2 0 1 9 A N N U A L R E P O R T
Markham, ON
Newmarket, ON
Uxbridge, ON
Chesterfield, MI
Toledo, OH
Dartmouth,
NS
Matamoros (2), MX
Wylie, TX
Queretaro (2), MX
Medellin,
COLOMBIA
Tangier,
MOROCCO
Sorocaba,
BRAZIL
PRODUCTION FACILITIES
Cas�ng & Extrusion Technologies
Automo�ve Solu�ons
Chonburi,
THAILAND
SALES
($ millions)
.
3
9
8
5
.
2
4
8
5
.
6
5
7
5
.
3
8
9
4
.
3
7
0
5
NET INCOME
($ millions)
DILUTED ADJUSTED
EARNINGS PER SHARE (1)
.
6
7
4
.
8
0
4
.
5
2
4
.
3
2
4
.
6
6
2
3
0
1
$
.
3
0
1
$
.
.
0
0
1
$
6
9
0
$
.
0
8
0
$
.
CASH FLOW
FROM OPERATING
ACTIVITIES (2)
($ millions)
.
5
9
6
.
7
4
6
.
7
4
6
.
9
9
5
.
1
5
5
15
16
17
18
19
15
16
17
18
19
15
16
17
18
19
15
16
17
18
19
(1) Earnings before other income/ expense (2) Before net change in non-cash working capital.
EXCO TOOLING SOLUTIONS
LETTER TO STAKEHOLDERS
for growth. Yet, we
Exco faced a number of challenges in fiscal 2019
contributing to a shortfall in earnings against our
remain
expectations
encouraged with our overall results for the year
having demonstrated good progress on a number
of fronts. We made tough decisions to adapt to
changing market conditions, continued
to
innovate across our portfolio of businesses and
expanded our tooling operations with new
building activity, all of which has enhanced our
future growth prospects. While overall industry
conditions have clearly softened, our diverse
portfolio of businesses remain exceptionally well
positioned to capitalize on opportunities we see
within our various market niches. Tangibly, we
enter fiscal 2020 with good underlying sales
momentum and expect near term relief against
some of the inflationary cost pressures that hurt
our results in the past year. Meanwhile, our
exceptional cash generating ability and solid
balance sheet remain unquestionably intact. With
these characteristics, it can be no surprise that we
remain very optimistic about our prospects in the
years ahead.
Adapting to Change
sizeable
Fiscal 2019 certainly presented us with a number
of
consuming
challenges. After
considerable financial and operational resources
over the past several years, it became apparent
that ALC’s operations would be unable to attain
after
sustained profitability. Consequently,
losses
recording $2.1 million of operating
($0.05 per share) in the first quarter of fiscal 2019
ALC filed a voluntary liquidation petition and
ceased production in January 2019 resulting in an
additional $6.4 million ($0.15 per share) charge to
our earnings. No sooner did we resolve ALC’s fate
when we were presented with exceptional labour
challenges at two of our large factories in Mexico.
As a result of an unprecedented Federal policy
change which doubled the minimum wage, the
traditionally reliable union workforce undertook
to strike in order to realize large bonus payments
that were contractually tied to the percentage
increase in the minimum wage rate. We settled
these labour issues relatively quickly albeit at
significant costs that hurt our results throughout
the year. Initial indications are that in fiscal 2020,
Mexican published minimum wage increases that
are contractually tied to union bonuses will be
back in line with fiscal years prior to fiscal 2019.
More broadly, we continue to adapt to lower
vehicle production volumes in our Automotive
Solutions segment by focusing our efforts on
market niches where there are undercurrents of
growth. These include: 1) the trend of OEMs to
make
their vehicles more appealing and
profitable through the greater promotion of
accessories and up-trimming vehicle interiors
including increased use of leather, 2) increasing
consumer demand for larger vehicles that have
more cargo and cabin space, and 3) growing
acceptance by European automakers
that
Morocco is a low-cost and dependable supply
base. Pursuing these themes provides Exco with
opportunity for growth in our accessory and
interior trim components despite weakness in
overall unit vehicle production levels. To point,
excluding the
foreign
exchange rate movements this segment recorded
revenue growth of 10% in the last quarter of fiscal
2019 despite a modest reduction in vehicles
produced.
impact of ALC and
Meanwhile, as it relates to all three of our tooling
businesses, demand for the aluminum products
EXCO TECHNOLOGIES LIMITED
1
ANNUAL REPORT 2019
they help create continues to grow across many
to designing and selling consumable and capital
Elsewhere in our tooling business Castool further
without acknowledging the dedication of our
applications. This is particularly true within the
equipment that enable our customers to achieve
expanded its main plant in Uxbridge Ontario over
seasoned and diverse human resources, totaling
automotive industry where an acute focus on
maximum die cast and extrusion production
the past year to provide additional capacity and
5,358 strong. Exco was founded on a commitment
vehicle light-weighting is driving the higher use
efficiency is just one such example. But perhaps
keep up with strong demand growth. Looking
to excellence and a culture of entrepreneurship.
of aluminum in all vehicles –including those with
there is no better indication of our ability to
forward, Castool will commence construction of a
We encourage continuance of these traits by
electric powertrains. We have been adapting our
innovate over the past year than with our
new facility
in Morocco
in order to better
providing incentives for our managers to grow
manufacturing processes and capabilities to
progress in additive manufacturing. We are now
penetrate the European market, which we expect
their business and giving our employees the
capitalize on these trends for many years now.
regularly incorporating 3D printed components
will be operational in early fiscal 2021. We also
latitude to push the envelope on innovation.
While the general extrusion market weakened in
into the design of our moulds which greatly
continue to explore additional growth projects
We are also mindful that sustainable operations
2019, we saw great traction on our initiatives
enhances the overall quality and performance of
across our entire tooling group where we see
require continuous
investment
in
technical
including a sharp rebound in the profitability of
the die-cast process. The use of additive
opportunity for both revenue enhancing and cost
training, human resource planning and, above all,
our large mould group. We fully expect our
manufacturing in this regard is still quite nascent
reduction capital projects. An in-house heat-treat
a safe and healthy work environment.
position as the leading independent tooling
but growing strongly. And we have a clear lead
facility is one such example which promises to not
player will assist our efforts to realize above
evidenced by our receipt of the Automotive News
only reduce our costs but provide strategic
In closing, I would like to thank all of our
market growth for the foreseeable future.
prestigious PACE award during the year.
benefits, including a further reduction in lead
stakeholders for contributing to our continued
times and product quality improvements.
success. I have full confidence that with the
Leveraging our Strong Human and
Financial Resources
years ahead.
strength of our partnership we will build, innovate
and adapt our way to produce great results in the
Innovating Our Way to Even Greater
Building for a Strong Future
Success
Over the years Exco has built a diverse collection
Continuous innovation is a critical factor to our
of leading businesses in typically niche industries
continued success and we promote a culture that
that provide our customers with
innovative,
keeps this core principle at the heart of each of
quality solutions
from
low-cost operations.
our businesses. Neocon’s operations are a great
Together with our preponderance of “capital light”
example where innovation is evident across the
businesses, geographic diversity and exceptional
entire organization. This of course can be easily
¬financial strength, Exco has tremendous staying
seen looking at Neocon’s growing portfolio of
power, all of which underlies our sustainable
vehicle protection and organization products
earnings growth and generation of significant
created by its in-house design studio. Less visible
free cash flow.
is
the
innovation Neocon employs
to
its
production methods where efficiency innovation
Our building activity remained front and center in
teams are dedicated to streamlining production
fiscal 2019 with the construction of our sixth
processes to get a better product to customers,
extrusion tooling plant. This facility – located in
faster. Neocon has grown significantly over the
Mexico to service the domestic market – began
years including a 16% sales gain in fiscal 2019. We
commercial production halfway through the year
have great optimism that with continuous
and its results handily beat our expectations. The
innovation, Neocon has unbounded potential for
success of our newest facility clearly speaks to the
additional growth.
benefit of our standardized manufacturing
processes, which provides increased fluidity and
We also innovate day in and day out across our
unmatched efficiency across our multi-plant
Darren M. Kirk
President and CEO
While earnings fell short of our expectations in
fiscal 2019 our cash generating ability and strong
financial position are clearly nothing to be
disappointed about. In fiscal 2019 we generated
Free Cash Flow of $0.89 per share and returned a
record $26.9 million or $0.65 cents per share to
shareholders even as we improved our balance
sheet, ending the year in a net cash position. For
2020, we expect capital spending will remain
healthy in support of our organic growth agenda,
but we still expect to produce Free Cash Flow well
in excess of our dividend payments. Acquisitions
continue to remain of interest however we will be
very selective in whatever we pursue. Absent any
acquisition activity we expect to use much of our
cashflow to continuing buying back our shares,
which we see as a bargain at current trading
levels.
entire tooling group. Castool’s systems approach
footprint.
No discussion of our prospects could be complete
Exco faced a number of challenges in fiscal 2019
challenges at two of our large factories in Mexico.
contributing to a shortfall in earnings against our
As a result of an unprecedented Federal policy
expectations
for growth. Yet, we
remain
change which doubled the minimum wage, the
encouraged with our overall results for the year
traditionally reliable union workforce undertook
having demonstrated good progress on a number
to strike in order to realize large bonus payments
of fronts. We made tough decisions to adapt to
that were contractually tied to the percentage
changing market conditions, continued
to
increase in the minimum wage rate. We settled
innovate across our portfolio of businesses and
these labour issues relatively quickly albeit at
expanded our tooling operations with new
significant costs that hurt our results throughout
building activity, all of which has enhanced our
the year. Initial indications are that in fiscal 2020,
future growth prospects. While overall industry
Mexican published minimum wage increases that
conditions have clearly softened, our diverse
are contractually tied to union bonuses will be
portfolio of businesses remain exceptionally well
back in line with fiscal years prior to fiscal 2019.
positioned to capitalize on opportunities we see
within our various market niches. Tangibly, we
More broadly, we continue to adapt to lower
enter fiscal 2020 with good underlying sales
vehicle production volumes in our Automotive
momentum and expect near term relief against
Solutions segment by focusing our efforts on
some of the inflationary cost pressures that hurt
market niches where there are undercurrents of
our results in the past year. Meanwhile, our
growth. These include: 1) the trend of OEMs to
exceptional cash generating ability and solid
make
their vehicles more appealing and
balance sheet remain unquestionably intact. With
profitable through the greater promotion of
these characteristics, it can be no surprise that we
accessories and up-trimming vehicle interiors
remain very optimistic about our prospects in the
including increased use of leather, 2) increasing
years ahead.
Adapting to Change
Fiscal 2019 certainly presented us with a number
of
sizeable
challenges. After
consuming
considerable financial and operational resources
over the past several years, it became apparent
that ALC’s operations would be unable to attain
sustained profitability. Consequently,
after
recording $2.1 million of operating
losses
($0.05 per share) in the first quarter of fiscal 2019
ALC filed a voluntary liquidation petition and
ceased production in January 2019 resulting in an
additional $6.4 million ($0.15 per share) charge to
our earnings. No sooner did we resolve ALC’s fate
when we were presented with exceptional labour
consumer demand for larger vehicles that have
more cargo and cabin space, and 3) growing
acceptance by European automakers
that
Morocco is a low-cost and dependable supply
base. Pursuing these themes provides Exco with
opportunity for growth in our accessory and
interior trim components despite weakness in
overall unit vehicle production levels. To point,
excluding the
impact of ALC and
foreign
exchange rate movements this segment recorded
revenue growth of 10% in the last quarter of fiscal
2019 despite a modest reduction in vehicles
produced.
Meanwhile, as it relates to all three of our tooling
businesses, demand for the aluminum products
LETTER TO STAKEHOLDERS
they help create continues to grow across many
applications. This is particularly true within the
automotive industry where an acute focus on
vehicle light-weighting is driving the higher use
of aluminum in all vehicles –including those with
electric powertrains. We have been adapting our
manufacturing processes and capabilities to
capitalize on these trends for many years now.
While the general extrusion market weakened in
2019, we saw great traction on our initiatives
including a sharp rebound in the profitability of
our large mould group. We fully expect our
position as the leading independent tooling
player will assist our efforts to realize above
market growth for the foreseeable future.
