operations performing very strongly while our
Brazilian operations remain challenged by the weak economic environment in that country. Nonetheless, the financial
performance of our Brazilian operations continued to improve in fiscal 2018 and we continue to grow from a small
base, while we hone our skills and capabilities, positioning ourselves for the economic recovery when it eventually
takes place. Exco is currently constructing a new extrusion die facility in Mexico to better service the local market in
that country. The new facility is expected to be operational in early calendar 2019.
In addition to its investments in South America, Exco has expanded its presence in the North America extrusion die
market to provide increased growth in a distinct market segment where proximity to customers is a key element to
success. In 2013, the Company acquired and subsequently expanded an existing toolshop in Wylie Texas to better
service the south-central region of the United States. Exco is now focused on harmonizing the manufacturing process
of its various extrusion die plants and implementing various changes in order to improve the growth prospects and the
efficiency of these operations.
Our Castool business also has solid growth prospects, globally. Demand growth for Castool’s machine consumable
parts prompted us to build a production facility in 2014 in Thailand to more efficiently serve our customers while
taking advantage of lower production and shipping costs to Asia and Europe. This facility has been producing since
July 2014 and is now generating consistent profitability. In fiscal 2019, Castool plans to add approximately 20,000
square feet to its existing building in Uxbridge, Ontario. This addition will provide additional manufacturing capacity
and enable Castool to construct its own heat-treat facility in order to improve quality and service while lowering its
operating costs.
Over the past few years, strong vehicle production volumes in both North American and Europe have helped fuel sales
and profit growth in our Automotive Solutions interior trim segment. Furthermore, particularly in North America, a
good proportion of the vehicles produced are refreshed or completely new models with a growing representation of
SUV/ CUV’s and light trucks, which have greater cabin and cargo areas. Meanwhile, we continue to expand our
capabilities and broaden our product offerings. All of this helps us to increase our content per vehicle and replace
older programs which have been ‘costed down’ over the years with new programs reflecting current costs and better
margins. Cost inflation of major raw materials used by the segment has generally picked up over the past year and
contributed to softer financial performance in fiscal 2018. We continue to take various initiatives to offset these
pressures and expect any further impact to be manageable through the near term.
While we believe North American and European vehicle production volumes appear sustainable near current levels
for the next few years, we believe prospects for further growth are limited by several structural trends. These include:
a steadily aging population and historically high levels of consumer and government debt. As a result, it is likely that
the US and the Euro zone economies will, over the long term, underperform the economies of most developing
countries – particularly, in Latin and South America and Southeast Asia. Admittedly certain emerging economies are
currently under pressure. Brazil is a case in point. However, over the long term we believe the underlying structural
trends will reassert themselves.
Exco remains committed to establishing a larger presence in these markets to plant the seeds of revenue and earnings
growth for future years. Our focus has been traditionally on relatively low-risk opportunities in markets that are already
familiar to us, and which leverage our technological leadership and existing product and service capabilities – such as
South America and Asia. Exco has exported to these emerging markets for many years and we are familiar with the
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
customers and the general business climate. We have also operated several large plants in low-cost jurisdictions such
as Mexico and Morocco for many years with exceptional performance and financial results. The increasingly
sophisticated customers in these emerging markets are looking for superior quality, innovative product solutions and
the benefit of local sourcing, product development and service. By manufacturing locally, we also significantly reduce
transportation costs and mitigate the effect of unfavorable currency trends.
Notwithstanding Exco’s investment in developing markets, we also continue to look for selective acquisitions that
will bolster our position and enhance profitability in North America and Europe. On March 1, 2014 we purchased
Automotive Leather Company which specializes in the manufacture and export of luxury leather interior trim
components to the middle and luxury automotive sector. This acquisition provided us with a facility in Eastern Europe,
to which European automotive manufacturing had been migrating, and a central European technical and service centre
from which we can better serve our European customers. ALC’s operations in South Africa and Lesotho were less
compelling. Consequently, Exco closed its operations in South Africa in fiscal 2016 and ceased production in Lesotho
in November 2016. During fiscal 2018, management continued to direct significant efforts towards improving the
operating and financial performance of ALC’s operations in Bulgaria. The performance of these operations has been
increasingly challenged by a concentration of activity with one large labor-intensive program coupled with falling
unemployment rates, rising wages and fixed-price program pricing that was established when labor conditions were
materially more favorable. In management’s view, these labor pressures will likely continue for the foreseeable future,
warranting a change to ALC’s strategy of growing and diversifying its operations in Bulgaria. To that end, in fiscal
2018, ALC began voluntarily winding down certain programs with its customers’ consent and started shifting a portion
of its production volumes to Polydesign in Morocco. These efforts are expected to leave ALC with a smaller, more
focused business and enable the development of a workforce that is more reliable and motivated. As well, ALC has
engaged customers to improve program economics and received a temporary price increase during the year. ALC is
continuing these customer discussions with an objective of receiving a permanent price increase in order to restore
ALC to sustained profitability. More generally, Exco management remains focused on exiting or repricing business
with inadequate profitability in both of its business segments. While this initiative may dampen future sales, it is
expected to have a positive impact on profitability and margins.
On April 4, 2016 we acquired AFX Industries LLC. The acquisition builds on Exco’s significant leather-based interior
trim stable of products while also providing new customers, suppliers, products and capabilities in a region that is very
familiar to us. As well, the increased scale and diversity provides incremental opportunities across Exco’s Automotive
Solutions Group. AFX is based in Port Huron, Michigan with manufacturing operations in Matamoros, Mexico. The
company is a tier 2 supplier of leather and leather-like interior trim components to the North American automotive
market. AFX supplies die-cut leather sets for seating and many other interior trim applications as well as injection-
molded, hand sewn, machine-sewn and hand-wrapped interior components of all types.
2018 RESULTS
Consolidated Results - Sales
Annual sales totalled $575.6 million compared to $584.2 million last year – a decrease of $8.6 million or 1% over last
year. The US dollar averaged 2% lower ($1.29 versus $1.31) against the Canadian dollar over the year reducing sales
by $7.2 million. The Euro averaged 5% higher ($1.53 versus $1.46) against the Canadian dollar over the year
increasing sales by $8.4 million.
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ANNUAL REPORT 2018
Selected Annual Information
The following table sets out selected financial data relating to the Company’s years ended September 30, 2018 and
2017. This financial data should be read in conjunction with the Company’s audited consolidated financial statements
for these years:
(in $ millions except per share amounts)
Sales
Net income for the year
Earnings per share from net income
Basic and diluted
Earnings per share from adjusted net income (Adjusted EPS)
Basic and diluted
Total assets
Cash dividend paid per share
EBITDA
Segment Sales
2018
$575.6
$42.3
2017
$584.2
$42.5
$1.00
$1.00
$1.00
$447.9
$0.33
$76.6
$1.03
$431.2
$0.31
$83.2
● Automotive Solutions Segment
Sales in this segment were $375.6 million – a decrease of $25.3 million or 6% from the prior year. The appreciation
of the Canadian dollar versus the US dollar in fiscal 2018 compared to fiscal 2017 reduced sales in North America by
$4.5 million. The strengthening of the Euro against the Canadian dollar increased segment sales in Europe by $8.0
million year over year. Consequently, segment sales were down $28.8 million, or 7% from last year excluding foreign
exchange rate movements. Sales were lower at the company’s North American based operations (Polytech, Neocon
and AFX) by 13% during the year due to a 4% decline in overall North American vehicle production volumes
including an ongoing weakness in the demand for passenger cars, a focus on higher margin business, the timing of
product launches, adverse foreign exchange rate movements, and isolated pricing pressures. Reduced demand for
certain accessory products also negatively impacted sales during the year. The pipeline for new order activity for both
new and existing products however remains robust at all three of the segment’s North American businesses. Sales
were higher at the segment’s European operations (ALC and Polydesign) by 4% during the year due to temporary
pricing adjustments ALC received from its primary customer on its main program, favorable foreign exchange rate
movements and a number of new program launches at Polydesign, where quoting activity for additional programs
remains extremely robust. These factors more than offset a decline in volumes at ALC arising from the permanent
closure of that entity’s operations in Lesotho, the end of a large program in fiscal 2017, and the voluntary wind-down
of several smaller programs through fiscal 2018 ultimately aimed at improving ALC’s profitability.
• Casting and Extrusion Segment
Sales in this segment were $199.9 million – an increase of $16.7 million or 9% from the prior year. Foreign exchange
rate movements reduced segment sales by $2.3 million during the year. Consequently, segment sales were up $19.0
million, or 10% from last year excluding foreign exchange rate movements. Within the segment, sales were higher in
each of the Extrusion, Large Mould and Castool group’s during the year. Almost all of the segment’s various plants
experienced increased sales evidencing widespread strength with percentage increases the highest at the segment’s
newest locations of Thailand, Texas and Brazil. Key factors behind the higher segment sales include increased
volumes in the Large Mould group as activity picked up following new program awards, market share gains associated
with the continued seasoning of Extrusion group greenfield plants and enhanced quality initiatives, a rebound in capital
equipment sales at the Castool group together with ongoing market penetration of the group’s innovative product
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
offerings, selective price increases (including the pass-through of certain steel tariffs on to customers), and generally
firm overall market conditions. These factors were partially offset by adverse foreign exchange rate movements as
well as pockets of competitive pressures. New order activity remained robust throughout the year across most of the
segment’s businesses. In anticipation that these trends will continue, management continues to invest significant
capital to further improve its market share potential and the efficiency of its operations.
Cost of Sales
Cost of sales totalled $453.9 million – a decrease of $0.3 million or essentially equal to the prior year. Cost of sales
as a percentage of sales increased to 79% from 78% the prior year as lower direct material costs were more than offset
by slightly higher direct labor and factory overhead costs. This, in turn, is largely driven by a mix shift between the
company’s various businesses and business segments as well as higher freight and labour costs at ALC associated
with tight labor markets and rising inflationary pressures in Bulgaria. More generally, inflationary pressures increased
in fiscal 2018 relative to the prior year but remain manageable for Exco’s major input materials – petroleum/natural
gas-based resin and plastic products in the Automotive Solutions segment and tool grade steel in the Casting and
Extrusion segment. Where possible, Exco has been passing along US steel tariffs on to its customers through effective
price increases in order to mitigate the negative impact on its profitability.
Selling, General and Administrative Expenses
Selling, general and administrative expense in the current year decreased to $46.1 million from $46.8 million last year,
a reduction of 1%. As a percentage of sales however, these expenses remained stable year over year at 8.0%.
Depreciation and Amortization
Consolidated depreciation expense in fiscal 2018 totalled $15.7 million, which was essentially unchanged from the
$15.8 million expense last year. Amounts within the Company’s reporting segments were also relatively stable year
over year. Depreciation expense within the Casting and Extrusion segment totalled $12.3 million in fiscal 2018 versus
$12.4 million in fiscal 2017 and depreciation expense within the Automotive Solutions segment totalled $3.4 million
this year versus $3.3 million last year. Amortization expense increased to $5.2 million in fiscal 2018 from $4.8 million
the prior year with the difference primarily attributable to accelerated amortization of the remaining intangibles related
to ALC. The carrying value of total intangible assets amounted to $36.6 million as at September 30, 2018. The
Company expects the associated annual amortization expense will total approximately $4.0 million in fiscal 2019,
although could vary depending on USD/ CAD exchange rates.
Interest
Net interest expense in the current year totalled $1.0 million in fiscal 2018 compared to $1.3 million in fiscal 2017.
The reduction is primary attributable to lower average debt levels in fiscal 2018 compared to fiscal 2017 partially
offset by a rise in benchmark interest rates during fiscal 2018 compared to fiscal 2017.
Income Taxes
Exco’s effective income tax rate was 22.6% in fiscal 2018 compared to an effective income tax rate of 29.2% in fiscal
2017. The lower effective income tax rate in fiscal 2018 was driven by a reduction to the corporate income tax rate in
the US and increased proportion of earnings from jurisdictions which have a lower tax rate. As well, the fiscal 2017
tax rate was adversely impacted by $1.2 million in non-deductible ALC closure costs (see ‘Net Income’ section –
below).
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ANNUAL REPORT 2018
Net Income
• Consolidated
The Company reported consolidated net income of $42.3 million or basic and diluted earnings of $1.00 per share,
which was essentially unchanged compared to consolidated net income of $42.5 million or basic and diluted earnings
of $1.00 per share respectively. Net income in fiscal 2017 included a $1.2 million charge to earnings related to the
permanent closure of ALC’s operations in Lesotho. Excluding this item, net income would have been $43.7 million
($1.03 per basic and diluted share) in fiscal 2017.
• Automotive Solutions Segment (Operating Earnings)
The Automotive Solutions segment recorded operating earnings of $44.4 million for the year compared to $51.1
million last year – a decrease of $6.7 million or 13%. In North America, segment earnings were adversely impacted
by lost contribution from lower sales as well as a reduction in margins. Pre-tax profit margins were lower at Polytech,
Neocon and AFX by 220 basis points on a combined basis during the year arising from reduced overhead absorption,
unfavorable product mix variance, operational disruption associated with certain product launches, adverse foreign
exchange rate movements as well as isolated competitive pricing pressures and modest raw material/ labour cost
inflation. These factors were partially offset by a gain on the sale of a building of $1.8 million in the fourth quarter of
fiscal 2018. During the year, management implemented several initiatives to improve its cost position for these
businesses. Together with the benefit of new product launches, management believes profitability for its North
American businesses within this segment are well positioned to improve through fiscal 2019. In Europe, profitability
and margins improved to record levels in fiscal 2018. Polydesign benefited from several new product launches
contributing to strong revenue growth. Despite the elevated level of activity, Polydesign’s margin also improved year
over year due to the relative reduction in operational disruption which was heightened in fiscal 2017 when constant-
currency revenue growth approached 30%. Looking forward, quoting activity for new business remains exceptionally
strong at Polydesign and management remains focused on adding new business that maximizes its profitability. Also
in Europe, ALC’s results improved sharply in fiscal 2018 compared to fiscal 2017 although it remained in a loss
position. ALC’s losses totalled $1.2 million ($0.03 per share) for the year compared to a loss of $6.0 million ($0.14
per share) the prior year (including a $1.2 million or $0.03 per share loss associated with shut down costs). The year
over year improvement ocurred despite very challenging fundamentals marked by deteriorating local market labour
conditions linked to falling unemployment rates and rising wages. The expectation that this situation will continue led
to a strategic shift in ALC’s operating plans. During the year, ALC began to focus on shrinking rather than growing
its production within Bulgaria while continuing to implement significant operational improvements. As well, ALC
engaged its primary customer in discussions and received a temporary price increase to temper incremental costs.
