EXCELLENCE
IN EXECUTION
“AT HÉR OUX- DE VTE K , WE AR E
CO MM ITTE D TO EXCE LLE NCE
I N E VERY THI NG WE DO . FR O M
I NI TI A L DESI GN , E NGI NEE R ING
AND MANUFACTURING , TO DELIVERY
AND AFTERMARKET SERVICE .”
MARTIN BRASSARD, PRESIDENT & CEO
BOEING MQ- 25
Unmanned Aer ial Ref uel in g Pr og r am
Select ed in A pr il 2019 to S up p ly th e Co mp le te
Landing Gear S yste m s
HÉROUX-DEVTEK
AT A GLANCE
} Héroux-Devtek Inc. (traded on the Toronto
Stock Exchange under the symbol “HRX”) is
an international company specializing in the
design, development, manufacture, repair and
overhaul of aircraft landing gear, hydraulic
and electromechanical flight control actuators,
custom ball screws and fracture-critical
components for the global aerospace market.
} With headquarters
in Quebec, Canada,
Héroux-Devtek is the third-largest landing
gear company in the world, supplying leading
aerospace customers operating in both the
commercial and defence sectors.
} Founded in 1942, Héroux-Devtek now employs
approximately 1,960 dedicated people at its 18
facilities located in Canada, the United States,
the United Kingdom and in Spain.
} Héroux-Devtek is recognized for its forward
thinking, engineering, world class service and
above all, its excellence in execution.
BOEIN G 777/ 777X
Hér o ux- Devtek 2019 [ 3 ]
Héroux-Devtek 2019 [ 5 ]
FEATURED
SUPPLY
CONTRACTS
supplies
Héroux-Devtek
the
complete landing gear systems
and aftermarket parts for The
Boeing Company’s 777/777x
commercial jet. The contract was
awarded in 2013 and first deliveries
occurred in 2016.
SA AB AB G RIP EN E
_
Héroux-Devtek supplies the com-
plete landing gear systems for
Saab AB’s Gripen E fighter
aircraft as part of a design, manu-
facturing and life cycle contract.
_
Héroux-Devtek supplies the landing
gear systems for the Sikorsky
CH-53K King Stallion heavy
lift helicopter as part of design,
manufacturing and
life cycle
contract
_
Héroux-Devtek will supply the
landing gear systems
for
Dassault Aviation’s Falcon
6X as part of a design, manu-
facturing and life cycle contract.
_
SIKORSK Y C H53-K KING S TAL LIO N
DASS AULT AV IATION FALC ON 6X
Hér o ux- Devtek 2019 [ 4 ]
FINANCIAL HIGHLIGHTS
FI SC AL Y EA R S END ED MA R C H 3 1
2019
2018
2017
2016
2015
OPERATING RESULTS
Sales
Operating income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net income
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
Funded backlog
FINANCIAL POSITION
Cash and cash equivalents
Working capital
Total assets
Long-term debt (2)
Shareholders’ equity
PER SHARE DATA
EPS – basic and diluted
Adjusted EPS (1)
(in millions of dollars, except per share data and ratios)
483.9
386.6
406.5
406.8
364.9
37.2
41.6
74.2
26.2
30.4
70.0
58.1
23.4
30.3
56.9
13.7
24.2
56.1
50.8
35.6
35.9
61.4
31.8
26.4
56.1
33.0
624.0
466.0
405.0
37.8
39.3
64.1
26.6
27.7
6.8
6.6
29.4
47.8
3.2
19.4
46.2
(66.3)
460.0
(15.0)
459.0
35.1
177.6
874.7
263.3
402.0
93.2
201.9
632.2
132.0
379.0
42.5
165.1
607.3
134.8
355.9
19.3
150.5
609.4
147.2
331.1
35.1
109.7
575.5
114.2
293.5
0.73
0.84
0.38
0.67
0.88
0.73
0.74
0.77
0.09
0.55
Average number of shares outstanding (diluted, in 000’s)
36,437
36,332
36,284
36,119
35,016
FINANCIAL RATIOS
Adjusted EBITDA (1) margin
Working capital ratio
Net debt-to-equity (2) (3)
15.3%
14.7%
15.1%
15.7%
13.1%
1.95
0.56
2.86
0.10
2.58
0.26
2.34
0.39
1.75
0.27
[1] These are non-IFRS measures. Please refer to the “Non-IFRS financial measures” section of the MD&A under Operating Results for definitions and reconciliations to
the most comparable IFRS measures.
[2] Including the current portion, but excluding net deferred financing costs.
[3] Defined as the total long-term debt, including the current portion, but excluding net deferred financing costs, less cash and cash equivalents over shareholders’ equity.
Hér o ux- Devtek 2019 [ 5 ]
Hé roux - Devtek 2019 [ 7 ]
Hé roux - Devtek 2019 [ 7 ]
INVESTMENT HIGHLIGHTS
B U I LD I NG LO NG -TE RM VALUE FOR SHARE H O L DE RS
HÉ RO UX- DEVTEK H AS DE LIVERED A COMP OUND A NNUA L GROWTH RATE OF 11%
FOR OPE RATIN G I NCOME AN D 14% FOR ADJUSTED EBITDA (1) OVER THE LAST 6 YEARS
GROWING A DJU STE D PRO FITABILIT Y
Adjusted EBTIDA(1) $M
Adjusted EBTIDA(1) %
GROWING OPERATING
PROFITABILITY AND PRODUCTIVITY ($M)
Non Recurring items
Total Operating Income Sales per Employee (‘000s)
)
s
0
0
0
‘
n
i
(
e
e
y
o
p
m
e
l
r
e
p
s
e
a
S
l
FY14
FY15
FY16
FY17
FY18
FY19
FY14
FY15
FY16
FY17
FY18
FY19
MAIN TAIN IN G STRO NG C ASH FLOW AND CO NSIS TENTLY R E IMB URS IN G DEB T
(In millions of dollars)
225
175
125
75
25
(25)
(75)
FY14
FY15
FY16
FY17
FY18
FY19
Cash Flow Related to Operating Activities
Free Cash Flow(1)
Net Debt(2)
[1] These are non-IFRS measures. Please refer to the “Non-IFRS financial measures” section of the MD&A under Operating Results for definitions and reconciliations to
the most comparable IFRS measures.
[2] Including the current portion, but excluding net deferred financing costs.
EMBRAER LEGACY 450/50 0
H é r o ux-D ev tek d esigne d, d eve lo p e d a n d s up p l ie s t he
l a n d i n g g ea r s ystem s f o r Em brae r’s L e g ac y 4 5 0/5 0 0
b u s i n ess jets as par t of a li fe -c yc le c o nt ra ct ob ta in ed
i n J u ly 20 08
FINANCIAL
DELIVERING VALUE
TO SHAREHOLDERS
• Nurture acquisitions
• Grow revenues
• Extract operational
leverage
• Deleverage
STRATEGIC
PILLARS
OP ER ATIO NAL
E MPL OYE ES
FOCUSED ON
EXCELLENCE
FOSTER OUR
ENTREPRENEURIAL
CULTURE
• Maintain the best
operational track record
• Respect
• Deliver excellence
• Responsibility
• Implement best-in-
class processes and
technology
• Leverage position as
global supplier
• Recognition
• Resilience
CU STOMERS
EXCEED
EXPECTATIONS
• Reliability
• Quality
• Commitment
• Agility
Hér o ux- Devtek 2019 [ 7 ]
Hé ro ux- Dev tek 20 19 [ 9 ]
STRONG GOVERNANCE AND INDUSTRY FOCUSED BOARD
GILLES LABBÉ
Executive Chairman of the Board
Non-Independent Board Member Since 1985
MARTIN BRASSARD
President and Chief Executive Officer
Non-Independent Board Member Since 2019
PAULE DORÉ
Corporate Director
Independent Board Member Since 2010
Chair of the Human Resources and Corporate
Governance Committee
JAMES J. MORRIS
Corporate Director and Consultant
Independent Director Since 2013
Member of the Human Resources and Corporate
Governance Committee
BRIAN A. ROBBINS
Executive Chairman, Exco Technologies
Limited Lead Director
Independent Board Member Since 2000
Member of the Human Resources and Corporate
Governance Committee
NATHALIE BOURQUE
Corporate Director
Independent Board Member Since 2015
Member of the Audit Committee
LOUIS MORIN
President, Busrel Inc.
Independent Director Since 2008
Chair of the audit committee
ANDREW JOHN STEVENS
Corporate Director
Independent Director Since 2014
Member of the Audit Committee
BEVERLY WYSE
Corporate Director
Independent Director Since 2019
Member of the audit committee
Hér o ux- Devtek 2019 [ 8 ]
EXECUTIVE
CHAIRMAN’S
MESSAGE
DEAR SHAREHOLDERS,
It is with immense pride that I took on the role of Executive Chairman on
June 1, 2019. After more than 30 years at the helm of Héroux-Devtek, I
am now ready to dedicate more time to our strategic direction and leave
our operations in the highly capable hands of Martin Brassard.
Today, Héroux-Devtek is the world’s third-largest manufacturer of landing
gears and a growing provider of complementary actuation systems,
dedicated to serving the world’s largest aerospace companies. It is our
team’s focus on excellence, uncompromising quality and entrepreneurial
culture that has brought us to where we are today.
Strong Financial and Operational Performance in Fiscal 2019
Over the past year, we laid the foundations of our next phase of growth.
We completed four strategic acquisitions that broaden our geographical
reach and customer portfolio and bring new capabilities in the growing
actuation and hydraulic market.
We achieved strong financial results on all fronts from the contribution
of the acquisitions of Beaver and CESA in Fiscal 2019 and from the
ramp-up of our systems deliveries for Boeing’s 777/777X program, from
higher sales in the business jet market and of spare parts.
We ended the year with $483.9 million in revenues, up more than 25%
from last year and exceeding our revenue guidance. Operating income
and adjusted EBITDA(1) margins stood respectively at 7.7% of sales and
15.3% of sales, up from 6.0% of sales and 14.7% of sales last year.
Strong Fundamentals and Diversification
Our industry continues to benefit from strong tailwinds. Passenger
travel demand remains strong and global defence spending is reaching
record levels. Deliveries and orders for new aircrafts are reaching all-time
highs, driving sustained growth and multi-year manufacturing ramp-ups
in the industry. As a key systems manufacturer for most of the world’s
leading aircraft OEMs, we are well positioned to benefit from these solid
fundamentals. We have an enviable and diversified portfolio of customers
within both the commercial and defence industries, a healthy combination
G O V E R N A N C E
Héroux-Devtek has always believed in
strong governance. Our Board is mainly
composed of independent directors and
veterans of the global aerospace industry.
Héroux-Devtek’s success is based on
consistent and actionable
interactions
between our Board of directors and our
management team. In this spirit, in fiscal
2019 we welcomed Beverly Wyse to our
Board, a long-time Boeing executive with
an impeccable track record and deep
industry relations. She is also the third
woman director to join Héroux-Devtek. I am
especially proud of our directors’ combined
expertise, diversified backgrounds and
complementary mindsets. As Executive
Chairman of the Board, I look forward to
further contributing to our success and
assisting Martin Brassard in his new role
as President and CEO. I also wish to
thank Brian A. Robbins for his exceptional
contribution as Chairman of the Board, a
position he recently left to become lead
director, as well as Andrew Stevens, who
will be retiring from the Board of Directors.
[1] These are non-IFRS measures. Please refer to the “Non-IFRS financial measures” section of the MD&A under Operating Results for definitions and reconciliations to
the most comparable IFRS measures.
Hér o ux- Devtek 2019 [ 9 ]
Hé rou x- Dev tek 2019 [ 11 ]
of build-to-print business and proprietary designs and increasing revenue
from spare parts and aftermarket services.
As always, we remain dedicated to value creation for all our stakeholders.
We strive to create a passionate work environment for all our employees
and are unwaveringly committed to offering excellence in our products,
irreproachable execution and world-class service for our customers.
Sincerely,
GIL LES LABBÉ
EXECUTIVE CHAIRMAN OF THE BOARD
AIRBUS A400M
Héroux-Dev tek (vi a C ESA ) supp lies sy st em s and com ponents for
Airbus’s A400M military transportation aircraft .
DIV ERSIFIED AND BA LA NCED REVENUE MIX
DEFENCE / C OMMERCI AL
PRO PRIETA RY / B UILD-TO-P RINT
50/50
Defence
Commercial
43%
57%
Build-to-Print
Proprietary and Life of
Program Contracts
OE M / A FTERMAR KET
64%
36%
OEM
Aftermarket
Large Jets
Business Jets
Regional Jets
Helicopters
Other
Transport
Fighters
Helicopters
Hér o ux- Devte k 2019 [ 10 ]
PRESIDENT &
CEO’S MESSAGE
DE AR STAKEH OLDE RS,
I would like to thank Gilles and our Board members for their confidence and
support during my 25 years at Héroux-Devtek. Over time, I have had different
roles, responsibilities and experiences that prepared me well to take on the
role of President and CEO. We have built a strong company with an enviable
reputation in a very competitive aerospace market, an accomplishment of
which I am proud. With a well-diversified, record firm order backlog and the
competent team of executives I am fortunate to count on, the Company is
well positioned for long-term success.
I am also proud of the excellent work executed by both our operational
and corporate teams last year. Their dedication and hard work allowed us
to complete four acquisitions while continuing to deliver on our existing
business with the high level of execution our customers have come to expect.
Four Acquisitions to Accelerate Growth
The companies we have acquired are all well-respected suppliers to the
global aerospace industry. They are providing us with additional exposure
to both the defence and commercial markets and have grown our customer
and supplier base internationally.
In October 2018, we completed the acquisition of Compañia Española de
Sistemas Aeronáuticos S.A. (“CESA”), a subsidiary of Airbus SE, which added
to our customer relationships and marked our entry into the complementary
actuation systems market. CESA’s strong technical and engineering expertise
as well as their proven commitment to delivering quality products on time to
customers are pillars that we are excited to build on. We are working closely
with the team in Spain to grow that business segment by introducing their
capabilities to our existing North American customers’ base. We are very
proud to see this newly acquired organization embrace the Héroux-Devtek
entrepreneurial culture and many best practices are being exchanged
between our teams in a very collaborative and transparent manner.
In July 2018, we completed the acquisition of Beaver Aerospace & Defense
Inc. (“Beaver”), a leading supplier of ball screws and actuation systems. Since
joining Héroux-Devtek, Beaver has performed very well operationally and
financially, as evidenced by their firm order backlog increasing significantly.
We have plans to invest in new technology that will add to their competitive
edge. We also see Beaver as a key partner partner for CESA in developing
electromechanical actuators, a product line that will see increasing demand
as new aircraft programs will feature more electrical components and
systems than those flying today.
In January 2019, we completed the acquisition of a majority equity stake
in Tekalia Aeronautik (2010) Inc. (“Tekalia”). This plating operation has very
unique capabilities in the North American surface treatment supply chain
that are necessary to produce landing gear components. It is a one-stop-
shop that has all necessary customer approvals which gives us flexibility in
KEEPING AHEAD OF THE CURVE
While the aerospace sector continues to be
a growing and resilient industry, we remain
focused on implementing new technology
and hiring the best talent to maintain our
leading position in the market. We are
continuously looking for ways to further
automate our manufacturing processes
in order to improve our efficiency. We do
this, among other ways, by promoting,
sharing and implementing best practices
throughout all of our facilities. Looking
ahead, the digitalization of our business
processes and data analytics will push
our technology further, allowing us to
manufacture
first-class products at a
lower cost.
Hér o ux- Devte k 2019 [ 11 ]
Héroux- Devte k 2 019 [ 1 3 ]
our production systems, allows our suppliers to count on a reliable plating
facility and will generate additional revenue for the corporation.
And finally, in June 2019, we completed the acquisition of Alta Precision Inc.,
a Québec-based manufacturer of high-precision landing gear components.
This acquisition adds two new growing programs in the commercial jet
market to our portfolio: the Embraer E-jet E2 family and Airbus A-220. It also
expands our scope of work on Boeing’s 787 and Airbus’ A-350 programs.
with this important customer to set up the required capabilities and capacity
to execute properly on this major program. We believe this approach sets the
foundations for mutual trust and a long-lasting beneficial relationship with our
customers and supply chain.
13% CAG R
G ROWIN G REV ENUE
$635
$570
$484
These acquisitions bring strong growth opportunities in terms of products
and customers and expand our global operations with an incredible group of
highly motivated and talented employees.
$272
$407
$407
$387
$365
Positioned for Long-Term Success
We are entering Fiscal 2020 with a record firm order backlog that is set to
grow further with the entry into service of several programs for which we
supply landing gear systems.
Leading the organic growth, the Boeing 777 production rate is expected to
increase in the coming years as the 777X is scheduled to enter in service in
2020. Currently, Boeing has a backlog of 436 airplanes for the 777 program,
including 344 orders for the 777X. We have all capabilities necessary to
properly execute this new program as we have already manufactured all
landing gears sets necessary for the flight test vehicles in Fiscal 2019.
Four other programs for which we designed the complete landing gear
system are scheduled to enter into service in the coming years. The design
and manufacture of these systems, namely the Sikorsky CH-53K King
Stallion, Saab Gripen E, Dassault Falcon 6X and Boeing MQ-25 Stingray
provides a clear path to sustained growth and profitability while expanding
our portfolio of proprietary products.
Transparency and Collaborative Approach
We believe that our solid relationships with the world’s largest aerospace
companies are a testament to our collaborative approach, transparency and
dedication to excellence in everything we do. We are proud to have been
selected once more by Boeing to provide the main landing gear system
for the F/A-18 E/F program, an agreement that was recently expanded to
include the Advanced F-15 program. We are currently working hand-in-hand
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY22
GUIDANCE (Middle Range)
Reiterating Long-Term Guidance
Our recent performance and strong industry fundamentals in both the
commercial and defence sectors are allowing us to reiterate our longer-
term growth prospects. We are confident in our ability to reach our revenue
guidance of $620 million to $650 million in fiscal 2022. We are starting fiscal
2020 in a strong position, with a funded backlog of firm orders that now
stands at a record $624 million, up from $466 million as at March 31, 2018.
Our solid financial results and the positive outlook created by our expanded
business are the result of the hard work and dedication of a strong team
of employees and suppliers combined with the collaboration of our clients.
I would like to thank them all for contributing to Héroux-Devtek’s success.
With our larger manufacturing footprint, new customers and additional
product offerings, we have everything in hand to meet our growth and
profitability objectives. We are motivated to continue creating shareholder
value, and I want to thank our investors for their continued trust.
MART IN BR ASSA RD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BO EING F/A-18 E /F SUPE R HO R NE T
Hér oux-Devtek wa s se l e c te d i n 2018 a n d 2019 t o su p p ly the main landing gear systems for B oeing’s F/A-18 E/F
Super Hornet and EA -18G Gr owl e r a n d f o r Bo e i n g ’ s A d v anced F-15 program.
13
3
4 5
2
1
8
67
9
10
11
12
GLOBAL
CENTERS OF
EXCELLENCE
Héroux-Devtek facilities
Héroux-Devtek’s recently acquired facilities
1. St-Hubert, Québec, Canada
Design, engineering and product
support. Technical expertise and
state-of-the-art testing facility
2. Longueuil, Québec, Canada
R&O, finishing and assembly
3. Laval, Québec, Canada
Manufacturing and assembly of
actuators. Manufacturing of small to
medium landing gear components
4. Alta Précision, Montreal,
Québec, Canada
Manufacturer of high precision
landing gear components
5. Tekalia Aeronautik, Montreal,
Québec, Canada
Surface treatment services
6. Kitchener, Ontario, Canada
Manufacturing of medium to large
complex landing gear components
7. Cambridge, Ontario, Canada
Manufacturing of ultra large-scale
complex landing gear components
8. Magtron Precision, Toronto,
Ontario
Precision components and assembly
Hé rou x- Dev tek 2019 [ 15 ]
14
15
16
17
18
9. Beaver Aerospace and Defense,
12. Wichita, Kansas, U.S.
16. Bolton, Westhoughton, U.K.
Livonia, Michigan, U.S.
Design and manufacturing of ball
screws and actuation systems
10. Springfield, Ohio, U.S.
Manufacturing of medium to large
complex landing gear and titanium
components
11. Strongsville,
(Greater Cleveland) Ohio, U.S.
Finishing and assembly of landing gear
R&O activities and manufacturing of
hydraulic systems and components
Design, manufacturing, assembly and
testing of fluid filtration applications
13. Everett, Washington, U.S.
Final assembly of Boeing 777/777X
landing gear systems
14. Runcorn, Cheshire, U.K.
R&O activities, finishing and assembly
of landing gear, product support, testing
and design engineering
15. Nottingham, Nottinghamshire, U.K.
Manufacturing of small to medium
landing gear components
17. Compañia Española de
Siestemas Aeronauticos, S.A.
Getafe, Spain
Design, engineering, assembly and
support for landing gear and
actuation systems
18. Compañia Española de Siestemas
Aeronáuticos, S.A. Seville, Spain
Assembly and installation of aircraft
components at customer assembly lines
MANAGEMENT TEAM
Hér o ux- Devte k 2019 [ 14 ]
n
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e
m
a
H
y
m
m
J
i
:
s
t
i
d
e
r
c
o
t
o
h
P
STÉPHANE RAINVILLE, Vice-President,
Human Resources • PATRICK GAGNON,
Director, Internal Audit and Corporate
Governance • STÉPHANE ARSENAULT,
Vice-President and Chief Financial Officer
MARTIN BRASSARD, President and
Chief Executive Officer • JEAN GRAVEL,
Vice-President, Sales & Programs
ANNIE GOUDREAULT, Vice-President
Corporate Controller • GILLES LABBÉ,
Executive Chairman of the Board
OLIVIER PERRON, Tax Director
JEAN-PHILIPPE SANCHE, Director,
Legal Affairs • MICHEL PAQUIN,
Corporate Director of Human Resources
DOMINIQUE DALLAIRE,
Eastern Region Vice-President
MIKE MESHAY, General Manager - Beaver
GAÉTAN ROY, Managing Director UK
JACK CURLEY, Central Region Vice-President
DANIEL NORMANDIN, Vice-President
Engineering, QA & Environment
MARC-OLIVIER GAGNON,
Vice-President Product Support
MANAGEMENT’S
DISCUSSION AND ANALYSIS
F O R T H E F I S C A L Y E A R E N D E D M A R C H 3 1 , 2 0 1 9
TABLE OF CONTENTS
OVERVIEW ................................................................................................................................................................................................
Forward-looking Statements ....................................................................................................................................................................
Highlights of the Year ...............................................................................................................................................................................
Overview of the Business ........................................................................................................................................................................
Business Acquisition ................................................................................................................................................................................
Economic Outlook ....................................................................................................................................................................................
Guidance .................................................................................................................................................................................................
Foreign Exchange ....................................................................................................................................................................................
OPERATING RESULTS .............................................................................................................................................................................
Non-IFRS Financial Measures .................................................................................................................................................................
LIQUIDITY AND CAPITAL RESOURCES .................................................................................................................................................
Credit Facility and Cash and Cash Equivalents .......................................................................................................................................
Government Authorities Loans .................................................................................................................................................................
Variations in Cash and Cash Equivalents ................................................................................................................................................
Free Cash Flow .......................................................................................................................................................................................
Liquidity Requirements ............................................................................................................................................................................
FINANCIAL POSITION ..............................................................................................................................................................................
Capital Structure ......................................................................................................................................................................................
Issued Capital
..........................................................................................................................................................................................
Consolidated Balance Sheets ..................................................................................................................................................................
Pension Plans ..........................................................................................................................................................................................
ADDITIONAL INFORMATION ...................................................................................................................................................................