Innovating Our Way to Even Greater
Success
Continuous innovation is a critical factor to our
continued success and we promote a culture that
keeps this core principle at the heart of each of
our businesses. Neocon’s operations are a great
example where innovation is evident across the
entire organization. This of course can be easily
seen looking at Neocon’s growing portfolio of
vehicle protection and organization products
created by its in-house design studio. Less visible
is
its
innovation Neocon employs
production methods where efficiency innovation
teams are dedicated to streamlining production
processes to get a better product to customers,
faster. Neocon has grown significantly over the
years including a 16% sales gain in fiscal 2019. We
have great optimism that with continuous
innovation, Neocon has unbounded potential for
additional growth.
the
to
We also innovate day in and day out across our
entire tooling group. Castool’s systems approach
to designing and selling consumable and capital
equipment that enable our customers to achieve
maximum die cast and extrusion production
efficiency is just one such example. But perhaps
there is no better indication of our ability to
innovate over the past year than with our
progress in additive manufacturing. We are now
regularly incorporating 3D printed components
into the design of our moulds which greatly
enhances the overall quality and performance of
the die-cast process. The use of additive
manufacturing in this regard is still quite nascent
but growing strongly. And we have a clear lead
evidenced by our receipt of the Automotive News
prestigious PACE award during the year.
Building for a Strong Future
from
Over the years Exco has built 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, geographic diversity and exceptional
¬financial strength, Exco has tremendous staying
power, all of which underlies our sustainable
earnings growth and generation of significant
free cash flow.
Our building activity remained front and center in
fiscal 2019 with the construction of our sixth
extrusion tooling plant. This facility – located in
Mexico to service the domestic market – began
commercial production halfway through the year
and its results handily beat our expectations. The
success of our newest facility clearly speaks to the
benefit of our standardized manufacturing
processes, which provides increased fluidity and
unmatched efficiency across our multi-plant
footprint.
Elsewhere in our tooling business Castool further
without acknowledging the dedication of our
expanded its main plant in Uxbridge Ontario over
seasoned and diverse human resources, totaling
the past year to provide additional capacity and
5,358 strong. Exco was founded on a commitment
keep up with strong demand growth. Looking
to excellence and a culture of entrepreneurship.
forward, Castool will commence construction of a
We encourage continuance of these traits by
new facility
in Morocco
in order to better
providing incentives for our managers to grow
penetrate the European market, which we expect
their business and giving our employees the
will be operational in early fiscal 2021. We also
latitude to push the envelope on innovation.
continue to explore additional growth projects
We are also mindful that sustainable operations
across our entire tooling group where we see
require continuous
investment
in
technical
opportunity for both revenue enhancing and cost
training, human resource planning and, above all,
reduction capital projects. An in-house heat-treat
a safe and healthy work environment.
facility is one such example which promises to not
only reduce our costs but provide strategic
In closing, I would like to thank all of our
benefits, including a further reduction in lead
stakeholders for contributing to our continued
times and product quality improvements.
success. I have full confidence that with the
Leveraging our Strong Human and
Financial Resources
years ahead.
strength of our partnership we will build, innovate
and adapt our way to produce great results in the
Darren M. Kirk
President and CEO
While earnings fell short of our expectations in
fiscal 2019 our cash generating ability and strong
financial position are clearly nothing to be
disappointed about. In fiscal 2019 we generated
Free Cash Flow of $0.89 per share and returned a
record $26.9 million or $0.65 cents per share to
shareholders even as we improved our balance
sheet, ending the year in a net cash position. For
2020, we expect capital spending will remain
healthy in support of our organic growth agenda,
but we still expect to produce Free Cash Flow well
in excess of our dividend payments. Acquisitions
continue to remain of interest however we will be
very selective in whatever we pursue. Absent any
acquisition activity we expect to use much of our
cashflow to continuing buying back our shares,
which we see as a bargain at current trading
levels.
No discussion of our prospects could be complete
EXCO TECHNOLOGIES LIMITED
2
ANNUAL REPORT 2019
Exco faced a number of challenges in fiscal 2019
challenges at two of our large factories in Mexico.
they help create continues to grow across many
to designing and selling consumable and capital
contributing to a shortfall in earnings against our
As a result of an unprecedented Federal policy
applications. This is particularly true within the
equipment that enable our customers to achieve
expectations
for growth. Yet, we
remain
change which doubled the minimum wage, the
automotive industry where an acute focus on
maximum die cast and extrusion production
encouraged with our overall results for the year
traditionally reliable union workforce undertook
vehicle light-weighting is driving the higher use
efficiency is just one such example. But perhaps
having demonstrated good progress on a number
to strike in order to realize large bonus payments
of aluminum in all vehicles –including those with
there is no better indication of our ability to
of fronts. We made tough decisions to adapt to
that were contractually tied to the percentage
electric powertrains. We have been adapting our
innovate over the past year than with our
changing market conditions, continued
to
increase in the minimum wage rate. We settled
manufacturing processes and capabilities to
progress in additive manufacturing. We are now
innovate across our portfolio of businesses and
these labour issues relatively quickly albeit at
capitalize on these trends for many years now.
regularly incorporating 3D printed components
expanded our tooling operations with new
significant costs that hurt our results throughout
While the general extrusion market weakened in
into the design of our moulds which greatly
building activity, all of which has enhanced our
the year. Initial indications are that in fiscal 2020,
2019, we saw great traction on our initiatives
enhances the overall quality and performance of
future growth prospects. While overall industry
Mexican published minimum wage increases that
including a sharp rebound in the profitability of
the die-cast process. The use of additive
conditions have clearly softened, our diverse
are contractually tied to union bonuses will be
our large mould group. We fully expect our
manufacturing in this regard is still quite nascent
portfolio of businesses remain exceptionally well
back in line with fiscal years prior to fiscal 2019.
position as the leading independent tooling
but growing strongly. And we have a clear lead
positioned to capitalize on opportunities we see
player will assist our efforts to realize above
evidenced by our receipt of the Automotive News
within our various market niches. Tangibly, we
More broadly, we continue to adapt to lower
market growth for the foreseeable future.
prestigious PACE award during the year.
enter fiscal 2020 with good underlying sales
vehicle production volumes in our Automotive
momentum and expect near term relief against
Solutions segment by focusing our efforts on
some of the inflationary cost pressures that hurt
market niches where there are undercurrents of
our results in the past year. Meanwhile, our
growth. These include: 1) the trend of OEMs to
exceptional cash generating ability and solid
make
their vehicles more appealing and
balance sheet remain unquestionably intact. With
profitable through the greater promotion of
these characteristics, it can be no surprise that we
accessories and up-trimming vehicle interiors
remain very optimistic about our prospects in the
including increased use of leather, 2) increasing
years ahead.
Adapting to Change
Fiscal 2019 certainly presented us with a number
of
sizeable
challenges. After
consuming
considerable financial and operational resources
over the past several years, it became apparent
that ALC’s operations would be unable to attain
sustained profitability. Consequently,
after
recording $2.1 million of operating
losses
($0.05 per share) in the first quarter of fiscal 2019
ALC filed a voluntary liquidation petition and
ceased production in January 2019 resulting in an
additional $6.4 million ($0.15 per share) charge to
our earnings. No sooner did we resolve ALC’s fate
when we were presented with exceptional labour
consumer demand for larger vehicles that have
more cargo and cabin space, and 3) growing
acceptance by European automakers
that
Morocco is a low-cost and dependable supply
base. Pursuing these themes provides Exco with
opportunity for growth in our accessory and
interior trim components despite weakness in
overall unit vehicle production levels. To point,
excluding the
impact of ALC and
foreign
exchange rate movements this segment recorded
revenue growth of 10% in the last quarter of fiscal
2019 despite a modest reduction in vehicles
produced.
Meanwhile, as it relates to all three of our tooling
businesses, demand for the aluminum products
Innovating Our Way to Even Greater
Building for a Strong Future
Success
Over the years Exco has built a diverse collection
Continuous innovation is a critical factor to our
of leading businesses in typically niche industries
continued success and we promote a culture that
that provide our customers with
innovative,
keeps this core principle at the heart of each of
quality solutions
from
low-cost operations.
our businesses. Neocon’s operations are a great
Together with our preponderance of “capital light”
example where innovation is evident across the
businesses, geographic diversity and exceptional
entire organization. This of course can be easily
¬financial strength, Exco has tremendous staying
seen looking at Neocon’s growing portfolio of
power, all of which underlies our sustainable
vehicle protection and organization products
earnings growth and generation of significant
created by its in-house design studio. Less visible
free cash flow.
is
the
innovation Neocon employs
to
its
production methods where efficiency innovation
Our building activity remained front and center in
teams are dedicated to streamlining production
fiscal 2019 with the construction of our sixth
processes to get a better product to customers,
extrusion tooling plant. This facility – located in
faster. Neocon has grown significantly over the
Mexico to service the domestic market – began
years including a 16% sales gain in fiscal 2019. We
commercial production halfway through the year
have great optimism that with continuous
and its results handily beat our expectations. The
innovation, Neocon has unbounded potential for
success of our newest facility clearly speaks to the
additional growth.
benefit of our standardized manufacturing
processes, which provides increased fluidity and
We also innovate day in and day out across our
unmatched efficiency across our multi-plant
without acknowledging the dedication of our
seasoned and diverse human resources, totaling
5,358 strong. Exco was founded on a commitment
to excellence and a culture of entrepreneurship.
We encourage continuance of these traits by
providing incentives for our managers to grow
their business and giving our employees the
latitude to push the envelope on innovation.
We are also mindful that sustainable operations
require continuous
technical
training, human resource planning and, above all,
a safe and healthy work environment.
investment
in
In closing, I would like to thank all of our
stakeholders for contributing to our continued
success. I have full confidence that with the
strength of our partnership we will build, innovate
and adapt our way to produce great results in the
years ahead.
Darren M. Kirk
President and CEO
LETTER TO STAKEHOLDERS
in Morocco
Elsewhere in our tooling business Castool further
expanded its main plant in Uxbridge Ontario over
the past year to provide additional capacity and
keep up with strong demand growth. Looking
forward, Castool will commence construction of a
in order to better
new facility
penetrate the European market, which we expect
will be operational in early fiscal 2021. We also
continue to explore additional growth projects
across our entire tooling group where we see
opportunity for both revenue enhancing and cost
reduction capital projects. An in-house heat-treat
facility is one such example which promises to not
only reduce our costs but provide strategic
benefits, including a further reduction in lead
times and product quality improvements.
Leveraging our Strong Human and
Financial Resources
While earnings fell short of our expectations in
f scal 2019 our cash generating ability and strong
f nancial position are clearly nothing to be
disappointed about. In fiscal 2019 we generated
Free Cash Flow of $0.89 per share and returned a
record $26.9 million or $0.65 cents per share to
shareholders even as we improved our balance
sheet, ending the year in a net cash position. For
2020, we expect capital spending will remain
healthy in support of our organic growth agenda,
but we still expect to produce Free Cash Flow well
in excess of our dividend payments. Acquisitions
continue to remain of interest however we will be
very selective in whatever we pursue. Absent any
acquisition activity we expect to use much of our
cashflow to continue buying back our shares,
which we see as a bargain at current trading
levels.
entire tooling group. Castool’s systems approach
footprint.
No discussion of our prospects could be complete
EXCO TECHNOLOGIES LIMITED
3
ANNUAL REPORT 2019
CONTENTS
5
Management's Discussion and Analysis
21
23
27
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, 2019. This MD&A has been prepared as of November
27, 2019.
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 Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EPS, Adjusted Net
Income, Adjusted Pretax Profit and Free Cash Flow which are not measures of financial performance under
International Financial Reporting Standards (“IFRS”). Exco calculates Adjusted EBITDA as earnings before other
income/expense, interest, taxes, depreciation and amortization and Adjusted EBITDA Margin as Adjusted EBITDA
divided by sales. Exco calculates Adjusted EPS as earnings before other income/expense divided by the weighted
average number of shares. Adjusted Net Income is calculated as net income before other income/expense and Pretax
Profit as segmented earnings before other income/expense, interest and taxes. Free Cash Flow is calculated as cash
provided by operating activities less interest paid less investment in fixed assets net of proceeds of disposal. Adjusted
EBITDA, Adjusted EBITDA Margin, Adjusted EPS, Pretax Profit and Free Cash Flow are used by management, from
time to time, to facilitate period-to-period operating comparisons and we believe some investors and analysts use
these measures as well when evaluating Exco’s financial performance. These measures, as calculated by Exco, do not
have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented
by other issuers.