ALC is continuing these customer discussions with an objective of receiving a permanent price increase and returning
to sustained profitability.
• Casting and Extrusion Segment (Operating Earnings)
Casting and Extrusion operating earnings increased to $18.2 million from $18.0 million in the prior year – a difference
of $0.2 million or 1%. Excluding a $0.9 million loss on the disposal of equipment in the Extrusion group in fiscal
2018 (no such charge in fiscal 2017) the segment operating earnings improved by $1.1 million or 6%. Overall
profitability improvement within the segment was driven by the Castool group, which benefited from selective price
increases, efficiency initiatives, continued seasoning of its operations in Thailand and deepening market penetration
of its innovative products amidst generally favorable market conditions. Profitability within the Extrusion group also
improved year over year despite the asset disposition charge as the group benefited from rising revenues, operational
improvements associated with its plant harmonization initiative, generally strong overall market conditions and the
continued seasoning of its newer locations. The Large Mould group however experienced a decline in profitability
during the year despite higher revenues as inefficiencies associated with the ramp up of new equipment/ processes
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ANNUAL REPORT 2018
persisted longer than expected. These challenges were compounded by a higher volume of work, rising raw material
and other input costs, an unfavorable product mix associated with customer timing requirements and losses on a few
“first-off” programs. While the Large Mould group’s performance was disappointing in fiscal 2018, management
remains very confident that the new equipment/ processes will further enhance the Company’s competitiveness and
lead to a reduction in its costs as implementation issues dissipate through fiscal 2019. The stronger Canadian dollar
also negatively impacted this segment by decreasing the value of US dollar denominated earnings from US operations.
This segment’s three plants in Canada were also negatively impacted from the stronger Canadian dollar by decreasing
the value of US dollar denominated sales – for greater discussion of foreign exchange see ‘Segment Sales – Casting
and Extrusion Segment’ above.
Corporate Segment (Operating Expense)
•
Corporate expense in the current year amounted to $6.9 million compared to $6.5 million the prior year. The year over
year increase was primarily driven by higher incentive compensation expense in 2018 relative to 2017.
EBITDA
EBITDA in the current year amounted to $76.6 compared to $83.2 million the prior year – a decrease of $6.6 million
or 8%. The EBITDA margin decreased to 13.3% compared to 14.2% the prior year. EBITDA in the Casting and
Extrusion segment was $31.4 million, which was $0.2 million higher than fiscal 2017 although the segment EBITDA
margin declined to 15.7% compared to 17.0% the prior year. The Automotive Solution segment EBITDA was $52.0
million, which was lower by $6.5 million, or 11% compared to fiscal 2017. The segment EBITDA margin deteriorated
to 13.8% in fiscal 2018 compared to 14.6% the prior year. Corporate cash expenses increased slightly, to 1.2% of sales
compared to 1.1% of sales the prior year.
Quarterly Results
The following table sets out financial information for each of the eight fiscal quarters through to the fiscal year
ended September 30, 2018:
($ thousands except per share
amounts)
Sales
Net income
Earnings per share
Basic
Diluted
September 30,
2018
$139,538
$11,587
$0.27
$0.27
($ thousands except per share
amounts)
September 30,
2017
Sales
Net income
Earnings per share
Basic
Diluted
$131,416
$7,521
$0.18
$0.18
June 30,
2018
$152,755
$11,211
$0.27
$0.27
June 30,
2017
$145,909
$10,933
$0.26
$0.26
March 31,
2018
$148,390
$10,556
December 31,
2017
$134,871
$8,916
$0.25
$0.25
$0.21
$0.21
March 31,
2017
$153,783
$12,602
December 31,
20161
$153,097
$11,463
$0.30
$0.30
$0.27
$0.27
1 Net income in the first quarter of fiscal 2017 was reduced by $1.2 million ($0.03 per share) due to charges
associated with the closure of ALC’s operations in Lesotho.
EXCO TECHNOLOGIES LIMITED
12
ANNUAL REPORT 2018
Exco typically experiences softer sales and profit in the first fiscal quarter, which coincides with our customers’ plant
shutdowns in North America during the Christmas season. Exco also experiences a slowdown in the fourth fiscal
quarter as North American customers typically schedule summer plant shutdowns and Exco’s European customers
typically curtail releases during the month of August to accommodate vacations.
Fourth Quarter
In the fourth quarter, consolidated sales were $139.5 million – an increase of $8.1 million or 6% from the prior year.
Over the quarter the average USD/CAD exchange rate was 4% higher ($1.30 versus $1.25 last year) increasing sales
by $3.3 million. The average EUR/ CAD exchange rate was modestly higher ($1.51 versus $1.48 last year) increasing
sales by $1.0 million compared to the fourth quarter of fiscal 2017.
The Automotive Solutions segment experienced a 2% increase in sales, or $2.0 million, to $89.0 million from $87.1
million in the fourth quarter of 2017. The increase was mainly driven by higher revenues at ALC assisted by temporary
price increases on its main program although Polydesign also recorded higher sales driven by new program launches.
In North America, overall vehicle production volumes were relatively flat during the quarter compared to a year ago,
however the mix shift towards trucks/ SUV’s and away from passenger cars continued. These trends helped Polytech
and Neocon generate higher revenues year over year although hampered the results of AFX. Sales were also impacted
by the timing of program launches at the segment’s various businesses, favorable foreign exchange rate movements,
and a focus on higher margin activities. The higher average value of the US dollar compared to the Canadian dollar
increased segment sales by $1.9 million in the current quarter. The higher value of the Euro compared to the Canadian
dollar increased segment sales by $1.0 million in the current quarter.
The Casting and Extrusion segment recorded sales of $50.5 million compared to $44.3 million last year – an increase
of $6.2 million or 14%. This increase was widespread with all three of the segment’s businesses contributing. Factors
behind the increase include a rebound in demand for capital equipment within the Castool group together with price
increases and strong demand for the group’s other innovative product offerings as well as continued seasoning of
Castool’s operations in Thailand. Revenue generated by the Extrusion group were higher due to continued strong
market conditions coupled with price increases (including the pass-through of US steel tariffs) and, management
believes, market share gains. Large mould group sales were higher as the division continued to execute on its strong
backlog while quoting activity for new programs remains robust. The higher average value of the US dollar compared
to the Canadian dollar increased segment sales by $1.4 million in the current quarter. Fluctuations between the
Canadian dollar and Euro did not meaningfully impact segment sales in the quarter.
The Company’s fourth quarter consolidated net income increased to $11.6 million or earnings of $0.27 per share
compared to $7.5 million or earnings of $0.18 per share in the same quarter last year – an EPS increase of 50%. The
effective income tax rate was 18.7% in the current quarter compared to 27.4% in the same quarter last year. The
effective tax rate in the current period was improved by a reduction to the corporate income tax rate in the US and a
greater proportion of earnings generated in lower tax rate jurisdictions.
Fourth quarter pretax earnings in the Automotive Solutions segment totalled $12.8 million, an increase of $3.9 million
or 44% over the same quarter last year. This improvement was driven mostly by the segment’s European operations
where temporary price increases and other operating efficiency measures enabled ALC to record a profit this quarter
compared to a loss the prior year period. The higher income occurred despite a $1.6 million ($0.04 per share) bad debt
expense at ALC associated with a customer dispute upon program conclusion, though collection efforts continue
unabated. ALC’s results clearly demonstrate progress with efforts to turnaround that business units’ performance.
These efforts continue with an objective of further reducing ALC’s footprint in Bulgaria and achieving a permanent
price increase from ALC’s main program customer. Also in the quarter, profitability was boosted in the segment’s
EXCO TECHNOLOGIES LIMITED
13
ANNUAL REPORT 2018
North American operations by $1.8 million due to the sale of a building which offset a drag on earnings from the
lower sales volumes and underlying margin weakness. Margin rate reduction was caused by reduced absorption of
factory overhead expenses, unfavorable product mix shifts and isolated supplier challenges with a new program launch
that led to incremental costs.
Pretax earnings in the Casting and Extrusion segment improved by $0.6 million or 23% over the same quarter last
year to $3.4 million. The earnings improvement was mainly driven by contributions from the Castool and Extrusion
groups which benefited from higher revenues and, in the case of Castool, margin expansion. These increases more
than offset weaker results from the Large Mould group associated primarily with losses on a few near-complete
programs for which production costs exceeded prior estimates due in part to increased outsourcing requirements. This
occurred, in part, as internal capacity was limited by operating inefficiencies that persisted through the quarter.
Program volumes and quoting activity however remain very healthy and after implementing various measures to
resolve the group’s challenges, management firmly believes the Large Mould group’s performance is at an inflection
point with stronger results expected ahead.
The Corporate segment in the fourth quarter recorded expenses of $1.8 million compared to $0.9 million last year with
the higher amount mainly due to incentive compensation expense which was temporarily decreased in 2017. As a
result of the forgoing, consolidated EBITDA in the quarter increased to $20.1 million (14.4% of sales) compared to
$15.8 million (12.0% of sales) last year.
FINANCIAL RESOURCES, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Operating cash flow before net changes in non-cash working capital was $64.7 million in both fiscal 2018 and fiscal
2017. This result occurred despite a modest reduction in Net Income in fiscal 2018 (as described above) primarily due
to an increase in deferred tax amounts in fiscal 2018 compared to a reduction the prior year and modestly higher
Depreciation and Amortization expense in fiscal 2018. Other factors that contributed to the year over year variance
included $0.7 million of ALC closure costs that were non-cash in nature in fiscal 2017 and $1 million of net gains
recorded from the disposal of property, plant and equipment in fiscal 2018. Net change in non-cash working capital
was $15.9 million cash used in fiscal 2018 compared to $1.7 million cash provided last year. The year over year swing
was primarily driven by timing of accounts receivable collection and unbilled revenue as well as higher inventory
levels while trades and other accruals remained relatively stable. The year over year variance in non-cash working
capital was also attributable to the higher sales volumes in the fourth quarter of fiscal 2018 relative to the same quarter
in fiscal 2017. Consequently, cash provided by operating activities declined 27% to $48.8 million compared to $66.4
million last year.
Cash Flows from Financing Activities
Cash used by financing activities amounted to $34.3 million compared to a use of $41.0 million in fiscal 2017. The
lower use in fiscal 2018 is mainly attributable to $12.8 million of debt reduction compared to $25.3 million the prior
year. Other factors that contributed to the year over year variance include higher dividends of $14.1 million in fiscal
2018 compared to $13.2 million last year and an incremental net use of $5.3 million to repurchase share capital.
In addition to the obligations disclosed on its consolidated statements of financial position, Exco also enters into
operating lease arrangements from time to time. Exco owns 15 of its 18 manufacturing facilities and most of its
production equipment. Leased facilities consist of ALC’s operations in Bulgaria. Exco acquired AFX’s operations in
Mexico in early fiscal 2018. The Company also leases sales and support centers in Troy, Michigan and Port Huron,
EXCO TECHNOLOGIES LIMITED
14
ANNUAL REPORT 2018
Michigan, and a warehouse in Brownsville, Texas. The following table summarizes the Company’s significant short-
term and long-term commitments on an undiscounted basis:
(000’s)
Bank indebtedness
Trade accounts payable
Long-term debt
Operating leases
Purchase commitments
Capital expenditures
Total
$11,764
46,966
22,289
2,936
39,782
2,079
$125,816
< 1 year
$11,764
46,966
4,108
1,181
39,782
2,079
$105,880
1-3 years
-
-
18,181
1,605
-
-
$19,786
Over 3 years
-
-
-
150
-
-
$150
∗ Exco leases facilities, automotive, material handling vehicles and other miscellaneous office equipment. It is not Exco’s policy
to purchase these assets at the expiry of their terms but occasionally it may purchase the assets at the end of the lease terms when
the purchase options are favorable. Exco does not expect any material liquidity or capital resource impacts from these possible
purchases.
Cash Flows from Investing Activities - Capital Expenditures
Cash used in investing activities in the current year totalled $20.4 million compared to $16.0 million last year. Most
of the difference is explained by higher capital spending in the current year of $22.9 million compared to $15.3 million
last year. Capital spending in the current year included $5.1 million to purchase the building where AFX’s operations
are located. The balance of the capital spending is mostly related to machinery and equipment needed to maintain or
upgrade our production capacity. Cash flow from Investing Activities was favorably impacted in the current year by
$3.1 million in proceeds from the disposal of property, plant and equipment, most of which was related to the sale of
a building in Huntsville, Alabama which was leased to a third-party tenant.
In fiscal 2019, Exco plans to invest approximately $35.0 million in capital expenditures of which roughly $16.5 million
is for maintenance, ongoing equipment upgrades and the expansion of existing facilities within the Casting and
Extrusion segment, about $8.5 million is for the construction and build-out of a previously announced extrusion
facility in Mexico (also in the Casting and Extrusion segment), and approximately $10.0 million is for maintenance
expenditures and targeted capacity additions in the Automotive Solutions segment.
We expect that in fiscal 2019 our cash flow from operations will exceed anticipated capital expenditures. Together
with our cash deposits and our unused credit lines we believe we have ample financial resources to fund our operating
and capital requirements.
Financial Position and Cash Balance
Exco’s financial position and liquidity remains strong. The Company’s conservative financial policies have served it
well throughout the years and has allowed it to take advantage of acquisition opportunities and further organic growth
as circumstances permit.