Key Performance Indicators .....................................................................................................................................................................
Risk Management ....................................................................................................................................................................................
Derivative Financial Instruments ..............................................................................................................................................................
Critical Accounting Estimates ...................................................................................................................................................................
Internal Controls and Procedures ............................................................................................................................................................
New Accounting Standards ......................................................................................................................................................................
Future Changes in Accounting Policies ....................................................................................................................................................
Selected Financial Information .................................................................................................................................................................
Additional Information and Continuous Disclosure ...................................................................................................................................
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16 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
OVERVIEW
The purpose of this management discussion and analysis (‘’MD&A’’) is to provide the reader with an overview of how the financial position of
Héroux-Devtek Inc. and its subsidiaries (‘’Héroux-Devtek’’, the ‘’Corporation’’ or “Management”) evolved between March 31, 2018 and March 31,
2019. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2019 to those of the same periods
of the prior fiscal year.
This MD&A is based on the audited consolidated financial statements for fiscal year ended March 31, 2019, which are prepared in accordance
with International Financial Reporting Standards (“IFRS”), and should be read in conjunction with them. All amounts in this MD&A are in thousands
of Canadian dollars, the Corporation’s functional and presentation currency for all periods referred to herein, unless otherwise indicated. Financial
data for the quarters ended March 31, 2019 and 2018 has not been audited.
IFRS and non-IFRS financial measures
This MD&A contains both IFRS and non-IFRS financial measures. Non-IFRS financial measures are defined and reconciled to the most
comparable IFRS measures in the Non-IFRS Financial Measures section under Operating Results.
Materiality for disclosures
Management determines whether information is material based on whether they believe a reasonable investor’s decision to buy, sell or hold
securities of the Corporation would likely be influenced or changed should the information be omitted or misstated, and discloses material
information accordingly.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements which are mainly about, but may not be limited to, Héroux-Devtek’s future financial performance,
expectations, objectives or possible events. These statements are mainly, but may not be exclusively, contained in the Guidance and Economic
Outlook sections and are usually identifiable by the use of such terms as: “aim”, “anticipate, “assumption”, “believe”, “continue”, “expect”, “foresee”,
“forecast”, “guidance”, “intend”, “may”, “plan”, “predict”, “should” or “will”. The predictive nature of such statements makes them subject to risks,
uncertainties and other important factors that could cause the actual performance or events to differ materially from those expressed in or implied
by such statements.
Such factors include, but are not limited to: the impact of worldwide general economic conditions; industry conditions including changes in laws
and regulations; increased competition; the lack of availability of qualified personnel or management; availability of commodities and fluctuations
in commodity prices; financial and operational performance of suppliers and customers; foreign exchange or interest rate fluctuations; and the
impact of accounting policies issued by international standard setters. For more details, please see the Risk Management section of this MD&A.
Readers are cautioned that the foregoing list of factors that may affect future growth, results and performance is not exhaustive and undue
reliance should not be placed on forward-looking statements.
Héroux-Devtek provides such forward-looking statements for the purpose of assisting the reader in understanding the Corporation’s financial
performance and prospects and to present management’s assessment of future plans and operations. The reader is cautioned that such
statements may not be appropriate for other purposes.
Although management believes in the expectations conveyed by the forward-looking statements and while they are based on information available
on the date such statements were made, there can be no assurance that such expectations will prove to be correct and readers are advised
that actual results may differ from expected results. All subsequent forward-looking statements, whether written or orally attributable to the
Corporation or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. Unless otherwise required
by applicable securities laws, the Corporation expressly disclaims any intention, and assumes no obligation to update or revise any forward-
looking statements whether as a result of new information, future events or otherwise.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 17
HIGHLIGHTS OF THE YEAR
Fiscal year
Sales
Operating income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net income
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
In dollars per share
EPS - basic and diluted
Adjusted EPS (1)
In millions of dollars, as at
Funded backlog (2)
$
$
2019
483,877
37,240
41,563
74,213
26,194
30,352
69,969
58,121
2018
386,564
23,378
30,325
56,904
13,674
24,213
56,122
50,811
$
$
0.73
0.84
March 31,
2019
624
$
$
0.38
0.67
March 31,
2018
466
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
(2) Represents firm orders.
Key Events
On October 1, 2018, the Corporation completed the acquisition of Compañia Española de Sistemas Aeronáuticos, S.A. (“CESA”), a subsidiary
of Airbus SE (PA: AIR) and on July 2, 2018, the Corporation completed the acquisition of Beaver Aerospace & Defense Inc. and its wholly-
owned subsidiary PowerTHRU Inc. (“Beaver”). See Business Acquisitions for further details.
The Corporation achieved sales of $483.9 million, operating income of $37.2 million and Adjusted EBITDA of $74.2 million in fiscal 2019
compared to $386.6 million, $23.4 million and $56.9 million in fiscal 2018. See Operating Results for further details.
Héroux-Devtek generated cash flows related to operating activities of $70.0 million and record free cash flow of $58.1 million during fiscal
2019, compared to $56.1 million and $50.8 million in fiscal 2018.
Backlog increased to $624.0 million, compared to $466.0 million as at March 31, 2018 due to contributions by CESA and Beaver totaling
$113.8 million and an organic increase of $44.2 million.
In January 2019, the Corporation received the final customer certification required to perform all surface treatment planned to produce the
Boeing 777 and 777X major landing gear components at its Strongsville, Ohio facility.
On July 17, 2018, Héroux-Devtek announced that it had been selected by The Boeing Company (“Boeing”) to manufacture the main landing
gear and side braces for the F/A 18 Super Hornet and EA-18G Growler aircraft. First deliveries are expected in the third quarter of calendar
2020. The contract also includes potential spare parts and aftermarket services.
In April 2019, subsequent to the end of the fiscal year, the Corporation announced that it had been selected by Boeing to supply the complete
landing gear system for the MQ-25 unmanned aerial refueling program.
18 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
OVERVIEW OF THE BUSINESS
Profile
Héroux-Devtek Inc. (TSX: HRX) is an international company specializing in the design, development, manufacture and repair and overhaul
(R&O) of landing gear, hydraulic and electromechanical flight control actuators, custom ball screws and fracture-critical components. The
Corporation has also built a strong, well-recognized design engineering team. Héroux-Devtek is the third largest landing gear company in the
world based on sales, supplying both the commercial and defence sectors.
In the commercial sector, the Corporation is active in the large commercial and business jet, regional aircraft and helicopter markets. On the
defence side, the Corporation provides parts and services for major military aircraft in the United States and Europe. As a result, a significant
portion of the Corporation’s sales are made to a limited number of customers located in Canada, the United States and Europe.
The Corporation's head office is located in Longueuil, Québec while operating facilities are located in the Greater Montreal area (Longueuil,
Laval, St-Hubert and Montreal); Kitchener, Cambridge and Toronto, Ontario; Springfield and Cleveland, Ohio; Wichita, Kansas; Everett,
Washington; Livonia, Michigan; Seville and Madrid, Spain; as well as Bolton, Runcorn and Nottingham in the United Kingdom.
Héroux-Devtek sells to Original Equipment Manufacturers (“OEMs”) such as Boeing, Airbus, Lockheed Martin, Leonardo, Embraer and BAE
Systems; to Tier 1 suppliers such as Safran Landing Systems and AAR; and to end users in the aftermarket where its largest customer is the
U.S. Air Force (“USAF”). In fiscal 2019, sales to these nine customers represented approximately 63% of total consolidated sales. More specifically,
the Corporation has one customer representing 22% of its consolidated sales.
The following charts describe Héroux-Devtek’s revenue segmentation in terms of intellectual property and destination:
* BTP: Build to Print
** Based on fiscal 2019 actual annualized sales for Beaver, CESA and Tekalia
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 19
BUSINESS ACQUISITIONS
Acquisition of CESA
On October 1, 2018, the Corporation completed the acquisition of all the shares of CESA, a subsidiary of Airbus SE, for €130.4 million ($195.8
million). Headquartered in Madrid, Spain, CESA is a leading European provider of fluid mechanical and electromechanical systems for the
aerospace industry. This acquisition allows the Corporation to broaden its existing aerospace and product offering into actuation, landing gear,
and hydraulic systems. The transaction was treated as a business combination.
The acquisition of CESA was financed as follows:
A $50.0 million, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
A US$50.0 million ($65.2 million) drawing on the Corporation’s credit facility, whose limit was increased from $200.0 million to $250.0
million; and,
The Corporation’s available cash balance.
In addition, the Corporation assumed CESA’s net outstanding debt amounting to approximately €23.7 million ($35.6 million) upon closing.
For the period between October 1, 2018 and March 31, 2019, the Corporation's consolidated sales and net income included €42.1 million ($63.5
million) and €2.7 million ($4.0 million), generated by CESA, respectively. Management is satisfied with the first six-month of performance by the
newly-acquired company as they delivered high throughput combined with a favourable product mix when compared to the previous six months.
If the acquisition had closed on April 1, 2018, the consolidated sales and net income of CESA would have amounted to $117.3 million and $2.8
million, respectively, for the fiscal year ended March 31, 2019.
Acquisition of Beaver
On July 2, 2018, the Corporation completed the acquisition of all the shares of Beaver Aerospace & Defense Inc. and its wholly-owned subsidiary
PowerTHRU Inc. («Beaver») for a purchase price of US$21.6 million ($28.5 million). This price includes a working capital adjustment received
in April 2019 of US$0.3 million ($0.4 million) and a US$3.5 million ($4.6 million) balance of sale payable over the next two years which bears
interest at 3%. The transaction was financed through the Corporation’s cash and was treated as a business combination. This acquisition allows
the Corporation to broaden its existing aerospace and product offering into ball screws and actuation systems as well as expand its footprint in
North America.
For the period between July 2, 2018 and March 31, 2019, the Corporation's consolidated sales and net income included US$18.9 million ($24.8
million) and US $1.4 million ($1.8 million), generated by Beaver, respectively. If the acquisition had closed on April 1, 2018, the consolidated
sales and net income of Beaver would have amounted to $33.2 million and $2.2 million, respectively, for the fiscal year ended March 31, 2019.
Acquisition of Tekalia
On January 23, 2019, the Corporation completed the acquisition of 60% of the shares of Tekalia Aeronautik (2010) Inc. (“Tekalia”), a supplier of
surface treatment services to the aerospace sector with annual sales of approximately $12.0 million, for a purchase price of $6.5 million. The
transaction was financed through the Corporation’s cash and was treated as a business combination. The acquisition of Tekalia allows the
Corporation to further secure surface treatment capacity to support its North American customers’ growth.
Purchase Prices
The purchase prices and the purchase price allocations that reflect the fair value of the assets acquired and liabilities assumed with any excess
allocated to goodwill were determined using the acquisition method as follows:
Cash payment
Long-term debt assumed
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price for the Corporation’s interest
Non-controlling interests
CESA
$ 170,930 $
35,594
(10,708)
—
$ 195,816 $
—
$ 195,816 $
Beaver
23,671 $
574
(388)
4,609
28,466 $
—
28,466 $
Tekalia
Total
3,548 $ 198,149
39,149
2,981
(11,096)
—
4,609
—
6,529 $ 230,811
2,365
2,365
8,894 $ 233,176
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 20
Purchase Price Allocations
Accounts receivable
Inventories
Income tax receivable
Other current assets
Property, plant and equipment
Finite-life intangible assets
Deferred income tax assets
Other long-term assets - Tax credits receivable
Total identifiable assets
Accounts payable and accrued liabilities
Provisions
Customer advances and progress billings
Provisions
Deferred income tax liabilities
Other liabilities - long-term accounts payable
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
Beaver
Tekalia
$
CESA
28,293 $
36,692
505
596
66,086
44,923
40,407
—
7,843
$ 159,259 $
16,773
11,897
4,188
32,858
6,787 $
10,165
—
50
17,002
3,635
4,050
2,774
—
27,461 $
2,588
2,118
450
5,156
2,406 $
1,105
—
182
3,693
Total
37,486
47,962
505
828
86,781
8,566
176
—
—
57,124
44,633
2,774
7,843
12,435 $ 199,155
4,833
—
—
4,833
24,194
14,015
4,638
42,847
12,857
3,465
4,365
63,534
4,308
3,465
4,365
44,996 $
8,549
—
—
13,705 $
$
—
—
—
4,833 $
114,263
81,553
$ 195,816 $
13,756
14,710
28,466 $
135,621
7,602
1,292
97,555
8,894 $ 233,176
The purchase price allocations of CESA and Tekalia are preliminary. The purchase price of CESA is subject to final working capital adjustments.
In the case of Tekalia, due to the limited time between the date of acquisition and the date of the financial statements, management is in the
process of gathering all the information necessary to finalize it. Accordingly, the final purchase price allocations could result in changes to the
fair value of assets acquired and liabilities assumed.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 21
ECONOMIC OUTLOOK(1)
Commercial Aerospace Growth Forecasts Remain Positive in Light of Recent Signs of a Slowdown in Global Expansion
The commercial market represents approximately/over 75% of the total value of aircraft production in Calendar 2018.(5)
Passenger traffic volumes and air cargo volumes, measured in revenue passenger kilometers (RPK) and freight ton kilometers (FTK) respectively
are two important metrics used to measure commercial air traffic volumes.
International Air Transport Association’s (“IATA”) most recent forecast for 2019 calls for passenger volumes to remain broadly in line with the
average annual growth rate of 5.6% recorded in the previous 20-year period. Passenger traffic volumes, expressed in revenue passenger
kilometres (“RPK”), eased to a year-over-year growth of 5.3% in February 2019. In April 2019, the International Monetary Fund (“IMF”) issued
a downward revision to its global GDP growth forecast to 3.3% in calendar 2019, with a return to 3.6% in 2020. This fourth revision in twelve
months results from a slowing trend in business confidence (as indicated by the global composite Purchasing Manager’s Index). Following the
IMF’s GDP forecast revision, the IATA reported that if the pace of growth of the global economy continued to slow down in 2019, RPK growth
in 2019 would be closer to 5.0%, down from its previous forecast of 6.0%. In spite of these short-term revisions, the long-term outlook for the
airline industry remains positive.
Air cargo volume, measured in freight ton kilometres (“FTK”), were marginally higher by 0.1% year-over-year in March 2019, resulting from
softness in global trade and recent economic indicators. According to the IATA, leading indicators suggest that FTK growth should remain
subdued in the coming months. IATA’s last update to its FTK long-term growth forecast was published in March 2019 and forecasts an annual
growth of 2.7% for 2019 and of 4.4% per year over the next five years. This positive outlook is supported in part by fast-growing areas such as
e-commerce.(3)
“Air traffic has proven to be resilient to external shocks and doubles every 15 years(2)”, Airbus 2018-2037 Global Market Forecast.
22 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Customers’ Commercial and Defence Order Backlogs Remain Strong
Meanwhile, in the large commercial aircraft sector, Boeing reported record revenue and profitability results in 2018 mainly driven by commercial
and defence airplane deliveries. Boeing’s commercial airplanes order backlog reached 5,900 airplanes. Over the next 20 years, Boeing forecasts
a need for 43,000 new commercial airplanes, which would double the size of today’s fleet.
Airbus also reported robust 2018 profitability resulting from strong operational performance. Their commercial aircraft order backlog reached
an industry record of 7,577 aircrafts at year end. Airbus reported strong first quarter 2019 results on robust commercial aircraft deliveries and
production ramp-up and continues to see good prospects in its helicopter and defence business.
Both Boeing and Airbus are adjusting their production rates as they introduce certain more fuel-efficient aircraft variants on several leading
programs. These adjustments are scheduled through calendar 2020. Order backlogs have increased year-over-year and remain strong for both
manufacturers driven by a higher combined total of new orders and commitments at the end of 2018.(4) Their combined backlogs represent a
total of 13,477 aircraft representing over 8 years of production based on calendar 2018 production rates.
Defence Remains a Solid Growth Market with Spending on the Rise
The defense market in Calendar 2018 represented about 25% of global aircraft production, according to Teal Group(5). It remains a “solid growth”
market, driven by rising global tensions and an aging fleet. Fighter jets are forecasted as the largest share aircraft production at approximately
$293 billion over the next ten years. (TEAL)
On March 11, 2019, the U.S. administration sent Congress a Proposed Fiscal Year 2020 Budget request to increase funding for the Department
of Defense (DOD) to US$718 billion from US$668 billion in 2018 representing 7.5% of year over year growth. In Canada, the new defence policy
calls for a rise in spending, from $18.9 billion in the 2017 fiscal year to $32.7 billion in the 2027 fiscal year, an increase of over 70%. Europe is
also committing more funds to defence, as evidenced by a 7.2% projected overall spending increase by members of NATO for 2019 (expressed
in US dollars, assuming constant prices and exchange rates).(6)
New Certifications and Demand in North America Drive Business Jet Deliveries
Business jets are forecasted as the third largest segment new aircraft production over the next ten years at approximately US$253 billion. (TEAL)
In the business jet market, aircraft shipments increased by 3.8% in calendar 2018, to 703 aircrafts, according to data published by the General
Aviation Manufacturers Association (“GAMA”). Looking ahead, the business jet industry is expected to experience growth in the short to medium
term, supported by several new airplane models coming to market and an improved used aircraft environment. The North American market took
delivery of 65.1% of all business jets delivered in 2018.(7)
(1) Refer to Forward-Looking Statements in Overview for further information regarding forward-looking statements and related risks.
(2) Source: Airbus Global Market Forecast, 2018-2037
(3) Sources: Air Passenger Market Analysis, IATA, February 2019; Air Freight Market Analysis, IATA, May 2019; IMF Downgrades GDP
Forecast, But Growth Still Looks OK, April 2019; World Economic Outlook, International Monetary Fund, April 2019.
(4) Sources: Airbus press release February 14, 2019 and April 30, 2019; Boeing press releases January 30, 2019 and April 9, 2019; Speech
from Boeing CEO Dennis Muilenberg: 2019 Address to Shareholders, April 29, 2019. Statement from Boeing CEO Dennis Muilenburg: We
Own Safety - 737 MAX Software, Production and Process Update, April 5, 2019.
(5) Source: World Military and Civil Aircraft Briefing, Teal Group Corporation, March 2019.
(6)Sources: DOD press release March 12, 2019; NATO press release, December 19, 2018; The Standing Senate Committee on National
Finance Evidence, February 19, 2019.
(7) Sources: GAMA press release February 20, 2019, GAMA annual report 2018; Business Aviation Market Forecast, Jetcraft, October 2018.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 23
GUIDANCE
See Forward-Looking Statements for cautionary notice regarding Guidance and Risk Management for discussion of certain factors which may
cause future results to differ from guidance included in this section.
In October 2018, Management provided updated fiscal 2019 sales guidance as well as guidance on Fiscal 2019 additions to PP&E and Long term
sales growth in order to reflect the expected contributions of Beaver and CESA to Héroux-Devtek’s financial performance.
As such, revised guidance for fiscal 2019 was as follows:
Metric
Fiscal 2019 sales
Fiscal 2019 additions to PP&E
Long-term sales growth
Initial fiscal 2019 guidance
Stable as compared to fiscal 2018
Approximately $15 million
Updated Fiscal 2019 guidance
Sales of $460 to $470 million
Approximately $20 million
N/A
Fiscal 2022 sales of $620 to $650 million
FISCAL 2019 OPERATING RESULTS COMPARED TO REVISED GUIDANCE
*Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most comparable
IFRS measures.
Fiscal 2019 sales were slightly above guidance owing to strong results both from the Corporation’s existing and acquired operations. Additions
to property, plant and equipment totaled $12.9 million, compared to guidance of $20 million due mainly to the timing of certain investment initiatives.
FISCAL 2020 GUIDANCE
Metric
Fiscal 2020 sales
Long-term sales growth
Fiscal 2020 Guidance
Fiscal 2020 sales of $560 to $580 million
Fiscal 2022 sales of $620 to $650 million
The growth in fiscal 2020 sales over fiscal 2019 mainly relates to a full year of contribution from acquired businesses as well as increased deliveries
related to the Boeing 777 and 777X programs.
Management has prepared the foregoing guidance using the best information available upon preparing this MD&A, and based it on assumptions
and sources of information including, but not limited to:
•
•
•
•
•
•
•
Héroux-Devtek’s backlog, long-term sales contracts and estimated future order intake;
Existing OEM backlogs, production rates and disclosed production and delivery expectations;
Government defence budget, spending climates, trends and expectations;
Ongoing economic conditions;
Stability of foreign exchange rates;
The Corporation’s ability to deliver on key contract initiatives; and,
The successful deployment of integration and cross-selling initiatives.
24 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
FOREIGN EXCHANGE
As a Corporation with operations in various countries which deals with customers from across the world, Héroux-Devtek’s financial position and
results of operations are partly influenced by movements in foreign exchange (“FX”) rates. More specifically, the Corporation has operations in
Canada, the United States, Spain and the United Kingdom, and thus incurs costs denominated in the respective currencies of these four countries,
the Canadian dollar (“CAD”), United States dollar (“USD”) Euros (“EUR”) and British pound (“GBP”). In addition to costs denominated in their
local currencies, a large portion of materials costs of the Canadian, Spanish and British operations are denominated in USD, as is a large portion
of their sales.
The Corporation must convert foreign-denominated revenues, expenses, assets and liabilities into CAD for financial reporting purposes. Gains
and losses occur as a result of the fluctuations of these foreign currencies against the CAD between balance sheet periods, or between the
date of a transaction and the reporting date.
Transactions denominated in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transactions,
excluding the impact of forward foreign exchange contracts (“FFEC”), while the statement of income of foreign operations is translated at the
average exchange rate for the period. Balance sheet items are translated at the spot rate on the reporting date.
The foreign exchange rates used to translate assets and liabilities into Canadian dollars were as follows, as at:
USD (Canadian equivalent of US$1.0)
EUR (Canadian equivalent of €1.0)
GBP (Canadian equivalent of £1.0)
March 31, 2019 March 31, 2018
1.3363
1.5002
1.7418
1.2894
N/A
1.8106
The foreign exchange rates used to translate revenues and expenses into Canadian dollars were as follows:
USD (Canadian equivalent of US$1.0)
EUR (Canadian equivalent of €1.0)
GBP (Canadian equivalent of £1.0)
Quarters ended March 31,
Fiscal years ended March 31,
2019
1.3292
1.5094
1.7315
2018
1.2648
N/A
1.7607
2019
1.3122
1.5192
1.7228
2018
1.2834
N/A
1.7022
Héroux-Devtek is most exposed to the performance of the USD versus CAD, GBP and EUR due to the prevalence of USD in Aerospace market
transactions and the geographical location of operations. Fiscal 2019 featured a notable increase in the value of the USD compared to CAD,
EUR and GBP, the main impact of which was growth in the value of the Corporation’s U.S. denominated sales and assets. Approximately 70%
of the Corporation’s sales are denominated in USD, compared to only a bit less than half of the related costs, which creates significant net
inflows of USD, the value of which fluctuate with the USD/CAD, USD/EUR and USD/GBP exchange rate.
In order to manage this risk, the Corporation has put in place a foreign currency hedging policy whereby Héroux-Devtek contracts FFEC to sell
USD in amounts equivalent to expected net inflows. This policy requires that the Corporation hedge between 50% and 100% of the identified
net exposure, mainly over the next two fiscal years. See the Derivative Financial Instruments section under Additional Information for further
details.
As at March 31, 2019, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $228.4 million denominated
in USD, EUR and GBP. This amount includes contracts with nominal value of US$146.9 million convertible into Canadian dollars at an average
rate of 1.3060. These contracts mature at various dates between April 2019 and March 2023, with the majority maturing this fiscal year and the
next.