CAUTIONARY STATEMENT
Information in this document relating to: projected 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 certain
of our operations achieve sustained profitability. These forward-looking statements include known and unknown risks,
EXCO TECHNOLOGIES LIMITED
4
ANNUAL REPORT 2019
uncertainties, assumptions and other factors which may cause actual results or achievements to be materially different
from those expressed or implied. For a more extensive discussion of Exco’s risks and uncertainties see the ‘Risks and
Uncertainties’ section in this Annual Report and other reports and securities filings made by the Company. This
information is available at www.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 its markets which principally consist of North America for die-cast tooling, North, Central and South
America for extrusion tooling and globally for consumable tooling parts and related equipment. Across its markets,
Exco is focused on further entrenching itself by reducing lead times and manufacturing costs through design and
process enhancements. Major capital projects have been implemented in recent years to increase capacity, reduce lead
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 Automotive Solutions segment designs, develops and manufactures automotive interior trim components and
assemblies primarily for passenger and light truck vehicles. The Polytech and Polydesign businesses manufacture
synthetic net and other cargo restraint products, injection-moulded components, shift/ brake boots, related interior trim
components and assemblies. Polydesign is also a manufacturer and/or finisher of injection moulded interior trim and
instrument panel components, sun visors, seat covers, head rests and other cut and sew products. Neocon is a supplier
of soft plastic trunk trays, rigid plastic trunk organizer systems, floor mats and bumper covers. AFX Industries is a
tier 2 supplier of leather and leather-like interior trim components to the North American automotive market. AFX
also supplies die cut leather sets for seating and many other interior trim applications as well as injection-molded,
hand-sewn, machine-sewn and hand-wrapped interior trim components of all sorts. Automotive Solutions
manufacturing facilities are located in Canada, the United States, Mexico, and Morocco supplying the automotive
markets in North America, Europe and to a lesser extent, Asia.
EXCO TECHNOLOGIES LIMITED
5
ANNUAL REPORT 2019
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 leadership and competitive position in our chosen markets through
automation and technology, (2) minimizing our cost structure, (3) maintaining the bulk of our productive capacity in
lower-cost jurisdictions and in close proximity to our customers’ operations, (4) diversifying our revenue base with
new products and services that leverage our competitive strengths, and (5) capitalizing on organic and inorganic
growth opportunities in both our existing and select developing markets.
The North American automotive industry is Exco’s largest end market. This end market contracted in Exco’s fiscal
2019 with industry vehicle sales and production levels declining modestly from prior year levels. Passenger cars and
light trucks (including sport utility and crossover vehicles) continue to exhibit divergent trends whereby demand for
the former has been declining and demand for the latter is holding fairly steady or growing slightly. Nonetheless,
despite the decline, overall vehicle sales and production volumes remain near historically high levels and the consensus
outlook is that volumes will decline modestly or remain relatively stable for the next few years. This view is 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 government-mandated clean air initiatives. These
developments provide meaningful growth opportunities for our tooling businesses, but also for our interior trim
businesses, which sell components that are generally lighter in weight than the products they aim to displace.
During fiscal 2019, Exco continued to solidify its technological leadership with the production of die-cast moulds for
structural parts. 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. Quoting activity for these types of powertrain moulds
remains fairly robust. 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.
End market applications for extruded aluminum components are very diverse and demand variance generally
correlates well with GDP growth over time. Exco’s extrusion tooling facilities focus on the markets in North, Central
and South America, although the US market is the Company’s largest. While US GDP continues to grow, the pace of
this activity slowed over the past year and demand for extruded aluminum components contracted in this timeframe.
Nonetheless, secular trends remain favorable with the automotive end market for aluminum extrusions continuing to
grow 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. While it is difficult to say how long current weaker market conditions will persist, we are making
EXCO TECHNOLOGIES LIMITED
6
ANNUAL REPORT 2019
the necessary investments to further solidify our leading market position and take advantage of opportunities for
market share gains regardless of market conditions.
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 over the last few years with our Colombia operations performing very strongly
while our Brazilian operations remain challenged. Nonetheless, the financial performance of our Brazilian operations
improved in fiscal 2019 and we continue to hone our skills and capabilities. During fiscal 2019, Exco completed
construction of a new extrusion die facility in Mexico to better service the local market in that country. The new
facility began commercial operation on April 1, 2019 and achieved very strong performance given the early stage of
the operation.
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 continues to have solid growth prospects in both the die cast and extrusion markets globally.
This growth is driven by the increasing focus of extrusion press and die cast operators on the efficiency of their
performance coupled with Castool’s leading portfolio of products and systems that support these goals. To better
capitalize on the growth prospects for Castool’s machine consumable parts, we constructed a production facility in
Thailand in 2014 which positioned us closer to customers in Asia and Europe. This facility began production in July
2014 and remains profitable despite weaker market conditions evident in Asia through much of fiscal 2019. In fiscal
2019, Castool began construction of an approximately 20,000 square feet addition to its existing building in Uxbridge,
Ontario to provide additional manufacturing capacity. As well, Castool is currently in the process of acquiring land in
Morocco for construction of a new facility which will enable Castool to better penetrate the European market.
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, the introduction of new SUV/
CUV’s and light trucks is growing each year compared to regular passenger vehicles. In addition, OEMs have been
updating and refreshing vehicle interiors mid-production cycle. These developments have created greater cabin and
cargo areas which generally increases opportunity for the Company’s products. 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 labour and major raw materials used by the segment has generally picked up over the past
year and contributed to softer financial performance in fiscal 2019. 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
EXCO TECHNOLOGIES LIMITED
7
ANNUAL REPORT 2019
currently under pressure. However, over the long term we believe the underlying structural trends will reassert
themselves.
Exco remains committed to establishing its presence in these markets to lay the groundwork for revenue and earnings
growth in 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
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 specialized in the manufacture and export of luxury leather interior trim
components to the middle and luxury automotive sector. The performance of these operations however became
increasingly difficult over the past year given 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. After ALC failed to secure a permanent price increase from its
primary customer, ALC voluntarily filed a liquidation petition in Bulgaria and ceased operations in January 2019.
Consequently, Exco recorded a $6.4 million provision to write-off its remaining equity in ALC during fiscal 2019.
ALC was de-consolidated from Exco’s financial statements in the second quarter of fiscal 2019, eliminating
approximately $23.1 million of total assets and $23.1 million of total liabilities from Exco’s balance sheet, including
$4.2 million in net debt.
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.
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.
2019 RESULTS
Consolidated Results - Sales
Annual sales totalled $507.3 million compared to $575.6 million last year – a decrease of $68.3 million or 12% over
last year. The decline reflects the deconsolidation of ALC in January 2019 offset by modest growth in the rest of our
operations. The US dollar averaged 3% higher ($1.33 versus $1.29) against the Canadian dollar over the year
increasing sales by $11.2 million. The Euro averaged 2% lower ($1.50 versus $1.53) against the Canadian dollar over
the year reducing sales by $1.9 million.
EXCO TECHNOLOGIES LIMITED
8
ANNUAL REPORT 2019
Selected Annual Information
The following table sets out selected financial data relating to the Company’s years ended September 30, 2019 and
2018. 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
2019
$507.3
$26.6
2018
$575.6
$42.3
$0.65
$1.00
$0.80
$426.0
$0.36
$62.6
$1.00
$447.9
$0.33
$76.6
● Automotive Solutions Segment
Sales in this segment were $303.1 million – a decrease of $72.5 million or 19% from the prior year. The sales decline
was driven by the deconsolidation of ALC from Exco’s results following ALC’s filing of a voluntary liquidation
petition in January 2019, which removed $86.0 million of sales year over year. The appreciation of the US dollar
versus the Canadian dollar in fiscal 2019 compared to fiscal 2018 increased segment sales in North America by $6.8
million. The weakening of the Euro against the Canadian dollar decreased segment sales in Europe by $1.7 million
year over year. Excluding results from ALC and foreign exchange rate movements, segment sales were higher by $8.4
million, or 3% compared to fiscal 2018. During the year, overall industry vehicle production volumes were modestly
lower in both North America and Europe. Segment sales were nonetheless supported by a number of program launches
for both new and existing products, particularly at Polydesign and Neocon. More broadly, the segments four businesses
continue to focus their efforts on higher margin activity. Relatedly, the curtailment of uneconomic programs modestly
dampened sales during the year, particularly at AFX. Despite generally soft vehicle production levels, management
sees continuing opportunity for future growth supported by recent program wins and decent quoting activity for new
programs in both North American and Europe.
• Casting and Extrusion Segment
Sales in this segment were $204.3 million – an increase of $4.4 million or 2% from the prior year. Most of this increase
was effectively driven by foreign exchange rate movements, which increased segment sales by $4.3 million. Within
the segment, sales were higher in both the Castool and Extrusion groups but lower in the Large Mould group. Castool’s
sales benefited from solid demand for certain of its capital equipment products, including extrusion containers and die
ovens. This more than offset slowing demand for some of Castool’s consumable components due to softer market
conditions, particularly in Asia. Extrusion group sales were buoyed by the launch of the group’s new facility in Mexico
during the year as well as higher steel prices. Steel prices generally increased over the past year due to the
implementation of US tariffs, which we aim to mostly recapture from customers through pass-through pricing
mechanisms. Market conditions within the North American extrusion industry however weakened compared to the
prior year. This reduced sales opportunities for the Extrusion group’s mature plants, particularly as the year progressed.
EXCO TECHNOLOGIES LIMITED
9
ANNUAL REPORT 2019
Sales were modestly lower at the Large Mould group due to the completion/ wind-down of uneconomic programs and
– to a much lesser extent – customer timing requirements. While overall market conditions for our tooling operations
were undoubtedly softer in fiscal 2019 compared to the prior year, quoting activity remains reasonable and we remain
confident we are making the necessary investments to further improve our share potential and the efficiency of our
operations.
Cost of Sales
Cost of sales totalled $400.5 million – a decrease of $53.4 million or 12% from the prior year. Cost of sales as a
percentage of sales remained stable at 79% as lower direct material costs were 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 reporting segments, particularly related to the deconsolidation of ALC’s operations during the year. More
generally, inflationary pressures increased in fiscal 2019 relative to the prior year, particularly as it relates to labour
in Mexico for the Company’s Automotive Solutions segment. Costs related to Exco’s major input materials –
petroleum/natural gas-based resin and plastic products in the Automotive Solutions segment were generally stable
over the past year while tool grade steel in the Casting and Extrusion segment increased, mostly due to US steel tariffs.
Where possible, Exco has been passing along these tariffs to its customers through effective price increases in order
to mitigate the negative impact on its profitability. US steel tariffs however began to recede during the year as
importers began to receive exemptions.
Selling, General and Administrative Expenses
Selling, general and administrative expense in the current year decreased to $44.4 million from $46.1 million last year,
a reduction of 4% mainly due to the deconsolidation of ALC. As a percentage of sales however, these expenses
increased modestly, to 9% versus 8% the prior year.
Depreciation and Amortization
Consolidated depreciation expense in fiscal 2019 totalled $15.4 million, which was modestly lower than the $15.7
million expense last year. Depreciation expense within the Casting and Extrusion segment totalled $12.5 million in
fiscal 2019 versus $12.3 million in fiscal 2018 and depreciation expense within the Automotive Solutions segment
totalled $2.8 million this year versus $3.4 million last year. Amortization expense decreased to $4.1 million in fiscal
2019 from $5.2 million the prior year with the difference primarily attributable to accelerated amortization of the
remaining intangibles related to ALC last fiscal year. The carrying value of total intangible assets amounted to $33.9
million as at September 30, 2019. The Company expects the associated annual amortization expense will total
approximately $4.0 million in fiscal 2020, although this could vary depending on USD/ CAD exchange rates.
Interest
Net interest expense in the current year totalled $0.8 million in fiscal 2019 compared to $1.0 million in fiscal 2018.
The reduction is primary attributable to lower average debt levels in fiscal 2019 compared to fiscal 2018.
Income Taxes
Exco’s effective income tax rate was 26.0% in fiscal 2019 compared to an effective income tax rate of 22.6% in fiscal
2018. The higher effective income tax rate in fiscal 2019 was driven by ‘Other Expense’ related to the de-consolidation
of ALC in the amount of $6.4 million, which was not deductible for tax purposes. Excluding the impact of this charge,
the effective income tax rate for fiscal 2019 was 22.0%. Exco’s tax rate in fiscal 2019 benefited from a modest
EXCO TECHNOLOGIES LIMITED
10
ANNUAL REPORT 2019
reduction in the US corporate income tax rate during the year which was partially offset by a shift in the proportion
of earnings from jurisdictions which have a higher tax rate.