Exco’s net debt totalled $2.7 million as at September 30, 2018 compared to net debt of $10.9 million as at September
30, 2017, for a reduction of $8.2 million during the year. This reduction primarily occurred through the generation of
$27.4 million of free cash flow less dividends paid of $14.1 million and net share repurchases of $6.4 million during
fiscal 2018.
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
In addition to its cash balances of $31.3 million, Exco retains access to $25.6 million of its $50.0 million committed
credit facility, which matures February 2021. Pursuant to the terms of the credit facility, Exco is required to maintain
compliance with certain financial covenants. The Company was in compliance with these covenants as at September
30, 2018.
Outstanding Share Capital
As at September 30, 2018, the Company had 41,840,681 common shares outstanding. In addition, as at September
30, 2018, the Company had outstanding stock options for the purchase of up to 880,150 common shares.
CRITICAL ACCOUNTING POLICIES
The preparation of Exco’s financial statements in conformity with International Financial Reporting Standards
requires management to make estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements,
as well as the reported amount of revenue and expenses during the reporting period.
Exco recognizes revenue upon percentage of completion of long-term contracts in the large die-cast moulds business
and upon product completion for all other businesses. For short-term contracts in the large die-cast moulds business
and all contracts in the extrusion and other tooling products and the Automotive Solutions segment products,
completion is defined as shipment to customers.
Management estimates and expenses the fair value of stock-based compensation granted after January 1, 2002. This
fair value is amortized to earnings over the remaining vesting period using the Black-Scholes option pricing model.
The Company believes that the estimate of stock-based compensation is a “critical accounting estimate” because
management is required to make significant forward-looking assumptions including expected stock volatility, the
change in expected dividend yields and the expected option term. Currently the compensation expense is recorded in
the selling, general and administration category in the consolidated statements of income and comprehensive income.
We evaluate property, plant and equipment and other long-lived assets for impairment whenever indicators of
impairment exist. Indicators of impairment include prolonged operating losses or a decision to dispose of, or otherwise
change the use of, an existing fixed or other long-lived asset.
We believe that accounting estimates related to goodwill, property, plant and equipment and other long-lived asset
impairment assessments are “critical accounting estimates” because: (i) they are subject to a significant measurement
uncertainty and are susceptible to changes as management is required to make forward-looking assumptions regarding
the impact of improvement plans on current operations, in-sourcing and other new business opportunities, program
price and cost assumptions on current and future business, the timing of new program launches and future forecasted
production volumes; and (ii) any resulting impairment loss could have a material impact on our consolidated net
income and on the amount of assets reported on our consolidated statements of financial position.
RECENT ACCOUNTING CHANGES AND EFFECTIVE DATES
Refer to Note 2 to the consolidated financial statements for information pertaining to the accounting changes and
issued accounting pronouncements effective in 2018 and future years.
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, together with other members of
management, after evaluating the effectiveness of the Company’s disclosure controls and procedures, have concluded
that the Company’s disclosure controls and procedures are adequate and effective in ensuring that material information
relating to the Company and its consolidated subsidiaries would have been known to them.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Chief Executive Officer, the Chief Financial Officer and the Chief Operating Officer, together with other members
of management, after having designed internal controls over financial reporting and conducted an evaluation of its
effectiveness based on the integrated framework issued by the Committee of Sponsoring Organization of the Treadway
Commission to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial reporting in accordance with generally accepted accounting principles, have not identified any changes to
the Company’s internal control over financial reporting which would materially affect, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
RISKS AND UNCERTAINTIES
The Casting and Extrusion segment is a capital goods business. Interest rates, exchange rates, corporate capital
spending, the general economic climate, business confidence and the financial strength of our customers affect the
demand for Exco’s dies, moulds and consumable parts for die-cast and extrusion machines. Abrupt changes in these
factors often bring about dramatic changes in demand and pricing. Exco believes that its broad product line,
geographic diversification and leadership position in its niche markets mitigate against this risk but some risk remains.
Exco’s Automotive Solutions segment services automotive component suppliers (and Tier 1 suppliers) around the
world. The results of this segment depend on demand for automobiles, the type of automobiles (which demand has
been shifting away from passenger cars towards SUV/ CUV’s in North America) and the level of automobile
production, which can fluctuate significantly with consumer confidence, general economic conditions, the cost and/or
availability of consumer credit and gasoline, as well as, the market share of individual OEM customers. Contraction
and slowing GDP growth in emerging economies, North America and Europe may also have a dampening effect on
consumer demand for automobiles in these regions.
Exco sells to its automotive customers pursuant to purchase orders which typically sets out price per unit but not
volumes or fixed terms. These purchase orders may be terminated at any time with limited recourse for compensation
or damages and pricing is typically adjusted downward from time to time in the form of ‘cost downs’. Termination
of purchase orders and ‘cost downs’ may impact Exco’s margin and overall earnings if not contemporaneously offset
by new business at better margin or cost reductions. Furthermore, in any given year, any number of programs will be
expiring. While Exco is constantly quoting on replacement programs or new programs, there is no assurance that these
will be awarded or that if awarded, the pricing and margin will be comparable to those of programs ending.
In some cases, OEMs can decide to design the Company’s products out of the automobile (“de-contented”) or reduce
the trim level on which the Company’s products are installed for either aesthetic, cost or product redesign reasons.
While Exco believes its focus on evolving from component supplier to a designer and integrator of small assemblies
and sub-assemblies used in automotive and trunk interiors reduces the risk of de-contenting and trimming down
decisions, some of Automotive Solutions products are not critical components and may still be de-contented.
OEMs or their tiers may have excess production capacity or collective agreements which preclude efficient capacity
reduction during times of declining sales. In these cases OEMs and/or their tiers may choose to fill their excess capacity
EXCO TECHNOLOGIES LIMITED
17
ANNUAL REPORT 2018
by taking production from their suppliers and manufacturing the parts themselves. This process of ‘in-sourcing’ may
have the impact of reducing the amount of business available to suppliers such as Exco.
Exco is a global manufacturer which has organized its global production and logistics footprint based on, among other
things, the extent of duties/levies imposed on the import/export of our products and raw material inputs. As a general
rule governments have been encouraging greater trade and more liberal access to their markets by reducing or
eliminating tariffs. This has benefited Exco over the years. More recently, certain governments have postured with a
more protectionist tone. In particular, NAFTA is currently being renegotiated and, while the terms of a replacement
agreement (“USMCA”) have been reached in principle, it is not expected to be ratified until calendar 2019. In the
event that governments pursue protectionist trade practises with respect to automotive components or their raw
materials or subassemblies, Exco may be prejudiced.
Exco has in 2010, 2011, 2013, 2014 and 2016 made five acquisitions (Allper AG, Exco Colombia, Extrusion Texas,
Automotive Leather Company and AFX Industries) and may make others in the future. Acquisitions inherently
involve risk. While Exco has concluded many acquisitions that have been very successful, there have also been
disappointing acquisitions which have adversely impacted earnings.
Exco’s Canadian operations negotiate sales contracts with customers in both Canadian and U.S. dollars and Euro. We
also purchase, where we can, raw material in these currencies. U.S. dollar and Euro purchases provide a natural hedge
against U.S. dollar and Euro sales of Exco’s Canadian operations. As for the remaining foreign exchange exposure
in these currencies not naturally hedged, Exco does not enter into forward contracts but prefers to incur U.S. dollar or
Euro debt, from time to time as appropriate. Despite these measures, Exco is structurally a net seller of U.S. dollars
and, to a lesser extent Euro, with increasing adverse financial impact as the U.S. dollar and Euro decline in value
against the Canadian dollar. While Exco has made considerable progress in reducing its reliance on U.S. dollar sales,
markets which Exco currently services may experience rising competition from imports which have become more
competitive as a result of foreign exchange movements.
Exco’s U.S. operations earn profits in U.S. dollars while our Canadian operations are exposed to fluctuations in the
value of the Canadian dollar relative to the U.S. dollar on U.S. dollar sales less purchases. For fiscal 2019, it is
estimated that Exco’s total corresponding U.S. dollar foreign exchange risk exposure before tax will amount to
approximately US$88.0 million. Therefore, if the Canadian dollar were to strengthen or weaken by $0.01 in fiscal
2019 from a baseline level of $1.25 USD/CAD, it is estimated that pre-tax profit would change by about $900 thousand
or about $700 thousand after tax. These estimates are based on historical norms and may be materially different in
2019 if customers deviate from their past practices.
Exco’s has three manufacturing operations in Mexico and accordingly incurs a portion of its labour and other expenses
in Mexican pesos. In turn, these Mexican pesos expenses are incurred to mainly support US dollar denominated sales.
Consequently, any strengthening of the Mexican pesos against the US dollar reduces our profitability, all other things
equal. In recognition of this risk, Exco hedges a portion of its Mexican pesos/ US dollar exposure with various foreign
exchange contacts and options. For fiscal 2019, we estimate our pesos exposure net of hedges and pesos denominated
sales to be approximately 160 million pesos. If the Mexican pesos were to strengthen or weaken by 5% versus the US
dollar from a baseline USD/MEX rate of 19:1, and further assuming the Canadian dollar strengthens or weakens
against the US dollar also by 5% from a baseline USD/CAD rate of 1.25, we estimate pre-tax profit would change by
$520 thousand or about $340 thousand after tax. These estimates are based on historical norms and may be materially
different in fiscal 2019 if customers deviate from their past practices.
Exco also has manufacturing facilities in Colombia, Brazil, Thailand, Bulgaria and Morocco and Exco’s presence in
jurisdictions such as these has generally been increasing in recent years. Some of these operations incur labor costs
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
and often other operating expenses in local currency. In several of these countries, sales contracts and major purchases
such as material and equipment are negotiated in U.S. dollars or Euro. In other countries, sales contracts and major
purchases are negotiated in local functional currencies as well. Major long-term fluctuations in the value of the local
currencies against the U.S. dollar and Euro have the potential to affect Exco’s operating results, retained earnings and
value of its investment in these countries. Exco may enter into forward contracts or ‘collar’ contracts from time to
time in order to protect itself from currency fluctuations. These contracts are derivative instruments which, depending
on their structure, may not qualify for hedge accounting treatment and accordingly may be ‘marked to market’ each
quarter and expensed if necessary. It is difficult to anticipate fluctuations in these local currencies in the event of major
economic, fiscal or political instability in these countries.
The cost of manufacturing our products is a critical factor in determining our success over the long term.
Manufacturing has generally expanded to developing countries where competing technologies and lower labor-cost
structures exist. Exco must compete against companies doing business in these developing countries. Exco has met
this challenge by manufacturing some labour-intensive products in Mexico, Thailand, Bulgaria and Morocco;
however, many of our operations based in Canada and the U.S. must compete with products manufactured in lower-
cost environments.
A significant portion of Exco’s receivables are with automotive customers. These customers have varying degrees
of financial strength. These receivables are subject to varying degrees of collectability. The majority of these
receivables are with U.S. entities that can avail themselves of Chapter 11 protection from creditors in certain
circumstances and avoid payment of the Company’s receivables that are over 20 days from the date of the Chapter 11
filing. Exco’s receivables may also be with highly leveraged customers that may have recently merged or chosen to
leverage their balance sheet for tax purposes or otherwise increase their investment yield. Doing business with such
customers typically increases the risk of default and filing for bankruptcy protection. The Company uses its best
efforts to collect accounts receivable under 60 days but in some cases the terms may be notably longer and often in
other currencies thereby requiring Exco to bear the exchange rate risk. The Company often has the benefit of statutory
or common law liens on its products, however, it is not uncommon for significant receivables to be outstanding for
considerable periods, particularly in the large mould business.