Consistent with hedge accounting under IFRS, gains and losses on these FFEC are accounted for in other comprehensive income until settlement,
at which point they are realized in the consolidated statement of income along with the opposing gain or loss on translation of the related financial
instruments. As at March 31, 2019, a 1% strengthening of the CAD versus the USD would result in a 0.4 million decrease in the Corporation’s
fiscal 2019 net income.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 25
OPERATING RESULTS
Quarters ended March 31,
Fiscal years ended March 31,
2019
2018
Variance
2019
2018
Variance
Sales
Gross profit
Selling and administrative expenses
Adjusted operating income(1)
Non-recurring items
Operating income
Financial (gains) expenses(2)
Income tax expense(2)
Net income
Adjusted net income(1)
As a percentage of sales
Gross profit
Selling and administrative expenses
Operating income
Adjusted operating income(1)
In dollars per share
EPS - basic and diluted
Adjusted EPS(1)
$
$
$
$
$
157,914
$
113,024
$
29,730
13,522
16,208
1,018
15,190
1,402
1,830
11,958
12,794
18.8%
8.6%
9.6%
10.3%
$
$
18,958
6,869
12,089
5,392
6,697
(389)
1,228
5,858
10,439
16.8%
6.1%
5.9%
10.7%
$
$
44,890
10,772
6,653
4,119
(4,374)
8,493
1,791
602
6,100
2,355
200 bps
250 bps
370 bps
-40 bps
$
483,877
$
386,564
$
83,196
41,633
41,563
4,323
37,240
6,811
4,235
26,194
30,352
$
$
61,276
30,951
30,325
6,947
23,378
2,537
7,167
13,674
24,213
$
$
$
$
17.2%
8.6%
7.7%
8.6%
15.9%
8.0%
6.0%
7.8%
97,313
21,920
10,682
11,238
(2,624)
13,862
4,274
(2,932)
12,520
6,139
130 bps
60 bps
170 bps
80 bps
0.34
0.36
$
$
0.16
0.29
$
$
0.18
0.07
$
$
0.73
0.84
$
$
0.38
0.67
$
$
0.35
0.17
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
(2) Refer to the Non-Recurring Items section for more details
Sales
26 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Sales can be broken down by sector as follows:
Commercial
Defence(1)
Total
Commercial
Defence(1)
Total
2019
2018
Acquisitions
FX impact
Net variance
Quarters ended March 31,
$
78,004
79,910
$ 157,914
2019
$ 236,283
247,594
$ 483,877
$
$
$
$
57,509
55,515
113,024
$
$
19,278
24,172
43,450
$
$
1,685
1,760
3,445
$
$
(468)
(1,537)
(2,005)
(0.8)%
(2.8)%
(1.8)%
Fiscal years ended March 31,
2018
Acquisitions
FX impact
Net variance
195,101
191,463
386,564
$
$
31,474
58,924
90,398
$
$
2,108
2,208
4,316
$
$
7,600
(5,001)
2,599
3.9 %
(2.6)%
0.7 %
(1) Includes defence sales to civil customers and governments.
The following analysis excludes the impact of acquisitions and foreign exchange which are itemized in the table above.
Commercial
The $7.6 million net increase in commercial sales for the fiscal year was mainly driven by:
Increased deliveries for the Boeing 777 and 777X programs;
Higher sales related to business jets, mainly due to the ramp-up of deliveries for the Embraer 450/500 program.
Commercial sales were relatively stable during the fourth quarter this year compared to last as increased deliveries for the Boeing 777 and 777X
programs were offset by lower sales on Bell Helicopter programs.
Defence
The $5.0 million and $1.5 million respective net decreases in defence sales for the fiscal year and fourth quarter were mainly driven by:
The net impact of the end of the USAF R&O contract partially offset by the ramp-up of the corresponding contract with AAR signed
earlier this fiscal year; and
Lower manufacturing sales to Boeing for the CH-47 contract;
These factors were partially offset by higher sales of spares, namely to the U.S. Navy and USAF.
Gross Profit
The respective increases in gross profit from 15.9% to 17.2% this fiscal year and from 16.8% to 18.8% for the quarter compared to the same
periods last fiscal year were mainly driven by the impact of the Beaver and CESA acquisitions and higher throughput which led to better absorption
of manufacturing costs. Foreign exchange did not have a significant impact on gross profit.
Selling and Administrative Expenses
When excluding gains on translation of net monetary items, selling and administrative expenses represented 8.8% and 8.5% of sales for the
fiscal year and the quarter, respectively, compared to 8.0% and 7.6% for the same periods last fiscal year.
The increases compared to the same periods last fiscal year mainly relate to lower stock-based compensation expense last year due to the
delay in fiscal 2018 long term incentive plan issuances caused by trading blackouts as well as the impact of acquisitions.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 27
Non-Recurring Items
Non-recurring items comprise the following:
Non-recurring items in operating income
Acquisition-related costs
Restructuring charges
Non-recurring items in financial expenses
Net losses on certain derivative financial instruments
Non-recurring items in income tax expense
Impact of US Tax Reform
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
$
$
$
$
$
$
1,018
—
1,018
$
$
— $
— $
— $
— $
402
4,990
5,392
698
698
$
$
$
$
4,323
—
4,323
391
391
$
$
$
$
1,957
4,990
6,947
89
89
— $
— $
— $
— $
4,912
4,912
Acquisition-related costs
These costs mainly pertain to professional fees and expenses related to the acquisitions of CESA, Beaver and Tekalia.
Restructuring charges
In March 2018, the Corporation announced workforce adjustments of about 60 employees at its Longueuil facility following the non-renewal of
the USAF contract. These adjustments along with other costs related to the decrease in volume resulted in restructuring charges totaling
$5.0 million accounted for during the fourth quarter of fiscal 2018, including termination benefits of $2.7 million and other costs related to the
reduction in volume totaling $2.3 million. The unpaid portion of these restructuring charges amounted to $0.3 million as at March 31, 2019 ($2.5
million as at March 31, 2018).
Net losses on certain derivative financial instruments
These losses relate to derivative financial instruments acquired in order to mitigate foreign currency and interest rate risks arising from the
purchase price and financing related to the acquisition of CESA. Refer to the Derivatives section under Additional Information below for further
details.
Impact of US Tax Reform
This one-time tax expense of $4.9 million recorded during fiscal 2018 is related to the US Tax Reform enacted on December 22, 2017. Refer to
the Income Tax section for further details.
Operating Income
The increases in operating income from 6.0% to 7.7% of sales (increase from 7.8% to 8.6% excluding non-recurring items) for the fiscal year
and from 5.9% to 9.6% of sales (decrease from 10.7% to 10.3% excluding non-recurring items) for the quarter compared to the same periods
last fiscal year were mainly the result of the factors described above.
Year-over-year, foreign exchange had a positive impact of $0.7 million on operating income, while it had a negative impact of $1.0 million during
the fourth quarter of fiscal 2019 compared to the same period last fiscal year.
28 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Net financial Expenses
Quarters ended March 31,
Fiscal years ended March 31,
2019
2018 Variance
2019
2018
Variance
Interest on long-term debt
$
1,644
$
536
$
1,108
$
4,914
$
2,614
$
2,300
Net interest expense (income) related to government loans
Interest income (expense) related to financial instruments
Other interest income (expense)
(549)
(46)
353
(1,189)
441
(177)
640
(487)
530
1,325
(409)
981
466
(491)
(52)
$
1,402
$
(389) $
1,791
$
6,811
$
2,537
$
859
82
1,033
4,274
The $4.3 million and $1.8 million respective increases during the fiscal year and fourth quarter compared to the same periods last fiscal year
mainly reflect interest charges on new debt incurred to finance the CESA acquisition and higher interest rates, as well as the negative impact
of discount rates on provisions compared to a positive impact last year. In addition, there was a lower gain resulting from revisions of the
repayment schedules of governmental authorities’ loans, described in Government Authorities Loans under Liquidity and Capital Resources.
Income Tax Expense
Quarters ended
March 31,
Fiscal years ended
March 31,
2019
2018
2019
2018
Income before income tax expense
$
13,788
$
7,086
$
30,429
$
20,841
Income tax expense
Effective tax rate
Effect of US Tax Reform
Income tax expense excluding U.S. Tax reform
Effective tax rate excluding the US Tax Reform impact
Canadian blended statutory income tax rate
1,830
13.3%
1,228
17.3%
4,235
13.9%
$
— $
— $
— $
1,830
13.3%
26.6%
1,228
17.3%
26.6%
4,235
13.9%
26.6%
7,167
34.4%
4,912
2,255
10.8%
26.6%
For fiscal 2019, the Corporation’s effective income tax rate is lower than the Canadian blended statutory rate by 12.7% primarily due to the
favourable impact of earnings in lower tax rate jurisdictions of $4.8 million ($4.8 million in fiscal 2018), partially offset by non-deductible acquisition-
related costs of $0.7 million ($0.5 million in fiscal 2018) and permanent differences of $0.5 million ($0.3 million in 2018).
The effective income tax rate for the quarter mainly reflects the $1.7 million favourable impact of earnings in lower tax rate jurisdictions ($0.9 million
in fiscal 2018), partially offset by permanent differences totaling $0.1 million ($0.1 million in fiscal 2018). The effective income tax rate was also
impacted by non-deductible acquisitions-related costs of $0.2 million incurred in the fourth quarter of fiscal 2018.
On December 22, 2017, the United States Government passed into law the Tax Cuts and Jobs Act (the "US Tax Reform"). The US Tax Reform
includes a number of changes in tax law impacting businesses including a permanent reduction in the federal corporate income tax rate from
35% to 21% effective January 1, 2018. This reduction caused a revaluation of the Corporation’s net deferred tax assets, resulting in a one-time
income tax expense of $4.9 million during fiscal 2018.
Net Income
Earnings increased from $13.7 million to $26.2 million (or increased from $24.2 million to $30.4 million excluding non-recurring items net of
taxes) this fiscal year compared to last and increased from $5.9 million to $12.0 million (or increased from $10.4 million to $12.8 million excluding
non-recurring items net of taxes) during the quarter compared to the same quarter last fiscal year mainly as a result of the factors described
above.
During the fiscal year, earnings per share increased from $0.38 to $0.73 per share (or increased from $0.67 to $0.84 per share excluding
non recurring items net of taxes), while they increased from $0.16 to $0.34 per share (or increased from $0.29 to $0.36 excluding non recurring
items net of taxes) during the quarter compared to the same quarter last fiscal year.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 29
NON-IFRS FINANCIAL MEASURES
This MD&A is based on earnings in accordance with IFRS and the following non-IFRS financial measures:
Adjusted operating income: Operating income excluding non-recurring items.
EBITDA:
Adjusted EBITDA:
Adjusted net income:
Adjusted earnings per share: Diluted earnings per share calculated on the basis of adjusted net income.
Free cash flow:
Earnings before financial expenses, income tax expense and amortization expense.
EBITDA as defined above excluding non-recurring items.
Net income excluding non-recurring items net of taxes.
Cash flows related to operating activities, less additions to property, plant and equipment and net increase or
decrease in finite life intangible assets.
These Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and may therefore not be comparable to similar
measures presented by other issuers. Management considers these metrics to be information which may assist investors in evaluating the
Corporation’s profitability and enable better comparability of the results from one period to another and with peers who may employ similar
measures.
These measures are not considered by management to be a substitute for IFRS measures, nor to be superior as they often do not fully reflect
periodic costs, the long-term costs of investing or financing decisions or the impact of events which are not a result of operations.
The following are reconciliations of these items to their most comparable IFRS measures as well as additional information about what they
represent, excluding free cash flow. For the reconciliation of free cash flow to cash flows related to operating activities, refer to Liquidity and
Capital Resources.
The Corporation’s Adjusted operating income is calculated as follows:
Operating income
Non-recurring items
Adjusted operating income
Quarters ended
March 31,
Fiscal years ended
March 31,
2019
15,190
1,018
16,208
$
$
2018
6,697
5,392
12,089
$
$
2019
37,240
4,323
41,563
$
$
2018
23,378
6,947
30,325
$
$
Management believes adjusted operating income provides investors with a figure that provides an alternative assessment of the Corporation’s
future profitability by excluding from operating income the impact of events which are not in the expected course of future operations, or which
are not a result of operations.
The Corporation’s EBITDA and Adjusted EBITDA are calculated as follows:
Net income
Income tax expense
Financial income (expenses)
Amortization expense
EBITDA
Non-recurring items
Adjusted EBITDA
Quarters ended
March 31,
Fiscal years ended
March 31,
2019
11,958
1,830
1,402
9,702
24,892
1,018
25,910
$
$
$
2018
5,858
1,228
(389)
7,280
13,977
5,392
19,369
$
$
$
2019
26,194
4,235
6,811
32,650
69,890
4,323
74,213
$
$
$
2018
13,674
7,167
2,537
26,579
49,957
6,947
56,904
$
$
$
Management believes EBITDA and adjusted EBITDA provide valuable insight into the Corporation’s day-to-day operations as they exclude from
earnings factors that are more reflective of long-term financing or investing decisions than of current performance.
Adjusted EBITDA, in addition, provides an alternative assessment of future operating results as it excludes the impact of events which are not
in the expected course of future operations, or which are not a result of operations. Adjusted EBITDA is also used by management to assess
operational performance and is a component of certain performance-based employee remuneration.
30 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
The Corporation’s adjusted net income and adjusted earnings per share are calculated as follows:
Net income
Non-recurring items net of taxes
Adjusted net income
In dollars per share
Earnings per share - basic and diluted
Non-recurring items net of taxes
Adjusted earnings per share
$
$
$
$
Quarters ended
March 31,
2018
5,858
4,581
10,439
$
$
2019
11,958
836
12,794
0.34
0.02
0.36
$
$
0.16
0.13
0.29
$
$
$
$
Fiscal years ended
March 31,
2018
13,674
10,539
24,213
2019
26,194
4,158
30,352
$
$
0.73
0.11
0.84
$
$
0.38
0.29
0.67
Management believes adjusted net income and adjusted earnings per share provide investors with an alternative assessment of the Corporation’s
current period results and future earnings prospects as they exclude from earnings the impact of events which are of a non-recurring nature or
do not reflect current operations. They are also a component of certain performance-based employee remuneration.
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY AND CASH AND CASH EQUIVALENTS
Senior Secured Syndicated Revolving Credit Facility (“Revolving Facility”)
The Corporation has a Revolving Facility with a syndicate of five Canadian banks and their U.S. affiliates or branches and a Canadian branch
of a U.S. bank. This facility allows the Corporation and its subsidiaries to borrow up to $250.0 million, either in Canadian dollars, US dollars,
British Pounds, Euro or equivalent currencies and will mature in May 2022. It also includes an accordion feature to increase available credit by
an additional $100.0 million during the term of this agreement, subject to the approval of the lenders.
The Revolving Facility was amended during the fiscal year ended March 31, 2019, increasing the credit limit from $200.0 million to $250.0 million
in connection with the acquisition of CESA.
As at March 31, 2019, the Corporation had $94.9 million drawn against the Revolving Facility, compared to $54.2 million as at March 31, 2018.
This increase is mainly related to a US$50.0 million ($65.2 million) drawing made in order to finance the CESA acquisition, net of US$21.0 million
($27.9 million) repayments made during the last six months of the fiscal year.
Unsecured Subordinated Term Loan Facility (“Term Loan Facility”)
On September 24, 2018, the Corporation signed a Term Loan Facility with Fonds de Solidarité FTQ for an amount of up to $75.0 million. The
facility consists of a $50.0 million term loan related to the acquisition of CESA and additional financing, available until September 30, 2020, of
up to $25.0 million subject to certain conditions.
The initial $50.0 million loan, drawn on September 25, 2018, bears interest at 5.7% and is repayable at maturity on September 30, 2025. Starting
on September 30, 2021, the Corporation will have the option to make early repayments subject to certain fees.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 31
Net Debt Position
The Corporation’s net debt position is calculated as follows, as at:
Long-term debt, including current portion(1)
Less: Cash and cash equivalents
Net debt position
March 31, 2019 March 31, 2018
$
$
263,258
$
131,964
35,128
228,130
$
93,209
38,755
(1) Excluding net deferred financing costs of $3.0 million as at March 31, 2019 and $0.9 million as at March 31, 2018.
Long-term debt is subject to certain general and financial covenants related to, among others, indebtedness, cash flows and equity of the
Corporation and/or certain subsidiaries. The Corporation complied with all covenants during the fiscal year ended March 31, 2019 and expects
to continue to comply with these restrictive financial covenants through the current fiscal year. In general terms, the Corporation has a healthy
financial situation and is well positioned to face its financial needs.
GOVERNMENT AUTHORITIES LOANS
Governmental authorities’ loans represent government assistance for the purchase of certain equipment or tooling, for the modernization or
additions to the Corporation’s facilities or for development costs capitalized or expensed for aerospace programs. They were granted as incentives
under Canadian federal and provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refund. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest rate.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in the consolidated statements of income as financial expense.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2019, the Corporation updated the estimated repayment
schedule of its government authorities’ loans, taking into account revised assumptions mainly related to sales forecasts. This resulted in a non-
cash gain of $1,036 ($1,834 in fiscal 2018), which was included in net financial expenses.
As at March 31, 2019, the Corporation had a present value of $89.7 million outstanding under these agreements ($52.5 million as at March 31,
2018), bearing effective interest rates of 0.0% to 6.6% as at March 31, 2019 (2.5% to 7.2% as at March 31, 2018). These loans have repayment
terms extending to fiscal 2033 at the latest.
32 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
VARIATIONS IN CASH AND CASH EQUIVALENTS
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
Cash and cash equivalents at beginning of periods
$
28,639
$
70,642
$
93,209
$
Cash flows related to operating activities
Cash flows related to investing activities
Cash flows related to financing activities
Effect of changes in exchange rates on cash and cash equivalents
37,181
(7,926)
(22,096)
(670)
18,521
3,121
20
905
69,969
(208,619)
80,320
249
42,456
56,122
(4,996)
(565)
192
Cash and cash equivalents at end of periods
$
35,128
$
93,209
$
35,128
$
93,209
Operating Activities
The Corporation generated cash flows from operations and used cash and cash equivalents for its operating activities as follows:
Cash flows from operations
Net change in non-cash items
Cash flows related to operating activities
$
$
Quarters ended
March 31,
2018
11,961
$
2019
19,116
18,065
6,560
37,181
$
18,521
Fiscal years ended
March 31,
2018
42,624
2019
60,396
$
9,573
69,969
$
13,498
56,122
$
$
The respective $17.8 million and $7.2 million increases in cash flows from operations for the fiscal year and fourth quarter ended March 31,
2019 when compared to the same periods last fiscal year mainly relate to the contribution from the results of CESA and Beaver.
The net change in non-cash items can be summarized as follows:
Accounts receivable
Income tax receivable
Inventories
Other assets
Accounts payable and accrued liabilities and other liabilities
Provisions
Customer advance and progress billings
Income tax payable
Effect of changes in exchange rates
Net change in non-cash items
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
$
(5,546) $
(40)
74
(3,063)
21,233
(1,204)
7,264
(794)
141
(19,305) $
48
7,520
417
4,165
209
8,913
1,744
2,849
(5,624) $
(385)
(1,746)
(2,245)
20,013
(5,377)
4,655
(2,404)
2,686
(2,335)
(184)
9,539
(869)
719
(3,335)
7,097
1,916
950
$
18,065
$
6,560
$
9,573
$
13,498
For the fiscal year ended March 31, 2019, the positive net change in non-cash items mainly reflected:
An increase in accounts payable due to the higher level of activity in the fourth quarter and the timing of cash outflows; and,
An increase in customer advances following cash receipt, offset by revenue recognition.
These positive elements were partially offset by an increase in accounts receivable due to higher deliveries in the fourth quarter and an increase
in inventories mainly related to the ramp-up of the Boeing 777 and 777X contract and a decrease in provisions mainly due to utilization of the
restructuring and product warranty provisions.
For the fiscal year ended March 31, 2018, the positive net change in non-cash items mainly reflected:
Lower inventories following the scheduled ending of a Tier-2 contract and lower spare parts volume with the U.S. Government; and,
The receipt of customer advances.
These positive elements were partially offset by a decrease in certain provisions.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 33
For the quarter ended March 31, 2019, the positive net change in non-cash items mainly reflected:
An increase in accounts payable due to timing of cash outflows; and,
An increase in customer advances following cash receipt, offset by revenue recognition.
These positive elements were partially offset by the timing of receivable collections and by the negative effect of change in exchange rates.
For the quarter ended March 31, 2018, the positive net change in non-cash items mainly reflected:
The receipt of customer advances;
A decrease in inventories following a high level of deliveries during the quarter; and,
An increase in accounts payable due to a high level of activity in the fourth quarter.
These positive elements were partially offset by an increase in accounts receivable due to the high level of activity in the fourth quarter.
Investing Activities
The Corporation’s investing activities were as follows:
Additions to property, plant and equipment
Cash payments for business acquisition
Net decrease in finite-life intangible assets
Proceeds on disposal of property, plant and equipment
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
$
(4,513) $
(3,548)
(3,744) $
—
(12,858) $
(198,149)
130
5
6,799
66
2,353
35
(9,930)
—
4,761
173
Cash flows related to investing activities
$
(7,926) $
3,121
$
(208,619) $
(4,996)
The increase in cash payments related to investing activities for the quarter and compared to the same period last fiscal year mainly relates to
the $3.5 million payment made for the acquisition of Tekalia. For the fiscal year ended March 31, 2019, the cash payments related to investing
activities also include a $170.9 million payment for the acquisition of CESA and a $23.7 million payment made for the acquisition of Beaver.
The net decrease in finite-life intangible assets during the quarter and the fiscal year ended March 31, 2019 is due to the timing of certain
customer funding for capitalized development costs received during the current period.
Additions to property, plant and equipment shown above can be reconciled as follows:
Gross additions to property, plant and equipment
Government assistance
Additions to property, plant and equipment
Variation in unpaid additions included in Accounts payable
Additions, as per statements of cash flows
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
5,286
(497)
4,789
(276)
4,513
$
$
$
5,696
(352)
5,344
(1,600)
3,744
$
$
$
13,876
(497)
13,379
(521)
12,858
$
$
$
10,691
(619)
10,072
(142)
9,930
$
$
$
Net decrease in finite-life intangible assets shown above can be reconciled as follows:
Decrease (increase) in finite-life intangible assets
Variation in unpaid additions included in Accounts payable
Net decrease, as per statements of cash flows
$
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
(692)
822
130
6,799
—
1,531
822
$
6,799
$
2,353
$
4,761
—
4,761
34 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Financing Activities
The Corporation’s financing activities were as follows:
Increase in long-term debt
Repayment of long-term debt
Issuance of common shares
Increase in deferred financing cost
Cash flows related to financing activities
Quarters ended
March 31,
2018
2019
Fiscal years ended
March 31,
2018
2019
$
1,278
$
1,603
$
117,883
$
(23,652)
245
33
(1,264)
205
(524)
(36,198)
1,169
(2,534)
$
(22,096) $
20
$
80,320
$
3,821
(4,634)
772
(524)
(565)
The increase in long-term debt during the fiscal year ended March 31, 2019 is mainly related to a US$50.0 million ($65.2 million) drawing on
the Revolving facility and a $50.0 million drawing on the Term Loan Facility, both in order to finance the CESA acquisition.
During the fiscal year ended March 31, 2019, repayments of US$21.0 million or $27.9 million (US$16.0 million or $21.3 million in the last quarter)
of the Revolving facility and scheduled repayments of finance leases and governmental loans totaling $8.3 million were made.