Net Income
• Consolidated
The Company reported consolidated net income of $26.6 million or basic and diluted earnings of $0.65 per share in
fiscal 2019, compared to consolidated net income of $42.3 million or basic and diluted earnings of $1.00 per share the
prior year. Net income in fiscal 2019 included a $6.4 million charge ($0.15 per share) to earnings related to the write-
off of Exco’s remaining equity in ALC. Excluding this item, net income would have been $33.0 million ($0.80 per
basic and diluted share) in fiscal 2019 (Adjusted Net Income and Adjusted EPS).
• Automotive Solutions Segment (Operating Earnings)
The Automotive Solutions segment recorded operating earnings of $31.9 million for the year compared to $44.4
million last year – a decrease of $12.5 million or 28%. Current year results were adversely impacted by a number of
factors. In particular, AFX and Polytech’s operations incurred higher wages and bonus payments to production staff
associated with the January annual wage settlement. Management estimates these incremental amounts totalled
approximately $7.0 million, of which the bonus payments represented about $4.4 million. As well, AFX and Polytech
experienced additional overtime and expedited freight costs associated with the labour disruption in January 2019
while severance costs associated with improving future efficiencies also increased current period costs. Profitability
in the current year benefited from foreign exchange gains but costs were also adversely impacted by unfavorable
product mix and start-up costs/ front-end inefficiencies associated with several new program launches, particularly at
Polydesign and Neocon but also AFX. In addition, operating losses at ALC in the current year totaled $2.1 million
($0.05 per share) compared to $1.2 million ($0.03 per share) the prior year for an increase of $0.9 million. Lastly,
segment profitability was boosted in the prior year by a gain on the sale of a building of $1.8 million in the fourth
quarter of fiscal 2018. Despite the profitability decline in fiscal 2019 and weaker potential vehicle production volumes
in the year ahead, management remains optimistic on the segment’s prospects for returning to growth. This view is
supported by program wins over the past year and decent quoting activity for new business where our efforts are
directed to adding new business that maximizes our profitability. Management also expects cost improvements will
accrue in fiscal 2020 as inefficiencies associated with the ramp up of several new programs during fiscal 2019 recede
and bonus payments to production staff in Mexico are anticipated to be at a lower level than the prior year.
• Casting and Extrusion Segment (Operating Earnings)
Casting and Extrusion operating earnings were relatively stable at $18.0 million compared to $18.2 million in the prior
year. The Large Mould group experienced a rebound in profitability during the year despite lower revenues. This
occurred as efficiencies associated with the ramp up of new equipment/ processes gained traction, work was completed
on previous loss-making programs and contributions from the group’s additive manufacturing operations increased.
Profitability within the Extrusion group declined during the year despite a $0.9 million asset disposition charge in
fiscal 2018. Results were hampered by softer overall market conditions which negatively impacted overhead
absorption rates at some of the group’s facilities and tempered efficiency gains from various operational initiatives.
Start up losses at the group’s new tooling facility in Mexico also modestly contributed to the reduction in group profits
during the year. At the Castool group, profits declined modestly year over year despite higher sales driven by strong
capital equipment demand. The reduction in the group’s profitability was driven by weaker market conditions in Asia
and a mix shift towards lower margin products. Generally, management remains focused on reducing its overall cost
structure, improving manufacturing efficiencies and building out new greenfield operations. Such activities are
expected to lead to improved segment profitability over time.
EXCO TECHNOLOGIES LIMITED
11
ANNUAL REPORT 2019
Corporate Segment (Operating Expense)
•
Corporate expense in the current year amounted to $6.7 million compared to $6.9 million the prior year. The year over
year decrease was primarily driven by lower incentive compensation expense in 2019 relative to 2018 offset by higher
salary and benefit costs as well as higher professional fees.
EBITDA
EBITDA in the current year amounted to $62.6 million compared to $76.6 million the prior year – a decrease of $14.0
million or 18%. The EBITDA margin decreased to 12.3% compared to 13.3% the prior year. EBITDA in the Casting
and Extrusion segment was $31.2 million, which was $0.2 million lower than in fiscal 2018. Casting and Extrusion
segment EBITDA margin declined to 15.3% from 15.7% the prior year. The Automotive Solution segment EBITDA
was $38.1 million, which was lower by $13.9 million, or 27% compared to fiscal 2018. The segment EBITDA margin
deteriorated to 12.6% in fiscal 2019 compared to 13.8% the prior year.
Quarterly Results
The following table sets out financial information for each of the eight fiscal quarters through to the fiscal year
ended September 30, 2019:
($ thousands except per share
amounts)
September 30,
2019
Sales
Net income
Earnings per share
Basic
Diluted
$121,815
$6,773
$0.17
$0.17
($ thousands except per share
amounts)
September 30,
2018
Sales
Net income
Earnings per share
Basic
Diluted
$139,538
$11,587
$0.27
$0.27
June 30,
2019
$119,944
$7,477
$0.18
$0.18
June 30,
2018
$152,755
$11,211
$0.27
$0.27
March 31,
2019
$123,465
$8,564
December 31,
20181
$142,124
$3,818
$0.21
$0.21
$0.09
$0.09
March 31,
2018
$148,390
$10,556
December 31,
2017
$134,871
$8,916
$0.25
$0.25
$0.21
$0.21
1 Net income in the first quarter of fiscal 2019 was reduced by $6.4 million ($0.15 per share) due to charges
associated with the liquidation of ALC.
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.
EXCO TECHNOLOGIES LIMITED
12
ANNUAL REPORT 2019
Fourth Quarter
In the fourth quarter, consolidated sales were $121.8 million – a decrease of $17.7 million or 13% from the prior year.
Excluding $26.2 million in revenue from ALC in the fourth quarter of fiscal 2018, consolidated revenues increased
by $8.5 million, or 8% year over year. Over the quarter the average USD/CAD exchange rate was 2% higher ($1.32
versus $1.30 last year) increasing sales by $1.5 million. The average EUR/ CAD exchange rate was 4% lower ($1.46
versus $1.51 last year) decreasing sales by $0.7 million compared to the fourth quarter of fiscal 2018.
The Automotive Solutions segment experienced a 22% decrease in sales, or a reduction of $19.7 million, to $69.4
million from $89.0 million in the fourth quarter of 2018. The decrease was driven by the deconsolidation of ALC from
Exco’s consolidated results in January 2019. Excluding $26.2 million of contributions from ALC in the fourth quarter
of fiscal 2018, segment sales increased by $6.6 million, or 11%. The higher average value of the US dollar compared
to the Canadian dollar increased segment sales by $0.9 million while the lower value of the Euro compared to the
Canadian dollar decreased segment sales by $0.7 million in the current quarter. In North America, overall vehicle
production volumes were roughly 2% lower during the quarter compared to a year ago. The groups three North
American businesses however recorded higher revenues as newer programs ramped up, particularly at AFX. In
Europe, market conditions softened during the quarter with a notable reduction in the amount of near-term takeover
business available. Polydesign nonetheless recorded solid growth year over year driven by new programs launched
both during the year and in the quarter.
The Casting and Extrusion segment recorded sales of $52.4 million compared to $50.5 million last year – an increase
of $1.9 million or 4%. The higher average value of the US dollar compared to the Canadian dollar increased segment
sales by $0.6 million in the current quarter while the weaker Euro against the Canadian dollar reduced segment sales
by $0.1 million. Segment sales gains were driven mainly by the Castool group, which continued to experience strong
demand for its capital equipment goods and generally firm demand for its consumable tooling. Markets in Asia
however remained soft, negatively impacting the group’s operations in Thailand. Revenue generated by the Extrusion
group were essentially flat during the quarter despite the benefit of sales from the group’s new facility in Mexico,
which began commercial production on April 1, 2019. Sales gains from this facility were offset by softer market
conditions for extrusion dies elsewhere in North America. Within the segment, US steel tariffs continued to reduce
during the quarter as certain steel distributors began receiving exemptions of these tariffs earlier in the year. Large
mould group sales were higher due to customer timing requirements, commencement of work on new programs, and
an improvement in the demand of spare parts. Looking forward, quoting activity for new work within the Large Mould
group remains fairly robust. This is particularly the case for work that takes advantage of the group’s enhanced
capabilities, including its ability to deliver high quality complex dies relatively quickly and its leadership position in
additive manufacturing for certain mould components.
The Company’s fourth quarter consolidated net income decreased to $6.7 million or earnings of $0.17 per share
compared to $11.6 million or earnings of $0.27 per share in the same quarter last year – an EPS decrease of 37%. The
effective income tax rate was 16% in the current quarter compared to 19% in the same quarter last year. The effective
tax rate in the current period was improved by approximately $1.4 million of foreign exchange gains that are not
subject to tax as well as 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 $5.0 million, a decrease of $7.8 million
or 35% over the same quarter last year. Prior year results benefited from $2.4 million of operating earnings generated
by ALC (nil in the fourth quarter of fiscal 2019) as well as a $1.8 million gain from the sale of a building. Current
period results benefited from foreign exchange gains but were also adversely impacted by ongoing higher labour costs
at Polytech and AFX, significant inefficiencies at Polytech and Polydesign associated with launch programs,
EXCO TECHNOLOGIES LIMITED
13
ANNUAL REPORT 2019
unfavorable product mix shifts, higher severance costs and inefficiencies related to the General Motors strike, which
was settled subsequent to quarter end. While General Motors strike related costs will continue into the first quarter of
fiscal 2020, management is optimistic that its overall cost structure will improve as newer programs mature and labour
costs are expected to improve.
Pretax earnings in the Casting and Extrusion segment improved by $0.6 million or 18% over the same quarter last
year to $4.0 million. The earnings improvement was mainly driven by increased contributions from the Large Mould
group which benefited from its ongoing efficiency efforts as well as the completion of a few loss-making programs
which negatively impacted results the prior year quarter. Profitability within the Extrusion group was lower during
the quarter, as it was adversely impacted by reduced market demand for extrusion dies within North America as well
as operational support and start-up costs for the new Extrusion facility in Mexico. Nonetheless, despite initial losses,
management remains encouraged by the early results of this facility. As is the case with Exco’s prior greenfield
operations, these operations typically require several quarters after production commences to mature and reach
sustained profitability. Castool’s profitability was down modestly in the quarter due to higher delivery and selling
costs associated with slower market conditions in Asia as well as a mix shift towards lower margin products.
Generally, management remains focused on reducing its overall cost structure and improving manufacturing
efficiencies and expects such activities together with its sales efforts should lead to improved segment profitability
over time.
The Corporate segment in the fourth quarter recorded expenses of $0.9 million compared to $1.8 million last year
mainly due to lower incentive compensation expense in the current year. As a result of the forgoing, consolidated
EBITDA in the quarter decreased to $13.3 million (11% of sales) compared to $20.1 million (14% 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 $55.1 million in fiscal 2019 compared to
$64.7 million in fiscal 2018. The $9.6 million year over year reduction was driven by $9.2 million of lower net income
excluding the non-cash write-off of the remaining equity in ALC. The remaining variance was mostly driven by
modestly lower other non-cash expenses in fiscal 2019 including depreciation, amortization, stock-based
compensation and deferred income taxes. Net change in non-cash working capital was $9.7 million cash provided in
fiscal 2019 compared to $15.9 million cash used last year. The year over year swing amounting to $25.6 million was
primarily driven by timing of accounts receivable collection, lower unbilled revenue and inventory levels. Trades and
other accruals were also generally higher year over year, mostly due to timing differences. The positive working
capital variance boosted cash provided by operating activities to $64.8 million in fiscal 2019, which was 33% higher
than the $48.8 million generated last year.
Cash Flows from Financing Activities
Cash used by financing activities amounted to $41.4 million compared to a use of $34.3 million in fiscal 2018 for a
year over year increase of $7.1 million. The higher use in fiscal 2019 is mainly attributable to an incremental $6.6
million of cash used to repurchase share capital and $14.5 million of debt reduction compared to $12.8 million the
prior year. Higher dividends of $14.6 million in fiscal 2019 compared to $14.1 million last year also contributed to
the variance.
EXCO TECHNOLOGIES LIMITED
14
ANNUAL REPORT 2019
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 all of its 15 manufacturing facilities and most of its
production equipment. The Company also leases sales and support centers in Troy, Michigan and Port Huron,
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
$578
44,183
17,186
772
29,426
7,931
$100,076
< 1 year
$578
44,183
93
280
29,426
7,931
$82,491
1-3 years
-
-
17,093
436
-
-
$17,529
Over 3 years
-
-
-
56
-
-
$56
∗ 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 $27.5 million compared to $20.4 million last year. Most
of the difference is explained by higher capital spending in the current year of $27.4 million compared to $22.9 million
last year. Capital spending in the current year included about $9.5 million to construct a new extrusion tooling facility
in Mexico while the prior year included $5.1 million to purchase the building where AFX’s operations are located.