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Exco Technologies Limited
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Exco Technologies Limited, which
comprise the consolidated statements of financial position as at September 30, 2018 and 2017, and the
consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash
flows for the years then ended and a summary of significant accounting policies and other explanatory
information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that are
free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Exco Technologies Limited as at September 30, 2018 and 2017, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
November 26, 2018
EXCO TECHNOLOGIES LIMITED
20
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
$(000)'s
As at
September 30, 2018 September 30, 2017
As at
ASSETS
Current
Cash and cash equivalents
Accounts receivable (note 9)
Unbilled revenue (note 8)
Inventories (note 10)
Prepaid expenses and deposits
Derivative instruments (note 9)
Income taxes recoverable
Total current assets
Property, plant and equipment, net (note 5)
Intangible assets, net (note 6)
Goodwill (note 6)
Deferred tax assets (note 14)
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (notes 4 and 9)
Trade accounts payable (note 9)
Accrued payroll liabilities (note 9)
Other accrued liabilities (note 9)
Derivative instruments (note 9)
Provisions (note 7)
Customer advance payments (note 9)
Long-term debt - current portion (notes 4 and 9)
Total current liabilities
Long-term debt - long-term portion (notes 4 and 9)
Deferred tax liabilities (note 14)
Total liabilities
Shareholders' equity
Share capital (note 3)
Contributed surplus (note 3)
Accumulated other comprehensive income (note 3)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$31,343
102,520
24,438
63,771
3,585
779
3,170
229,606
117,270
36,639
63,122
1,247
$447,884
$11,764
46,966
14,498
9,834
-
1,267
2,865
4,108
91,302
18,181
8,238
117,721
51,230
4,391
10,895
263,647
330,163
$447,884
$35,876
94,332
20,207
59,782
2,532
-
3,646
216,375
111,524
39,849
62,091
1,382
$431,221
$15,717
48,369
12,720
10,088
314
1,339
3,223
3,959
95,729
27,134
7,100
129,963
51,707
3,998
4,232
241,321
301,258
$431,221
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
Brian A. Robbins
Director,
President and
Chief Executive Officer
Laurie T.F. Bennett
Director,
Chairman of
the Board
EXCO TECHNOLOGIES LIMITED
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ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
$(000)'s except for income per common share
Sales (notes 8 and 12(A))
Cost of sales
Selling, general and administrative expenses (note 3)
Depreciation (note 5)
Amortization (note 6)
Loss (gain) on disposal of property, plant and equipment (note 5)
Interest expense, net (note 17)
Other expense (note 18)
Income before income taxes
Provision for (recovery of) income taxes (note 14)
Current
Deferred
Net income for the year
Other comprehensive income (loss)
Items that may be reclassified to net income in subsequent periods:
Net unrealized gain on derivatives designated as cash flow hedges (notes 3 and 9)
Unrealized gain (loss) on foreign currency translation (note 3)
Comprehensive income
Income per common share
Basic
Diluted
Weighted average number of common shares outstanding (note 13)
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
Years ended September 30
2017
$584,205
454,172
46,838
15,774
4,831
7
1,327
1,223
524,172
2018
$575,554
453,932
46,101
15,734
5,180
(1,033)
1,022
-
520,936
54,618
60,033
11,438
910
12,348
$42,270
805
5,858
6,663
$48,933
$1.00
$1.00
42,264
42,296
18,543
(1,029)
17,514
$42,519
2,784
(9,742)
(6,958)
$35,561
$1.00
$1.00
42,600
42,675
EXCO TECHNOLOGIES LIMITED
22
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
$(000)'s
Share
capital
$51,366
-
-
-
525
(184)
-
51,707
-
-
-
370
(847)
-
$51,230
Contributed
surplus
$3,566
-
-
591
(159)
-
3,998
-
-
504
(111)
-
-
$4,391
Retained
earnings
$213,283
42,519
(13,201)
-
-
(1,280)
-
241,321
42,270
(14,136)
-
-
(5,808)
-
$263,647
Accumulated other comprehensive income (loss)
Total
Unrealized gain
accumulated
(loss) on
other
foreign
comprehensive
currency
income (loss)
translation
$11,190
$14,207
-
-
-
-
-
-
-
-
Net unrealized
gain (loss) on
derivatives
designated as
cash flow hedges
($3,017)
-
-
-
-
2,784
(233)
-
-
-
-
-
805
$572
(9,742)
4,465
-
-
-
-
-
5,858
$10,323
(6,958)
4,232
-
-
-
-
-
6,663
$10,895
Total
shareholders'
equity
$279,405
$42,519
($13,201)
$591
$366
($1,464)
($6,958)
301,258
42,270
(14,136)
504
259
(6,655)
6,663
$330,163
Balance, September 30, 2016
Net income for the year
Dividends paid (note 3)
Stock option grants (note 3)
Issuance of share capital (note 3)
Repurchase of share capital (note 3)
Other comprehensive income (loss) (note 3)
Balance, September 30, 2017
Net income for the year
Dividends paid (note 3)
Stock option grants (note 3)
Issuance of share capital (note 3)
Repurchase of share capital (note 3)
Other comprehensive income (note 3)
Balance, September 30, 2018
The accompanying notes are an integral part of these consolidated financial statements.
EXCO TECHNOLOGIES LIMITED
23
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
$(000)'s
OPERATING ACTIVITIES:
Net income for the year
Add (deduct) items not involving a current outlay of cash
Depreciation (note 5)
Amortization (note 6)
Stock-based compensation expense
Deferred income taxes (recovery) (note 14)
Net interest expense
Non-cash cost of ALC plant closures (note 18)
Loss (gain) on disposal of property, plant and equipment
Net change in non-cash working capital (note 15)
Cash provided by operating activities
FINANCING ACTIVITIES:
Increase (decrease) in bank indebtedness
Repayment of long-term debt (note 4)
Interest paid, net
Dividends paid (note 3)
Repurchase of share capital
Issuance of share capital (note 3)
Cash used in financing activities
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (note 5)
Purchase of intangible assets (note 6)
Proceeds from liquidation of ALC capital assets
Proceeds on disposal of property, plant and equipment
Cash used in investing activities
Years ended September 30
2017
2018
$42,270
$42,519
15,734
5,180
600
910
1,022
-
(1,033)
64,683
(15,850)
48,833
(3,953)
(8,804)
(1,022)
(14,136)
(6,655)
259
(34,311)
(22,920)
(592)
-
3,135
(20,377)
15,774
4,831
509
(1,029)
1,327
730
7
64,668
1,738
66,406
2,248
(27,594)
(1,327)
(13,201)
(1,464)
366
(40,972)
(15,295)
(991)
85
163
(16,038)
Effect of exchange rate changes on cash
1,322
(1,029)
Net increase (decrease) in cash during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(4,533)
35,876
$31,343
8,367
27,509
$35,876
The accompanying notes are an integral part of these consolidated financial statements.
EXCO TECHNOLOGIES LIMITED
24
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
1. CORPORATE INFORMATION
Exco Technologies Limited (the “Company”) is a global designer, developer and manufacturer of dies, moulds,
components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. Through
18 strategic locations in 8 countries, the Company services a diverse and broad customer base. The Company is
incorporated and domiciled in Canada. The registered office is located at 130 Spy Court, Markham, Ontario, Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are outlined below:
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements and accompanying notes as at and for the year ended September 30, 2018 were
authorized for issue by the Board of Directors on November 26, 2018.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and the entities controlled
by the Company, its subsidiaries. Control exists when the Company is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power over the investee.
Specifically, the Company controls an investee if and only if the Company has all of the following: power over the
investee; exposure or rights to variable returns from its involvement with the investee; and the ability to use its power
over the investee to affect its returns. The financial statements of the subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases. All intercompany
transactions and balances have been eliminated on consolidation.
Functional and presentation currency
Items included in the financial statements of each of the Company’s subsidiaries are measured using the currency of
the primary economic environment in which the entity operates (the “functional currency”). The consolidated
financial statements are presented in Canadian dollars, which is the Company’s functional currency.
Transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the
dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rates
of exchange at the consolidated statements of financial position dates. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at
year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit
or loss in the consolidated statements of income and comprehensive income.
Translation of foreign operations
The results and financial position of all the group entities that have a functional currency different from the
presentation currency are translated into the presentation currency as follows:
• Assets and liabilities for each statement of financial position presented are translated at the closing rate at the
•
date of the consolidated statements of financial position; and
Income and expenses for each statement of income and comprehensive income are translated at the exchange
rates prevailing at the dates of the transactions.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations are
recorded in other comprehensive income.
When a foreign operation is sold, exchange differences that were recorded in accumulated other comprehensive
EXCO TECHNOLOGIES LIMITED
25
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
income (loss) are recognized in the consolidated statements of income and comprehensive income as part of the gain
or loss on sale.
Segment reporting
Management has determined the operating segments based on the information regularly reviewed for the purposes of
decision making, allocating resources and assessing performance by the Company’s chief operating decision maker,
which is the chief executive officer. Factors used to identify reportable segments include product categories, customers
served and geographical region of operations. The chief operating decision maker evaluates the financial performance
of its operating segments primarily based on net income before interest, income taxes, depreciation and amortization.
Interest in joint arrangement
The Company has an interest in a joint arrangement, whereby the parties to the arrangement have a contractual
arrangement that establishes joint control over the economic activities of the individual entity. As the arrangement is
considered to be a joint operation for accounting purposes, the Company recognized its share of the joint operation’s
assets, liabilities, revenues and expenses in the consolidated financial statements. The financial statements of the joint
operation are prepared for the same reporting period as the Company.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of the business combination is
measured as the aggregate of the fair values (at the date of exchange) of assets acquired and liabilities incurred or
assumed. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition
under IFRS 3, Business Combinations, are recognized at their fair values at the acquisition date. Acquisition costs are
expensed as incurred.
Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of
the business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities recognized. If the Company’s interest in the fair value of the acquiree’s identifiable assets,
liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognized immediately
in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Where goodwill forms part of a Cash-Generating Unit (“CGU”) or group of CGUs and part of the operation within
that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of under
this circumstance is measured based on the relative fair values of the operation disposed of and the portion of the
group of CGU retained.
Revenue recognition
Revenue is recognized when it can be measured reliably, the significant risks and rewards of ownership are transferred
to the customer, and it is probable that future economic benefits will flow to the Company. Revenue is
measured at the fair value of the consideration received, excluding discounts, rebates, sales taxes and duties.
•
•
Revenue from short-term casting contracts, extrusion and other tooling, and Automotive Solutions segment
products is recognized when the significant risks and rewards of ownership of the goods have passed to the
buyer, usually upon shipment or acceptance by customers.
Revenue from long-term large die-cast mould contracts is recognized using the percentage of completion method
according to IAS 11, Construction Contracts, under which:
- When the outcome of a contract can be reliably estimated, revenue and costs associated with a contract are
recognized as revenue and expenses, respectively, by reference to the stage of completion of the contract at
the consolidated statements of financial position dates. The stage of completion is determined by the
percentage of the costs incurred to date to the total estimated cost.
- When the outcome of a contract cannot be reliably estimated, revenue is recognized only to the extent of
contract costs incurred. When the uncertainties that prevented reliable estimation of the outcome of a
EXCO TECHNOLOGIES LIMITED
26
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
contract no longer exist, contract revenue and expenses are recognized using the percentage of completion
method.
-
-
If the expected outcome of a contract is a loss, the loss is recognized immediately regardless of whether or
not work has commenced on the contract.
For contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed
progress billings, a gross amount due from customers for contract work is recognized as unbilled revenue −
an asset in the consolidated statements of financial position. For all contracts in progress for which progress
billings exceed costs incurred plus recognized profits (less recognized losses), a gross amount due to
customers for contract work is recognized as customer advance payments − a liability in the consolidated
statements of financial position.
Share-based payments
The Company grants stock options to buy common shares of the Company to officers and employees. The Board of
Directors grants such options for periods of up to 10 years, with vesting periods determined at its sole discretion and
at prices equal to the average closing market prices for the five days preceding the date on which the options were
granted.
The Company follows the fair value based method of accounting for stock-based compensation. The fair value of the
options is recognized as compensation expense in selling, general and administrative expenses in the consolidated
statements of income and comprehensive income over the vesting period with a corresponding increase to contributed
surplus. The contributed surplus balance is reduced as the options are exercised, and the amount initially recorded for
the options in contributed surplus is credited to share capital, along with the proceeds received on exercise.
On November 18, 2005, the Board of Directors adopted a Deferred Share Unit (“DSU”) plan for Independent
Directors. The DSU plan replaces the past practice of granting eligible directors stock options under the Stock Option
Plan. Under the DSU plan, a portion of the quarterly remuneration of a director is credited to the director’s DSU
account in the form of deferred share units on the last business day of the quarter. The number of DSUs credited to
the director’s account is determined by dividing the portion of a director’s quarterly remuneration allocated to DSUs
by the weighted average price of the common share value traded in the last five business days of the quarter. DSUs
are fully vested upon being credited to a director’s DSU account. The DSUs will be redeemed by the Company in
cash payable 60 days after the Independent Director departs from the Board of Directors at the fair market value at the
payment date. The fair value of DSUs is recognized as compensation expense in selling, general and administrative
expenses in the consolidated statements of income and comprehensive income with the corresponding credit or debit
to other accrued liabilities.
Income taxes
Income tax expense consists of current and deferred income taxes. Income tax expense is recognized in the
consolidated statements of income and comprehensive income.
Current income tax expense is the expected income taxes payable on the taxable income for the year, using tax rates
enacted or substantively enacted at year-end, adjusted for amendments to income taxes payable with regards to
previous years.
Deferred income taxes are recorded using the statement of financial position liability method. Under the statement of
financial position liability method, deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax
rates expected to apply when the asset is realized or the liability settled.
Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are
recognized to the extent that it is probable that taxable income will be available against which deductible timing
differences can be utilized.
EXCO TECHNOLOGIES LIMITED
27
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Deferred income taxes are charged or credited in the consolidated statements of income and comprehensive income,
except when they relate to items credited or charged directly to equity, in which case the deferred income taxes are
also recorded in equity.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it
is no longer probable that all or part of the deferred income tax asset will be utilized. Unrecognized deferred
income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable
that the benefit will be recovered.
Other comprehensive income
Other comprehensive income includes unrealized gains and losses on translation of the Company’s foreign operations
that use the local currency as the functional currency, net of taxes, the change in fair value of available-for-sale
investments, net of taxes, and to the extent that cash flow hedges are effective, the change in their fair value, net of
income taxes.
Accumulated other comprehensive income is a separate component of shareholders’ equity which includes the
accumulated balances of all components of other comprehensive income which are recognized in comprehensive
income but excluded from net income.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with remaining
maturities at their acquisition date of three months or less.
Property, plant and equipment
(i)
Machinery and equipment
Machinery and equipment are recorded at cost less accumulated depreciation and accumulated impairment
losses. All direct costs related to the acquisition and installation of machinery and equipment are capitalized
until the properties to which they relate are capable of carrying out their intended use. Machinery and
equipment are depreciated using the diminishing balance method based on their estimated useful lives, which
range from 4 to 20 years.
(ii)
Other assets
Other assets are recorded at cost less accumulated depreciation and accumulated impairment losses and are
depreciated using the straight-line method based on estimated useful lives of the assets, which generally range
from 3 to 10 years, with the exception of buildings, which have estimated useful lives of 30 years. Land is
not depreciated.
Where an item of property, plant and equipment comprises major components with different useful lives, the
components are accounted for as separate items of property, plant and equipment.
Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted
for separately, including major inspection and overhaul expenditures, are capitalized. Directly attributable
expenses incurred for major capital projects are capitalized and no depreciation is recorded until the asset is
brought to a working condition for its intended use.
The costs of day-to-day servicing are expensed as incurred. These costs are more commonly referred to as
“maintenance and repairs”.
The depreciation methods and useful lives are assessed annually or when critical events occur that may affect
the useful lives and expected pattern of consumption of economic benefits embodied in the asset.
(iii)
Subsequent costs
The cost of replacing part of an item within property, plant and equipment is capitalized when the cost is
incurred or if it is probable that the future economic benefits will flow to the business unit and the cost of the
item can be measured reliably. The carrying amount of the replaced part is derecognized. All other costs are
expensed as incurred.