FREE CASH FLOW(1)
Cash flows related to operating activities
Additions to property, plant and equipment
Net decrease (increase) in finite-life intangible assets
Free cash flow(1)
Quarters ended
March 31,
Fiscal years ended
March 31,
2019
2018
2019
37,181
$
18,521
$
69,969
$
(4,789)
(692)
(5,344)
6,799
(13,379)
1,531
31,700
$
19,976
$
58,121
$
2018
56,122
(10,072)
4,761
50,811
$
$
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for the definition of this metric.
Management considers free cash flow to be a good indicator of
financial strength and profitability because it shows how much cash
generated by operations is available for distribution, to repay debt and
fund investments.
Héroux-Devtek’s Free Cash Flow has increased compared to last
fiscal year mainly as a result of the contributions of CESA and Beaver.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 35
LIQUIDITY REQUIREMENTS
The summary of the following contractual obligations of the Corporation includes payments due over the next five years and thereafter, as at
March 31, 2019:
Contractual obligations
Governmental authorities’ loans
Total
1 year
2-3 years
4-5 years
> 5 years
$
110,666 $
6,780 $
17,165 $
21,938 $
64,783
Payments due by period
Finance leases
Credit facility
Term loan facility
Others
Purchase obligations
Accounts payable
Building, machinery and equipment acquisition commitments
Operating leases - Buildings and facilities
21,762
108,396
69,225
9,623
319,672
205,451
76,749
6,796
16,823
6,007
4,269
2,850
3,306
23,212
172,500
76,749
6,624
2,517
11,185
8,538
5,700
3,897
46,485
30,855
—
172
4,685
4,570
95,589
5,700
798
—
—
54,975
1,622
128,595
121,380
1,825
—
—
271
—
—
3,637
5,984
Total contractual obligations(1)
$
625,491 $
281,602 $
82,197 $
134,057 $
127,635
(1) Excluding defined benefit pension plan obligations presented in the Pension Plans section.
FINANCIAL POSITION
CAPITAL STRUCTURE
The general objectives of the Corporation’s management, in terms of capital management, reside in the preservation of the Corporation’s capacity
to continue operating, providing benefits to its stakeholders and in providing an adequate return on investment to its shareholders by selling its
products and services at a price commensurate with the level of operating risk assumed by the Corporation.
The Corporation thus determines the total amount of capital required consistent with risk levels. This capital structure is adjusted on a timely
basis depending on changes in the economic environment and risks of the underlying assets.
In order to maintain or adjust its capital structure, the Corporation can, for example:
•
•
•
•
Issue new common shares;
Repurchase common shares;
Sell certain assets to reduce indebtedness;
Return capital to shareholders.
The net debt-to-equity ratio, calculated as net debt divided by shareholders’ equity, is the overriding factor in the Corporation’s capital management
and monitoring practices.
During fiscal year ended March 31, 2019, the Corporation pursued the same capital management strategy as last year, which consists in generally
maintaining a sufficient net debt-to-equity ratio to allow access to financing at a reasonable or acceptable cost.
36 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
The Corporation's net debt-to-equity ratio was as follows, as at:
Current portion of long-term debt
Long-term debt
Deferred financing costs, net
Less: Cash and cash equivalents
Net debt
Shareholders’ equity
Net debt-to-equity ratio
March 31, 2019 March 31, 2018
5,356
$
15,066
$
245,240
2,952
35,128
228,130
404,098
0.56:1
$
125,685
923
93,209
38,755
379,034
0.10:1
$
The increase in net debt this fiscal year is mainly related to the business acquisitions, net of free cash flow generated during the year.
ISSUED CAPITAL
Capital stock varied as follows:
Opening balance
Issued for cash on exercise of stock options
Issued for cash under the stock purchase and ownership incentive plan
Ending balance
Quarter ended
March 31, 2019
Issued
capital
Fiscal year ended
March 31, 2019
Issued
capital
Number of
shares
Number of
shares
36,341,054
$
79,361
36,218,572
$
17,250
3,906
276
39
107,450
36,188
78,105
1,101
470
36,362,210
$
79,676
36,362,210
$
79,676
As at May 22, 2019, the number of common shares outstanding stood at 36,362,210.
Stock options varied as follows:
Opening balance
Granted
Exercised
Cancelled / forfeited
Ending balance
Quarter ended
March 31, 2019
Weighted-
average
exercise price
Fiscal year ended
March 31, 2019
Weighted-
average
exercise price
Number of
stock options
Number of
stock options
1,187,720
$
—
(17,250)
(3,375)
1,167,095
$
13.22
—
11.87
14.97
13.23
1,105,295
$
207,500
(107,450)
(38,250)
1,167,095
$
12.09
16.21
6.50
15.24
13.23
During fiscal 2019, following the approval by the shareholders of the Corporation at the last Annual General Meeting of shareholders, the
aggregate number of shares available for future issuance under the stock option plan was replenished due to the limited number of common
shares remaining under this plan.
As at March 31, 2019, 2,762,507 common shares remained reserved for issuance upon exercise of stock options compared to 1,514,481 at
March 31, 2018 and 22,678 common shares remained reserved for issuance under the stock purchase and ownership incentive plan compared
to 58,866 at March 31, 2018.
As at May 22, 2019, the number of stock options outstanding stood at 1,167,095.
For further information regarding the Corporation’s outstanding issued capital and related compensation plans, refer to Note 22, Issued Capital,
to the consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 37
CONSOLIDATED BALANCE SHEETS
The acquisitions of CESA, Beaver and Tekalia contributed assets and liabilities to the Corporation’s balance sheet as at March 31, 2019 as
detailed in the Business Acquisitions section under Overview.
Working Capital
The Corporation’s working capital was as follows, as at:
Current assets
Current liabilities
Net working capital
Working capital ratio
March 31, 2019 March 31, 2018
Variance
$
$
$
$
364,467
186,840
177,627
1.95
310,649
$
53,818
108,750
78,090
17.3 %
71.8 %
201,899
$ (24,272)
(12.0)%
2.86
The $53.8 million increase in current assets is mainly due to:
$86.8 million of current asset as acquired through business acquisitions; and,
$58.1 million of free cash flow generated during fiscal 2019.
These positive factors were partly offset by $82.9 million of cash used for the business acquisitions.
The $78.1 million increase in current liabilities is mainly due to $42.8 million assumed in business acquisitions and an increase of $26.2 million
in accounts payable and accrued liabilities as previously explained.
Long-term assets, Long-term liabilities and Shareholders’ equity
The Corporation’s long-term assets and liabilities and shareholders’ equity were as follows, as at:
Long-term assets
Long-term liabilities
Shareholder’s equity
March 31, 2019 March 31, 2018
Variance
$
510,273
$
321,513
$ 188,760
283,802
404,098
144,378
379,034
139,424
25,064
58.7%
96.6%
6.6%
The increase in long-term assets is mainly due to $211.0 million acquired with CESA, Beaver and Tekalia, including $97.6 million of goodwill.
The increase in long-term liabilities is mainly due to the financing of the acquisition of CESA. Refer to the Credit Facilities & Net Debt Position
section under Liquidity and Capital Resources for further details.
PENSION PLANS
The Corporation has funded and unfunded defined benefit pension plans as well as defined contribution pension plans that provide pension
benefits to its employees. Retirement benefits provided by the defined benefit pension plans are based on either years of service and flat amount,
years of service and final average salary, or set out by individual agreements.
38 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
The net defined benefit obligations varied as follows, during fiscal year:
Net defined benefit obligations, beginning of year
Net gains (losses) from remeasurement
Employer contributions
Current service cost
Interest on net defined benefit obligations
Other
Net defined benefit obligations, end of year
The funding status of the Corporation’s pension plans was as follows, as at:
Present value of defined benefit obligations of funded plans
Fair value of plan assets
Funding ratio
2019
$
(3,958) $
(2,487)
1,335
(1,192)
(150)
(198)
$
(6,650) $
2018
(3,610)
261
1,489
(1,459)
(153)
(486)
(3,958)
March 31, 2019 March 31, 2018
61,216
$
58,974
65,962
60,710
$
92.0%
96.3%
The Corporation made contributions of $1.3 million and $3.5 million to its defined benefit and defined contribution benefit plans, respectively,
during fiscal 2019, and expects to make respective contributions of $1.7 million and $3.6 million during fiscal 2020.
ADDITIONAL INFORMATION
KEY PERFORMANCE INDICATORS
Héroux-Devtek measures its performance on a corporate-wide basis through the following elements:
•
•
•
•
Profitability
Liquidity
Growth and competitive positioning
Financial position
To do so, the Corporation developed key performance indicators (“KPI”). The following is a list of these indicators as well as the elements
which they help measure:
PERFORMANCE ELEMENT
KPI
Profitability
Liquidity
Growth and competitive
positioning
Financial position
Gross profit
Adjusted operating income(1)
Adjusted net income(1)
Adjusted EPS(1)
MEASURES
Manufacturing performance
Operating performance
Global profitability
Global profitability and shareholder return
Return on net assets (“RONA”)
Return on investment
Adjusted EBITDA(1)
Cash flow from operations
Free cash flow(1)
Sales
Funded backlog
Working capital
Net debt to EBITDA ratio
Net debt to equity ratio
Overall liquidity generation
Operating liquidity generation
Net liquidity generation
Growth
Outstanding firm orders
Available liquidity
Indebtedness
Overall capital structure
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 39
In addition to the above measures, on an internal basis, the Corporation uses such measures as manufacturing capacity utilization, as well as
on-time deliveries and non-quality costs to measure customer satisfaction.
Héroux-Devtek’s incentive-based pay for management varies partially based on reaching established global or divisional targets of certain of
the metrics listed above, including operating income, RONA, adjusted EBITDA and adjusted net income. Incentive pay also relies on individual
objectives and, in the case of stock-based compensation, share price performance.
RISK MANAGEMENT
Héroux-Devtek operates in an industry which exposes it to a variety of risk factors and uncertainties that may have a material adverse effect on
the business, financial condition and results. The Corporation is also subject to more general economic or natural risks which could have
widespread, cross-industry impacts.
Héroux-Devtek’s general philosophy is to avoid unnecessary risk and to limit, to the extent practicable, any risk associated with business activities.
Taking any risk unrelated to normal business activities is considered inappropriate.
It is ultimately the responsibility of the Board of Directors and its committees to identify material risks to the business and ensure management
performs adequate risk management duties. Their role in this regard is largely one of high level decisions, oversight and review. In order to
succeed, the Board of Directors entrusts the bulk of risk prevention, detection and mitigation to management.
It is Corporate management’s responsibility to ensure that systems and procedures are in place to identify and assess risk exposures and
manage them within tolerable limits. In order to do so, management has set out the following objectives:
•
•
•
identify and evaluate risk exposures and, when practicable, reduce exposures to a tolerable level;
use the most effective and efficient methods to eliminate, reduce or transfer risk exposures; and,
consider risks associated with operating decisions and structure transactions in such a fashion as to avoid risks whenever possible.
The most significant risk management methods used by management have entity-wide impacts. Such entity-wide efforts include, but are not
limited to:
•
the establishment of a corporate culture which fosters responsible management and integrity by adhering to strict hiring policies and
emitting strong tone from the top;
the application of a code of ethical conduct and a whistleblower policy in order to assure the quality of the Corporation's corporate
governance, and the integrity of the Corporation's functioning;
the establishment and ongoing alignment of company-wide quality organizations and systems, including supply chain, quality assurance
and continuous improvement; and,
the company-wide establishment of a strong internal control environment in order to manage risks associated with financial reporting,
fraud, treasury and operations.
•
•
•
The tables below include a selection of key risks identified by management as well as the related risk management approach. This list is not,
nor is it intended to be, exhaustive. Other risks which may not yet have been identified by management could have an adverse effect on the
Corporation’s business, financial condition or results.
40 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Strategic Risks
Strategic risks have company-wide impacts and are typically related to the Corporation’s overall direction.
RISK
DESCRIPTION
Boeing 777 and
777X programs
Reliance on large
customers
Acquisitions and
integrations
The Boeing 777 and 777X programs are integral to the
long-term growth of Héroux-Devtek and have
engendered approximately $110 million of investments.
Solid execution of this contract is crucial in order for the
Corporation to, among other objectives:
- Recover invested capital
- Achieve forecasted sales and profitability growth
- Demonstrate the Corporation’s ability to compete as a
Tier-1 producer of landing gear for larger commercial
aircraft
The top 9 of Héroux-Devtek’s customers represent
approximately 63% of consolidated sales, including one
customer representing 22% of its consolidated sales.
The loss of one of these customers would have a
material adverse impact on current and forecasted
financial results.
As a growth strategy, the Corporation at times engages
in business acquisitions. Such acquisitions increase the
size and scale of the Corporation, and may expose it to
new geographical, political, operational and financial
risks.
Acquisitions furthermore may place significant demand
on management or cause subsequent difficulties related
to the integration of new operations. The integration of
new operations poses risks, which are difficult to
forecast, that may adversely affect the Corporation's
growth and profitability, and may include the inability to
successfully integrate acquired operations.
RISK MANAGEMENT APPROACH
The Boeing 777 and 777X programs are subject to
constant oversight by senior management and represent
a company-wide effort. Furthermore:
- The Corporation has invested in state-of-the-art
equipment and facilities to ensure proper execution;
- Execution is subject to rigorous internal and external
qualification processes;
- Héroux-Devtek works very closely with Boeing in order
to ensure requirements are consistently met or
exceeded.
This risk is partly mitigated by entering into long-term
sales agreements with customers as well as by actively
seeking out new and diverse customers in order to
diversify the sales portfolio.
In addition, further diversification is achieved by
diversifying sales by subsegment and product or service
within sales to individual customers.
Héroux-Devtek carefully selects acquisition targets within
restrictive criteria and only goes forward when
satisfactory fit is identified.
Acquisition agreements, further, are thoroughly
negotiated with the goal in mind to mitigate key
acquisition risks via mutually agreeable conditions,
warranties and contingent pricing agreements.
The Corporation further manages risks associated with
acquisitions and integrations via thorough due diligence
work, internal experience and external assistance, as
needed.
Héroux-Devtek plans integration of acquisitions from the
top down and dedicates resources over the long term in
order to optimize integration and achieve strategic goals.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 41
Financial Risks
Financial risks are related to the financial condition, results and liquidity of the corporation and/or relate to market conditions directly related to
the Corporation.
RISK
Foreign currency
fluctuations
DESCRIPTION
Refer to the Foreign exchange section under Overview for details of Héroux-Devtek’s exposure to foreign exchange
rate fluctuations and related risk management practices.
RISK MANAGEMENT APPROACH
The Corporation requires continued access to capital
markets to finance its activities. The long-term nature
and up-front cost structure of certain programs can
require significant amounts of start-up costs. Inability to
access such capital could impede the Corporation’s
ability to bid on significant contracts, or negatively impact
ongoing operations.
Héroux-Devtek has access to such financing from its
banking syndicate, unsecured subordinated term loan
facility as well as from loans from government authorities
and capital lease facilities. These agreements subject
the Corporation to the financial covenants as described
in the Liquidity and capital resources section. They
furthermore restrict the Corporation's ability to sell all or
substantially all of its assets, incur secured or certain
other indebtedness, engage in mergers or consolidations
or engage in transactions with affiliates.
These restrictions and covenants could impede access
to capital or prevent the Corporation from engaging in
business activities that may be in its interest.
The Corporation is exposed to fluctuations in interest
rates through the floating rate of its credit facility as well
as the impact on the cost of future capital requirements.
Fluctuations in interest rates may also negatively impact
profitability by their impact on rates used by Héroux-
Devtek to discount provisions and pension obligations,
among other balances. Lower interest rates would result
in higher present obligations, with resulting adjustments
impacting financial results.
In order to maintain proper liquidity, Héroux-Devtek
makes cash management a daily priority. Liquidity
balances, receivables, cash projections and market rates
of foreign exchange and interest are monitored
constantly.
In order to ensure stability and long-term financial
viability, the Corporation also:
- Ensures proper bid approval in order to ensure proper
forecasting and risk assessment of revenue and costs;
- Structures contracts in order to obtain customer
advances and progress billings;
- Develops long-term agreements with customers and
suppliers which go through bid processes for key costs;
- Performs long-term cash projections as part of the
annual budget and strategic plan process;
- Maintains positive relationships with all major creditors.
Management also monitors covenants on an ongoing
basis in order to ensure they are met and identifies
trends which could indicate future risks.
Héroux-Devtek’s risk management policies specifically
address the management of interest rate risk by allowing
the use of derivatives such as interest rate swaps. The
goal of this policy is to obtain an overall fixed rate debt
ratio between 40% and 70% of overall long-term debt.
Outstanding derivatives are detailed in the Derivative
Financial Instruments section under Additional
Information.
Risks associated with pensions are managed through
investment policies put in place by the Corporation and
pension committees.
Liquidity, capital
resources and
related covenants
Changing interest
rates
42 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Operational Risks
Operational risks are more specific to or result from Héroux-Devtek’s operations than strategic risks.
RISK
Litigation
DESCRIPTION
Héroux-Devtek is subject to possible litigation in the
ordinary course of its business by, among others,
customers, suppliers, competitors, shareholders or
government agencies including specific import/export
laws and regulations. Such litigation can vary both in
terms of financial magnitude and in duration, either of
which could remain unknown for substantial periods of
time.
RISK MANAGEMENT APPROACH
The Corporation employs legal professionals who advise
senior management on the subject of ongoing legal and
regulatory compliance and related risk management.
The Corporation also subscribes to several forms of
insurance coverage which may, in the event of liability of
certain types, partially or entirely compensate for
potential losses.
Regardless of outcome, litigation could result in
substantial costs to the Corporation in addition to
potentially material losses, both of which would
negatively impact financial results. Litigation, in addition,
could divert management’s attention and resources
away from day-to-day operations and strategic
objectives.
The Corporation is party to certain collective bargaining
agreements which govern the working relationship with
certain employees. Failure to renew such agreements
upon mutually agreeable terms could result in work
stoppages or other labour disturbances which could
have adverse effects on financial results, operational
execution and customer satisfaction.
The market for skilled labour in the aerospace industry is
highly competitive and is expected to remain so in the
future. Execution of key programs and customer
satisfaction are heavily reliant on employing top talent.
The Corporation relies on such labour, particularly
engineers, machinists and programmers, for all levels of
operations.
Information technology systems are essential to most of
Héroux-Devtek’s operations. These systems could be
vulnerable to cyber-attacks or spying, viruses and any
other form of hardware or software failures, intentional or
not.
The non-availability of these systems would directly and
negatively affect the Corporation’s operations.
Unauthorized access to first or third-party confidential
data in Héroux-Devtek’s possession would also
negatively affect the Corporation’s reputation and,
consequently, its business and results.
The complex and sophisticated nature of the
Corporation’s products creates a risk that defects may
be found after they have been delivered to customers.
Such defects may result in warranty claims or customer
losses for which Héroux-Devtek may be liable.
Furthermore, the primary use of these products being for
air travel may compound the magnitude of such warranty
claims or losses. Liability for such losses, or the inability
to correct such errors, may have material adverse effect
on the Corporation’s business and results.
The increasing growth, integration and automation of the
Corporation’s business result in increased reliance on,
and exposure to, the performance of its supply chain.
Reductions in quality, reliability, availability of supply
chain performance could result in material adverse
effects on the Corporation’s business and results.
Collective
bargaining
agreements
Availability of
skilled labour
Information
technology
Warranty casualty
claim losses
Supplier
performance
In order to minimize this risk, Héroux-Devtek endeavours
to maintain cooperative and professional relationships
with union leadership and plans the negotiation of
renewals to allow reasonable time to achieve positive
results.
Héroux-Devtek targets top candidates for key roles and
carefully evaluates hires for long-term fit and growth.
Retention of employees is addressed through solid
human resources practices, competitive remuneration
and, in the case of key management, incentive-based
pay such as bonuses, stock options, performance share
units and stock purchase and ownership incentive plans.
In order to reduce technology-related risks,
Héroux Devtek has implemented a variety of measures,
including:
- A security program based on the NIST framework,
including frequent maturity assessments, audits and
penetration tests;
- 24/7 monitoring via a security operations center;
- Intrusion detection and prevention solutions;
- A global security committee, strict governances process
and policies regarding information technology;
- A cybersecurity awareness program and phishing
campaigns; and,
- Disaster recovery planning.
Héroux-Devtek’s rigorous dedication to quality
standards, systems and certifications in all stages of
design, production or repair and overhaul partially
mitigate the risk of product-related failure which could
lead to warranty claims or litigation.
The Corporation has in place a product support
organization which monitors performance and reliability
of products and also subscribes to product liability
insurance which may mitigate potential losses.
Héroux-Devtek manages supplier-related risks through
frequent supplier audits and maintaining high standards,
such as requiring AS9100 and Nadcap certification.
The Corporation also tracks and monitors supplier
performance and mitigates potential losses by ensuring
poor quality, if any, is detected through internal quality
management.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 43
External Risks
External risks are generally outside of management’s control and mostly result from external factors.
RISK
Competition and
innovation
DESCRIPTION
Héroux-Devtek operates in an industry that has faced
ongoing consolidation, resulting in a smaller overall
number of larger competitors, as well as constant
innovation in technology and products.
RISK MANAGEMENT APPROACH
Héroux-Devtek manages risk from competition by
maximizing customer satisfaction, on-time delivery,
bidding competitively and maintaining high quality
products.
Larger competitors may have increased capabilities to
compete for significant contracts, as would competitors
who bring new technological innovation to market. Either
could result in lost customers or opportunities for the
Corporation, hindering growth and future profitability.
The Corporation also manages risk associated with
innovation by monitoring technological developments
and performing in-house research and development in
order to remain at the forefront of technology in the
industry.
Availability and
cost of raw
materials
General economic
conditions
The main raw materials purchased by the Corporation
are steel, aluminum and titanium. Supply and cost of
these materials can fluctuate due to factors outside of
the Corporation’s control. Difficulty in procuring raw
materials in sufficient quantities and in a timely fashion
or increases in the costs of these materials could have a
material adverse effect on Héroux-Devtek’s operations
and financial results.
While the aerospace and defence industries have proven
over the long-term to be relatively resilient in the face of
economic turmoil, they are not immune to short-term
downturns when market conditions take their toll on
customers. Such market conditions may be caused by
any number of factors, including but not limited to
political instability, terrorist activity, or natural disasters.
Such unfavourable conditions could negatively impact
which could lead the Corporation to incur significant
costs associated with temporary layoffs and termination.
Defence spending
Environmental
matters
Defence spending is approved by governments on a
yearly basis and is subject to political climates and
changing priorities. Austerity measures or shifts away
from defence spending on the part of a government,
particularly that of the United States, could lead to a
significant downward trend in demand for the
Corporation’s defence products.
The Corporation’s activities are subject to environmental
laws and regulations associated with risks to human
health and the environment. These laws and regulations
and potential related charges could have a significant
adverse effect on the Corporation’s operations and
financial condition.
The Corporation mitigates this risk with the inclusion of
clauses in certain long-term sales contracts which
govern the sharing of risks related to the availability and
cost of raw materials with customers. Héroux-Devtek
also negotiates long-term supply agreements for certain
raw materials and monitors the supply chain to ensure
timely delivery.
While such economic conditions are outside of the direct
sphere of control of management, Héroux-Devtek
indirectly manages this risk through maintaining a
portfolio of customers and programs which is diversified
both geographically and by market segment. This could
decrease the overall impact of a downturn in any one of
these segments on the Corporation as a whole.
This risk is further mitigated by continuous effort on the
part of Héroux-Devtek to manage costs, capital and
profitability in such a fashion as to maintain a healthy
financial position, allowing for more resiliency in the
event of unexpected downturns.