The balance of the capital spending in both years is mostly related to machinery and equipment needed to maintain or
upgrade our production capacity. Cash flow from Investing Activities was favourably impacted by $0.5 million in
proceeds from the disposal of property, plant and equipment in the current year and $3.1 million the prior year related
to the sale of a building in Huntsville, Alabama which was leased to a third-party tenant.
In fiscal 2020, Exco plans to invest approximately $32.0 million in capital expenditures of which roughly $16.0 million
is for maintenance, ongoing equipment upgrades and the expansion of existing facilities within the Casting and
Extrusion segment, about $10.0 million is for the construction and build-out of a greenfield facility in Morocco and
plant expansion in Uxbridge for the Castool group and approximately $6.0 million is for maintenance expenditures
and targeted capacity additions in the Automotive Solutions segment.
We expect that in fiscal 2020 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 balance sheet was in a $8.7 million net cash position at September 30, 2019 compared to net debt position of
$2.7 million as at September 30, 2018, for an improvement of $11.4 million. This primarily occurred through the
EXCO TECHNOLOGIES LIMITED
15
ANNUAL REPORT 2019
generation of $36.5 million of Free Cash Flow less dividends paid of $14.6 million and net share repurchases of $11.6
million during fiscal 2019. The deconsolidation of ALC also removed $4.2 million of net debt.
In addition to its cash balances of $26.5 million, Exco retains access to $33.0 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, 2019.
Non-IFRS Measures
The following table provides a reconciliation of net income for the periods to adjusted net income, adjusted pretax
profit, adjusted EBITDA, adjusted basic earnings per share as well as a reconciliation of cash provided by operating
activities to free cash flow.
Net income
Other expense
Adjusted net income
Provision for income tax
Adjusted Pretax Profit
Depreciation
Amortization
Net interest expense
Adjusted EBITDA
Sales
Three Months ended
Twelve Months ended
September 30
September 30
(in $ thousands)
2019
$6,773
-
6,773
1,272
2018
$11,587
-
2019
$26,632
6,409
2018
$42,270
-
11,587
33,041
42,270
2,667
9,344
12,348
8,045
14,254
42,385
54,618
4,095
998
130
13,268
4,151
1,492
199
20,096
15,398
4,062
790
62,635
15,734
5,180
1,022
76,554
$121,815
$139,538
$507,348
$575,554
Adjusted EBITDA margin
10.9%
14.4%
12.3%
13.3%
Weighted average basic shares outstanding
Adjusted EPS
41,017
$0.17
42,152
$0.27
41,334
$0.80
42,313
$1.00
Cash provided by operating activities
Interest
Investment in Fixed assets net of proceeds of
disposal
$29,437
(130)
$5,465
$64,816
$48,833
(199)
(790)
(1,022)
(8,277)
($1,799)
($27,518)
($20,377)
Free Cash Flow
$21,030
$3,467
36,508
27,434
EXCO TECHNOLOGIES LIMITED
16
ANNUAL REPORT 2019
Outstanding Share Capital
As at September 30, 2019, the Company had 40,527,663 common shares outstanding. In addition, as at September
30, 2019, the Company had outstanding stock options for the purchase of up to 785,400 common shares at exercise
prices ranging from $8.86 to $14.58 per share.
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. 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 2019 and future years.
EXCO TECHNOLOGIES LIMITED
17
ANNUAL REPORT 2019
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer, together with other members of management, after
evaluating the effectiveness of the Company’s disclosure controls and procedures, have concluded that the Company’s
disclosure controls and procedures are adequate and effective 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 and Chief Financial 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
Exco’s Automotive Solutions segment services automotive component suppliers (and Tier 1 suppliers) around the
world. The results of this segment depend on demand for automobiles, the type of automobiles (which demand has
been shifting away from passenger cars towards SUV/ CUV’s in North America), the rate at which the electric vehicle
is more widely adopted and the level of automobile production, 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.
A significant portion of Exco’s receivables are with automotive customers. These customers have varying degrees of
financial strength which could ultimately impact the collectability of the respective receivable. The majority of these
receivables are with U.S. entities that can avail themselves of Chapter 11 protection from creditors in certain
circumstances and avoid payment of the Company’s receivables that are over 20 days from the date of the Chapter 11
filing. Exco’s receivables may also be with highly leveraged customers that may have recently merged or chosen to
leverage their balance sheet for tax purposes or otherwise increase their investment yield. Doing business with such
customers typically increases the risk of default and filing for bankruptcy protection. The Company uses its best
efforts to collect accounts receivable under 60 days but in some cases the terms may be notably longer and often in
other currencies thereby requiring Exco to bear the exchange rate risk. The Company often has the benefit of statutory
or common law liens on its products, however, it is not uncommon for significant receivables to be outstanding for
considerable periods, particularly in the large mould business.
In some cases, OEMs can decide to design the Company’s products out of the automobile (“de-contented”) or reduce
the trim level on which the Company’s products are installed for either aesthetic, cost or product redesign reasons.
While Exco believes its focus on evolving from component supplier to a designer and integrator of small assemblies
and sub-assemblies used in automotive and trunk interiors reduces the risk of de-contenting and trimming down
decisions, some of Automotive Solutions products are not critical components and may still be de-contented.
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
EXCO TECHNOLOGIES LIMITED
18
ANNUAL REPORT 2019
capacity by taking production from their suppliers and manufacturing the parts themselves. This process of ‘in-
sourcing’ may have the impact of reducing the amount of business available to suppliers such as Exco.
Exco has a significant number of employees worldwide and accordingly availability of labour is critical and wages
are a major manufacturing input cost. While real wage increases have been relatively muted over the last decade,
especially in low-cost countries, this may not continue to be the case. In Mexico particularly, where Exco has
approximately half its employees at four production facilities, all of which are represented by national labor unions,
real wage increases may materially impact the Corporation’s financial performance.
Exco sells to its automotive customers pursuant to purchase orders which typically sets out price per unit but not
volumes or fixed terms. These purchase orders may be terminated at any time with limited recourse for compensation
or damages and pricing is typically adjusted downward from time to time in the form of ‘cost downs’. Termination
of purchase orders and ‘cost downs’ may impact Exco’s margin and overall earnings if not contemporaneously offset
by new business at better margin or cost reductions. Furthermore, in any given year, any number of programs will be
expiring. While Exco is constantly quoting on replacement programs or new programs, there is no assurance that these
new programs will be awarded or that if awarded, the pricing and margin will be comparable to those of programs
ending.
The Casting and Extrusion segment is a capital goods business. Interest rates, exchange rates, corporate capital
spending, the general economic climate, business confidence and the financial strength of our customers affect the
demand for Exco’s dies, moulds and consumable parts for die-cast and extrusion machines. Abrupt changes in these
factors often bring about dramatic changes in demand and pricing. Exco believes that its broad product line,
geographic diversification and leadership position in its niche markets mitigate against this risk but some risk remains.
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 yet ratified by all parties. Furthermore, USA/China
trade negotiations have taken longer and appear more contentious than originally expected and are currently ongoing.
As well the US is weighing whether to impose large tariffs on foreign built automobiles. If 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,
EXCO TECHNOLOGIES LIMITED
19
ANNUAL REPORT 2019
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 2020, it is
estimated that Exco’s total corresponding U.S. dollar foreign exchange risk exposure before tax will amount to
approximately US$70.0 million. Therefore, if the Canadian dollar were to strengthen or weaken by $0.01 in fiscal
2020 from a baseline level of $1.30 USD/CAD, it is estimated that pre-tax profit would change by about $700 thousand
or about $550 thousand after tax. These estimates are based on historical norms and may be materially different in
2020 if customers deviate from their past practices.
Exco’s has four 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 2020, we estimate our pesos exposure net of hedges and pesos denominated
sales to be approximately 250 million pesos. If the Mexican pesos were to strengthen or weaken by 1% 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 1% from a baseline USD/CAD rate of 1.30, we estimate pre-tax profit would change by
$280 thousand or about $185 thousand after tax. These estimates are based on historical norms and may be materially
different in fiscal 2020 if customers deviate from their past practices.
Exco also has manufacturing facilities in Colombia, Brazil, Thailand 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 and often other
operating expenses in local currency. In several of these countries, sales contracts and major purchases such as material
and equipment are negotiated in U.S. dollars or Euro. In other countries, sales contracts and major purchases are
negotiated in local functional currencies as well. Major long-term fluctuations in the value of the local currencies
against the U.S. dollar and Euro have the potential to affect Exco’s operating results, retained earnings and value of
its investment in these countries. Exco may enter into forward contracts or ‘collar’ contracts from time to time in order
to protect itself from currency fluctuations. These contracts are derivative instruments which, depending on their
structure, may not qualify for hedge accounting treatment and accordingly may be ‘marked to market’ each quarter
and expensed if necessary. It is difficult to anticipate fluctuations in these local currencies in the event of major
economic, fiscal or political instability in these countries.
The cost of manufacturing our products is a critical factor in determining our success over the long term.
Manufacturing has generally expanded to developing countries where competing technologies and lower labor-cost
structures exist. Exco must compete against companies doing business in these developing countries. Exco has met
this challenge by manufacturing some labour-intensive products in Mexico, Thailand and Morocco; however, many
of our operations based in Canada and the U.S. must compete with products manufactured in lower-cost environments.
Although we have established and continue to enhance security controls intended to protect our IT systems and
infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical
access or cyber attacks. A significant breach of our IT systems could: result in theft of funds; cause disruptions in our
manufacturing operations; lead to the loss, destruction or inappropriate use of sensitive data; or result in theft of our,
our customers’ or our suppliers’ intellectual property or confidential information. The occurrence of any of the
foregoing could adversely affect our operations and/or reputation and could lead to claims against us that could have
a material adverse effect on our profitability.
EXCO TECHNOLOGIES LIMITED
20
ANNUAL REPORT 2019
Independent auditor’s report
To the Shareholders of Exco Technologies Limited
Opinion
We have audited the consolidated financial statements of Exco Technologies Limited and its subsidiaries (the “Group”),
which comprise the consolidated statements of financial position as at September 30, 2019 and 2018, and the
consolidated statements of income and comprehensive income, consolidated statements of changes in shareholders’
equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Group as at September 30, 2019 and 2018 and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International Financial
Reporting Standards (“IFRS”).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements
section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to
our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Other information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual
Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any
form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information,
and in doing so, consider whether the other information is materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis and Annual Report prior to the date of this auditor’s report. If based
on the work we have performed, we conclude that there is a misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with
EXCO TECHNOLOGIES LIMITED
21
ANNUAL REPORT 2019
Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness for of the
Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
•
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may
cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the
disclosures, and whether the consolidated financial statements represent the underlying transactions and events
in a manner that achieves fair presentation.
•
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are responsible for
the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our
audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Blake Langill.
Toronto, Canada
November 27, 2019
EXCO TECHNOLOGIES LIMITED
22
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
$(000)'s
As at
September 30, 2019 September 30, 2018
As at
ASSETS
Current
Cash and cash equivalents (note 9)
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
$26,488
93,552
18,719
57,850
2,874
-
1,875
201,358
126,787
33,891
62,834
1,174
$426,044
$578
44,183
12,643
8,041
278
2,672
1,010
93
69,498
17,093
9,972
96,563
50,538
4,349
9,480
265,114
329,481
$426,044
$31,343
102,520
24,438
63,771
3,585
779
3,170
229,606
117,549
36,639
62,843
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
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
Darren M. Kirk
President and
Chief Executive Officer
Brian A. Robbins
Director,
Executive Chairman
EXCO TECHNOLOGIES LIMITED
23
ANNUAL REPORT 2019
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)
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 (loss) 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
2018
$575,554
453,932
46,101
15,734
5,180
(1,033)
1,022
-
520,936
2019
$507,348
400,494
44,445
15,398
4,062
(226)
790
6,409
471,372
35,976
54,618
7,598
1,746
9,344
$26,632
(779)
(636)
(1,415)
$25,217
$0.65
$0.65
41,245
41,253
11,438
910
12,348
$42,270
805
5,858
6,663
$48,933
$1.00
$1.00
42,264
42,296
EXCO TECHNOLOGIES LIMITED
24
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
$(000)'s
Share
capital
$51,707
-
-
-
370
(847)
-
51,230
-
-
-
1,041
(1,733)
-
$50,538
Contributed
surplus
$3,998
-
-
504
(111)
-
-
4,391
-
-
270
(312)
-
-
$4,349
Retained
earnings
$241,321
42,270
(14,136)
-
-
(5,808)
-
263,647
26,632
(14,597)
-
-
(10,568)
-
$265,114
Accumulated other comprehensive income (loss)
Total
Unrealized gain
accumulated
(loss) on
other
foreign
comprehensive
currency
income (loss)
translation
$4,232
$4,465
-
-
-
-
-
-
-
-
-
-
6,663
5,858
10,895
10,323
-
-
-
-
-
-
-
-
-
-
(1,415)
(636)
$9,480
$9,687
Net unrealized
gain (loss) on
derivatives
designated as
cash flow hedges
($233)
-
-
-
-
-
805
572
-
-
-
-
-
(779)
($207)
Total
shareholders'
equity
$301,258
$42,270
($14,136)
$504
$259
($6,655)
$6,663
330,163
26,632
(14,597)
270
729
(12,301)
(1,415)
$329,481
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
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 loss (note 3)
Balance, September 30, 2019
The accompanying notes are an integral part of these consolidated financial statements.