EXCO TECHNOLOGIES LIMITED
28
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Intangible assets
An intangible asset is defined as being identifiable, able to bring future economic benefits to the Company and
controlled by it. Intangible assets are recorded initially at cost and relate primarily to computer software, production
and technology rights and customer relationships. An intangible asset is recognized when it is probable that the
expected future economic benefits attributable to the asset will flow to the Company and the cost of the asset can be
measured reliably. Intangible assets with finite lives are amortized over their useful economic life and assessed for
impairment whenever there is an indication that the intangible asset may be impaired. Amortization is provided based
on the following estimated useful lives using the straight-line method:
-
-
-
-
Customer relationships: 5 to 15 years
Computer software and production and technology rights: 2 to 4 years
Non-compete agreements: 5 years
Trade name: 7 years
Intangible assets acquired in a business acquisition are primarily customer relationships and are initially recorded at
fair value and subsequently at cost less amortization and impairment losses. Other intangible assets are comprised of
computer software and production and technology rights.
Identifiable intangible assets are recognized separately from goodwill.
Impairment of long-lived assets and goodwill
Impairment of long-lived assets
(i)
The Company’s property, plant and equipment and intangible assets are reviewed for indicators of
impairment as at each consolidated statements of financial position date. If indication of impairment exists,
the asset’s recoverable amount is estimated and an impairment loss is recognized when the carrying amount
of an asset, or its CGU, exceeds its recoverable amount. Impairment loss is recognized in income or loss for
the period. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU
on a pro rata basis.
The recoverable amount is the greater of the asset’s fair value less costs to sell and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined
for the CGU to which the asset belongs. In determining fair value less costs to sell, recent market transactions
are taken into account, if available.
The Company bases its impairment calculation on detailed budgets that are prepared for each of the CGUs
and generally cover a period of three years. For longer periods, a long-term growth rate is calculated and
applied to project future cash flows after the third year.
A previous impairment loss is reversed if there is an indication that there has been a change in the estimates
used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation,
if no impairment loss had been recognized.
(ii)
Impairment of goodwill
Goodwill is allocated to a CGU or a group of CGUs for the purpose of impairment testing based on the level
at which it is monitored by management. The Company manages its goodwill at the level of its two operating
segments, Automotive Solutions and Casting and Extrusion. Goodwill is tested for impairment annually
during the fourth quarter of the year or whenever there is an indicator that the CGU group in which it resides
may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU
group to which the goodwill relates. Where the recoverable amount of the CGU group is less than its carrying
amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future
EXCO TECHNOLOGIES LIMITED
29
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
periods. The recoverable amounts of the CGU groups are determined based on the greater of fair value less
costs to sell or value in use.
Inventories
Inventories, comprising raw materials, work in process, finished goods and production supplies, are valued at the
lower of cost and net realizable value. Cost is determined substantially on a first-in, first-out basis and an appropriate
portion of normal overhead expenditure and labour. Net realizable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and selling expenses. Obsolete, redundant and slow-moving
stock is identified and written down. When circumstances that previously caused inventories to be written down below
cost no longer exist, the amount of the write-down previously recorded is reversed.
Determination of fair value
The fair value of an asset or liability is measured using the assumptions that market participants would use when
pricing the asset or liability, assuming that market participants act in their economic best interests.
A fair value measurement on a non-financial asset takes into account a market participant’s ability to generate
economic benefits by using the asset in its highest and best use or by selling it to another market participant that would
use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is
available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of
unobservable inputs.
Government grants
Government grants are recognized where there is reasonable assurance that the grant will be received and all attached
conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic
basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant
relates to an asset, the cost of the asset is reduced by the amount of the grant.
Financial instruments
As defined under IAS 39, Financial Instruments, financial assets and liabilities are recognized in the Company’s
consolidated statements of financial position when the Company becomes a party to the contractual provisions of the
instrument. Financial assets are derecognized when the Company no longer has the rights to such cash flows, the risks
and rewards of ownership or control of the asset. Financial liabilities are derecognized when the obligation under the
liability is discharged, cancelled or expired.
Financial instruments recognized in the consolidated statements of financial position comprise cash and cash
equivalents, accounts receivable, trade accounts payable, bank indebtedness, other accrued liabilities, customer
advance payments, derivative instruments and long-term debt.
Financial instruments are measured at their fair values on initial recognition. After initial recognition, financial
instruments are measured at their fair values, except for financial assets classified as held to maturity or financial
liabilities classified as loans and receivables and other financial liabilities, which are measured at amortized cost using
the effective interest rate method.
Changes in fair value are included in the consolidated statements of income and comprehensive income unless
the instrument is included in a cash flow hedge. If the instruments are included in a cash flow hedging
relationship that is effective, changes in value are recorded in other comprehensive income. When the hedged forecast
transaction occurs, amounts previously recorded in other comprehensive income are recognized in the consolidated
statements of income and comprehensive income. Amounts recognized as other comprehensive income are transferred
to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or
financial expense is recognized or when a forecast purchase occurs.
Accounts receivable are initially recognized at the transaction value and subsequently carried at amortized cost less
impairment losses. The impairment loss of accounts receivable is based on a review of all outstanding amounts at
EXCO TECHNOLOGIES LIMITED
30
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
year-end. Bad debts are written off during the period in which they are identified. Trade accounts payable and
customer advance payments are initially recognized at the transaction value and subsequently carried at amortized
cost.
The Company uses derivative financial instruments, such as forward foreign currency exchange contracts in the form
of put and call option contracts (“Collars”), to hedge cash outflows anticipated to be made in Mexican peso
denominated payments against foreign currency fluctuations between US dollars and Mexican pesos. In addition, in
the current year the Company used a forward foreign exchange contract in the form of a collar to hedge against the
repayment of debt denominated in CAD, using cash denominated in US dollars. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes. Such derivative financial instruments are initially
recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at
fair value. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial
liabilities when the fair value is negative.
At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to
which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking
the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the
nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s
fair value in offsetting the exposure to changes in the cash flows attributable to the hedged risk. Such hedges are
expected to be effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to
determine that they actually have been effective throughout the financial reporting periods for which they were
designated.
The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive
income in the cash flow hedge reserve, while any ineffective portion is recognized immediately to profit or loss.
If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously
recognized in other comprehensive income is transferred to profit or loss. If the hedging instrument expires or is sold,
terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative
gain or loss previously recognized in other comprehensive income remains in other comprehensive income until the
forecast transaction or firm commitment affects profit or loss.
Forward foreign exchange contracts have been entered into with JP Morgan Chase with a long-term debt rating of A+
as determined by Standard & Poor’s. The Company does not anticipate non-performance by JP Morgan Chase.
The Company’s financial assets and liabilities recorded at fair value in the consolidated statements of financial position
are each categorized into one of three categories based on a fair value hierarchy. Fair value of assets and liabilities
included in Level I is determined by reference to quoted prices in active markets for identical assets and
liabilities. Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all
significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based
primarily on inputs that are not based on observable market data.
Transaction costs are expensed as incurred for financial instruments classified or designated as a derivative or
held for trading. Transaction costs for financial assets classified as available for sale are netted against the value
of the instruments at the acquisition date. Transaction costs related to other financial liabilities are added to the value
of the instrument at the acquisition date and recorded in income using the effective interest rate method.
Provisions
As required under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, provisions are recorded when a
present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the
obligation can be made.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation
at the consolidated statements of financial position dates, taking into account the risks and uncertainties surrounding
EXCO TECHNOLOGIES LIMITED
31
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
the obligation. Where a provision is measured using cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows. When some or all of the economic benefits required to settle a
provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually
certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Leases
As required under IAS 17, Leases, assets held under finance leases are recognized as assets of the Company at the
lower of the fair value at the inception of the lease or the present value of the minimum lease payments. The
corresponding amount is recognized as a finance lease liability. The finance lease liability is reduced by lease
payments less finance charges, which are expensed as part of interest expense in the consolidated statements of income
and comprehensive income. Under operating leases, payments are recognized as an expense over the term of the
relevant leases.
Employee future benefits
Leave pay
(i)
Employee entitlements to annual leave are recognized as they are earned by the employees. A provision,
stated at current cost, is made for the estimated liability at year-end.
(ii)
Termination benefits
The Company is subject to Mexican statutory laws and regulations governing Mexican employee termination
benefits. Employee future benefits include statutorily mandated accrued benefits payable to employees in the
event of termination in certain circumstances. Termination benefits are recognized as an expense and an
associated liability at the discounted value of the expected future payments.
Critical judgments and use of estimates
The preparation of the consolidated financial statements requires management to make judgments, estimates and
assumptions that affect the application of policies and reported amounts of assets, liabilities, revenue and expenses.
The estimates and associated assumptions are based on historical experience and various other factors that are believed
to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the
revision and future periods if the review affects both current and future periods.
Significant accounts that require estimates as the basis for determining the stated amounts include accounting for
doubtful accounts receivable, unbilled revenue, inventories, property, plant and equipment, contingent liabilities,
income taxes, fair value of financial instruments and stock option valuation.
Measurement for doubtful accounts receivable requires management to make estimates and assumptions based on
prior experience and assessment of current financial conditions of customers, as well as the general economic
environment and industry sectors in which they operate.
Several divisions engage in the construction of custom-order large die-cast moulds. Such activities fall into the scope
of IAS 11, Construction Contracts, where revenue is recognized using the percentage of completion method. Under
this method, at every reporting date, management is required to estimate the expected outcome on all outstanding
contracts as well as measurement of their progress achieved towards their completion. The estimation requires
management to make certain assumptions and judgments. These assumptions and judgments are continuously
reviewed and updated. If different assumptions are used, it is possible that different amounts would be recognized in
the consolidated financial statements.
Net realizable value of inventories is dependent upon the estimated selling price in the ordinary course of business,
less the estimated costs of completion and selling expenses based on prior experience and assessment of current market
conditions.
EXCO TECHNOLOGIES LIMITED
32
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Depreciation and amortization of property, plant and equipment and intangible assets are dependent upon estimates
of useful lives, which are determined with the exercise of judgment. The assessment of any impairment of property,
plant and equipment and intangible assets is dependent upon estimates of recoverable amounts that take into account
factors such as economic and market conditions and the useful lives of assets.
The estimated useful lives of property, plant and equipment and intangible assets are reviewed on an annual basis.
Assessing the reasonableness of the estimated useful lives of property, plant and equipment and intangible assets
requires judgment and is based on currently available information. Property, plant and equipment and intangible
assets are also reviewed for potential impairment on a regular basis or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Changes in circumstances, such as technological advances and changes to business strategy, can result in actual
useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and
methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the
estimated useful lives of property, plant and equipment and intangible assets or future cash flows constitute a change
in accounting estimates and are applied prospectively.
Income taxes are determined based on estimates of the Company’s current income taxes and estimates of deferred
income taxes resulting from temporary differences. Deferred tax assets are assessed to determine the likelihood
that they will be realized from future taxable income before they expire.
Impairment of non-financial assets exists when the carrying value of an asset or CGU exceeds its recoverable amount,
which is the higher of the fair value less costs of disposal and its value in use. The fair value less costs of disposal is
based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable
market prices less incremental costs for disposing of the asset. The value-in-use calculation is based on a discounted
cash flow (“DCF”) model. The cash flows are derived from the budget for the next three years and do not include
restructuring activities that the Company is not yet committed to or significant future investments that will enhance
the asset’s performance of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the
DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. The key
assumptions used to determine the recoverable amount for the CGUs, including a sensitivity analysis, are disclosed
and further explained in note 6.
Accounting standards issued but not yet applied
The following standards are not effective for the year ended September 30, 2018 but will be in subsequent years as
follows:
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9, as issued in 2014, introduces new requirements for the classification and measurement of financial
instruments, a new expected loss impairment model that will require more timely recognition of expected credit losses
and a substantially reformed model for hedge accounting, with enhanced disclosures about risk management activity.
IFRS 9 also removes the volatility in profit or loss that was caused by changes in an entity’s own credit risk for
liabilities selected to be measured at fair value. This new standard also includes a new general hedge accounting
standard that will align hedge accounting more closely with risk management. It does not fully change the types of
hedging relationships or the requirement to measure and recognize ineffectiveness, however, it will provide more
hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to
assess the effectiveness of a hedging relationship. IFRS 9 is effective for annual periods beginning on or after January
1, 2018, which is effective October 1, 2018 for the Company. The Company intends to use the modified retrospective
approach and has determined that the adoption of IFRS 9 is not likely to have a material impact on its consolidated
financial statements.
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
In May 2014 the IASB issued IFRS 15, which establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that
EXCO TECHNOLOGIES LIMITED
33
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a
customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The
new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under
IFRS. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Company will apply the
standard using the modified retrospective approach effective October 1, 2018.
The Company has established a cross-functional team to implement the guidance related to the recognition of revenue
from contracts with customers. The Company is in the process of evaluating its customer contracts and identifying
contractual provisions that may result in a change in the timing, or the amount of revenue recognized in comparison
with current guidance. In addition, the Company is assessing the enhanced disclosure requirements of the new
guidance and the design of new controls and processes designed to comply with IFRS 15.
While the Company continues to assess all potential impacts of the new standard, it does not currently expect that the
adoption of the new revenue standard is likely to have a material quantitative impact on its net income. The Company
is evaluating the effects of the additional disclosure requirements related to the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
IFRS 16, Leases (“IFRS 16”)
In January 2016, the IASB issued IFRS 16 in which lessees will have a single accounting model for all leases, with
certain exemptions and lessor accounting is substantially unchanged. The guidance would require lessees to recognize
most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. IFRS 16 is effective for
annual periods beginning on or after January 1, 2019, which will be October 1, 2019 for the Company using a modified
retrospective approach with the option to elect certain practical expedients. The Company is currently evaluating the
impact of IFRS 16 on its consolidated financial statements.
3. SHAREHOLDERS’ EQUITY
Authorized
The Company’s authorized share capital consists of an unlimited number of common shares, an unlimited number of
non-voting preference shares issuable in one or more series and 275 special shares. None of these shares have par
value.