The Corporation’s diversified sales portfolio, including a
growing commercial product portfolio, defence programs
outside of the United States and balance between
manufacturing and aftermarket products and services
reduces the impact that a downward trend in defence
spending on the part of certain governments could have.
Héroux-Devtek manages this risk by putting in place
management systems and policies in order to manage
and monitor the environmental impact its operations may
have.
In the event of an environmental incident which could
lead to a larger loss, the Corporation also subscribes to
insurance policies which may partially mitigate such
losses.
44 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
DERIVATIVE FINANCIAL INSTRUMENTS
Héroux-Devtek makes use of certain derivative financial instruments as tools for risk management purposes in order to mitigate certain foreign
exchange, interest rate or other price risks to which it is exposed. Management uses these derivatives within the guidelines laid out by the
Corporation’s risk management policy. See the Risk Management section under Overview for further details of Héroux-Devtek’s risk management
practices.
As at March 31, 2019, these derivative financial instruments are as follows:
Forward foreign exchange contracts
See Foreign Exchange under Overview for information about the Corporation’s exposure to foreign exchange risks as well as the derivative
financial instruments used to mitigate it. See also note 32 to the Consolidated financial statements.
Cross-currency interest rate swaps
The acquisition of CESA exposed the Corporation to new foreign currency and interest rate risks related to the investment in Euros. A decrease
in value of the Euro compared to the Canadian dollar would decrease the value of the foreign investment, and an increase in the interest rates
of the underlying debt would increase related the net financial expenses.
As at March 31, 2019, the Corporation had entered into the following cross-currency interest rate swap agreements in order to mitigate foreign
exchange and interest rate risks:
Notional
EURO equivalent
Interest rate
€ 25,000
€ 34,110
1.86 %
3.40 %
€ 15,000
Euribor 1 month + 1.74%
September 2018
€ 15,000
Euribor 1 month + 1.76%
November 2018
Inception
October 2017
October 2017
Maturity
May 2022
September 2025
May 2022
March 2020
US$
C$
US$
US$
29,370
50,000
17,523
17,100
Equity swap agreement
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs and PSUs (see note 22 to the consolidated financial
statements). In order to mitigate this exposure, the Corporation has entered into an equity swap agreement with a financial institution.
Pursuant to this agreement, upon settlement, the Corporation receives payment for any share price appreciation while providing payment to the
financial institution for any share price depreciation. The net effect of the equity swap partly offsets movements in the Corporation’s share price
which impacts the expense resulting from the DSUs and PSUs included in the Corporation’s selling and administrative expenses.
As at March 31, 2019, the equity swap agreement covered 245,000 common shares of the Corporation (150,000 at March 31, 2018) at a price
of $12.68 ($11.45 at March 31, 2018). This agreement is a derivative that is not part of a designated hedging relationship and matures in June
2020.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. Uncertainty
about these assumptions and estimates could result in outcomes that require material adjustments to the Corporation’s financial results or the
carrying amount of assets or liabilities.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 45
Key estimates and assumptions are as follows:
Impairment of non-financial assets
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset. The
value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget and
strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that may
enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the discounted cash
flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used to determine the
recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17 to the Consolidated financial statements.
Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that taxable
income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is required to
determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable income
together with future tax planning strategies.
Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about
discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the interest rates
of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. The significant
assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity analysis, are further explained
in note 25 to the Consolidated financial statements.
Capitalized development costs
Development costs are capitalized in accordance with the accounting policy described in note 3 to the Consolidated financial statements. In determining
the amounts to be capitalized, management makes assumptions regarding the expected future cash generation of the assets, discount rates to be
applied, the expected period of benefits and contract quantities. For purpose of impairment testing, the Corporation exercises judgment to identify
the cash inflows and outflows. The recoverable amount is based on fair value less costs of disposal, generally determined using a discounted cash
flow model. Other assumptions used to determine the recoverable amount include the applicable discount rate and the expected future cash flows
which include costs to complete the development activities.
Provisions
The Corporation has recorded provisions to cover cost exposures that could materialize in future periods. In determining the amount of the provisions,
assumptions and estimates are made in relation to discount rates and the expected cost to settle such liabilities.
Government Authorities Loans
The Corporation has outstanding loans with government authorities with variable repayment schedules. Annual repayments of these loans generally
vary based on the sales of certain of the Corporation’s programs or segments. In order to account for the present value of these loans under the
effective interest method, or for government assistance upon initial recognition, management must estimate the future sales growth of these programs
or segments over the expected duration of the loan. These forecasts are used to determine effective interest rates and expected repayment schedules.
In determining these amounts, management must rely on market rates of interest and assumptions such as, but not limited to, current and future
order intake, industry order backlogs, Original Equipment Manufacturer (“OEM”) production rates, expected economic conditions, the stability of
foreign exchange rates and the Corporation’s ability to deliver on key contract initiatives.
46 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
Customer Relationships
Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon
acquisition using valuation methodologies which rely on many underlying assumptions, including:
•
•
•
•
•
Expected future order intake;
Operational execution and cost management;
Stability of economical conditions, including foreign exchange rates;
Production rates;
Government spending.
They are recorded at cost less accumulated impairment and amortization and are amortized on a straight-line basis over their useful lives
without exceeding 15 years.
INTERNAL CONTROLS AND PROCEDURES
In compliance with Regulation 52-109 respecting Certification of Disclosure in Issuer’s Annual and Interim Filings (“Regulation 52-109”), the
Corporation has filed certifications signed by the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) that, among other things,
report on disclosure controls and procedures and the design of internal controls over financial reporting.
Disclosure controls and procedures
The CEO and the CFO have designed disclosure controls and procedures, or have caused them to be designed under their supervision, to provide
reasonable assurance that material information relating to the Corporation has been made known to them and has been properly disclosed in the
interim and annual filings.
As at March 31, 2019, an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures was also carried out
under the supervision of the CEO and CFO, as defined in Regulation 52-109. Based on this evaluation, the CEO and CFO concluded that the design
and operation of these disclosure controls and procedures were effective. This evaluation took into account the Corporation’s disclosure policy and
its disclosure committee.
Internal controls over financial reporting
The CEO and CFO have also designed internal controls over financial reporting, or have caused them to be designed under their supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with IFRS.
As at March 31, 2019, an evaluation of the design and effectiveness of the Corporation’s internal controls over financial reporting was carried out
under the supervision of the CEO and CFO, as defined in Regulation 52-109. Based on this evaluation, the CEO and CFO concluded that the design
and effectiveness of these internal controls over financial reporting were effective to provide reasonable assurance that the Corporation’s financial
reporting is reliable and that the Corporation’s consolidated financial statements were prepared in accordance with IFRS. However, a control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
As permitted by the Canadian Securities Administrators’ Regulation 52-109, management’s assessment and conclusion on the design of disclosure
controls and procedures and internal controls over financial reporting exclude the controls, policies and procedures of Beaver and CESA, which
were acquired respectively on July 2, 2018 and October 1, 2018. Those results are included in the March 31, 2019 consolidated annual financial
statements of Héroux-Devtek and constituted approximately 34.6% of total assets as at March 31, 2019 and 18.3% of total revenues for the year
ended March 31, 2019. Management expects that Beaver and CESA business acquisitions will be included in management's assessment and
certification on the design of DCP and effectiveness ICFR by the second and third of fiscal 2020, respectively.
Changes in internal controls over financial reporting
No changes were made to the Corporation’s internal controls over financial reporting during the fiscal year ended March 31, 2019 that have materially
affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 47
NEW ACCOUNTING STANDARDS
IFRS 9, Financial Instruments
In July 2014, the IASB issued a complete and final version of IFRS 9 “Financial Instruments”, replacing the current standard on financial
instruments (IAS 39). IFRS 9 introduces a single, principle-based approach for the classification of financial assets, driven by the nature of cash
flows and the business model in which an asset is held. IFRS 9 also provides guidance on an entity’s own credit risk relating to financial liabilities
and has modified the hedge accounting model to align the economics of risk management with its accounting treatment. The standard results
in a single expected loss impairment model rather than an incurred losses model.
The Corporation adopted IFRS 9 on April 1, 2018 and this adoption did not have a significant impact on the Corporation’s consolidated financial
statements.
Initial recognition
At initial recognition, financial assets are classified either as financial assets at fair value through profit or loss (“FVTPL”), measured at amortized
cost (“AC”) or fair value through other comprehensive income (“FVTOCI”). The classification is based on two criteria: the Corporation’s business
model for managing the assets; and whether the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the
principal amount outstanding (the “SPPI criterion”). The Corporation’s financial assets are held within a business model with the objective to
hold the financial assets in order to collect contractual cash flows that meet the SPPI criterion are classified and subsequently measured at
amortized cost. They consist of cash and cash equivalents, accounts receivable and certain other current and long-term assets.
When financial assets are recognized initially, they are measured at fair value, plus in the case of a financial asset other than FVTPL, the directly
attributable transaction costs. Purchases and sales of financial assets are recognized on the transaction date, which is the date that the Corporation
commits to purchase or sell the assets.
FVTPL
FVTPL include certain derivative financial instruments, except those that are designated as Hedges. FVTPL are carried at fair value with gains
and losses recognized in the consolidated statements of income. The Corporation assesses whether embedded derivative financial instruments
are required to be separated from host contracts when the Corporation first becomes party to the contract.
AC
AC are non-derivative financial assets with fixed or determinable payments not quoted in an active market. AC are mainly comprised of accounts
receivable and certain other current and long-term assets. AC are carried at amortized cost using the effective interest rate method. An allowance
for doubtful accounts is recorded when an account receivable become impaired. Also, under the forward-looking expected credit loss (“ECL”)
approach, all financial assets, except for those measured at FVTPL, are subject to review for impairment at least at each reporting date. ECLs
are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Corporation
expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.
For accounts receivables, the Corporation has applied the standard’
expected credit losses and the amount was insignificant at March 31, 2019 and 2018.
s simplified approach and has calculated ECLs based on lifetime
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance for doubtful accounts. Any
subsequent reversal of an impairment loss is recognized in the consolidated statements of income.
FVTOCI
These include cross-currency interest rate swap agreements that are used to hedge the net investments in certain foreign subsidiaries and
forward foreign exchange contracts. They are carried at fair value. The change in the fair value of the effective portion of hedges is recognized
in other comprehensive income, while the ineffective portion is recognized in the consolidated statements of income, if any.
The Corporation assesses at each reporting date whether any financial asset is impaired.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) jointly issued IFRS
15, a converged standard on the recognition of revenue from contracts with customers. It supersedes the IASB’s current revenue recognition
guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts”, and related interpretations. IFRS 15 provides a single principle based
five step model to use when accounting for revenue arising from contracts with customers.
On April 1, 2018, the Corporation adopted IFRS 15 using the full retrospective method and this adoption did not have a material impact on the
Corporation’s consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 48
Revenue is measured at the fair value of the consideration received or receivable, net of estimated discounts, and after eliminating intercompany
sales. Revenue from the sale of goods is recognized in a manner that depicts the transfer of promised goods to a customer and at an amount
that reflects the consideration expected to be received in exchange for transferring those goods. This is achieved by applying the following five
steps:
1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when (or as) the entity satisfies a performance obligation, which is generally achieved upon the delivery of
the products.
Revenues from the sale of new or overhauled aerospace components are considered a single performance obligation and are recognized at
the point in time when the customer has obtained control of the component and the Corporation has satisfied its performance obligation. Generally,
these conditions are met upon delivery of the goods.
FUTURE CHANGES IN ACCOUNTING POLICIES
The standard issued but not yet effective that may apply to the Corporation are the following:
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases. The new standard, which represents a major revision of the way in which companies
account for leases, sets out the principles that both parties to a contract, i.e. the customer (“lessee”) and the supplier (“lessor”), apply to provide
relevant information about leases in a manner that faithfully represents those transactions. To meet this objective, a lessee is required to recognize
assets and liabilities arising from a lease, following a single model where previously leases were classified as either finance leases or operating
leases. Most leases will be recognized on the Corporation’s consolidated balance sheet. Certain exemptions will apply for short-term leases
and leases of low-value assets. The Corporation anticipates the adoption of the IFRS will have an impact on the balance sheet and statement
of income as all operating leases will be capitalized with a corresponding lease liability while the rent expense will be replaced by the amortization
expense of the right to use the related assets and interest accretion expense from the liability recorded.
The Corporation is required to apply this standard based on the full retrospective or modified retrospective (without restating comparative
figures) approaches for its fiscal year beginning April 1, 2019. Many of the Corporation’s leases are already accounted for as finance leases
on the Corporation’s consolidated balance sheet. Certain operating leases will be required to be brought on balance sheet while others do not
as they are covered by practical expedients. The Corporation has elected to apply the following practical expedients:
•
•
Account for leases for which the remaining lease term ends within 12 months of the effective date as a short term lease; and
Recognize short term leases and low value leases on a straight line basis as is the case currently under IAS 17, leases as part of the
operating expenses in the consolidated statements of income.
Upon the initial application of this standard on April 1, 2019, using the modified retrospective approach, the Corporation expects its opening
assets (right-of-use assets) and liabilities (lease liabilities) to increase by an approximate amount of $15.0 million in its consolidated financial
statements.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 49
SELECTED FINANCIAL INFORMATION
Selected financial information is as follows, for the quarters ended:
Fiscal year
Sales
Operating income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net Income
Adjusted Net Income (1)
In dollars per share
Fourth
quarter
Fourth
quarter
Third
quarter
Second
quarter
2019
First
quarter
2018
First
quarter
$157,914 $144,528 $ 95,665 $ 85,770 $113,024 $ 97,006 $ 89,677 $ 86,857
5,408
5,408
11,940
4,027
4,027
6,629
7,238
13,563
626
5,690
15,190
16,208
25,910
11,958
12,794
11,904
13,973
22,883
7,390
9,367
6,697
12,089
19,369
5,858
10,439
5,289
6,165
13,176
3,294
4,405
4,857
5,217
12,244
3,552
3,786
4,644
5,590
12,032
3,163
4,057
Second
quarter
Third
quarter
Earnings per share - Basic & Diluted
Adjusted Earnings per share (1)
In millions of shares
Weighted average number of common diluted
shares outstanding
$
0.34 $
0.36
0.20 $
0.26
0.09 $
0.12
0.10 $
0.10
0.16 $
0.29
0.02 $
0.16
0.09 $
0.11
0.11
0.11
36.5
36.4
36.5
36.4
36.4
36.4
36.3
36.3
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
Seasonal trends
Héroux-Devtek’s first semester is usually slower than the last one due to seasonality such as plant shutdowns and summer vacations.
Selected financial information is as follows, for fiscal years:
Sales
Operating income
Adjusted operating income(1)
Adjusted EBITDA(1)
Net income
Adjusted net income(1)
Earnings per share ($) - basic and diluted
Adjusted earnings per share(1) ($)
Cash and cash equivalents
Total assets
Long-term financial liabilities(2)
2019
2018
$
483,877
$
386,564
$
37,240
41,563
74,213
26,194
30,352
0.73
0.84
35,128
874,740
268,273
23,378
30,325
56,904
13,674
24,213
0.38
0.67
93,209
632,162
137,388
2017
406,536
35,552
35,880
61,448
31,768
26,353
0.88
0.73
42,456
607,286
138,257
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
(2) Represents long-term debt including the current portion, long-term derivative financial instruments, and the pension and other retirement benefit liabilities
included in other liabilities.
50 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE
This MD&A was approved by the Audit Committee and by the Board of Directors on May 22, 2019. Additional information about the Corporation,
including the Annual Information Form, can be found on SEDAR at www.sedar.com or on the Corporation’s website at www.herouxdevtek.com.
HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A – 51
52 – HÉROUX-DEVTEK INC. – Fiscal 2019 MD&A
CONSOLIDATED
FINANCIAL STATEMENTS
F O R T H E F I S C A L Y E A R E N D E D M A R C H 3 1 , 2 0 1 9
TABLE OF CONTENTS
Note 8
Note 1
Note 2
Note 4
Note 7
Note 5
Note 3
Note 6
Management’s report .................................................................................................................................................................................
Independent Auditor’s report ....................................................................................................................................................................
Consolidated financial statements ...........................................................................................................................................................
Notes to the consolidated financial statements ......................................................................................................................................
Nature of activities and corporate information ........................................................................................................................
Basis of preparation ................................................................................................................................................................
Significant accounting policies ................................................................................................................................................
Significant accounting estimates and assumptions ................................................................................................................
Business acquisitions .............................................................................................................................................................
Sales and backlog ..................................................................................................................................................................
Government assistance ..........................................................................................................................................................
Cost of sales, selling and administrative expenses ................................................................................................................
Note 9
Net financial expenses (income) .............................................................................................................................................
Note 10 Non-recurring items ................................................................................................................................................................
Note 11 Earnings per share .................................................................................................................................................................
Note 12
Inventories ..............................................................................................................................................................................
Note 13 Derivative financial instruments ..............................................................................................................................................
Note 14 Other assets ...........................................................................................................................................................................
Note 15 Property, plant and equipment ................................................................................................................................................
Note 16 Finite-life intangible assets .....................................................................................................................................................
Note 17 Goodwill ..................................................................................................................................................................................
Note 18 Accounts payable and accrued liabilities ................................................................................................................................
Note 19 Provisions ...............................................................................................................................................................................
Note 20
Long-term debt .......................................................................................................................................................................
Note 21 Other liabilities ........................................................................................................................................................................
Note 22
.........................................................................................................................................................................
Note 23 Accumulated other comprehensive income ............................................................................................................................
Income taxes ..........................................................................................................................................................................
Note 24
Note 25 Pension and other retirement benefit plans ............................................................................................................................
Note 26 Commitments .........................................................................................................................................................................
Note 27 Contingencies .........................................................................................................................................................................
Note 28 Net change in non-cash items ................................................................................................................................................
Note 29 Geographic information ..........................................................................................................................................................
Note 30 Executive compensation .........................................................................................................................................................
Note 31 Financial instruments ..............................................................................................................................................................
Note 32 Financial risk management .....................................................................................................................................................
Note 33 Capital risk management ........................................................................................................................................................
Issued capital
55
56
58
63
63
63
64
73
74
75
76
76
76
77
77
77
78
78
79
80
81
82
82
83
85
85
87
87
89
92
92
93
93
93
94
94
97
54 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
MANAGEMENT’S REPORT
The accompanying consolidated financial statements and Management Discussion and Analysis (“MD&A”) of Héroux-Devtek Inc. (the
“Corporation”) are the responsibility of management and have been reviewed and approved by its Board of Directors. The accompanying
consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”).
The MD&A has been prepared in accordance with the requirements of Canadian securities regulators. The consolidated financial statements
and MD&A include items that are based on best estimates and judgments of the expected effects of current events and transactions. Management
has determined such items on a reasonable basis in order to ensure that the consolidated financial statements and MD&A are presented fairly
in all material respects. All figures presented in these consolidated financial statements are expressed in thousands of Canadian dollars unless
otherwise indicated.
Héroux-Devtek Inc.’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed internal controls over financial reporting
(“ICFR”) and disclosure controls and procedures (“DC&P”), or have caused them to be designed under their supervision, to provide reasonable
assurance regarding the reliability of financial reporting, the preparation of consolidated financial statements for external purposes in accordance
with IFRS and that material information related to the Corporation has been made known to them and has been properly disclosed in the
accompanying consolidated financial statements and MD&A. Héroux-Devtek Inc.’s CEO and CFO have also evaluated the effectiveness of such
ICFR and DC&P as of the end of fiscal year 2019. As of March 31, 2019, management has concluded that the ICFR and DC&P effectively
provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with IFRS and that material information related to the Corporation has been disclosed in the consolidated financial
statements and MD&A. Also, based on this assessment, the CEO and the CFO determined that there were no material weaknesses in the ICFR
and DC&P. However, due to their inherent limitation, certain misstatements may not be prevented or detected by ICFR.
Management’s assessment and conclusion on the design of ICFR and DC&P excludes the controls, policies and procedures of Beaver and
CESA which were acquired respectively 9 months and 6 months prior to the Corporation’s fiscal year-end. Their results since their respective
acquisition dates are included in the March 31, 2019, consolidated financial statements of Héroux-Devtek and constituted approximately 34.6%
of total assets as of March 31, 2019, and approximately 18.3% of revenue for the year then ended. See Note 5 to the consolidated financial
statements for a description of these acquisitions.
Héroux-Devtek Inc.’s CEO and CFO have provided a certification related to Héroux-Devtek Inc.’s annual disclosure documents to the Canadian
Securities Administrators in accordance with Regulation 52-109, including the consolidated financial statements and MD&A.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible
for reviewing and approving the consolidated financial statements and MD&A. The Board of Directors carries out this responsibility principally
through its Audit Committee. The Audit Committee is appointed by the Board of Directors and consists entirely of independent and financially
literate directors.
The Audit Committee meets periodically with management, as well as with the external auditors, to review the consolidated financial statements,
the external auditors’ report, MD&A, auditing matters and financial reporting issues, to discuss ICFR and DC&P, and to satisfy itself that each
party is properly discharging its responsibilities. In addition, the Audit Committee has the duty to review the appropriateness of the accounting
policies and significant estimates and judgments underlying the consolidated financial statements as presented by management, and to review
and make recommendations to the Board of Directors with respect to the fees of the external auditors. The Audit Committee reports its findings
to the Board of Directors for its consideration when it approves the consolidated financial statements and MD&A for issuance to Shareholders.
The consolidated financial statements have been audited by Ernst & Young LLP, the external auditors, in accordance with Canadian generally
accepted auditing standards on behalf of the Shareholders. The external auditors have full and free access to the Audit Committee to discuss
their audit and related matters.
Gilles Labbé, FCPA, FCA
President and Chief Executive Officer
May 22, 2019
Stéphane Arsenault, CPA, CA
Chief Financial Officer
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 55
INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF HÉROUX-DEVTEK INC.
Opinion
We have audited the consolidated financial statements of Héroux-Devtek Inc. and its subsidiaries (the Group), which comprise the consolidated
balance sheets as at March 31, 2019 and 2018, and the consolidated statements of income, consolidated statements of 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 March 31, 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 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 & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information; we are required to report that fact. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other
information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statement
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.
56 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
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 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 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 Wajih Chemali.