EXCO TECHNOLOGIES LIMITED
25
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
$(000)'s
OPERATING ACTIVITIES:
Net income for the year
Add (deduct) items not involving a current outlay of cash
Depreciation (note 5)
Amortization (note 6)
Stock-based compensation expense
Deferred income tax expense (recovery) (note 14)
Net interest expense (note 17)
Non-cash cost of ALC plant closures (note 18)
Gain on disposal of property, plant and equipment
Net change in non-cash working capital (note 15)
Cash provided by operating activities
FINANCING ACTIVITIES:
Decrease in bank indebtedness
Repayment of long-term debt (note 4)
Interest paid, net
Dividends paid (note 3)
Repurchase of share capital (note 3)
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 on disposal of property, plant and equipment
Cash used in investing activities
Years ended September 30
2018
2019
$26,632
$42,270
15,398
4,062
305
1,746
790
6,409
(226)
55,116
9,700
64,816
(9,356)
(5,103)
(790)
(14,597)
(12,301)
729
(41,418)
(27,401)
(567)
450
(27,518)
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)
Effect of exchange rate changes on cash
229
1,322
Net decrease in cash during the year
De-consolidation of ALC cash (note 18)
Cash, beginning of year
Cash, end of year
(3,891)
(964)
31,343
$26,488
(4,533)
-
35,876
$31,343
The accompanying notes are an integral part of these consolidated financial statements.
EXCO TECHNOLOGIES LIMITED
26
ANNUAL REPORT 2019
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
15 strategic locations in 7 countries, the Company services a diverse and broad customer base. The Company is
incorporated and domiciled in Canada. The registered office is located at 130 Spy Court, Markham, Ontario, Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are outlined below:
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Certain amounts in the prior period have been reclassified to conform with current period presentation.
The consolidated financial statements and accompanying notes as at and for the year ended September 30, 2019 were
authorized for issue by the Board of Directors on November 27, 2019.
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.
EXCO TECHNOLOGIES LIMITED
27
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
When a foreign operation is sold, exchange differences that were recorded in accumulated other comprehensive income
are recognized in the consolidated statements of income and comprehensive income as part of the gain or loss on sale.
Segment reporting
Management has determined the operating segments based on the information regularly reviewed for the purposes of
decision making, allocating resources and assessing performance by the Company’s chief operating decision maker,
which is the chief executive officer. Factors used to identify reportable segments include product categories, customers
served and geographical region of operations. The chief operating decision maker evaluates the financial performance
of its operating segments primarily based on net income before interest, 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
For all periods presented that ended prior to October 1, 2018 the following was the Company’s accounting policy for
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
EXCO TECHNOLOGIES LIMITED
28
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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
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
EXCO TECHNOLOGIES LIMITED
29
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
differences can be utilized.
Deferred income taxes are charged or credited in the consolidated statements of income and comprehensive income,
except when they relate to items credited or charged directly to equity, in which case the deferred income taxes are also
recorded in equity.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it
is no longer probable that all or part of the deferred income tax asset will be utilized. Unrecognized deferred
income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that
the benefit will be 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
EXCO TECHNOLOGIES LIMITED
30
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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.
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 year.
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
EXCO TECHNOLOGIES LIMITED
31
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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 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
interests.
that market participants act
the asset or
their economic best
liability, assuming
in
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
For all periods presented that ended prior to October 1, 2018 the following was the Company’s accounting policy for
financial instruments.
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
EXCO TECHNOLOGIES LIMITED
32
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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 year-
end. Payment terms are generally based on the customers’ payment schedules, which typically range from 30 to 90
days from the invoice date. Payment is typically made through a lump-sum payment, however, milestone payments
throughout the asset fabrication process are sometimes agreed to. Payments made in advance of transfer of control are
recorded as a contract liability and recognized as revenue once control has transferred. 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 purchase of capital
equipment denominated in USD, using cash denominated in CAD 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.
EXCO TECHNOLOGIES LIMITED
33
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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
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
unbilled revenue, inventories, property, plant and equipment, contingent liabilities, income taxes, fair value of financial
instruments and stock option valuation.
Several divisions engage in the construction of custom-order large die-cast moulds. Such activities fall into the scope
of IFRS 15, Revenue from Contracts with Customers (supersedes 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
EXCO TECHNOLOGIES LIMITED
34
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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.
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 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 adopted in fiscal year 2019
Certain amendments to standards that were adopted on October 1, 2018 are noted below:
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
Effective October 1, 2018 the Company adopted IFRS 15, in accordance with the modified retrospective approach. The
adoption of the standard did not result in any restatement of previously reported results and did not have a material
impact on the presentation and disclosure in the consolidated financial statements.
Revenue Recognition
The Company recognizes sales primarily from two categories of goods: production contracts (including finished
production parts and assemblies, short-term die cast tooling contracts, extrusion and other tooling), and long-term large
die cast mould contracts.
EXCO TECHNOLOGIES LIMITED
35
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Production contracts
Revenue for production contracts is recognized at the point in time control of the goods is transferred to the customer.
Control of finished production parts, assemblies and tooling transfers when the goods are shipped from the Company’s
manufacturing facilities to the customer.
A receivable is recognized when control of goods transfers to the customer, as indicated above, and consideration is
unconditional. Payment terms are generally based on the customers’ payment schedules, which typically range from
30 to 90 days from the invoice date.
Long-term large die cast mould contracts
The Company recognizes revenue from long-term large die cast mould contracts over time using the percentage-of-
completion input method, which recognizes revenue as performance of the contract progresses. Contracts that do not
meet the criteria for over time recognition are recognized at a point in time. Revenue recognized over time is determined
based on the proportion of accumulated expenditures to date as compared to total anticipated expenditures as this
depicts the progress towards completion of the service. Revenue is recognized over time for contracts that the Company
creates an asset without an alternative use and has the contractual right to payment for performance completed to date.
The estimation of revenue and costs-to-complete is complex, subject to variables and requires significant judgement.
The contract value may include fixed amounts, variable amounts or both. The Corporation estimates variable
consideration at the most likely amount to which the Corporation expects to be entitled. The estimated variable amount
is included in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimation
of variable consideration is largely based on assessment of the Company’s historical, current and forecasted information
that is reasonably available.
A receivable is recognized when control of goods transfers to the customer, as indicated above, and consideration is
unconditional. Payment terms are generally based on the customers’ payment schedules, which typically range from
30 to 90 days from the invoice date.
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.
The Company has elected to apply the practical expedient provided under IFRS 15 for unsatisfied performance
obligation of a contract that has an original expected duration of one year or less or for which revenue is recognized
based on the right to invoice.
IFRS 9, Financial Instruments (“IFRS 9”)
The Company has adopted IFRS 9 using the modified retrospective approach effective October 1, 2018. The adoption
of IFRS 9 did not have a material impact on the consolidated financial statements. In accordance with the transitional
provisions in the standard, comparative figures have not been restated.
Financial instruments
(i) Financial assets and liabilities
The Company recognizes financial assets and financial liabilities initially at fair value and subsequently
measures these at either fair value or amortized cost based on their classification under IFRS 9 as described
below:
Amortized cost:
The Company classifies financial assets held to collect contractual cash flows at amortized cost, including
trade and other receivables. The Company initially recognizes the carrying amount of such assets on the
consolidated balance sheet at fair value plus directly attributable transaction costs, and subsequently measures
these at amortized cost using the effective interest rate method, less any impairment losses.
EXCO TECHNOLOGIES LIMITED
36
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Fair value through profit or loss (“FVTPL”):
Financial assets and financial liabilities purchased or incurred, respectively, with the intention of generating
earnings in the near term, and derivatives other than cash flow hedges, are classified as FVTPL. This category
includes cash and cash equivalents, and derivative assets and derivative liabilities that do not qualify for hedge
accounting. For items classified as FVTPL, the Company initially recognizes such financial assets and
liabilities on the consolidated balance sheet at fair value and recognizes subsequent changes in the consolidated
statement of operations. Transaction costs incurred are expensed in the consolidated statement of operations.
Loans and borrowings
The Company initially recognized the carrying amount of such liabilities on the consolidated balance sheet at
fair value net of directly attributable transaction costs. After initial recognition, they are subsequently
measured at amortized cost using the effective interest rate method. Gains and losses are recognized in profit
or loss when the liabilities are derecognized as well as through the effective interest rate method amortization
process.
(ii) Impairment of financial assets:
IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward-looking “expected credit loss” (“ECL”)
model. The ECL model is used in determining the allowance for doubtful accounts as it relates to trade and
other receivables. The Company’s ECL model aligns with the simplified approach under IFRS 9, which
measures lifetime ECL and forward-looking information and did not result in a significant change as compared
to the Company’s pre-IFRS 9 approach. The Company’s allowance is determined by historical experiences,
and considers factors including, the aging of the balances, the customer’s credit worthiness, and updates based
on the current economic conditions, expectation of bankruptcies, and the political and economic volatility in
the markets/location of customers.
(iii) Hedge Accounting:
The Company has applied hedge accounting prospectively. At the date of initial application of IFRS 9, all of
the Company’s existing hedging relationships were eligible to be treated as continuing hedging relationships.
Consistent with prior periods, the Company has continued to designate the change in fair value of the entire
forward contract in the Company’s cash flow hedge relationship in other comprehensive income (loss) to the
extent the hedge continues to be highly effective. The related other comprehensive income (loss) amounts are
allocated to the consolidated statements of income in the same period in which the hedged item affects
earnings. The adoption of the new hedge accounting requirements resulted in no transitional adjustment to
how the Company has applied hedge accounting under IFRS 9.
Accounting standards issued but not yet applied
The following standards are not effective for the year ended September 30, 2019 but will be in subsequent years as
follows:
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 will 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 and dos not expect it to result in a material change.
Application of IFRS 16 will result in an increase in liabilities and assets from the recognition of right to use assets and
lease liabilities, as well as a decrease in cost of sales and selling, general and administrative expenses and an increase
in interest expense and depreciation.
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.
EXCO TECHNOLOGIES LIMITED
37
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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, 2017
Issued for cash under Stock Option Plan
Transfer of contributed surplus on stock options exercised
Purchased and cancelled pursuant to normal course issuer bid
Issued and outstanding as at September 30, 2018
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, 2019
Common Shares
Number of Shares
42,499,391
37,690
-
(696,400)
41,840,681
103,000
-
(1,416,018)
40,527,663
Stated
Value
$51,707
259
111
(847)
51,230
729
312
(1,733)
$50,538
Accumulated other comprehensive income
Included in accumulated other comprehensive income in shareholders’ equity are gains and losses arising from the
translation of the Company’s foreign subsidiaries, net gains and losses on derivatives designated as cash flow hedges
and reclassification to income of net gains and losses on cash flow hedges as summarized in the following table:
Opening balance
Net unrealized gain (loss) on derivatives designated as cash flow hedges (1)
Unrealized gain (loss) on currency translation adjustments
Total other comprehensive income (loss) for the year
Closing balance
(1) Net of deferred taxes of $278 (2018 – $288).
2019
2018
$10,895
$4,232
(779)
(636)
(1,415)
$9,480
805
5,858
6,663
$10,895
Cash dividends
During the year, the Company paid four quarterly cash dividends totaling $14,597 (2018 – $14,136). The dividend rate
per quarter increased starting in the second quarter of the year from $0.085 to $0.09 per common share.