Issued
The Company has not issued any non-voting preference shares or special shares. Changes to the issued common shares
are shown in the following table:
Issued and outstanding as at October 1, 2016
Issued for cash under Stock Option Plan
Contributed surplus on stock options exercised
Purchased and cancelled pursuant to normal course issuer bid
Issued and outstanding as at September 30, 2017
Issued for cash under Stock Option Plan
Contributed surplus on stock options exercised
Purchased and cancelled pursuant to normal course issuer bid
Issued and outstanding as at September 30, 2018
Common Shares
Number of Shares
42,568,174
82,317
-
(151,100)
42,499,391
37,690
-
(696,400)
41,840,681
Stated
Value
$51,366
366
159
(184)
51,707
259
111
(847)
$51,230
EXCO TECHNOLOGIES LIMITED
34
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Accumulated other comprehensive income
Included in accumulated other comprehensive income in shareholders’ equity are gains and losses arising from the
translation of the Company’s foreign subsidiaries, net gain and loss on derivatives designated as cash flow hedges and
reclassification to income of net gain (loss) on cash flow hedges as summarized in the following table:
Opening balance
Net unrealized gain on derivatives designated as cash flow hedges (1)
Unrealized gain (loss) on currency translation adjustments
Total other comprehensive income (loss) for the year
Closing balance
(1) Net of deferred income tax payable of $288 (2017 - $993).
2018
2017
$4,232
$11,190
805
5,858
6,663
$10,895
2,784
(9,742)
(6,958)
$4,232
Cash dividends
During the year, the Company paid four quarterly cash dividends totaling $14,136 (2017 - $13,201). The dividend rate
per quarter increased in the second quarter of the year from $0.08 to $0.085 per common share.
Stock Option Plan
The Company has a Stock Option Plan under which common shares may be acquired by employees and officers of the
Company. The following table shows the changes to the number of stock options outstanding during the year:
2018
2017
Number of
Options
754,340
165,000
(37,690)
(1,500)
Weighted
Average
Exercise
Price
$11.32
$10.15
$6.87
$14.58
880,150
$11.29
Number of
Options
626,657
215,000
(82,317)
(5,000)
754,340
Weighted
Average
Exercise Price
$10.70
$10.48
$4.44
$10.48
$11.32
Balance, beginning of year
Granted during the year
Exercised during the year
Expired during the year
Balance, end of year
The following table summarizes information about stock options outstanding and exercisable as at September 30,
2018:
Range of Exercise
Prices
$7.09 - $10.00
$10.01 - $11.00
$11.01 - $14.58
Number
Outstanding
147,000
375,000
358,150
Weighted Average
Remaining
Contractual Life
Options Outstanding
Weighted
Average
Exercise
Price
$7.57
$10.33
$13.81
years
years
years
.71
4.10
2.25
Options Exercisable
Weighted
Average
Exercise
Price
$7.63
$10.48
$13.81
Number
Exercisable
98,000
42,000
208,850
$7.09 - $14.58
880,150
2.78
years
$11.29
348,850
$11.67
EXCO TECHNOLOGIES LIMITED
35
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
The number of common shares available for future issuance of options as at September 30, 2018 is 1,298,188
(2017 - 1,461,688). The number of options outstanding together with those available for future issuance totals
2,178,338 (2017 - 2,216,028) or 5.2% (2017 - 5.2%) of the issued and outstanding common shares. The options are
granted for a term of 5 to 10 years, and the options vest at 20% at each anniversary date from the date of grant.
Stock-based compensation
Stock-based compensation resulting from applying the Black-Scholes option pricing model to the Company’s Stock
Option Plan was $504 for the year ended September 30, 2018 (2017 - $591). All stock-based compensation has been
recorded in selling, general and administrative expenses. The weighted average assumptions used to measure the fair
value of stock options and the weighted average fair value of options granted during the years ended September 30,
2018 and 2017 are as follows:
Risk-free interest rates
Expected dividend yield
Expected volatility
Expected time until exercise
Weighted average fair value of the options granted
2018
1.64%
3.125%
29.70%
5.50 years
$2.08
2017
0.95%
2.61%
31.07%
5.50 years
$2.29
DSU Plan
The Company has a DSU plan under which members of the Company's Board of Directors who are not management
receive a portion of their annual retainers and fees in the form of DSUs, which are classified as other accrued liabilities.
The DSUs vest on the date they are granted and are settled in cash upon termination of Board service. This is a
cash-settled compensation arrangement.
During the year ended September 30, 2018, the Company granted 14,596 DSUs (2017 - 11,190 DSUs) and redeemed
no DSUs (2017 - 28,966). During the year ended September 30, 2018 the Company recorded stock-based
compensation expense of $96 (2017 - $82 income) related to awards under the DSU plan with a corresponding debit
to other accrued liabilities. As at September 30, 2018, 105,213 DSUs were outstanding with a carrying value of $981
recorded in other accrued liabilities.
Contributed surplus
Contributed surplus consists of accumulated stock option expense less the carrying amount of the options that have
been exercised and reclassified to share capital. The following is a continuity schedule of contributed surplus:
Balance, beginning of year
Stock option expense
Exercise of stock options
Balance, end of year
2018
$3,998
504
(111)
$4,391
2017
$3,566
591
(159)
$3,998
Normal course issuer bid
The Company received approval from the Toronto Stock Exchange for a normal course issuer bid for a 12-month
period beginning February 18, 2018. The Company’s Board of Directors authorized the purchase of up to 1,000,000
common shares representing approximately 2.4% of the Company’s outstanding common shares. During the year,
696,400 common shares were repurchased (2017 - 151,100) for a total cost of $6,655 (2017 - $1,464). The cost to
repurchase the common shares in the year exceeded their stated value by $5,808 (2017 - $1,280) which was charged
against retained earnings.
4. BANK INDEBTEDNESS AND LONG-TERM DEBT
The operating lines are available in US dollars, Canadian dollars, and Euros at variable rates ranging from prime minus
EXCO TECHNOLOGIES LIMITED
36
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
0.5% to prime plus 0.5%. The Company’s JP Morgan credit facilities are collateralized by a general security agreement
over its North American assets. The Bulgarian credit facilities are collateralized by a security interest over the
Company’s Bulgarian assets.
Utilizations
Facilities Current
Long-term
Unused and
Available
JP Morgan, credit facility (Canada, USA)
$50,000
$6,421
$18,000
JP Morgan, operating line (Europe)
DSK Bank, operating lines (Bulgaria)
2,328
8,261
601
4,742
-
-
$60,589
$11,764
$18,000
Prime rate in Canada
Prime rate in USA
Prime rate in Eurozone
2018
3.70%
5.25%
0.00%
$25,579
1,727
3,519
$30,825
2017
2.95%
4.25%
0.00%
On February 28, 2018, the Company closed an amendment to renew the $50,000 Committed Revolving Credit Facility
with JP Morgan Chase Bank N.A., of which $24,421 was utilized as at September 30, 2018 (2017 - $29,853). The
facility has a three-year term and there are no specific repayment terms prior to maturity. The facility is collateralized
by a general security agreement covering all assets of the Company’s Canadian and US subsidiaries with the exception
of real property.
The Credit Facility is available to fund working capital, capital expenditures and other general corporate purposes of
the Company and its subsidiaries, including acquisitions. Interest rates vary based on prime, bankers’ acceptance,
CDOR or LIBOR base rates plus a relevant margin depending on the level of the Company’s net leverage ratio.
Pursuant to the terms of the credit agreement, the Company is required to maintain compliance with a net worth
covenant. The Company was in compliance with these covenants as at September 30, 2018.
Additionally, the Company maintains a credit facility with JP Morgan Chase Bank N.A. London Branch related to any
needs for Euro currency. The facility totals $2,328 (EUR 1.55 million) and bears interest based on LIBOR. The
Company had utilized $601 as at September 30, 2018.
On September 15, 2017, the Company renewed a credit facility with DSK Bank in Bulgaria, which was to expire on
July 15, 2018. The expiry has been extended to May 25, 2019. The committed credit facility totals EUR 5.5 million
and is comprised of a loan for EUR 4.0 million and an accounts receivable factoring facility, with recourse, for
specified customers to a maximum amount of EUR 1.5 million. Both components of the credit facility bear interest
based on Euribor and are demand facilities. The loan is available to fund general working capital needs and capital
expenditures in Bulgaria, subject to certain principal repayment provisions. The Bulgarian credit facilities are
collateralized by a security interest over the Company’s Bulgarian assets.
On April 4, 2016, the Company entered into promissory Term Notes amounting to US$9,307 in conjunction with the
acquisition of AFX Industries L.L.C. (“AFX”). The Term Notes bear interest at a rate equal to the mid-term Applicable
Federal Rate in the United States, compounded annually. The principal and interest are payable in three annual
payments on the anniversary date of the AFX acquisition. The Term Notes are unsecured and the balance at September
30, 2018 is US$3,102. The Term Notes will be paid off in their entirety in April 2019.
Further, in the USA, the Company also has a long-term promissory note payable over five years and collateralized by
a specific parcel of land purchased as a factory location. The note bears interest at 6%. The interest and principal are
forgivable over a five-year period, subject to the Company meeting certain performance criteria for the specific factory
location. The note matures and expires in February 2021. As at September 30, 2018 there are no unfulfilled conditions
or contingencies attached to this loan.
EXCO TECHNOLOGIES LIMITED
37
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
The components of long-term debt are as follows:
Bank debt
Term notes
Promissory note
Subtotal
Less: current portion
Long-term debt, long-term portion
5. PROPERTY, PLANT AND EQUIPMENT
September 30, 2018
$18,000
4,017
272
22,289
(4,108)
$18,181
September 30, 2017
$23,000
7,744
349
31,093
(3,959)
$27,134
Cost
Balance as at
September 30, 2016
Additions
Assets acquired
Reclassification
Less: disposals
Foreign exchange movement
Balance as at
September 30, 2017
Additions
Assets acquired
Reclassification
Less: disposals
Foreign exchange movement
Balance as at
September 30, 2018
Machinery
and
Equipment
Tools Buildings
Land
Assets under
Construction
Total
$186,264
$21,003
$67,740
$9,671
$4,038 $288,716
2,031
9,850
(2,349)
(3,247)
990
853
(1,218)
(516)
431
875
(35)
(1,447)
596
-
-
(190)
11,247
(11,578)
-
(52)
15,295
-
(3,602)
(5,452)
192,549
21,112
67,564
10,077
3,655
294,957
3,180
10,321
(3,958)
1,610
1,159
835
(470)
287
3,656
2,555
(3,043)
557
2,284
-
(361)
12
12,641
(13,711)
-
46
22,920
-
(7,832)
2,512
$203,702 $22,923
$71,289
$12,012
$2,631 $312,557
EXCO TECHNOLOGIES LIMITED
38
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Accumulated depreciation
and impairment losses
Balance as at
September 30, 2016
Depreciation for the year
Less: disposals
Reclassification
Foreign exchange movement
Balance as at
September 30, 2017
Depreciation for the year
Less: disposals
Reclassification
Foreign exchange movement
Balance as at
September 30, 2018
Carrying amounts
As at September 30, 2017
As at September 30, 2018
Machinery
and
Equipment
Tools Buildings
Land
Assets under
Construction
Total
$127,519
11,218
(2,186)
(5)
(1,996)
134,550
11,008
(2,719)
(21)
1,128
$15,876
1,876
(1,104)
5
(466)
$30,626
2,680
(35)
-
(575)
16,187
1,860
(421)
21
246
32,696
2,866
(2,507)
-
393
$143,946
$17,893
$33,448
$-
-
-
-
-
-
-
-
-
-
$-
$- $174,021
15,774
(3,325)
-
(3,037)
-
-
-
-
-
-
-
-
-
183,433
15,734
(5,647)
-
1,767
$-
$195,287
$57,999
$59,756
$4,925
$5,030
$34,868
$37,841
$10,077
$12,012
$3,655
$2,631
$111,524
$117,270
As at September 30, 2018, the Company had deposits for machinery and equipment and buildings under construction
totalling $2,631 (2017 - $3,655). These assets are not being depreciated because they are under construction and not
in use.
6. INTANGIBLE ASSETS AND GOODWILL
Computer
Software
and Other
Acquisition
Intangibles**
Assets under
Construction
(Software)
Total
Intangible
Assets Goodwill
Cost
Balance as at September 30, 2016
Additions
Assets acquired
Reclassifications
Foreign exchange movement
Balance as at September 30, 2017
Additions
Assets acquired
Less: disposals
Reclassification
Foreign exchange movement
$19,833
$46,828
815
132
(166)
20,614
384
(165)
538
89
-
-
(2,115)
44,713
-
-
-
1,553
Balance as at September 30, 2018
$21,460
$46,266
$382
176
(132)
1
427
208
-
(538)
2
$99
$67,043
$64,071
991
-
(2,280)
65,754
592
(165)
-
1,644
-
-
(1,980)
62,091
-
-
1,031
$67,825
$63,122
EXCO TECHNOLOGIES LIMITED
39
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Computer
Software and
Other
Acquisition
Intangibles**
Assets under
Construction
(Software)
Total
Intangible
Assets Goodwill
Accumulated amortization
and impairment losses
Balance as at September 30, 2016
Amortization for the year
Foreign exchange movement
Balance as at September 30, 2017
Amortization for the year
Less: disposals
Foreign exchange movement
$18,044
933
(148)
18,829
1,062
(165)
71
Balance as at September 30, 2018
$19,797
$3,413
3,898
(235)
7,076
4,118
-
195
$11,389
$-
-
-
-
-
-
-
$21,457
4,831
(383)
25,905
5,180
(165)
266
$-
$31,186
$-
-
-
-
-
-
-
$-
Carrying amounts
As at September 30, 2017
As at September 30, 2018
$1,785
$1,663
$37,637
$34,877
$427
$99
$39,849
$36,639
$62,091
$63,122
**Acquisition intangibles are comprised of customer relationships and trade names resulting from business
acquisitions and the purchase price allocation thereof.
Of the total goodwill disclosed above, $62,843 (2017 - $61,820) is allocated to the Automotive Solutions segment and
the remainder to the Casting and Extrusion segment.
Of the customer relationships, $3,500 is fully amortized and $38,771 is amortized over 15 years from inception.