Ernst & Young, LLP
Montréal, Québec
May 22, 2019
_____________________________________________
1 CPA Auditor, CA, public accountancy permit no. A121006
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 57
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
As at
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Income tax receivable
Inventories
Derivative financial instruments
Other current assets
Property, plant and equipment, net
Finite-life intangible assets, net
Derivative financial instruments
Deferred income tax assets
Goodwill
Other long-term assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities
Provisions
Customers advances and progress billings
Income tax payable
Derivative financial instruments
Current portion of long-term debt
Long-term debt
Provisions
Derivative financial instruments
Deferred income tax liabilities
Other liabilities
Shareholders’ equity
Issued capital
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total equity attributable to the equity holders of the parent
Non-controlling interests
Total liability and shareholder’s equity
Commitments and Contingencies (notes 26 and 27)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors
Notes
March 31, 2019 March 31, 2018
20
12
13
14
7, 15
7, 16
13
24
17
14
18
19
13
20
20
19
13
24
21
22
23
$
$
$
$
35,128
115,431
2,393
184,035
783
26,697
364,467
227,954
69,377
5,816
14,575
185,637
6,914
874,740
117,990
27,820
21,919
1,911
2,134
15,066
186,840
245,240
16,789
1,317
7,479
12,977
470,642
79,676
4,707
10,502
307,101
401,986
2,112
404,098
874,740
$
$
$
$
93,209
73,469
1,412
134,327
1,776
6,456
310,649
179,503
35,856
3,421
7,388
91,137
4,208
632,162
67,591
16,869
15,522
3,023
389
5,356
108,750
125,685
5,921
2,389
3,767
6,616
253,128
78,105
4,227
14,217
282,485
379,034
—
379,034
632,162
Louis Morin
Director
Gilles Labbé
Director
58 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars, except per share data)
For the fiscal years ended March 31,
Notes
2019
2018
Sales
Cost of sales
Gross profit
Selling and administrative expenses
Non-recurring items
Operating income
Net financial expenses
Income before income tax expense
Income tax expense
Net income
Attributable to:
Equity holders of the parent
Non-controlling interests
5, 6, 29
$
483,877
$
7, 8, 12
400,681
7, 8
10
9, 10
10, 24
83,196
41,633
4,323
37,240
6,811
30,429
4,235
26,194
$
26,447
(253)
26,194
0.73
$
$
$
$
$
386,564
325,288
61,276
30,951
6,947
23,378
2,537
20,841
7,167
13,674
13,674
—
13,674
0.38
Earnings per share – basic and diluted
11
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 59
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2019
2018
Other comprehensive income (loss):
Items that may be reclassified to net income
Gains (losses) arising from translating the financial statements of foreign operations
Cash flow hedges:
Net gains (losses) on valuation of derivative financial instruments
Net losses (gains) on derivative financial instruments transferred to net income
Deferred income taxes
Gains (losses) on hedges of net investments in foreign operations
Deferred income taxes
Items that are never reclassified to net income
Defined benefit pension plans:
Gains (losses) from remeasurement
Deferred income taxes
Other comprehensive income (loss)
Comprehensive income
Net income
Other comprehensive income (loss)
Comprehensive income
Attributable to:
Equity holders of the parent
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
23
23
23
25
$
(850) $
5,860
(3,362)
906
660
(1,796)
(1,221)
152
(1,069)
(2,487)
656
(1,831)
4,450
(3,704)
(201)
545
1,701
(187)
1,514
261
(68)
193
$
$
$
$
(5,546) $
8,112
26,194
(5,546)
20,648
$
$
20,901
(253)
20,648
$
13,674
8,112
21,786
21,786
—
21,786
60 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In thousands of Canadian dollars)
Notes
23
22
5
22
Balance as at March 31, 2018
Common shares:
Issued under the stock purchase
and ownership incentive plan
Issued under the stock option plan
Business acquisition
Stock-based compensation expense
Net income (loss)
Other comprehensive loss
Balance as at March 31, 2019
Issued
capital
$ 78,105
Contributed
surplus
4,227
$
Accumulated
other
comprehensive
income
14,217
$
Retained
earnings
$ 282,485
Total equity
attributable
to the equity
holders of
the parent
$ 379,034
Non-
Controlling
interests
Total
Shareholders
’ equity
— $ 379,034
$
470
1,101
—
—
—
—
(402)
—
882
—
—
—
—
—
—
—
$ 79,676
$
—
4,707
$
(3,715)
10,502
—
—
—
—
470
699
—
882
26,447
(1,831)
26,447
(5,546)
$ 307,101
$ 401,986
$
—
—
2,365
—
(253)
—
2,112
470
699
2,365
882
26,194
(5,546)
$ 404,098
Balance as at March 31, 2017
Common shares:
Issued under the stock purchase and
ownership incentive plan
Issued under the stock option plan
Stock-based compensation expense
Net income
Other comprehensive income
Balance as at March 31, 2018
Notes
23
22
22
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
Shareholders’
equity
$
77,217
$
3,735
$
6,298
$
268,618
$
355,868
590
298
—
—
—
(116)
608
—
—
—
—
—
—
78,105
$
$
—
4,227
$
7,919
14,217
$
—
—
—
590
182
608
13,674
193
282,485
$
13,674
8,112
379,034
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 61
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2019
2018
Cash and cash equivalents provided by (used for):
Operating activities
Net income
Items not requiring an outlay of cash:
Amortization expense
Deferred income taxes
Loss (gain) on sale of property, plant and equipment and software
Write-down of property, plant and equipment
Non-cash net financial expenses
Stock-based compensation expense
Cash flows from operations
Net change in non-cash items
Cash flows related to operating activities
Investing activities
Cash payment for business acquisitions
Net additions to property, plant and equipment
Net decrease in finite-life intangible assets
Proceeds on disposal of property, plant and equipment
Cash flows related to investing activities
Financing activities
Increase of long-term debt
Repayment of long-term debt
Issuance of common shares
Increase in deferred financing cost
Cash flows related to financing activities
Effect of changes in exchange rates on cash and cash equivalents
Change in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Interest and income taxes reflected in operating activities:
Interest paid
Interest received
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
62 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
$
26,194
$
13,674
15, 16
24
10, 15
9
22
28
5
15
16
5
20
22
32,650
(2,019)
(8)
—
2,697
882
60,396
9,573
69,969
(198,149)
(12,858)
2,353
35
(208,619)
117,883
(36,198)
1,169
(2,534)
80,320
249
(58,081)
93,209
35,128
4,914
800
5,965
$
$
$
$
$
$
$
$
26,579
67
52
886
758
608
42,624
13,498
56,122
—
(9,930)
4,761
173
(4,996)
3,821
(4,634)
772
(524)
(565)
192
50,753
42,456
93,209
2,359
580
5,282
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For the fiscal years ended March 31, 2019 and 2018
(In thousands of Canadian dollars, except per share data)
NOTE 1. NATURE OF ACTIVITIES AND CORPORATE INFORMATION
Héroux-Devtek Inc. is incorporated under the laws of Québec. Its head office is domiciled at Complexe St-Charles, 1111 St-Charles Street West,
suite 600, West Tower, Longueuil (Québec), Canada. Héroux-Devtek Inc. and its subsidiaries (“Héroux-Devtek” or the “Corporation”) specialize
in the design, development, manufacture, repair and overhaul of aircraft landing gear, hydraulic and electromechanical flight control actuators,
custom ball screws and fracture-critical components.
The Corporation operates as one reporting segment, which is the Aerospace segment.
The Corporation's common shares are traded on the Toronto Stock Exchange under the symbol "HRX".
NOTE 2. BASIS OF PREPARATION
The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments, which are
measured at fair value, provisions, which are measured based on the best estimates of the expenditures required to settle the obligation and
the pension benefit obligations, which are measured at the present value of the defined benefit obligations and reduced by the fair value of plan
assets.
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”) and were approved for issue by the Board of Directors of the Corporation on May 22,
2019.
Reclassification of prior year presentation
Certain comparative figures have been reclassified to conform to the March 31, 2019 presentation. These relate to the combination of Customer
advances and Progress billings under the same caption on the consolidated balance sheet.
Basis of consolidation
The consolidated financial statements include the accounts of Héroux-Devtek Inc. and its subsidiaries, all of which are wholly-owned, except
for Tekalia Inc. where the Corporation holds a 60% controlling interest. The principal wholly-owned subsidiaries included in these consolidated
financial statements are the following:
Name
Devtek Aerospace Inc.
HDI Landing Gear USA Inc.
APPH Limited
Beaver Aerospace & Defense Inc.
Compañia Española de Sistemas Aeronauticos S.A.
Location
Canada
United States
United Kingdom
United States
Spain
Subsidiaries are consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated
until the date that such control ceases. Control is achieved when the Corporation has power over the investee; is exposed, or has rights, to
variable returns from its involvement with the investee; and ability to use its power to affect its returns. The Corporation reassesses whether or
not it controls an investee if facts and circumstances indicate that there are changes to one or more of these three elements of control. Changes
in the Corporation’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
The cost of an acquisition is measured as the aggregate of the consideration paid, measured at acquisition date fair value and the amount of
any non-controlling interest in the acquiree. For each business combination, the Corporation measures the non-controlling interests in the
acquiree either at fair value or at the proportionate share of the acquiree’s net identifiable assets.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 63
The financial statements of the subsidiaries are prepared for the same reporting period as Héroux-Devtek Inc., using consistent accounting
policies.
All inter-company transactions and account balances are eliminated in full.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
A. Foreign currency
The consolidated financial statements are presented in Canadian dollars. Each entity in the Corporation accounts for transactions in its own
functional currency and items included in the consolidated financial statements of each entity are measured using that functional currency.
The functional currency of Héroux-Devtek and of the Canadian operations is the Canadian dollar. The functional currency of the U.S. operations
is the U.S. dollar, the functional currency of the U.K operations is the British pound and the functional currency of Spain operations is the Euro.
The functional currency is the currency that is representative of an operation’s primary economic environment.
Conversion of transactions and account balances
Transactions denominated in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange at the reporting date.
All differences are included in the consolidated statements of income.
Non-monetary items denominated in foreign currencies are translated at the exchange rate at the date of the transactions.
Translation of financial statements of foreign operations
Assets and liabilities of foreign operations are translated into Canadian dollars at the rate of exchange at the reporting date and the statements
of income are translated at the average exchange rate for the fiscal year. Exchange differences arising from the translation are recognized in
other comprehensive income and remain in accumulated other comprehensive income until the disposal of the related net investment, at which
time they are recognized in the consolidated statements of income.
B. Cash and cash equivalents
Cash and cash equivalents comprise cash.
C. Inventories
Inventories include raw materials, direct labour and related manufacturing overhead costs.
Inventories consist of raw materials, work-in-progress and finished goods which are valued at the lower of cost (unit cost method except for
certain raw materials that are valued at the weighted average cost method) and net realizable value.
The unit cost method is the cost method under which the actual production costs are charged to each unit produced and recognized in the
consolidated statements of income as the unit is delivered. Estimates of net realizable value are based on the most reliable evidence available
of the amount for which the inventories are expected to be realized. These estimates take into consideration fluctuations of price or cost directly
relating to events occurring after the end of the reporting period to the extent that such events confirm conditions existing at the end of the
reporting period.
D. Property, plant and equipment
Assets acquired
Property, plant and equipment are stated at cost less accumulated amortization and accumulated impairment losses, if any (see H). Such cost
may include the cost of replacing a major part of the property, plant and equipment and, in this situation, the carrying amount of the replaced
part is derecognized. Cost also includes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset
(see F).
64 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Buildings and leasehold improvements - 5 to 50 years,
Amortization is calculated on a straight-line basis over the useful life of the asset as follows:
•
• Machinery and equipment - 3 to 25 years,
•
Tooling related to specific contracts - based on pre-determined contract quantities, not exceeding the lower of ten years or the useful life.
Contract quantities are assessed at the beginning of the production stage considering, among other factors, existing firm orders and options.
The Corporation’s management conducts quarterly and annual reviews of the contract quantities,
Standard and general tooling - 3 to 5 years,
Automotive equipment - 3 to 10 years,
Computer and office equipment - 3 to 5 years.
•
•
•
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or
disposal. The gain or loss on derecognition of the asset (calculated as the difference between the net disposal proceeds and the net carrying
amount of the asset) is included in the consolidated statements of income in the fiscal year the asset is derecognized. The asset’s residual
value, useful life and method of amortization are reviewed and adjusted annually at year-end, or when warranted by specific circumstances.
The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the
recognition criteria for a provision are met. Refer to section L of this note and note 4 - Significant accounting estimates and assumptions for
further information about provisions for asset retirement obligations.
Assets leased
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether
the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership to the Corporation. A finance
lease is capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease
payments, computed by using the implicit interest rate of the lease contract. Lease payments are apportioned between interest expense and
the reduction of the lease obligation. Interest expense is reflected in the consolidated statements of income. Capitalized leased assets are
accounted for in the categories of property, plant and equipment corresponding to their nature. Capitalized leased assets are amortized over
the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Corporation will obtain ownership
by the end of the lease term.
A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Operating lease
payments are recognized as an expense on a straight-line basis over the related lease term.
E. Finite-life intangible assets
Finite-life intangible assets include capitalized development costs, customer relationships and contracts and software. They are measured at
cost upon initial recognition. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. Following
initial recognition, they are carried at cost less accumulated amortization and impairment losses, if any.
Finite-life intangible assets are amortized over the useful life and assessed for impairment whenever there is an indication that the intangible
asset may be impaired. The amortization period and method for finite-life intangible assets are reviewed at each fiscal year-end or when warranted
by specific circumstances. Changes in the expected useful life or the expected pattern of consumption of future economic benefits associated
with finite-life intangible assets are accounted for as changes in accounting estimates.
The gain or loss arising from derecognition of an intangible asset is measured as the difference between the net disposal proceeds and the net
carrying amount of the asset and is recognized in the consolidated statements of income.
Development costs
Development costs of an individual sales contract are capitalized as an intangible asset when the Corporation can demonstrate:
•
•
•
•
•
•
the feasibility of completing the intangible asset so that it will be available for use or sale;
its intention to complete the intangible asset and use or sell it;
its ability to use or sell the asset;
how the asset will generate future economic benefits;
the availability of resources to complete the development and to use or sell the intangible asset; and,
the ability to measure reliably the expenditure attributable to the intangible asset during its development phase.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 65
Capitalized development costs (design engineering, manufacturing engineering costs and other related costs) related to sales contracts are
amortized based on predetermined expected quantities to be sold. They are presented net of related government assistance and amounts
contributed by customers.
The expected quantities to be sold are established based on management’s assessment at the beginning of the production stage for each
contract, taking into consideration, among other factors, existing firm orders and options. The Corporation’s management conducts quarterly
reviews as well as a detailed annual review in the fourth quarter of the contract quantities, its capitalized development costs and their recoverability.
Following initial recognition of capitalized development costs as an asset, the asset is carried at cost less accumulated amortization and
accumulated impairment losses, if any. Amortization begins when development is complete and the asset is available for use. Usually, the
development phase represents a period of 4 to 7 years. During the period of development, the asset is tested for impairment annually.
Customer relationships and contracts
Customer relationships and contracts are amortized on a straight-line basis over the estimated useful life of the related customer relationship
and contracts, which represents a period of up to 15 years.
Software
Software is amortized over 3 to 7 years.
F. Borrowing costs
Borrowing costs are recognized as an expense when incurred, except when they are capitalized as part of the cost of a qualifying asset. Borrowing
costs are capitalized when the Corporation:
incurs expenditures for the asset;
•
incurs borrowing costs; and
•
undertakes activities that are necessary to prepare the asset for its intended use or sale, to the extent that these activities are performed
•
over a period exceeding the normal operating cycle of the Corporation (12 months).
Conversely, the Corporation ceases capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are completed.
G. Business combinations and goodwill
Business combinations are accounted for using the acquisition method.
The cost of a business combination is measured as the fair value of assets given, equity instruments issued and liabilities assumed at the date
of acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed are measured initially at fair value at the date of acquisition.
Acquisition-related costs associated with the business combinations are expensed as incurred.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses, if any. For the purpose of impairment testing,
goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Corporation’s cash generating units (“CGU”)
or group of CGUs that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the
acquiree are assigned to those units. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent
of the cash inflows from other assets or groups of assets.
Where goodwill forms part of a CGU and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed
of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in
this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained.
H. Impairment of goodwill and other non-financial assets
Goodwill is tested for impairment annually on March 31 or when warranted by specific circumstances. A prior year’s impairment test may be
used in the annual impairment test when specific criteria are met. Impairment is determined by assessing the recoverable amount of the CGU
to which the goodwill relates. A CGU’s recoverable amount is the higher of a CGU’s fair value less costs of disposal and its value in use. The
Corporation uses the discounted cash flow method to estimate value in use, consisting of future cash flows derived from the most recent budget
and strategic plan, which cover five years, approved by the Corporation’s management and Board of Directors. These future cash flows consider
each CGU’s past performance, market share, economic trends, specific and market industry trends and corporate strategies. A perpetual growth
rate is used for cash flows beyond this five-year period. The perpetual growth rate is determined with regard to the specific markets in which
the CGU participates. The discount rate used by the Corporation for cash flows is a pre-tax rate based on the weighted-average cost of capital
pertaining to each CGU, which reflects the current market assessment of (i) the time value of money, and (ii) the risks specific to the assets.
66 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to
goodwill cannot be reversed in future periods.
For non-financial assets other than goodwill, the Corporation assesses at each reporting date whether there is an indication that the carrying
amount may be impaired. If any such indication exists, the Corporation estimates the asset’s recoverable amount. An asset’s recoverable amount
is the higher of an asset’s fair value less costs of disposal and its value in use and is determined for an individual asset, unless the asset does
not generate cash inflows that are largely independent of those from other assets or groups of assets. If the asset does not generate cash inflows
that are largely independent of those from other assets or group of assets, the recoverable amount is determined by reference to the CGU’s
value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written-down to
its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs
to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators.
For non-financial assets other than goodwill, a previously recognized impairment loss is reversed if there has been a change in the estimated
recoverable amount since the last impairment loss was recognized. That increased amount cannot exceed the carrying amount that would have
been determined, net of accumulated amortization, had no impairment loss been recognized for the asset in prior years. Such a reversal is
recognized in the consolidated statements of income.
I. Financial assets
In July 2014, the IASB issued a complete and final version of IFRS 9 “Financial Instruments”, replacing the current standard on financial
instruments (IAS 39). IFRS 9 introduces a single, principle-based approach for the classification of financial assets, driven by the nature of cash
flows and the business model in which an asset is held. IFRS 9 also provides guidance on an entity’s own credit risk relating to financial liabilities
and has modified the hedge accounting model to align the economics of risk management with its accounting treatment. The standard results
in a single expected loss impairment model rather than an incurred losses model.
The Corporation adopted IFRS 9 retrospectively on April 1, 2018 and this adoption did not have a significant impact on the Corporation’s
consolidated financial statements and no restatement of comparative figures were made.
Initial recognition
At initial recognition, financial assets are classified either as financial assets at fair value through profit or loss (“FVTPL”), measured at amortized
cost (“AC”) or fair value through other comprehensive income (“FVTOCI”). The classification is based on two criteria: the Corporation’s business
model for managing the assets; and whether the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the
principal amount outstanding (the “SPPI criterion”). The Corporation’s financial assets are held within a business model with the objective to
hold the financial assets in order to collect contractual cash flows that meet the SPPI criterion are classified and subsequently measured at
amortized cost. They consist of cash and cash equivalents, accounts receivable and certain other current and long-term assets.
When financial assets are recognized initially, they are measured at fair value, plus in the case of a financial asset other than FVTPL, the directly
attributable transaction costs. Purchases and sales of financial assets are recognized on the transaction date, which is the date that the Corporation
commits to purchase or sell the assets.
FVTPL
FVTPL include certain derivative financial instruments, except those that are designated as Hedges. FVTPL are carried at fair value with gains
and losses recognized in the consolidated statements of income. The Corporation assesses whether embedded derivative financial instruments
are required to be separated from host contracts when the Corporation first becomes party to the contract.
AC
AC are non-derivative financial assets with fixed or determinable payments not quoted in an active market. AC are mainly comprised of accounts
receivable and certain other current and long-term assets. AC are carried at amortized cost using the effective interest rate method. An allowance
for doubtful accounts is recorded when an account receivable become impaired. Also, under the forward-looking expected credit loss (“ECL”)
approach, all financial assets, except for those measured at FVTPL, are subject to review for impairment at least at each reporting date. ECLs
are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Corporation
expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.
For accounts receivables, the Corporation has applied the standard’
expected credit losses and the amount was insignificant at March 31, 2019 and 2018.
s simplified approach and has calculated ECLs based on lifetime
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 67
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance for doubtful accounts. Any
subsequent reversal of an impairment loss is recognized in the consolidated statements of income.
FVTOCI
These include cross-currency interest rate swap agreements that are used to hedge the net investments in certain foreign subsidiaries and
forward foreign exchange contracts. They are carried at fair value. The change in the fair value of the effective portion of hedges is recognized
in other comprehensive income, while the ineffective portion is recognized in the consolidated statements of income, if any.
The Corporation assesses at each reporting date whether any financial asset is impaired.
J. Financial liabilities
Liabilities at fair value
Financial liabilities classified at FVTPL are comprised of derivative financial instruments, except those that are designated as FVTOCI. They
are carried at fair value with gains and losses recognized in the consolidated statements of income. Gains and losses on FVTOCI are recognized
in other comprehensive income.
Amortized costs
All debts, accounts payable, accrued liabilities, provisions and certain other liabilities are initially recognized at fair value less directly attributable
transaction costs when they have not been designated as FVTPL.
After initial recognition, they are subsequently measured at amortized cost using the effective interest method.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation underlying the liability is discharged, cancelled or has expired.
K. Derivative financial instruments and hedges
Derivative financial instruments
The Corporation uses derivative financial instruments such as forward foreign exchange contracts, cross-currency interest rate swap agreements
and equity swap agreements to hedge its risks associated with foreign currency, interest rate and other price fluctuations. Such derivative
financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into. They are subsequently
measured 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.
Cash flow hedges
For the purpose of hedge accounting, all hedges are classified as cash flow hedges except for hedges of net investments in foreign operations
(see below). Hedging exposure to variability in cash flows is attributable to a risk associated with a recognized liability or a highly probable
forecast transaction in foreign currency.
At the inception of a hedge relationship, the Corporation formally designates and documents the hedge relationship to which the Corporation
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
hedging instrument’s effectiveness. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are
assessed quarterly to determine that they actually have been highly effective throughout the designated periods.
The change in the fair value of the effective portion of hedges is recognized in other comprehensive income, while the ineffective portion is
recognized in the consolidated statements of income. Amounts recognized in other comprehensive income are transferred to the consolidated
statements of income when the hedged transaction affects income, such as when the hedged financial income or financial expense is recognized
or when a forecast sale occurs. In the event that the forecast transaction or firm commitment is no longer expected to occur, amounts previously
recognized in accumulated other comprehensive income are transferred to the consolidated statements of income.
Hedges of net investments in foreign operations
The Corporation designates certain long-term debt as a hedge of its net investments in foreign operations. The portion of gains or losses from
the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, while the ineffective portion is
recorded in the consolidated statements of income. The amounts recognized in other comprehensive income are reclassified in the consolidated
statements of income upon disposal of the related net investments.
68 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
L. Provisions
Provisions are recognized when the Corporation has a present obligation (legal or constructive) 1) as a result of a past event; 2) when it is more
probable than not that an outflow of resources embodying economic benefits will be required to settle the obligation; and, 3) when a reliable
estimate can be made of the amount of the obligation. The expense relating to any provision is accounted for in the consolidated statements of
income, net of any reimbursement.
If the known expected settlement date exceeds twelve months from the date of recognition, provisions are discounted using a current pre-tax
interest rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is
recognized as a financial expense. Provisions are reviewed periodically and adjusted as appropriate.
Onerous contracts
These represent anticipated negative margins on sales contracts in progress or in the funded backlog (firm customer purchase orders).
Asset retirement obligations
The Corporation’s asset retirement obligations mainly consist of environmental rehabilitation costs related to one of the Corporation’s
manufacturing sites in Canada. The present value of these obligations is measured in the year in which they are identified and when a reasonable
estimate of their present value can be made. The present value of the obligations is determined as the sum of the estimated discounted future
cash flows of the costs associated with the legal obligations for future rehabilitation. These asset retirement costs are capitalized as part of the
property, plant and equipment and amortized over the relevant assets’ useful lives. The discount fluctuation is expensed as incurred and
recognized in the consolidated statements of income as financial expenses. The estimated future costs of decommissioning are reviewed
annually and adjusted as appropriate. Changes in the estimated future costs are recognized in the consolidated statements of income as changes
occur.
Product warranty
This provision covers the cost of known or anticipated defects on products under terms of warranties.
Litigations and other
Due to the nature of its business activities including the purchase or sale of businesses, the Corporation is exposed to the risks of technical and
business litigations. On the basis of information at its disposal at the reporting date, the Corporation carried out a review of the financial risks
to which the Corporation could be exposed. The recorded provision covers the risks associated with these litigations.