Stock Option Plan
The Company has a Stock Option Plan under which common shares may be acquired by employees and officers of the
Company. The following table shows the changes to the number of stock options outstanding during the year:
EXCO TECHNOLOGIES LIMITED
38
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
2019
2018
Number of
Options
880,150
165,000
(103,000)
(156,750)
Weighted
Average
Exercise
Price
$11.29
$9.87
$7.09
$11.55
785,400
$11.49
Number of
Options
754,340
165,000
(37,690)
(1,500)
880,150
Weighted
Average
Exercise Price
$11.32
$10.15
$6.87
$14.58
$11.29
Balance, beginning of year
Granted
Exercised
Expired
Balance, end of year
The following table summarizes information about stock options outstanding and exercisable as at September 30, 2019:
Weighted Average
Remaining
Contractual Life
Options Outstanding
Weighted
Average
Exercise
Price
$9.64
$10.33
$13.88
years
years
years
3.64
3.10
1.27
Options Exercisable
Weighted
Average
Exercise
Price
$8.86
$10.39
$13.87
Number
Exercisable
40,000
98,000
226,800
Number
Outstanding
180,000
315,000
290,400
785,400
2.55
years
$11.49
364,800
$12.39
Range of Exercise
Prices
$8.86 - $10.00
$10.01 - $11.00
$11.01 - $14.58
$8.86 - $14.58
The number of common shares available for future issuance of options as at September 30, 2019 is 1,289,938
(2018 – 1,298,188). The number of options outstanding together with those available for future issuance totals
2,075,338 (2018 – 2,178,338) or 5.1% (2018 – 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 $270 for the year ended September 30, 2019 (2018 – $504). 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,
2019 and 2018 are as follows:
Risk-free interest rates
Expected dividend yield
Expected volatility
Expected time until exercise
Weighted average fair value of the options granted
2019
2.29%
3.579%
29.85%
5.50 years
$2.01
2018
1.64%
3.125%
29.70%
5.50 years
$2.08
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, 2019, the Company granted 16,155 DSUs (2018 – 14,596 DSUs) and redeemed
EXCO TECHNOLOGIES LIMITED
39
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
60,312 DSUs (2018 – no DSUs). During the year ended September 30, 2019 the Company recorded stock-based
compensation expense of $35 (2018 – $96 income) related to awards under the DSU plan with a corresponding
adjustment to other accrued liabilities. As at September 30, 2019, 61,056 DSUs were outstanding with a carrying value
of $450 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
2019
$4,391
270
(312)
$4,349
2018
$3,998
504
(111)
$4,391
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, 2019. The Company’s Board of Directors authorized the purchase of up to 2,100,000 common
shares representing approximately 5.3% of the Company’s outstanding common shares. During the year, 1,416,018
common shares were repurchased (2018 – 696,400) for a total cost of $12,301 (2018 – $6,655). The cost to repurchase
the common shares in the year exceeded their stated value by $10,568 (2018 – $5,808) 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
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.
JP Morgan, credit facility (Canada, USA)
JP Morgan, operating line (Europe)
Prime rate in Canada
Prime rate in USA
Prime rate in Eurozone
Utilizations
Facilities Current
Long-term
$50,000
2,238
$-
578
$17,000
-
$52,238
$578
$17,000
2019
3.95%
5.00%
0.00%
Unused and
Available
$33,000
1,660
$34,660
2018
3.70%
5.25%
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 $17,000 was utilized as at September 30, 2019 (2018 - $24,421). 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
EXCO TECHNOLOGIES LIMITED
40
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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, 2019.
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 $2,238 (EUR 1.55 million) and bears interest based on LIBOR. The
Company had utilized $578 as at September 30, 2019 (2018 – $601).
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, 2019 there are no unfulfilled conditions
or contingencies attached to this loan.
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, 2019
$17,000
-
186
17,186
(93)
$17,093
September 30, 2018
$18,000
4,017
272
22,289
(4,108)
$18,181
Cost
Balance as at
September 30, 2017
Additions
Reclassification
Less: disposals
Foreign exchange movement
Balance as at
September 30, 2018
Additions
Reclassification
Less: disposals
Less: deconsolidation of ALC (note
18)
Foreign exchange movement
Balance as at
September 30, 2019
Machinery
and
Equipment
Tools Buildings
Land
Assets under
Construction
Total
$192,820
3,180
10,321
(3,958)
1,618
203,981
3,182
13,244
(10,118)
$21,112
1,159
835
(470)
287
22,923
1,569
1,432
(1,028)
$67,564
3,656
2,555
(3,043)
557
71,289
456
3,562
-
(6,962)
601
(601)
112
-
(44)
$10,077
2,284
-
(361)
12
12,012
-
-
-
-
(34)
$3,655 $295,228
22,920
12,641
-
(13,711)
(7,832)
-
2,520
46
2,631
22,194
(18,238)
-
312,836
27,401
-
(11,146)
-
(35)
(7,563)
600
$203,928
$24,407
$75,263
$11,978
$6,552 $322,128
EXCO TECHNOLOGIES LIMITED
41
ANNUAL REPORT 2019
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, 2017
Depreciation for the year
Less: disposals
Reclassification
Foreign exchange movement
Balance as at
September 30, 2018
Depreciation for the year
Less: disposals
Less: deconsolidation of ALC
(note 18)
Foreign exchange movement
Balance as at
September 30, 2019
Carrying amounts
As at September 30, 2018
As at September 30, 2019
Machinery
and
Equipment
Tools Buildings
Land
Assets under
Construction
Total
$134,550
11,008
(2,719)
(21)
1,128
$16,187
1,860
(421)
21
246
143,946
10,598
(9,931)
(4,269)
223
17,893
1,768
(991)
(473)
97
$32,696
2,866
(2,507)
-
393
33,448
3,032
-
-
-
$-
-
-
-
-
-
-
-
-
$- $183,433
15,734
(5,647)
-
1,767
-
-
-
-
-
-
-
-
195,287
15,398
(10,922)
(4,742)
320
$140,567
$18,294
$36,480
$-
$-
$195,341
$60,035
$63,361
$5,030
$6,113
$37,841
$38,783
$12,012
$11,978
$2,631
$6,552
$117,549
$126,787
As at September 30, 2019, the Company had deposits for machinery and equipment and buildings under construction
totalling $6,552 (2018 – $2,631). 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, 2017
Additions
Less: disposals
Reclassifications
Foreign exchange movement
Balance as at September 30, 2018
Additions
Less: disposals
Less: deconsolidation of ALC (note 18)
Reclassification
Foreign exchange movement
Balance as at September 30, 2019
$20,614
384
(165)
538
89
21,460
447
(392)
(321)
113
19
$21,326
$44,713
-
-
-
1,553
46,266
-
-
-
-
958
$47,224
$427
208
-
(538)
2
99
120
-
(113)
-
$106
$65,754
592
(165)
-
1,644
67,825
567
(392)
(321)
-
977
$68,656
$61,820
-
-
-
1,023
62,843
-
-
-
-
(9)
$62,834
EXCO TECHNOLOGIES LIMITED
42
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Accumulated amortization
and impairment losses
Balance as at September 30, 2017
Amortization for the year
Less: disposals
Foreign exchange movement
Balance as at September 30, 2018
Amortization for the year
Less: disposals
Less: deconsolidation of ALC (note 18)
Foreign exchange movement
Balance as at September 30, 2019
Carrying amounts
As at September 30, 2018
As at September 30, 2019
Computer
Software
and Other
Acquisition
Intangibles**
Assets under
Construction
(Software)
Total
Intangible
Assets Goodwill
$18,829
1,062
(165)
71
19,797
825
(392)
(273)
17
$19,974
$7,076
4,118
-
195
11,389
3,237
-
-
165
$14,791
$-
-
-
-
-
-
-
-
-
$-
$25,905
5,180
(165)
266
31,186
4,062
(392)
(273)
182
$34,765
$-
-
-
-
-
-
-
$-
$1,663
$1,352
$34,877
$32,433
$99
$106
$36,639
$33,891
$62,843
$62,834
+**Acquisition intangibles are comprised of customer relationships and trade names resulting from business
acquisitions and the purchase price allocation thereof.
Impairment testing of goodwill
The Company performed the annual impairment test of goodwill allocated to the Automotive Solutions segment as at
September 30, 2019. The recoverable amount 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 2% growth rate, which represents the expected growth in the global economy.
The discount rate applied to future cash flows was 7.1%. As a result of the analysis, management determined there was
no impairment.
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.
Sensitivity to changes in assumptions
Management believes that within reason, there can be possible changes to any of the above key assumptions and
recoverable amounts would still exceed carrying values.
EXCO TECHNOLOGIES LIMITED
43
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
7. PROVISIONS
The following table outlines the provisions at the dates of the consolidated statements of financial position and changes
to the provisions during the reporting periods.
Severance
Warranties
September 30, 2019
$2,474
198
$2,672
September 30, 2018
$1,115
152
$1,267
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, 2017
Additions
Utilized
Reversals
Foreign exchange differences
Closing balance, as at September 30, 2018
Additions
Utilized
Reversals
Foreign exchange differences
Closing balance, as at September 30, 2019
Severance
$1,188
378
(353)
(117)
19
$1,115
2,442
(972)
(100)
(11)
$2,474
Warranties
$151
-
-
-
1
$152
78
(33)
1
$198
Total
$1,339
378
(353)
(117)
20
$1,267
2,520
(1,005)
(100)
(10)
$2,672
8. TOOL CONSTRUCTION CONTRACTS
Contract revenue recognized under the percentage of completion method during the year amounted to $45,116 (2018 –
$53,968). The Company has recognized contract assets and liabilities in its consolidated statement of financial position
as Unbilled revenue of $18,719 and Customer advance payments of $1,010.
For contracts in progress, the following table summarizes the aggregate amount of costs incurred, profits recognized,
progress billings to customers for the related contracts and retentions being held to date.
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
September 30, 2019
September 30, 2018
$15,410
4,046
19,456
(737)
$18,719
$18,719
$20,680
4,392
25,072
(634)
$24,438
$24,438
EXCO TECHNOLOGIES LIMITED
44
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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 1, 2022 and designated them as cash
flow hedges against Mexican payroll and other local Mexican costs. The total amount of these Collars is 624.0 million
Mexican pesos (2018 – 408.0 million Mexican pesos). The selling price ranges from 19.52 to 22.646 Mexican pesos to
each US dollar. In addition, there is a series of collars extending through December 14, 2020 to convert $3.14 million
CAD to USD. These Collars have been designated as a cash flow hedge against capital equipment purchase in USD.
Management estimates that a cumulative loss of $278 (2018 – gain of $779) would be realized if these Collars were
terminated on September 30, 2019. Net of deferred taxes of $71, the cumulative loss of $207 is recorded in other
comprehensive income. During the year, the estimated fair value loss of $779, net of deferred taxes of $278 (2018 –
gain of $805 net of deferred taxes of $288) has been included in other comprehensive income, and the cumulative loss
of $278 is recorded in the consolidated statements of financial position under the caption derivative instruments.
Risks and uncertainties
The Company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a
measurement of the risks and how they are managed:
a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party fails to meet its contractual obligations. The
Company’s primary credit risk is its 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
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, 2019, the accounts receivable balance (net of allowance for doubtful
accounts) is $93,552 (2018 – $102,520) and the Company’s five largest trade debtors accounted for 35.7% of the total
accounts receivable balance (2018 – 44.4%). As at September 30, 2019, no accounts receivable are insured against
default (2018 – nil).
EXCO TECHNOLOGIES LIMITED
45
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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, 2019
$91,426
232
2,254
480
(840)
$93,552
September 30, 2019
$79,685
8,617
1,545
851
728
(840)
$90,586
September 30, 2018
$101,687
275
2,549
411
(2,402)
$102,520
September 30, 2018
$85,255
11,137
2,189
1,573
1,533
(2,402)
$99,285
September 30, 2019 September 30, 2018
$644
1,889
(70)
(61)
-
$2,402
$2,402
326
(1,949)
-
61
$840
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 facilities
due to the stand-by costs charged by its lenders. As at September 30, 2019, the Company has a net cash balance of
$8,724 (2018 – net debt of $2,710) and unused credit facilities of $34,660 (2018 – $30,825).