Impairment testing of goodwill
The Company performed the annual impairment test of goodwill allocated to the Automotive Solutions segment and
the Casting & Extrusion segment as at September 30, 2018. The recoverable amount of each segment has been
determined based on a value-in-use calculation using cash flow projections from financial budgets approved by senior
management covering a three-year period. Cash flow beyond the three-year period was extrapolated using a 1% growth
rate, which represents the expected growth in the global economy. The pre-tax discount rate applied to future cash
flows was 10.8%. As a result of the analysis, management determined there was no impairment for either business
segment.
Key assumptions to value-in-use calculations
The calculation of the value-in-use for the Automotive Solutions segment is most sensitive to the following
assumptions:
- Discount rates
- Growth rate to extrapolate cash flows beyond the budget period
- Revenue and margin growth rates during budget period
The discount rate used represents the current market assessment of the risks specific to each business segment, taking
into consideration the time value of money and individual risks of the underlying assets that have not been incorporated
in the cash flow estimates. The discount rate is derived from the CGU’s weighted average cost of capital, taking into
account both debt and equity. The cost of equity is derived from the expected return on investment by the Company’s
shareholders. The cost of debt is based on the interest-bearing borrowing the Company is obliged to service. Segment-
specific risk is incorporated by applying different debt to equity ratios.
EXCO TECHNOLOGIES LIMITED
40
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Sensitivity to changes in assumptions
Management believes that within reason, possible changes to any of the above key assumptions, recoverable amounts
exceed carrying values.
7. PROVISIONS
The following table outlines the provisions at the dates of the consolidated statements of financial position and changes
to the provisions during the reporting periods.
Severance
Warranties
September 30, 2018
$1,115
152
September 30, 2017
$1,188
151
$1,267
$1,339
The fair value of the above provisions is management’s best estimate based on information available. The ultimate
amounts of the payments approximate the provision amounts and the timing of payments is expected to be within the
next twelve months. There is no reimbursement expected for any of these provisions.
The movement in the provision accounts is as follows:
Closing balance, as at September 30,
2016
Additions
Utilized
Foreign exchange differences
Closing balance, as at September 30,
2017
Additions
Utilized
Reversals
Foreign exchange differences
Closing balance, as at September 30,
2018
Severance
Warranties
Claims and
Litigation
$1,205
690
(693)
(14)
$1,188
378
(353)
(117)
19
$1,115
$153
-
-
(2)
$151
-
-
1
$152
$24
-
(24)
-
$-
-
-
-
$-
Total
$1,382
690
(717)
(16)
$1,339
378
(353)
(117)
20
$1,267
8. TOOL CONSTRUCTION CONTRACTS
Contract revenue recognized under the percentage of completion method during the year amounted to $53,968
(2017 - $44,293). For contracts in progress, the following table summarizes the aggregate amount of costs incurred,
profits recognized, progress billings from customers for the related contracts and retentions being held to date.
EXCO TECHNOLOGIES LIMITED
41
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Contracts in progress:
Aggregate amount of costs incurred to date
Add: profits recognized to date
Gross unbilled revenue
Less: progress billings
Net unbilled revenue
Due from customers
Due to customers
Net unbilled revenue
September 30, 2018
September 30, 2017
$20,680
4,392
25,072
(634)
$24,438
$24,438
-
$24,438
$25,360
4,112
29,472
(9,265)
$20,207
$20,833
($626)
$20,207
9. FINANCIAL INSTRUMENTS
The Company classifies its financial instruments as follows:
Cash and cash equivalents
Accounts receivable*
Trade accounts payable
Bank indebtedness
Customer advance payments
Accrued liabilities
Derivative instruments
Long-term debt
*Recorded net of allowance for doubtful accounts.
Financial assets – held for trading measured at fair value
Financial assets – measured at amortized cost
Financial liabilities – measured at amortized cost
Financial liabilities – measured at amortized cost
Financial liabilities – financial liabilities measured at amortized cost
Financial liabilities – financial liabilities measured at amortized cost
Financial liabilities – held for trading measured at fair value
Financial liabilities – measured at amortized cost
Foreign exchange contracts
The Company entered into a series of Collars extending through to September 25, 2020 and designated them as cash
flow hedges against Mexican payroll and other local Mexican costs. The total amount of these Collars is 408.0 million
Mexican pesos (September 30, 2017 - 624.0 million Mexican pesos). The selling price ranges from 19.52 to 22.00
Mexican pesos to each US dollar. In addition, there is a Collar contract to convert $14.0 million USD to CAD on
October 30, 2018. This USD Collar has been designated as a cash flow hedge and relates to the repayment of debt
denominated in CAD, using cash denominated in USD.
Management estimates that a cumulative gain of $779 (September 30, 2017 - loss of $314) would be realized if these
Collars were terminated on September 30, 2018. Net of income tax payable of $207, the cumulative gain of $572 is
recorded in other comprehensive income. During the year, the estimated fair value gain of $805, net of deferred income
tax payable of $288 (2017 - gain of $2,784 net of income tax payable of $993) has been included in other
comprehensive income, and the cumulative gain of $779 is recorded in the consolidated statements of financial position
under the caption derivative instruments.
Financial risk management
The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides
a measurement of the risks and how they are managed:
a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party fails to meet its contractual obligations. The
Company’s primary credit risk is its outstanding trade accounts receivable. The carrying amount of its outstanding
trade accounts receivable represents the Company’s estimate of its maximum credit exposure. The Company regularly
monitors its credit risk exposure and takes steps such as credit approval procedures, establishing credit limits, utilizing
credit assessments and monitoring practices to mitigate the likelihood of these exposures from resulting in an actual
EXCO TECHNOLOGIES LIMITED
42
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
loss. The carrying amount of the trade accounts receivable disclosed in the consolidated statements of financial position
is net of allowance for doubtful accounts, estimated by the Company’s management, based on prior experience and
assessment of current financial conditions of customers as well as the general economic environment. When a
receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent
recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of
income and comprehensive income. As at September 30, 2018, the accounts receivable balance (net of allowance for
doubtful accounts) is $102,520 (2017 - $94,332) and the Company’s five largest trade debtors accounted for 44.4% of
the total accounts receivable balance (2017 - 37.2%). As at September 30, 2018, no accounts receivable are insured
against default (2017 - $591).
The following table presents a breakdown of the Company’s accounts receivable balances:
Trade accounts receivable
Employee receivable
Sales tax receivable
Other
Less: allowance for doubtful accounts
Total accounts receivable, net
The aging of trade accounts receivable balances is as follows:
Not past due
Past due 1-30 days
Past due 31-60 days
Past due 61-90 days
Past due over 90 days
Less: allowance for doubtful accounts
Total trade accounts receivable, net
The movement in the allowance for doubtful accounts is as follows:
Opening balance
Additions
Utilized
Reversal
Exchange differences
Closing balance
September 30, 2018
$101,687
275
2,549
411
(2,402)
September 30, 2017
$91,600
240
2,345
791
(644)
$102,520
$94,332
September 30, 2018
$85,255
11,137
2,189
1,573
1,533
(2,402)
September 30, 2017
$75,294
8,233
5,152
987
1,934
(644)
$99,285
$90,956
September 30, 2018
$644
1,889
(70)
(61)
-
$2,402
September 30, 2017
$566
262
(174)
(23)
13
$644
b) Liquidity risk
Liquidity risk refers to the possibility that the Company may not be able to meet its financial obligations as they come
due. The Company manages its liquidity risk by minimizing its financial leverage and arranging credit facilities in
order to ensure sufficient funds are available to meet its financial obligations. This is achieved by continuously
monitoring cash flows from its operating, investing and financing activities. The Company does not carry excess credit
EXCO TECHNOLOGIES LIMITED
43
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
facilities due to the stand-by costs charged by its lenders. As at September 30, 2018, the Company has a net debt
balance of $2,710 (2017 - $10,934) and unused credit facilities of $30,825 (2017 - $21,695).
In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum
payments. The following tables summarize the Company’s significant commitments on an undiscounted basis and
corresponding maturities:
Bank indebtedness
Trade accounts payable
Long-term debt
Operating leases
Purchase commitments
Capital expenditures
Bank indebtedness
Trade accounts payable
Long-term debt
Operating leases
Purchase commitments
Capital expenditures
Total
$11,764
46,966
22,289
2,936
39,782
2,079
$125,816
Total
$15,717
48,369
31,093
4,896
40,920
398
$141,393
1-3 Years
$-
-
18,181
1,605
September 30, 2018
< 1 Year
$11,764
46,966
4,108
1,181
39,782
2,079
$105,880
Over 3 Years
$-
-
-
150
-
$19,786
-
$150
September 30, 2017
< 1 Year
$15,717
48,369
3,959
1,724
40,920
398
$111,087
1-3 Years
$-
-
27,047
3,015
Over 3 Years
$-
-
87
157
-
$30,062
-
$244
c) Foreign exchange risk
The Company operates in Canada with subsidiaries located in the United States, Mexico, Colombia, Brazil, Thailand,
Bulgaria and Morocco. It is exposed to foreign exchange transaction and translation risk through its operating
activities. Unfavourable changes in the exchange rates may affect the operating results and shareholders’ equity of the
Company. In order to mitigate the foreign currency exposure, the Company reduces part of its foreign exchange risk
by sourcing a significant portion of its manufacturing inputs in the currency that its sales are denominated in. In
addition to the above natural hedge, the Company also uses Collars to hedge cash outflows for the Mexican payroll
and other local Mexican costs. These Collars are designated as cash flow hedges. The resulting gain or loss on the
valuation of these financial instruments is recognized in the consolidated statements of income and comprehensive
income. The Company does not mitigate the translation risk exposure of its foreign operations due to the fact that these
investments are considered to be long-term in nature.
With all other variables held constant, the following tables outline the Company’s annual foreign exchange exposure
at one percent fluctuation between various currencies compared with the average annual exchange rate.
Income before income taxes
Other comprehensive income
1% Fluctuation
USD vs. CAD
1% Fluctuation
EUR vs. CAD
1% Fluctuation
MXP vs. CAD
+/- 1,092
+/- 2,757
+/- 93
+/- 389
+/- 3
+/- 76
EXCO TECHNOLOGIES LIMITED
44
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Income before income taxes
Other comprehensive income
1% Fluctuation
COP vs. CAD
1% Fluctuation
BRL vs. CAD
+/- 11
+/- 77
+/- 11
+/- 177
d) Interest rate risk
The Company’s exposure to interest rate risk relates to its net cash position, variable rate credit facilities and variable
rate long-term debt. The Company mitigates its interest rate risk exposure by reducing or eliminating its overall debt
position. Net income or loss is sensitive to the impact of a change in interest rates on the average balance of interest-
bearing financial liabilities during the year. As at September 30, 2018, the Company has a net debt position of $2,710
(2017 - $10,934 net debt) (see note 11).
e) Fair value
Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions
or other factors. Presented below is a comparison of the fair value of each financial instrument to its carrying value.
Due to their short-term nature, the fair value of cash and cash equivalents, accounts receivable, trade accounts payable
and customer advance payments is assumed to approximate their carrying value.
The fair values of derivative instruments that are not traded in an active market, such as over-the-counter foreign
exchange options and Collars, are determined using quoted forward exchange rates as at the consolidated statements
of financial position dates and are Level 2 instruments.
During the year ended September 30, 2018, there were no transfers between Level 1 and Level 2 fair value
measurements.
The fair values of cash and cash equivalents, bank indebtedness, trade and other receivables and trade and other
payables approximates their carrying amounts due to the short-term maturities of these instruments. The estimated fair
value of long-term debt approximates its carrying value as the instruments’ terms and interest rate are market based.
The carrying value and fair value of all financial instruments are as follows:
September 30, 2018
Carrying Amount
of Asset
(Liability)
$31,343
102,520
(46,966)
(11,764)
(2,865)
(24,332)
779
($22,289)
Fair Value of
Asset
(Liability)
$31,343
102,520
(46,966)
(11,764)
(2,865)
(24,332)
779
($22,289)
September 30, 2017
Carrying
Amount of Asset
(Liability)
$35,876
94,332
(48,369)
(15,717)
(3,223)
(22,808)
(314)
($31,093)
Fair Value of
Asset
(Liability)
$35,876
94,332
(48,369)
(15,717)
(3,223)
(22,808)
(314)
($31,093)
Cash and cash equivalents
Accounts receivable
Trade accounts payable
Bank indebtedness
Customer advance payments
Accrued liabilities
Derivative instruments
Long-term debt
EXCO TECHNOLOGIES LIMITED
45
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
10. INVENTORIES
Raw materials
Work in process
Finished goods
Production supplies
Less: obsolescence provision
September 30, 2018
$44,516
8,690
14,382
3,985
(7,802)
$63,771
September 30, 2017
$38,068
7,329
14,106
3,857
(3,578)
$59,782
The movement in the obsolescence provision accounts is as follows:
Opening balance
Additions
Utilized
Reversals
Exchange differences
Closing balance
September 30, 2018
$3,578
5,864
(1,472)
(301)
133
$7,802
September 30, 2017
$3,316
1,243
(770)
(94)
(117)
$3,578
During the year, inventories of $298,989 (2017 - $306,306) were expensed, of which $5,563 was from the write-downs
of inventories (2017 - $1,149), net of $301 reversal of write-downs (2017 - $94).
11. CAPITAL MANAGEMENT
The Company defines capital as net debt and shareholders’ equity. As at September 30, 2018, total managed capital
amounted to $332,873 (2017 - $312,192), consisting of net debt of $2,710 (2017 - $10,934) and shareholders’ equity
of $330,163 (2017 - $301,258).
The Company’s objectives when managing capital are to:
• utilize short-term funding sources to manage its working capital requirements and fund capital expenditures
required to execute its operating and strategic plans; and
• maintain low overall debt levels relative to shareholders’ equity with a strong bias for short-term debt in order to
minimize the cost of capital and allow maximum flexibility to respond to current and future industry, market and
economic risks and opportunities.
The following ratios are used by the Company to monitor its capital:
Net debt to equity ratio
Net debt to EBITDA ratio
September 30, 2018
September 30, 2017
0.01:1
0.04:1
0.04:1
0.13:1
EXCO TECHNOLOGIES LIMITED
46
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
The following table details the net debt calculation used in the net debt to equity ratio as at the years ended as
indicated:
Bank indebtedness
Less: cash and short-term deposits
Net debt
September 30, 2018
$34,053
September 30, 2017
$46,810
(31,343)
$2,710
(35,876)
$10,934
The net debt to EBITDA ratio is calculated by dividing the net debt by EBITDA, and the Company calculates EBITDA
as earnings before other income/(expense), interest, taxes, depreciation and amortization.
Based on the current funds available and the expected cash flows from operations, management believes that the
Company has sufficient funds to meet its liquidity requirements.
The Company is not subject to any capital requirement imposed by regulators; however, the Company must adhere to
a net worth covenant related to the terms of its bank credit facility. As at September 30, 2018, the Company was in
compliance with the required financial covenants.
12. OTHER INFORMATION
A. SEGMENTED INFORMATION
Business segments
The Company operates in two business segments: Casting and Extrusion and Automotive Solutions. The accounting
policies followed in the operating segments are consistent with those outlined in note 2 to the consolidated financial
statements.
The Casting and Extrusion segment designs and engineers tooling and other manufacturing equipment. Its operations
are substantially for automotive and other industrial markets in North America.
The Automotive Solutions segment produces automotive interior components and assemblies primarily for seating,
cargo storage and restraint for sale to automotive manufacturers and Tier 1 suppliers (suppliers to automakers).
The Company evaluates the performance of its operating segments primarily based on net income before interest, other
income (expense) and income tax expense.
The Corporate segment involves administrative expenses that are not directly related to the business activities of the
above two operating segments.
EXCO TECHNOLOGIES LIMITED
47
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Sales
Intercompany sales
Net sales
Depreciation
Amortization
Segment pre-tax income (loss) before interest and other
Other expense
Net interest expense
Income before income taxes
Property, plant and equipment additions
Property, plant and equipment, net
Intangible asset additions
Intangible assets, net
Goodwill
Total assets
Total liabilities
Sales
Intercompany sales
Net sales
Depreciation
Amortization
Segment pre-tax income (loss) before interest and other
Other expense
Net interest expense
Income before income taxes
Property, plant and equipment additions
Property, plant and equipment, net
Intangible asset additions
Intangible assets, net
Goodwill
Total assets
Total liabilities
Casting
and
Extrusion
$207,322
(7,402)
199,920
12,338
874
18,236
-
15,237
90,286
454
1,362
279
205,206
30,822
Casting
and
Extrusion
$190,803
(7,557)
183,246
12,404
786
17,967
-
10,505
88,422
838
1,775
271
182,850
29,268
2018
Automotive
Solutions Corporate
Total
$381,750
(6,116)
375,634
3,354
4,304
44,351
-
7,547
25,610
138
35,274
62,843
237,928
47,863
$-
-
-
42
2
(6,947)
-
136
1,374
-
3
-
4,750
39,036
$589,072
(13,518)
575,554
15,734
5,180
55,640
-
(1,022)
54,618
22,920
117,270
592
36,639
63,122
447,884
117,721
2017
Automotive
Solutions
$401,959
(1,000)
400,959
3,324
4,043
51,100
(1,223)
4,743
21,822
153
38,069
61,820
246,718
65,502
Corporate
Total
$-
-
-
46
2
(6,484)
-
47
1,280
-
5
-
1,653
35,193
$592,762
(8,557)
584,205
15,774
4,831
62,583
(1,223)
(1,327)
60,033
15,295
111,524
991
39,849
62,091
431,221
129,963
EXCO TECHNOLOGIES LIMITED
48
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Geographic and customer information
Sales
Canada
United States
Europe
Mexico
South America
Asia
Other
2018
$20,734
301,569
175,086
54,639
9,239
9,625
4,662
$575,554
2017
$18,273
309,818
166,314
67,073
8,852
7,169
6,706
$584,205
In 2018 the total billings to the Company’s largest 2 customers accounted for 15.5% and 4.6% (2017 - 13.4% and
5.1%) of total sales. The account receivable pertaining to these customers were $11,554 and $4,487 at year- end
(2017 - $9,974 and $5,294). The allocation of sales to the geographic categories is based upon the customer location
where the product is shipped. In 2018, the Company’s largest 2 customers were from the Automotive Solutions
segment and the Casting and Extrusion segment (2017 - the Company’s largest 2 customers were from the Automotive
Solutions segment and the Casting and Extrusion segment).
Property, plant and equipment, net
Canada
United States
Mexico
South America
Thailand
Europe
Morocco
September 30, 2018
$39,898
33,339
14,716
9,152
7,449
2,899
9,817
September 30, 2017
$40,061
31,856
8,393
10,843
7,904
3,281
9,186
$117,270
$111,524
Property, plant and equipment are attributed to the country in which they are located.
Intangible assets, net
Canada
United States
Mexico
South America
Thailand
Europe
Morocco
September 30, 2018
$1,172
35,186
28
77
6
54
116
September 30, 2017
$1,459
36,985
60
162
29
1,026
128
$36,639
$39,849
B. EMPLOYEE FUTURE BENEFITS
The Company accrues employee future benefits for all of its Mexican employees. These benefits consist of a one-time
payment equivalent to 12 days of wages for each year of service (at the employee’s most recent salary, but not to
exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain
employees terminated involuntarily prior to vesting of their seniority premium benefit. Under Mexican labour laws,
the Company also provides statutorily mandated severance benefits to its employees terminated under certain
EXCO TECHNOLOGIES LIMITED
49
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
circumstances. Such benefits consist of a one-time payment of three months’ wages upon involuntary termination
without just cause.
The liability associated with the seniority and termination benefits is calculated as the present value of expected future
payments and amounted to $932 as at September 30, 2017 (2017 - $852) and is recorded under the caption other
accrued liabilities on the consolidated statements of financial position. In determining the expected future payments,
assumptions regarding employee turnover rates, inflation, minimum wage increases and expected salary levels are
required and are subject to review and change.
C. COMPENSATION OF KEY MANAGEMENT PERSONNEL
The remuneration of directors and other members of key management personnel during the years ended
September 30, 2018 and 2017 were as follows:
Salaries and cash incentives (i)
Directors’ fees
Share-based awards (ii)
September 30, 2018
September 30, 2017
$4,307
375
135
$4,817
$3,907
343
120
$4,370
i) Key management personnel were not paid post-employment benefits, termination benefits, or other long-term
benefits during the years ended September 30, 2018 and 2017.
ii) Share-based payments are director share units granted to directors and the fair value of stock options granted to
key management personnel.
13. INCOME PER COMMON SHARE
Income per common share is calculated using net income and the monthly weighted average number of common shares
outstanding of 42,264,189 (2017 - 42,600,223). Any potential common shares for which the effect is anti-dilutive
have not been reflected in the calculation of diluted income per share. There was a dilution effect of 31,503 shares
from the outstanding stock options on diluted weighted average number of common shares outstanding for 2018
(2017 - 74,712).
14. INCOME TAXES
The consolidated effective income tax rate for 2018 was 22.6% (2017 – 29.2%) per the following tables. The effective
tax rate is favourably impacted by the reduction in the US federal income tax rate that will apply to annual US earnings.
In addition, the effective income tax rate is favourably impacted by the remeasurement of US deferred income tax
liabilities, offset by the transition taxes accrued related to foreign earnings of certain of the Mexican subsidiaries which
have not been repatriated to the United States. The comparative year was adversely impacted by the non-deductibility
of post-production costs in the amount of $1,223 incurred in South Africa and Lesotho. Further, the effective tax rate
in 2018 benefited from improved proportion of earnings generated in lower tax jurisdictions.
EXCO TECHNOLOGIES LIMITED
50
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Income before income taxes
Income tax expense at Canadian statutory rates
Manufacturing and processing deduction
Foreign rate differential
Non-taxable income net of non-deductible expenses
Losses not tax effected
Other
Reported income tax expense
Income before income taxes
Income tax expense at Canadian statutory rates
Manufacturing and processing deduction
Foreign rate differential
Non-taxable income net of non-deductible expenses
Losses not tax effected
Other
Reported income tax expense
The major components of income tax expense are as follows:
Current income tax expense
Based on taxable income for the year
Deferred income tax expense (recovery)
Origination, reversal of temporary differences and losses not
recognized
Reported income tax expense
2018
$54,618
100.0%
14,990
(294)
(1,428)
(1,902)
481
501
$12,348
2017
$60,033
15,836
(390)
1,020
(1,937)
1,923
1,062
$17,514
27.4%
(0.5%)
(2.6%)
(3.5%)
0.9%
0.9%
22.6%
100.0%
26.4%
(0.7%)
1.7%
(3.2%)
3.2%
1.8%
29.2%
2018
2017
$11,438
$18,543
910
(1,029)
$12,348
$17,514
EXCO TECHNOLOGIES LIMITED
51
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Deferred income tax assets and liabilities consist of the following temporary differences:
Deferred tax assets
Tax benefit of loss carry forward
Items not currently deductible for income tax purposes
Unrealized foreign exchange losses
Deferred tax liabilities
Tax depreciation in excess of book depreciation
Unrealized revenue and foreign exchange
Investment in subsidiaries
2018
2017
$960
287
0
1,247
(3,977)
(577)
(3,685)
(8,238)
$803
262
317
1,382
(3,370)
(513)
(3,217)
(7,100)
Net deferred income tax liabilities
($6,991)
($5,718)
15. CONSOLIDATED STATEMENTS OF CASH FLOWS
Net change in non-cash working capital
The net change in non-cash working capital balances related to operations consists of the following:
Accounts receivable
Unbilled revenue
Inventories
Prepaid expenses and deposits
Trade accounts payable
Accrued payroll liabilities
Other accrued liabilities
Provisions
Customer advance payments
Income taxes payable
16. CONTINGENT LIABILITIES
2018
($6,648)
(3,973)
(2,807)
(1,030)
(2,540)
1,580
(583)
(72)
(369)
592
($15,850)
2017
$11,328
(1,234)
5,382
777
(15,296)
(352)
1,748
(43)
1,569
(2,141)
$1,738
In the ordinary course of business, the Company may be contingently liable for litigation and claims with customers,
suppliers and former employees. On an ongoing basis, the Company assesses the likelihood of any adverse judgments
or outcomes to these matters as well as potential ranges of probable costs and losses, and a determination of the
provision required, if any, for these contingencies is made after analysis of each individual issue.
During 2018, the Company agreed with a customer (the “Customer”) to utilize a government-sponsored third party
(the “Third Party”) tool financing program (the “Program”). The Program allows the Company to receive payment
from the Third Party in advance (the “Advance Payments”) of either tool delivery or the Customer’s receipt of payment
from the Original Equipment Manufacturer (the “OEM”). The Customer is obligated to pay all costs of the Program
including principal and interest. The Third Party retains recourse against the Company if the Customer fails to repay
the Advance Payments to the Third Party within 24 months of the Advance Payment. As at September 30, 2018 no
EXCO TECHNOLOGIES LIMITED
52
ANNUAL REPORT 2018
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
repayments were due. The Company has been indemnified by the Customer in this regard and expects recourse against
it to be extinguished in the normal course of business upon the Customer’s receipt of payment from the OEM. The
Advance Payments paid to the Company under this Program amounted to $9,419 as at September 30, 2018 (2017 -
$3,083) and related liabilities and receivables were not recorded on the Company’s consolidated statements of financial
position.
There are no material contingent liabilities as at September 30, 2018 (2017 - nil).
17. INTEREST EXPENSE
The following table outlines the interest expense (income) incurred during the year:
Interest expense on bank indebtedness and long-term debt
Interest income on deposits
Net interest expense
18. OTHER EXPENSE
September 30, 2018
September 30, 2017
$1,043
(21)
$1,022
$1,338
(11)
$1,327
On November 12, 2016, the Company ceased production in Lesotho and commenced the process of liquidating and
has subsequently wound-up the ALC legal entities in Lesotho and South Africa. During the first quarter of the 2017
fiscal year, the Company incurred post-production non-operating expenses of $1,223 which included non-cash asset
write-downs of $707 and a loss on disposal of capital assets of $23.
EXCO TECHNOLOGIES LIMITED
53
ANNUAL REPORT 2018
CORPORATE INFORMATION
Board of Directors
Transfer Agent and Registrar
Laurie T.F. Bennett, CPA, CA
Corporate Director
Edward H. Kernaghan, MSc
Executive Vice President
Kernaghan & Partners Ltd.
Nicole A. Kirk, BA, MBA
Corporate Director
Robert B. Magee, PEng
Chairman
Woodbridge Group
TSX Trust Company
301 – 100 Adelaide Street West
Toronto, Ontario M5H 4H1
Phone: 416.361.0930
www.tsxtrust.com
______________________________
Auditors
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
______________________________
Philip B. Matthews, MA, CPA, CA
Corporate Director
Stock Listing
Toronto Stock Exchange (XTC)
______________________________
Corporate Office
Exco Technologies Limited
130 Spy Court, 2nd Floor
Markham, Ontario L3R 5H6
Phone: 905.477.3065
www.excocorp.com
______________________________
2018 Annual Meeting
The 2018 Annual Meeting for the
Shareholders will be held at Magna
Golf Club, 14780 Leslie St., Aurora
on Wednesday, January 30, 2019
at 4:30 pm.
Colleen M. McMorrow, FCPA, FCA,ICD.D
Corporate Director
Paul E. Riganelli, MA, MBA, LLB
Executive Vice President of the Company
Brian A. Robbins, PEng
President and CEO of the Company
______________________________
Corporate Officers
Brian A. Robbins, PEng
President and CEO
Darren M. Kirk, MBA, CFA
Executive Vice President & COO
R. Drew Knight, CPA, CA
Chief Financial Officer & VP Finance
Secretary
Paul E. Riganelli, MA, MBA, LLB
Executive Vice President
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