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:
EXCO TECHNOLOGIES LIMITED
46
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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
$578
44,183
17,186
772
29,426
7,931
$100,076
Total
$11,764
46,966
22,289
2,936
39,782
2,079
$125,816
1-3 Years
$-
-
17,093
436
September 30, 2019
< 1 Year
$578
44,183
93
280
29,426
7,931
$82,491
Over 3 Years
$-
-
-
56
-
$17,529
-
$56
September 30, 2018
< 1 Year
$11,764
46,966
4,108
1,181
39,782
2,079
$105,880
1-3 Years
$-
-
18,181
1,605
Over 3 Years
$-
-
-
150
-
$19,786
-
$150
c) Foreign exchange risk
The Company operates in Canada with subsidiaries located in the United States, Mexico, Colombia, Brazil, Thailand,
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
Income before income taxes
Other comprehensive income
1% Fluctuation
USD vs. CAD
1% Fluctuation
EUR vs. CAD
1% Fluctuation
MXP vs. CAD
+/- 1,056
+/- 3,666
+/- 241
+/- 376
-
+/- 169
1% Fluctuation
COP vs. CAD
1% Fluctuation
BRL vs. CAD
+/- 12
+/- 78
+/- 10
+/- 56
EXCO TECHNOLOGIES LIMITED
47
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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 cash position of $8,724
(2018 – $2,710 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, 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.
The estimated fair value of long-term debt approximates its carrying value as the instruments’ terms and interest rate
are market based.
During the year ended September 30, 2019, there were no transfers between Level 1 and Level 2 fair value
measurements.
The carrying value and fair value of all financial instruments are as follows:
Cash and cash equivalents
Accounts receivable
Trade accounts payable
Bank indebtedness
Customer advance payments
Accrued liabilities
Derivative instruments
Long-term debt
10. INVENTORIES
Raw materials
Work in process
Finished goods
Production supplies
Less: obsolescence provision
September 30, 2019
September 30, 2018
Carrying Amount
of Asset
(Liability)
$26,488
93,552
(44,183)
(578)
(1,010)
(20,684)
(278)
($17,186)
Fair Value of
Asset
(Liability)
$26,488
93,552
(44,183)
(578)
(1,010)
(20,684)
(278)
($17,186)
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, 2019
$33,458
9,751
13,486
4,418
(3,263)
$57,850
September 30, 2018
$44,516
8,690
14,382
3,985
(7,802)
$63,771
EXCO TECHNOLOGIES LIMITED
48
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
The movement in the obsolescence provision accounts is as follows:
Opening balance
Additions
Utilized
Reversals
Exchange differences
Closing balance
September 30, 2019
$7,802
3,820
(8,535)
-
176
$3,263
September 30, 2018
$3,578
5,864
(1,472)
(301)
133
$7,802
During the year, inventories of $245,464 (2018 – $298,989) were expensed, of which $3,820 was from the write-downs
of inventories (2018 – $5,864), with no reversal of write-downs (2018 – $301).
11. CAPITAL MANAGEMENT
The Company defines capital as net debt and shareholders’ equity. As at September 30, 2019, total managed capital
amounted to $329,481 (2018 – $332,873), consisting of nil net debt (2018 – $2,710) and shareholders’ equity of
$329,481 (2018 – $330,163).
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 Adjusted EBITDA ratio
September 30, 2019
September 30, 2018
0.00:1
0.00:1
0.01:1
0.04:1
The following table details the net debt calculation used in the net debt to equity ratio as at the years ended as
indicated:
Bank indebtedness and long-term debt
Less: cash and cash equivalents
Net debt
September 30, 2019
$17,764
September 30, 2018
$34,053
(26,488)
nil
(31,343)
$2,710
The net debt to Adjusted EBITDA ratio is calculated by dividing the net debt by Adjusted EBITDA, and the Company
calculates Adjusted 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, 2019, the Company was in
compliance with the required financial covenants.
EXCO TECHNOLOGIES LIMITED
49
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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.
Sales
Intercompany sales
Net sales
Depreciation
Amortization
Segment pre-tax income (loss) before interest and other
Other expense (note 18)
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
$214,214
(9,922)
204,292
12,511
682
17,989
-
23,475
101,649
473
1,153
-
215,549
31,434
2019
Automotive
Solutions Corporate
Total
$311,658
(8,602)
303,056
2,813
3,378
31,867
(6,409)
3,818
23,738
94
32,738
62,834
214,734
43,440
$-
-
-
74
2
(6,681)
-
108
1,400
-
-
-
(4,239)
21,689
$525,872
(18,524)
507,348
15,398
4,062
43,175
(6,409)
(790)
35,976
27,401
126,787
567
33,891
62,834
426,044
96,563
EXCO TECHNOLOGIES LIMITED
50
ANNUAL REPORT 2019
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
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
Geographic and customer information
Sales
Canada
United States
Europe
Mexico
South America
Asia
Other
Casting
and
Extrusion
$207,322
(7,402)
199,920
12,338
874
18,236
Automotive
Solutions
$381,750
(6,116)
375,634
3,354
4,304
44,351
15,237
90,565
454
1,362
-
205,206
30,822
7,547
25,610
138
35,274
62,843
237,928
47,863
2018
Corporate
Total
$-
-
-
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
117,549
592
36,639
62,843
447,884
117,721
2019
$21,752
304,622
100,138
58,249
9,594
8,257
4,736
$507,348
2018
$20,734
301,569
175,086
54,639
9,239
9,625
4,662
$575,554
In 2019 the total billings to the Company’s largest 2 customers accounted for 6.5% and 6.1% (2018 – 15.5% and 4.6%)
of total sales. The accounts receivable pertaining to these customers were $8,578 and $4,478 at year-end
(2018 – $11,554 and $4,487). The allocation of sales to the geographic categories is based upon the customer location
where the product is shipped. In 2019, the Company’s largest 2 customers were from the Casting and Extrusion segment
and the Automotive Solutions segment (2018 - the Company’s largest 2 customers were from the Automotive Solutions
segment and the Casting and Extrusion segment).
EXCO TECHNOLOGIES LIMITED
51
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
Property, plant and equipment, net
Canada
United States
Mexico
South America
Thailand
Europe
Morocco
September 30, 2019
$44,344
32,396
24,317
8,611
7,013
-
10,106
September 30, 2018
$39,898
33,339
14,716
9,152
7,449
2,899
9,817
$126,787
$117,270
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, 2019
$973
32,633
48
97
3
-
137
September 30, 2018
$1,172
35,186
28
77
6
54
116
$33,891
$36,639
B. EMPLOYEE FUTURE BENEFITS
The Company accrues employee future benefits for its Mexican and Thailand employees. In Mexico these benefits
consist of a one-time payment equivalent to 12 days of wages for each year of service (at the employee’s most recent
salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as
well as to certain employees terminated involuntarily prior to vesting of their seniority premium benefit. Under Mexican
labour laws, the Company also provides statutorily mandated severance benefits to its employees terminated under
certain circumstances. Such benefits consist of a one-time payment of three months’ wages upon involuntary
termination without just cause. In Thailand the severance benefit varies from 1 to 10 months dependent on length of
service.
The liability associated with the seniority and termination benefits is calculated as the present value of expected future
payments and amounted to $2,110 as at September 30, 2019 (2018 – $932) 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.
EXCO TECHNOLOGIES LIMITED
52
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
C. COMPENSATION OF KEY MANAGEMENT PERSONNEL
The remuneration of directors and other members of key management personnel during the years ended
September 30, 2019 and 2018 were as follows:
Salaries and cash incentives (i)
Directors’ fees
Share-based awards (ii)
September 30, 2019
September 30, 2018
$3,644
492
133
$4,269
$4,307
375
135
$4,817
i) Key management personnel were not paid post-employment benefits, termination benefits, or other long-term benefits
during the years ended September 30, 2019 and 2018.
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 41,245,026 (2018 – 42,264,189). 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 8,100 shares from the
outstanding stock options on diluted weighted average number of common shares outstanding for 2019
(2018 – 31,503).
14. INCOME TAXES
The consolidated effective income tax rate for 2019 was 26.0% (2018 – 22.6%) per the following tables. The effective
tax rate is adversely impacted by the non-deductibility of Other Expense related to the de-consolidation of ALC in the
amount of $6,409 (note 18). Excluding ALC, the effective income tax rate for the current year would have been 22.0%.
In the comparative year, the effective income tax rate was 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.
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
2019
$35,976
100.0%
9,943
(260)
861
(1,620)
536
(116)
$9,344
27.6%
(0.7%)
(2.4%)
(4.5%)
1.5%
(0.3%)
26.0%
EXCO TECHNOLOGIES LIMITED
53
ANNUAL REPORT 2019
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
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
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
Deferred tax liabilities
Tax depreciation in excess of book depreciation
Unrealized revenue and foreign exchange
Investment in subsidiaries
2018
$54,618
14,990
(294)
(1,428)
(1,902)
481
501
$12,348
100.0%
27.4%
(0.5%)
(2.6%)
(3.5%)
0.9%
0.9%
22.6%
2019
2018
$7,598
$11,438
1,746
910
$9,344
$12,348
2019
2018
$692
482
1,174
(5,913)
(645)
(3,414)
(9,972)
$960
287
1,247
(3,977)
(577)
(3,685)
(8,238)
Net deferred income tax liabilities
($8,798)
($6,991)
EXCO TECHNOLOGIES LIMITED
54
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
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 recoverable
16. CONTINGENT LIABILITIES
2019
$848
5,719
(223)
339
3,300
(1,105)
695
1,005
(1,855)
977
$9,700
2018
($6,648)
(3,973)
(2,807)
(1,030)
(2,540)
1,580
(583)
(72)
(369)
592
($15,850)
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, 2019 no 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 for the year ended September 30, 2019 amounted to $5,048 (2018
– $6,220) and related liabilities and receivables were not recorded on the Company’s consolidated statements of
financial position. Repayments made in the current year amounted to $6,360. (2018 – nil). As at September 30, 2019
the balance outstanding under the Program was $8,754.
There are no material contingent liabilities as at September 30, 2019 (2018 – 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
September 30, 2019
September 30, 2018
$835
(45)
$790
$1,043
(21)
$1,022
EXCO TECHNOLOGIES LIMITED
55
ANNUAL REPORT 2019
EXCO TECHNOLOGIES LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
$(000)’s except per share amounts
18. DECONSOLIDATION OF ALC AND OTHER EXPENSE
On January 17, 2019, the Company’s indirect wholly owned subsidiary ALC Bulgaria EOOD (“ALC”) voluntarily
filed a liquidation petition in Bulgaria. As a result the Company lost control of and de-consolidated it from the
Company’s financial statements.
The Company had recorded a $6.1 million provision during the three months ended December 31, 2018 in respect to
ALC, the result of which was that the net assets of ALC were $nil.
During the three months ended March 31, 2019, the Company recorded Other Expense of $333 which included net
expenses of $356 related to the realization of deferred foreign exchange losses included in Other Comprehensive
Income associated with ALC and as well as entities in South Africa and Germany, the net impact of losses incurred
between December 31, 2018 and the date of deconsolidation (these resulting in a gain on deconsolidation) and the net
impact of the elimination of intercompany amounts with ALC. In total Current assets of $13,536 and PPE of $2,800
offset by Current Liabilities of $9,901 were derecognized upon deconsolidation.
EXCO TECHNOLOGIES LIMITED
56
ANNUAL REPORT 2019
CORPORATE INFORMATION
Board of Directors
Transfer Agent and Registrar
Edward H. Kernaghan, MSc
Executive Vice President
Kernaghan & Partners Ltd.
Darren M. Kirk, MBA, CFA
President and CEO of the Company
Robert B. Magee, PEng
Chairman
Woodbridge Group
Colleen M. McMorrow, FCPA, FCA,ICD.D
Corporate Director
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
______________________________
Paul E. Riganelli, MA, MBA, LLB
Executive Vice President of the Company
Stock Listing
Brian A. Robbins, PEng
Executive Chairman of the Company
Anne Marie Turnbull
President, AMT Associates Ltd.
______________________________
Corporate Officers
Brian A. Robbins, PEng
Executive Chairman
Darren M. Kirk, MBA, CFA
President and CEO
Matthew Posno, CPA, CA, MBA
Chief Financial Officer & VP Finance
Secretary
Paul E. Riganelli, MA, MBA, LLB
Executive Vice President
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
______________________________
F2019 Annual General
Meeting of Shareholders
Corporate office,
Exco Technologies Ltd.,
130 Spy Court, 2nd Floor,
Markham, Ontario L3R 5H6
Wednesday, January 29, 2020
at 4:30 pm.
w w w . e x c o c o r p . c o m
T S X - X T C