Restructuring provisions are recognized when the Corporation has put in place a detailed restructuring plan which has been communicated in
sufficient detail to create a constructive obligation. Restructuring provisions include only costs directly related to the restructuring plan, and are
measured at the best estimate of the amount required to settle the Corporation’s obligations.
M. Progress billings
Progress billings represent amounts received from customers for costs incurred on specific contracts. These amounts are reversed to sales at
such time as the related units are delivered and billed to customers.
N. Deferred financing costs
Deferred financing costs related to long-term debt are amortized using the effective interest rate method over the period that represents the
duration of the related long-term debt.
O. Pensions and other retirement benefits
The Corporation has defined contribution pension plans as well as funded and unfunded defined benefit pension plans that provide pension
benefits to its employees. The current and past service costs of these pension plans are recorded within the cost of sales and selling and
administrative expenses under “Employee costs” in the consolidated statements of income while the administrative costs related to these pension
plans are included in selling and administrative expenses. The net interest income or expense on the net surplus or deficit is recorded in financial
expenses.
The actuarial determination of the defined benefit obligations for pensions uses the projected unit credit method which incorporates management’s
best estimate of future salary levels, when applicable, other cost escalations, retirement ages of employees, discount rates and other actuarial
factors.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 69
The Pension and other retirement benefit plans liabilities included in Other liabilities in the consolidated balance sheets represent the present
value of the defined benefit obligations reduced by the fair value of plan assets.
Remeasurements on defined benefit plans include actuarial gains and losses, changes in the effect of the asset ceiling and the return on plan
assets, excluding the amount included in net interest on the net defined liability or assets. Remeasurements are charged or credited to other
comprehensive income in the period in which they arise.
Past service costs arising from the plan amendments are recognized in full immediately in the consolidated statements of income.
P. Share-based payments
Stock option plan
The Corporation has a stock option plan in which options to purchase common shares are issued to officers and key employees. The Corporation
uses a binomial valuation model to determine the fair value of stock options when granted. The resulting fair value is amortized to income over
their earned period using the graded amortization method. The related compensation expense is included in selling and administrative expenses
and its counterpart is accounted for in contributed surplus.
Stock purchase and ownership incentive plan
The Corporation has a stock purchase and ownership incentive plan allowing key members of management to purchase, by payroll deductions
of a maximum of 10% of their annual base salary, to a number of common shares of the Corporation on the TSE. The Corporation matches a
portion of such employee contributions in the form of additional common shares acquired on the TSE at market price. The Corporation’s matching
award cannot exceed 5.25% of the employee’s annual base salary. Common shares purchased by the Corporation on behalf of the employee
are accounted for in selling and administrative expenses.
Deferred share unit (“DSU”) plan
The Corporation has a DSU plan under which rights are issued to its non-employee directors. The DSU enables the participants to receive
compensation at the end of their mandate as a member of the Board of Directors, representing a cash amount equal to one time the quoted
price of the Corporation’s common share for each DSU.
These DSUs are expensed on an earned basis, their value is equal to that of the underlying shares and is remeasured at each reporting period.
Each director can also elect, each fiscal year, to have up to 100% of his director’s annual retainer fees converted into DSUs. These DSUs vest
over a one-year period. The related compensation expense is included in selling and administrative expenses and its counterpart is accounted
for in accounts payable and accrued liabilities until the DSUs are exercised and paid at the end of each director’s mandate.
Performance share unit (“PSU”) plan
The Corporation has a PSU plan as part of the incentive plan for management and key employees. PSUs vest over a period of three years. The
PSU enables the participants to receive compensation at the expiry or termination date representing a cash amount equal to the quoted price
of the Corporation’s common share for each PSU vested, conditional on the achievement of certain financial targets.
PSUs are expensed on an earned basis, their value is equal to that of the underlying shares and is remeasured at each reporting period.
The related compensation expense is included in selling and administrative expenses and its counterpart is accounted for in accounts payable
and accrued liabilities until the PSUs are paid or cancelled at the expiry or termination date.
Q. Revenue recognition
In May 2014, the International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) jointly issued IFRS
15, a converged standard on the recognition of revenue from contracts with customers. It supersedes the IASB’s current revenue recognition
guidance including IAS 18 “Revenue”, IAS 11 “Construction Contracts”, and related interpretations. IFRS 15 provides a single principle based
five step model to use when accounting for revenue arising from contracts with customers.
On April 1, 2018, the Corporation adopted IFRS 15 using the full retrospective method and this adoption did not have a material impact on the
Corporation’s consolidated financial statements.
70 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Revenue is measured at the fair value of the consideration received or receivable, net of estimated discounts, and after eliminating intercompany
sales. Revenue from the sale of goods is recognized in a manner that depicts the transfer of promised goods to a customer and at an amount
that reflects the consideration expected to be received in exchange for transferring those goods. This is achieved by applying the following five
steps:
1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when (or as) the entity satisfies a performance obligation, which is generally achieved upon the delivery of
the products.
Revenues from the sale of new or overhauled aerospace components are considered a single performance obligation and are recognized at
the point in time when the customer has obtained control of the component and the Corporation has satisfied its performance obligation. Generally,
these conditions are met upon delivery of the goods.
R. Government assistance
Government assistance, which mainly includes investment and other tax credits, grants and the discount portion of the governmental authorities
loans, is recognized when there is reasonable assurance that it will be received and all related conditions will be complied with. When the
government assistance relates to an expense item, it is recognized as a reduction of expense over the period necessary to match the government
assistance on a systematic basis to the costs that it is intended to subsidize. Where government assistance relates to an asset, it is deducted
from the cost of the related asset.
Forgivable loans from governmental authorities are accounted for as government assistance when there is reasonable assurance that the entity
will meet the terms for forgiveness of the loan.
Benefits derived from government authority loans with below-market interest rates are measured at the inception of the loans as the difference
between the cash received and the amount at which the loans are initially recognized in the consolidated balance sheet. At initial recognition,
the fair value of a loan with a below-market rate of interest is estimated at the present value of all future cash disbursements, discounted using
a prevailing market rate of interest for a similar instrument with a similar credit rating.
After initial recognition, the loan is accounted for as a financial liability measured at amortized cost using the effective interest method. Repayments
are mainly based on the Corporations sales growth, or sales of specific programs. Assumptions underlying expected sales are reviewed at least
annually, and are used to derive expected repayment schedules. When expected repayment schedule changes, the Corporation recalculates
the carrying value of the loan using the original effective interest rate, with the corresponding gain or loss accounted for in financial expenses.
S. Taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax
rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax
relating to items recognized directly in shareholders’ equity is recognized in shareholders’ equity and not in the consolidated statements of
income or in the consolidated statements of comprehensive income.
Deferred income tax
Deferred income tax is provided for using the liability method on temporary differences at the reporting date between the tax basis of assets
and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are recognized for all
deductible and taxable temporary differences, except:
•
where the deferred income tax asset or liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that
is not a business combination and, at the time of the transaction, affects neither the accounting income or loss nor taxable income or loss;
in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
•
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 71
Deferred income tax assets are recognized for all other deductible temporary differences, carry forward or unused tax credits and unused tax
losses to the extent that it is probable that taxable income will be available against which the deductible temporary differences and the carry
forward of unused tax credits and unused tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the
deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date. Deferred income
tax assets and liabilities are measured at the income tax rates that are expected to apply to the fiscal year when the asset is realized or the
liability is settled, based on income tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Deferred
income tax relating to items recognized directly in shareholders’ equity is recognized directly in shareholders’ equity and not in the consolidated
statements of income or in the consolidated statements of comprehensive income. Deferred income tax assets and liabilities are offset if a legally
enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred income taxes relate to the
same taxable entity and the same taxation authority. All deferred income tax assets and liabilities are classified as non-current.
Sales tax
Sales, expenses and assets are recognized net of the amount of sales tax, except where the sales tax incurred on a purchase of assets or
services is not recoverable from the taxation authorities, in which case the sales tax is recognized as part of the cost of acquisition of the asset
or as part of the expense item as applicable.
Receivables and payables are stated with the amount of sales tax included, if applicable.
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of other current assets or accounts payable
and accrued liabilities in the consolidated balance sheet.
T. Earnings per share
Basic and diluted earnings per share is computed based on net income attributable to equity holders of the Corporation. It is also determined
using the weighted-average number of common shares outstanding during the year. The calculation of diluted earnings per share takes into
consideration the exercise of all dilutive elements. This method assumes that the proceeds of the Corporation’s in-the-money stock options
would be used to purchase common shares at the average market price during the year.
U. Future changes in accounting policies
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases. The new standard, which represents a major revision of the way in which companies
account for leases, sets out the principles that both parties to a contract, i.e. the customer (“lessee”) and the supplier (“lessor”), apply to provide
relevant information about leases in a manner that faithfully represents those transactions. To meet this objective, a lessee is required to recognize
assets and liabilities arising from a lease, following a single model where previously leases were classified as either finance leases or operating
leases. Most leases will be recognized on the Corporation’s consolidated balance sheet. Certain exemptions will apply for short-term leases
and leases of low-value assets. The Corporation anticipates the adoption of the IFRS will have an impact on the balance sheet and statement
of income as all operating leases will be capitalized with a corresponding lease liability while the rent expense will be replaced by the amortization
expense of the right to use the related assets and interest accretion expense from the liability recorded.
The Corporation is required to apply this standard based on the full retrospective or modified retrospective (without restating comparative figures)
approaches for its fiscal year beginning April 1, 2019. Many of the Corporation’s leases are already accounted for as finance leases on the
Corporation’s consolidated balance sheet. Certain operating leases will be required to be brought on balance sheet while others do not as they
are covered by practical expedients. The Corporation has elected to apply the following practical expedients:
•
•
Account for leases for which the remaining lease term ends within 12 months of the effective date as a short term lease; and
Recognize short term leases and low value leases on a straight line basis as is the case currently under IAS 17, leases as part of the
operating expenses in the consolidated statements of income.
Upon the initial application of this standard on April 1, 2019, using the modified retrospective approach, the Corporation expects its opening
assets (right-of-use assets) and liabilities (lease liabilities) to increase by an approximate amount of $15.0 million in its consolidated financial
statements.
72 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
NOTE 4. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. Uncertainty
about these assumptions and estimates could result in outcomes that require material adjustments to the Corporation’s financial results or the
carrying amount of assets or liabilities.
Key estimates and assumptions are as follows:
Impairment of non-financial assets
A.
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset. The
value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget and
strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that may
enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the discounted cash
flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used to determine the
recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17.
B. Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that taxable
income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is required to
determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable income
together with future tax planning strategies.
C. Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about
discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the interest rates
of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. The significant
assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity analysis, are further explained
in note 25.
D. Capitalized development costs
Development costs are capitalized in accordance with the accounting policy described in note 3. In determining the amounts to be capitalized,
management makes assumptions regarding the expected future cash generation of the assets, discount rates to be applied, the expected period
of benefits and contract quantities. For purpose of impairment testing, the Corporation exercises judgment to identify the cash inflows and
outflows. The recoverable amount is based on fair value less costs of disposal, generally determined using a discounted cash flow model. Other
assumptions used to determine the recoverable amount include the applicable discount rate and the expected future cash flows which include
costs to complete the development activities.
E. Provisions
The Corporation has recorded provisions to cover cost exposures that could materialize in future periods. In determining the amount of the
provisions, assumptions and estimates are made in relation to discount rates and the expected cost to settle such liabilities.
F. Government authorities loans
The Corporation has outstanding loans with government authorities with variable repayment schedules. Annual repayments of these loans
generally vary based on the sales of certain of the Corporation’s programs or segments. In order to account for the present value of these loans
under the effective interest method, or for government assistance upon initial recognition, management must estimate the future sales growth
of these programs or segments over the expected duration of the loan. These forecasts are used to determine effective interest rates and
expected repayment schedules. In determining these amounts, management must rely on market rates of interest and assumptions such as,
but not limited to, current and future order intake, industry order backlogs, Original Equipment Manufacturer (“OEM”) production rates, expected
economic conditions, the stability of foreign exchange rates and the Corporation’s ability to deliver on key contract initiatives.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 73
G. Customer relationships
Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon
acquisition using valuation methodologies which rely on many underlying assumptions, including:
•
•
•
•
•
Expected future order intake;
Operational execution and cost management;
Stability of economical conditions, including foreign exchange rates;
Production rates;
Government spending.
They are recorded at cost less accumulated impairment and amortization and are amortized on a straight-line basis over their useful lives
without exceeding 15 years.
NOTE 5. BUSINESS ACQUISITIONS
Acquisition of CESA
On October 1, 2018, the Corporation completed the acquisition of all the shares of Compañia Española de Sistemas Aeronauticos S.A. ("CESA"),
a subsidiary of Airbus SE, for €130,370 ($195,816). Headquartered in Madrid, Spain, CESA is a leading European provider of fluid mechanical
and electromechanical systems for the aerospace industry. This acquisition allows the Corporation to broaden its existing aerospace and product
offering into actuation, landing gear, and hydraulic systems. The transaction was treated as a business combination.
The acquisition of CESA was financed as follows:
A $50,000, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
A US$50,000 ($65,205) drawing on the Corporation’s credit facility; and,
The Corporation’s available cash balance.
In addition, the Corporation assumed CESA’s net outstanding debt amounting to approximately €23,697 ($35,594) upon closing.
For the period between October 1, 2018 and March 31, 2019, the Corporation’s consolidated sales and net income included €42,086 ($63,519)
and €2,674 ($4,047), respectively, generated by CESA. If the acquisition had closed on April 1, 2018, the consolidated sales and net income of
CESA would have amounted to $117,277 and $2,806, respectively for the fiscal year ended March 31, 2019.
This transaction exposes the Corporation to new foreign exchange and interest rate risks. Refer to note 32 for further information on these risks
and how they are being mitigated.
Acquisition of Beaver
On July 2, 2018, the Corporation completed the acquisition of all the shares of Beaver Aerospace & Defense Inc. and its wholly-owned subsidary
PowerTHRU Inc. ("Beaver") from Phillips Service Industries Inc. for a purchase price of US$21,617 ($28,466). This price includes a working
capital adjustment received in April 2019 of US$295 ($388) and a US$3,500 ($4,609) balance of sale payable over the next two years which
bears interests at 3%. The transaction was financed through the Corporation’s cash and was treated as a business combination. This acquisition
allows the Corporation to broaden its existing aerospace and product offering into ball screws and actuation systems as well as expand its
footprint in North America.
For the period between July 2, 2018 and March 31, 2019, the Corporation's consolidated sales and net income included US$18,871 ($24,839)
and US$1,395 ($1,828), generated by Beaver, respectively. If the acquisition had closed on April 1, 2018, the consolidated sales and net income
of Beaver would have amounted to $33,223 and $2,243, respectively.
Acquisition of Tekalia
On January 23, 2019, the Corporation completed the acquisition of 60% of the shares of Tekalia Aeronautik (2010) Inc. (“Tekalia”), a supplier of
surface treatment services to the aerospace sector, with annual sales of approximately $12,000, for a purchase price of $6,529. The transaction
was financed through the Corporation’s cash and was treated as a business combination. The acquisition of Tekalia allows the Corporation to
further secure surface treatment capacity to support its North American customers’ growth.
In connection with these acquisitions, the Corporation incurred acquisition-related costs which are presented in note 10.
74 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Purchase Prices
The purchase prices and the preliminary purchase price allocations that reflects the fair value of the assets acquired and liabilities assumed with
any excess allocated to goodwill were determined using the acquisition method as follows:
Cash payment
Long-term debt assumed
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price for the Corporation’s interest
Non-controlling interests
Purchase Price Allocations
Accounts receivable
Inventories
Income tax receivable
Other current assets
Property, plant and equipment
Finite-life intangible assets
Deferred income tax assets
Other long-term assets - Tax credits receivable
Total identifiable assets
Accounts payable and accrued liabilities
Provisions
Customer advances and progress billings
Provisions
Deferred income tax liabilities
Other liabilities - long-term accounts payable
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
CESA
$ 170,930 $
35,594
(10,708)
—
$ 195,816 $
—
$ 195,816 $
Beaver
23,671 $
574
(388)
4,609
28,466 $
—
28,466 $
Tekalia
Total
3,548 $ 198,149
39,149
2,981
(11,096)
—
4,609
—
6,529 $ 230,811
2,365
2,365
8,894 $ 233,176
Beaver
Tekalia
$
CESA
28,293 $
36,692
505
596
66,086
44,923
40,407
—
7,843
$ 159,259 $
16,773
11,897
4,188
32,858
6,787 $
10,165
—
50
17,002
3,635
4,050
2,774
—
27,461 $
2,588
2,118
450
5,156
2,406 $
1,105
—
182
3,693
Total
37,486
47,962
505
828
86,781
8,566
176
—
—
57,124
44,633
2,774
7,843
12,435 $ 199,155
4,833
—
—
4,833
24,194
14,015
4,638
42,847
12,857
3,465
4,365
63,534
4,308
3,465
4,365
44,996 $
8,549
—
—
13,705 $
$
—
—
—
4,833 $
114,263
81,553
$ 195,816 $
13,756
14,710
28,466 $
135,621
7,602
1,292
97,555
8,894 $ 233,176
The purchase price allocations of CESA and Tekalia are preliminary. The purchase price of CESA is subject to final working capital adjustments.
In the case of Tekalia, due to the limited time between the date of acquisition and the approval date of the consolidated financial statements by
the Corporation’s Board of Directors, management is in the process of gathering all the information necessary to finalize it. Accordingly, the final
purchase price allocations could result in changes to the fair value of assets acquired and liabilities assumed.
NOTE 6. SALES AND BACKLOG
The amount of sales recognized in the following sectors was as follow for fiscal year:
Commercial
Defense
Total sales
2019
236,283
247,594
483,877
$
$
2018
195,101
191,463
386,564
$
$
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 75
The Corporation’s backlog represents the aggregate amount of the revenues expected to be realized within a period of 24 months, from partially
or fully unsatisfied performance obligations as at March 31, 2019 as we perform under contracts at delivery. The amounts in backlog include
only the value of firm orders. Such orders may be subject to future modifications that might impact the amount and/or timing of revenue recognition.
At March 31, 2019, the Corporation had a backlog of $623,925.
NOTE 7. GOVERNMENT ASSISTANCE
Government assistance deducted from the cost of the related assets or recognized as a reduction of expenses, was as follows, for fiscal year:
Finite-life intangible assets
Property, plant and equipment
Cost of sales and, selling and administrative expenses
Government assistance includes research and development tax credits, other credits and grants.
NOTE 8. COST OF SALES, SELLING AND ADMINISTRATIVE EXPENSES
The main components of these expenses were as follows, for fiscal year:
Raw materials and purchased parts
Employee costs
Amortization of property, plant and equipment and finite-life intangible assets (notes 15, 16)
Others
2019
1,125
$
497
3,903
2018
332
619
1,929
2019
179,395
$
154,406
32,650
75,863
2018
140,361
126,292
26,579
63,007
442,314
$
356,239
$
$
$
Foreign exchange gains or losses resulting from the translation of net monetary items denominated in foreign currencies are included in the
Corporation’s selling and administrative expenses. During the fiscal year ended March 31, 2019, the foreign exchange gain amounted to $718
($148 in 2018).
NOTE 9. NET FINANCIAL EXPENSES
Net financial expenses comprise the following, for fiscal year:
Interest accretion on governmental authorities loans
Net losses on certain derivative financial instruments (note 10)
Revision of governmental authorities loans repayment estimates (note 20)
Interest on net defined benefit obligations (note 25)
Amortization of deferred financing costs
Other non-cash financial expenses (income)
Non-cash net financial expenses
Interest expense
Net gains on certain derivative financial instruments (note 10)
Standby fees
Interest income on cash and cash equivalents
2019
2,361
$
391
(1,036)
150
505
326
2,697
4,461
—
453
(800)
6,811
$
2018
2,300
344
(1,834)
153
238
(443)
758
2,299
(255)
315
(580)
2,537
$
$
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 76
NOTE 10. NON-RECURRING ITEMS
Non-recurring items comprise the following, for fiscal year:
Non-recurring items in operating income
Acquisition-related costs
Restructuring charges
Non-recurring items in net financial expenses (income)
Net losses on certain derivative financial instruments
Non-recurring items in income tax expense
Impact of US Tax Reform
2019
4,323
$
— $
4,323
391
391
$
$
$
— $
— $
$
$
$
$
$
$
$
2018
1,957
4,990
6,947
89
89
4,912
4,912
Acquisition-related costs
These costs mainly pertain to professional fees and expenses related to the acquisitions of CESA, Beaver and Tekalia.
Restructuring charges
In March 2018, the Corporation announced workforce adjustments of about 60 employees at its Longueuil facility following the non-renewal of
the USAF contract. These adjustments along with other costs related to the decrease in volume resulted in restructuring charges totaling $4,990
accounted for during fiscal 2018 fourth quarter, including termination benefits of $2,729 and other costs related to the reduction in volume totaling
$2,261. The unpaid portion of these restructuring charges amounted to $304 as at March 31, 2019 ($2,545 as at March 31, 2018) is included
in other liabilities and short-term provisions on the Corporation’s consolidated balance sheet. Refer to note 19, under caption Other.
Net losses on certain derivative financial instruments
These losses relate to derivative financial instruments acquired in order to mitigate foreign currency and interest rate risks arising from the
purchase price and financing related to the acquisition of CESA. Refer to the Derivatives section under Additional Information below for further
details.
Impact of US Tax Reform
This one-time tax expense of $4,912 recorded during fiscal 2018 is related to the US Tax Reform enacted on December 22, 2017.
NOTE 11. EARNINGS PER SHARE
The following table sets forth the elements used to compute basic and diluted earnings per share, for fiscal year:
Weighted-average number of common shares outstanding
Effect of dilutive stock options of the Corporation
Weighted-average number of common diluted shares outstanding
Options excluded from diluted earnings per share calculation(1)
(1) Excluded from diluted earnings per share calculation due to anti-dilutive impact.
NOTE 12. INVENTORIES
As at
Raw materials
Work-in-progress
Finished goods
2019
36,307,708
129,344
36,437,052
526,500
2018
36,154,272
177,342
36,331,614
356,500
March 31, 2019 March 31, 2018
$
97,976
$
84,752
1,307
$
184,035
$
62,902
69,118
2,307
134,327
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 77
The amount of inventories recognized as cost of sales for the fiscal year ended March 31, 2019 is $333,917 ($267,753 in 2018).
Reserves related to inventories are as follows, for fiscal year:
Reserves recognized as cost of sales
Reversal of prior-period reserves
$
2019
8,118
$
9,116
2018
7,312
13,639
For fiscal year 2019, the reversal of prior-period reserves includes charges of $1,705 ($5,568 in 2018) for products delivered or written-off during
the year for which a net realizable value reserve was recorded in prior years with no effect on income. It also includes the results from the
revaluation, at each reporting date, of the net realizable value of inventories, based on related sales contracts and production costs. The
revaluation takes into consideration the variations in selling price and number of units to deliver for contracts signed and also the reduction in
production costs resulting from improvements in manufacturing processes.
NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS
As at
Current Assets
Forward foreign exchange contracts
Cross-currency interest rate swap agreements
Long-term Assets
Forward foreign exchange contracts
Cross-currency interest rate swap agreements
Equity swap agreements
Current Liabilities
Forward foreign exchange contracts
Interest rate swap agreements
Long-term Liabilities
Forward foreign exchange contracts
Cross-currency interest-rate swap agreements
NOTE 14. OTHER ASSETS
As at
Working capital adjustment receivable (note 5)
Investment and other tax credits receivable
Prepaid expenses
Sales tax receivable
Others
Other current assets
Tax credits receivable
Others
Other long-term assets
78 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
March 31, 2019 March 31, 2018
$
$
$
$
$
$
$
$
399
384
783
190
1,735
3,891
5,816
2,134
—
2,134
1,317
—
1,317
$
$
$
$
$
$
$
$
1,776
—
1,776
1,172
—
2,249
3,421
382
7
389
76
2,313
2,389
March 31, 2019 March 31, 2018
—
10,695
$
$
6,366
5,171
3,415
1,050
26,697
$
6,914
—
6,914
$
$
$
523
3,614
1,676
643
6,456
3,165
1,043
4,208
NOTE 15. PROPERTY, PLANT AND EQUIPMENT
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Total
Cost:
As at March 31, 2018
$ 6,500
$
90,089
$
235,411
$
14,574
$
Additions
Business acquisitions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
124
12,487
—
—
(82)
1,981
22,622
(23)
(10)
1,097
10,845
19,380
(420)
(1,157)
4,626
2,127
1,568
(54)
(94)
100
2,308
(1,201)
1,067
—
7
(48)
$
348,882
13,876
57,124
(497)
(1,254)
5,693
As at March 31, 2019
$ 19,029
$
115,756
$
268,685
$
18,221
$
2,133
$
423,824
Accumulated amortization:
As at March 31, 2018
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
$
— $
—
—
—
As at March 31, 2019
Net book value as at March 31, 2019
$
— $
$ 19,029
$
29,432
4,638
(6)
285
34,349
81,407
$
$
$
130,981
17,636
(1,128)
3,022
150,511
118,174
$
$
$
8,966
2,079
(93)
58
11,010
7,211
$
$
$
— $
—
—
—
— $
2,133
$
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Cost:
As at March 31, 2017
$ 6,502
$
90,553
$
233,182
$
14,607
$
Additions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
—
—
—
(2)
1,034
(15)
(1,018)
(465)
10,984
(557)
(7,078)
(1,120)
1,299
(47)
(1,244)
(41)
$
4,915
(2,626)
—
—
19
169,379
24,353
(1,227)
3,365
195,870
227,954
Total
349,759
10,691
(619)
(9,340)
(1,609)
As at March 31, 2018
$ 6,500
$
90,089
$
235,411
$
14,574
$
2,308
$
348,882
Accumulated amortization:
As at March 31, 2017
Amortization expense
Write-down (note 10)
Retirements and disposals
Effect of changes in exchange rates
$
— $
26,769
$
121,797
$
—
—
—
—
3,770
—
(1,005)
(102)
15,234
886
(6,979)
43
$
8,346
1,811
—
(1,169)
(22)
— $
—
—
—
—
As at March 31, 2018
Net book value as at March 31, 2018
$
— $
$ 6,500
$
29,432
60,657
$
$
130,981
104,430
$
$
8,966
5,608
$
$
— $
2,308
$
156,912
20,815
886
(9,153)
(81)
169,379
179,503
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 79
Additions to property, plant and equipment shown above can be reconciled as follows, for fiscal year:
Gross additions
Government assistance (note 7)
Additions to property, plant and equipment
Variation in unpaid additions included in Accounts payable and accrued liabilities at year-end
Additions, as per statements of cash flows
2019
13,876
$
(497)
13,379
(521)
12,858
$
2018
10,691
(619)
10,072
(142)
9,930
$
$
As at March 31, 2019, cost of machinery, equipment and tooling includes assets acquired through finance leases amounting to $40,716 ($40,151
as at March 31, 2018) with accumulated amortization of $10,006 ($6,847 as at March 31, 2018).
As at March 31, 2019 and 2018, construction in progress included mainly the cost related to machinery and equipment. As at March 31, 2019,
the cost of property, plant and equipment still in use and fully depreciated is $91,109 ($87,188 as at March 31, 2018).
NOTE 16. FINITE-LIFE INTANGIBLE ASSETS
Cost:
As at March 31, 2018
Additions
Business acquisitions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Accumulated amortization:
As at March 31, 2018
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Net book value as at March 31, 2019
$
$
$
$
$
Capitalized
development costs
Customer
relationships and
contracts
Software
31,160
$
18,641
$
25,404
$
3,165
—
(7,142)
(1,046)
—
219
26,356
11,493
948
—
25
12,466
13,890
$
$
$
$
2,749
1,693
—
(79)
(480)
(612)
21,912
14,152
2,226
(480)
(120)
15,778
6,134
$
$
$
$
—
42,940
—
—
—
(258)
68,086
13,704
5,124
—
(95)
18,733
49,353
$
$
$
$
Total
75,205
5,914
44,633
(7,142)
(1,125)
(480)
(651)
116,354
39,349
8,298
(480)
(190)
46,977
69,377
80 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Capitalized
development costs
Customer
relationships and
contracts
Software
37,073
$
17,773
$
23,918
$
1,053
(7,005)
—
—
39
31,160
10,907
586
—
—
11,493
19,667
$
$
$
$
1,523
—
(332)
(520)
197
18,641
12,902
1,683
(482)
49
14,152
4,489
$
$
$
$
—
—
—
—
1,486
25,404
9,488
3,495
—
721
13,704
11,700
$
$
$
$
Total
78,764
2,576
(7,005)
(332)
(520)
1,722
75,205
33,297
5,764
(482)
770
39,349
35,856
Cost:
As at March 31, 2017
Additions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2018
Accumulated amortization:
As at March 31, 2017
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2018
Net book value as at March 31, 2018
$
$
$
$
$
NOTE 17. GOODWILL
Goodwill varied as follows, during fiscal year:
Balance at beginning of the year
Business acquisitions
Effect of changes in exchange rates
Balance, end of year
2019
91,137
97,555
(3,055)
185,637
$
$
$
$
2018
86,049
—
5,088
91,137
March 31, 2019
67,561
$
65,041
53,035
185,637
$
The net carrying amount of goodwill was allocated to the following CGUs, as at:
North America
U.K.
Spain
Goodwill
The following key assumptions were used to determine recoverable amounts for the impairment tests performed as at March 31, 2019:
North America
U.K.
Spain
Pre-tax discount rate
Perpetual growth rate
13.1%
13.6%
14.1%
2.8%
2.8%
2.8%
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 81
Sensitivity of recoverable amounts
The following table presents, for each CGU, the change in the discount rate or in the perpetual growth rate used in the most recently performed
tests that would have been required to recover the carrying amount of the CGU as at March 31, 2019:
North America
U.K.
Spain
Incremental increase
in pre-tax discount rate
3.1%
6.7%
Incremental decrease in
perpetual growth rate
4.8%
12.9%
0.8%
2.4%
NOTE 18. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at
Trade payables (1)
Accrued liabilities (2)
Other
Accounts payable and accrued liabilities
(1) Trade payables are normally settled on 30 to 60 day terms.
(2) Accrued liabilities mainly include employees-related liabilities.
NOTE 19. PROVISIONS
$
March 31, 2019 March 31, 2018
41,645
$
23,412
2,534
67,591
76,749
37,403
3,838
117,990
$
$
As at March 31, 2018
Arising during the year
Business acquisitions (note 5)
Interest accretion expense
Utilized
Reversed
Discount rate adjustment
Effect of changes in exchange rates
As at March 31, 2019
Less: current portion
Long-term portion
Onerous
contracts
243
$
Asset
retirement
obligations
5,770
$
Product
warranty
Other
(note 26)
$
7,456
$
9,321
$
355
14,088
—
(2,300)
(2)
—
54
12,438
5,644
6,794
$
$
$
$
—
—
174
—
—
152
—
6,096
—
6,096
$
$
1,052
6,925
—
(1,567)
(1,029)
—
(187)
12,650
9,113
3,537
$
$
1,869
5,859
—
(2,642)
(821)
—
(161)
13,425
13,063
362
$
$
Total
22,790
3,276
26,872
174
(6,509)
(1,852)
152
(294)
44,609
27,820
16,789
82 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
NOTE 20. LONG-TERM DEBT
As at
March 31, 2019 March 31, 2018
Senior Secured Syndicated Revolving Credit Facility
$
94,877
$
Governmental authorities loans
Unsecured Subordinated Term Loan Facility
Obligations under finance leases
Balance of sale related to a business acquisition (note 5)
Other (1)
Deferred financing costs, net
Less: current portion
Long-term debt
(1) Other relates to secured loans contracted by a subsidiary
Senior Secured Syndicated Revolving Credit Facility (“Revolving Facility“)
The relevant terms and drawings on the Credit Facility are as follows:
As at
Limit, in Canadian, US$, Euro or British Pound equivalent (1)
US$ Drawings
Amount
Rate
Effective rate
89,701
50,000
20,411
4,677
3,592
(2,952)
260,306
15,066
245,240
$
$
54,155
52,540
—
25,269
—
—
(923)
131,041
5,356
125,685
March 31, 2019 March 31, 2018
$
250,000
$
200,000
US$
71,000
US$
42,000
Libor + 2.0% Libor + 1.125%
4.5%
3.0%
(1) Includes an accordion feature to increase the Credit Facility up to $350 million during the term of the credit agreement, subject to lenders’ approval.
On September 24, 2018, the Corporation reached an agreement with its syndicate of banks to increase the Revolving Facility's limit from $200,000
to $250,000. Most of the other terms remained unchanged. Financing costs totaling $1,699 were deferred and are amortized over the term of
the related loans using the effective interest rate method. The Credit Facility is secured by essentially all assets of the Corporation and its
subsidiaries and matures on May 24, 2022.
Governmental authorities loans
Governmental authorities loans represent government assistance for the purchase of certain equipment or tooling, for the modernization or
additions to the Corporation’s facilities or for development costs capitalized or expensed for aerospace programs. They were granted as incentives
under Canadian federal and provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refund. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest rate.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in the consolidated statements of income as financial expense.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2019, the Corporation updated the estimated repayment
schedule of its government authorities loans, taking into account revised assumptions mainly related to sales forecasts. This resulted in a non-
cash gain of $1,036 ($1,834 in fiscal 2018), which was included in Net financial expenses (income) (see note 9).
The effective interest rates for these loans were in the range of 0.0% to 6.6% as at March 31, 2019 (2.5% to 7.2% as at March 31, 2018).
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 83
Unsecured Subordinated Term Loan Facility (“Term Loan”)
On September 24, 2018, the Corporation signed an unsecured subordinated term loan facility with Fonds de Solidarité FTQ for an amount of
up to $75,000. The facility consists of a $50,000 term loan related to the acquisition of CESA (see Note 5) and additional financing available
until September 30, 2020, of up to $25,000 subject to certain conditions. The initial $50,000 loan was drawn on September 25, 2018, bears
interest at 5.7% and is repayable at maturity on September 30, 2025. Starting on September 30, 2021, the Corporation will have the option to
make early repayments subject to certain fees. Financing costs totaling $835 were deferred and are amortized over the term of the related loans
using the effective interest rate method.
Obligations under finance leases (“Finance Leases”)
Obligations under finance leases bear fixed interest rates between 2.4% and 5.0% as at March 31, 2019 and March 31, 2018, maturing from
July 2019 to December 2023, with amortization periods of approximately seven years, secured by the related property, plant and equipment,
net of interest of $1,351 ($1,928 as at March 31, 2018).
Covenants
Long-term debt is subject to certain general and financial covenants related, among others, indebtedness, cash flows and equity of the Corporation
and/or certain subsidiaries. The Corporation complied with all covenants as at March 31, 2019.
Minimum repayments
Minimum repayments of long-term debt during the next five years are as follows:
Fiscal years
2020
2021
2022
2023
2024
Beyond 5 years
Sub-Total
Less: Interest
Debt balance (1)
Revolving
Facility
4,269
4,269
4,269
95,589
—
—
108,396
13,519
94,877
$
$
Governmental
authorities loans
6,780
7,820
9,345
11,014
10,924
64,783
110,666
20,965
89,701
$
$
Term Loan
2,850
2,850
2,850
2,850
2,850
54,975
69,225
19,225
50,000
$
$
$
$
Finance
Leases
6,007
5,746
5,439
3,350
1,220
—
21,762
1,351
20,411
$
$
Other (2)
3,306
3,203
694
590
208
1,622
9,623
1,354
8,269
$
$
Total
23,212
23,888
22,597
113,393
15,202
121,380
319,672
56,414
263,258
(1) Before net deferred financing costs.
(2) Includes the balance of sales related to a business acquisition.
The following table presents reconciliation between the opening and closing balances for the Long-term debt.
Long-term debt, at beginning of the fiscal year
Increase in long-term debt
Repayment of long-term debt
Debt acquired through business acquisitions (note 5)
Amortization of deferred financing costs (note 9)
Fees incurred to amend or renew the Credit Facility
Interest accretion and adjustments on governmental authorities loans (note 9)
Effects of fluctuations in exchange rates
March 31, 2019
March 31, 2018
$
131,041
$
134,139
117,883
(36,198)
43,758
505
(2,534)
1,325
4,526
3,821
(4,634)
—
238
(524)
466
(2,465)
131,041
Long-term debt, at end of the fiscal year
$
260,306
$
84 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
NOTE 21. OTHER LIABILITIES
As at
Net defined benefit obligations (note 25)
Customer advances
Deferred revenue
Progress billings
Other
Other Liabilities
NOTE 22. ISSUED CAPITAL
$
March 31, 2019 March 31, 2018
3,958
$
—
2,639
19
—
6,616
6,650
2,050
1,468
863
1,946
12,977
$
$
Authorized
Voting common shares, without par value
First preferred shares, issuable in series, without par value
Second preferred shares, issuable in series, without par value
No preferred shares are outstanding.
Variations in common shares issued and fully paid were as follows, for fiscal year:
Unlimited
Unlimited
Unlimited
Balance, beginning of year
Issued for cash on exercise of stock options
Issued for cash under the stock purchase and ownership incentive
plan
Balance, end of year
Stock-based compensation
Number
36,218,572
$
107,450
36,188
36,362,210
$
2019
Issued
capital
78,105
1,101
470
79,676
Number
36,122,050
$
48,750
47,772
2018
Issued
capital
77,217
298
590
36,218,572
$
78,105
A. Stock option plan
The Corporation grants stock options at a subscription price representing the average closing price of the Corporation’s common shares on the
Toronto Stock Exchange for the five trading days preceding the grant date. Options granted under the plan mainly vest over a period of four
years. The options are exercisable over a period not exceeding seven years after the grant date.
Variations in stock options outstanding and related compensation expense were as follows, for fiscal year:
Balance, beginning of year
Granted
Exercised
Cancelled / forfeited
Balance, end of year
Stock-based compensation expense
2019
Weighted-
average
exercise price
Number of
stock options
2018
Weighted-
average
exercise price
Number of
stock options
1,105,295
$
207,500
(107,450)
(38,250)
1,167,095
$
$
12.09
16.21
6.50
15.24
13.23
882
914,295
$
243,500
(48,750)
(3,750)
1,105,295
$
$
10.88
14.93
3.71
11.71
12.09
608
The weighted-average share price at the date of exercise of stock options in fiscal 2019 was $15.86 ($14.44 in 2018).
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 85
Details of stock options granted were as follows, for fiscal year:
Number of stock options granted
Weighted average fair value per stock option
Total fair value
Expected life (years)
Expected volatility
Expected forfeiture
Expected dividend distribution
Compounded risk-free interest rate
2019
2018
207,500
243,500
$
$
4.25
882
$
$
3.84
935
4.8 years
4.9 years
24%
4.2%
None
2.3%
25%
4.5%
None
1.6%
During fiscal 2019, following the approval by the shareholders of the Corporation at the last Annual General Meeting of shareholders, the
aggregate number of shares available for future issuance under the stock option plan was replenished due to the limited number of common
shares remaining under this plan. As at March 31, 2019, 2,808,257 common shares are reserved for issuance of stock options, of which
2,762,507 remained to be issued, compared to 1,514,481 as at March 31, 2018.
As at March 31, 2019, 1,167,095 stock options were issued and outstanding and can be detailed as follows:
Exercisable price
$10.71 to $11.71
$14.93 to $16.22
Outstanding options
Weighted-average
years to maturity
2.26
5.72
3.97
Number
640,595
526,500
1,167,095
Weighted-average
exercise price
$12.15
15.42
$13.23
Vested options
Number
602,845
166,000
768,845
Weighted-average
exercise price
$11.47
14.95
$12.33
B. Stock purchase and ownership incentive plan
Movements in common shares and related expenses related to the stock purchase and ownership incentive plan were as follows, for fiscal
year:
In number of common shares
Issued
Attributed to participating employees
Expense related to common shares attributed
2019
2018
36,188
24,622
$
227
$
47,772
18,800
260
As at March 31, 2019, 340,000 shares are reserved for issuance under the stock purchase and ownership incentive plan, of which 22,678
remained to be issued, compared to 58,866 as at March 31, 2018.
C. Deferred Share Unit (“DSU”) and Performance Share Unit (“PSU”) plans
Movements in outstanding DSUs and related expense were as follows, for fiscal year:
In number of DSUs
Balance, beginning of year
Issued
Settled
Cancelled/Forfeited
Closing balance of DSUs outstanding
DSU expense
Fair value of outstanding DSUs, end of year
86 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
2019
2018
136,170
36,008
(4,512)
(1,332)
166,334
$
$
640
2,534
$
$
135,815
32,588
(32,233)
—
136,170
910
1,962
Movements in outstanding PSUs and related expense were as follows, for fiscal year:
In number of PSUs
Balance, beginning of year
Issued
Settled
Cancelled/forfeited
Closing balance of PSUs outstanding
PSU expense
Fair value of vested outstanding PSUs, end of year
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
2019
2018
187,948
81,350
(38,392)
(18,456)
212,450
$
$
1,505
1,850
$
$
114,434
100,650
(23,334)
(3,802)
187,948
163
842
Balance as at March 31, 2018
Other comprehensive loss
Balance as at March 31, 2019
Balance as at March 31, 2017
Other comprehensive income
Balance as at March 31, 2018
NOTE 24. INCOME TAXES
Income tax expense is as follows, for fiscal year:
Consolidated statements of income
Current income tax expense
Deferred income tax expense (recovery)
Income tax expense reported in the consolidated statements of income
Consolidated statements of changes in shareholders’ equity
Expense (recovery) related to items charged or credited directly to retained earnings
Expense (recovery) related to items charged or credited directly to other comprehensive income
Income tax expense reported directly in shareholders’ equity
Exchange
differences
on translation
of foreign
operations
Hedge of net
investments
in foreign
operations
Cash flow
hedges
$
$
20,116
(850)
19,266
$
$
24
$
(5,923) $
(1,796)
(1,069)
(1,772) $
(6,992) $
Exchange
differences
on translation
of foreign
operations
$
$
14,256
5,860
20,116
$
$
Hedge of net
investments
in foreign
operations
Cash flow
hedges
(521) $
(7,437) $
545
1,514
Total
14,217
(3,715)
10,502
Total
6,298
7,919
24
$
(5,923) $
14,217
2019
6,254
(2,019)
4,235
$
$
(656) $
(557)
(1,213) $
$
$
$
$
2018
7,100
67
7,167
68
826
894
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 87
The computation of income tax expense is as follows, for fiscal year:
Income taxes at combined Federal and Provincial statutory tax rates of 26.6%
Income tax rate differential – foreign subsidiaries
Permanent differences
Impact of US Tax Reform (note 10)
Other items
Income tax expense
2019
8,124
(4,788)
1,018
—
(119)
4,235
$
$
2018
5,554
(4,251)
827
4,912
125
7,167
$
$
On December 22, 2017, the United States Government passed into law the Tax Cuts and Jobs Act (the "US Tax Reform"). The US Tax Reform
includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the federal
corporate income tax rate from 35% to 21% effective January 1, 2018. The reduction in the corporate tax rate required a revaluation of the
Corporation net deferred tax assets, resulting in a one-time tax expense of $4,912 during the fiscal year 2018.
Significant deferred income tax assets and liabilities arising from the effect of temporary differences are as follows:
As at
Deferred income tax assets
Non-deductible reserves
Inventories
Receivables
Derivative financial instruments
Governmental authorities loans
Deferred tax benefits from tax losses and deductible expenses carried forward
Total deferred income tax assets
Deferred income tax liabilities
Investment and other tax credits
Property, plant and equipment
Customer relationships and contracts
Governmental authorities loans
Derivative financial instruments
Total deferred income tax liabilities
Net deferred income tax assets
March 31, 2019 March 31, 2018
$
$
$
$
9,850
$
5,345
20
113
10
22,185
37,523
$
(729)
(16,903)
(12,795)
—
—
(30,427) $
7,096
$
4,126
3,872
10
—
—
14,012
22,020
(557)
(14,863)
(2,891)
(64)
(24)
(18,399)
3,621
The net deferred income tax assets are included under the following captions on the consolidated balance sheets:
As at
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax assets
March 31, 2019 March 31, 2018
$
$
14,575
(7,479)
7,096
$
$
7,388
(3,767)
3,621
As at March 31, 2019, net deferred income tax assets of $4,540 were recognized ($8,790 as at March 31, 2018) in jurisdictions that incurred
losses in current and prior fiscal years. Based upon the level of historical taxable income and projections for future taxable income, the Corporation’s
management believes it is probable that the Corporation will realize the full benefits of these deductible temporary differences and non-capital
losses carried forward.
As at March 31, 2019, operating losses carried forward or other temporary differences for which related deferred income tax assets have not
been recognized in the consolidated financial statements amounted to $3,329 (none as at March 31, 2018).
The Corporation had the following non-capital losses available for carry-forward:
88 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
As at
Canada
United States
Spain
March 31, 2019 March 31, 2018
$
$
19,520
$
64,219
18,874
102,613
$
19,943
53,506
—
73,449
As at March 31, 2019, deferred income tax assets of $12,526 and deferred income tax liabilities of $930 are expected to be recovered or settled
in less than one year.
Deferred income tax is not recognized on the unremitted earnings of subsidiaries where the Corporation is able to control the timing of the
remittance and it is probable that there will be no remittance in the foreseeable future. As at March 31, 2019, the temporary differences associated
with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $21,614 ($25,151 in 2018).
NOTE 25. PENSION AND OTHER RETIREMENT BENEFIT PLANS
Description of benefit plans
The Corporation has funded and unfunded defined benefit pension plans as well as defined contribution pension plans that provide pension
benefits to its employees. Retirement benefits provided by the defined benefit pension plans are based on either years of service and flat amount,
years of service and final average salary, or set out by individual agreements.
Benefits provided by the post-retirement benefit plans are set out by individual agreements, which mostly provide for life insurance coverage
and health care benefits. Since their amount is not significant, they are not included in the figures below.
Total cash payments
For fiscal year 2019, total cash payments for employee future benefits, consisting of cash contributed by the Corporation to its funded defined
benefit pension plans and cash payments directly to beneficiaries for its unfunded defined benefit pension plans amounted to $1,335 ($1,489
in 2018) while the cash contributed to its defined contribution plans amounted to $3,492 ($3,200 in 2018).
Defined benefit plans
The Corporation measures the fair value of plan assets for accounting purposes as at March 31 of each year while its defined benefit obligations
are valued as at December 31 of each year and projected to March 31 for all plans, except one plan for which the valuation is made as at March
31.
The defined benefit plans expose the Corporation to actuarial risks such as:
•
Life expectancy risk
The present value of defined benefit obligations is calculated in part by reference to the estimated life expectancy of plan
members. An increase in life expectancy increases the Corporation’s obligations.
•
Currency risk
As a significant portion of plan assets are invested in foreign equities, an increase in the value of the Canadian dollar in
comparison to the denomination of these foreign equities would result in an increase in the Corporation’s obligations.
•
Interest rate risk
A decrease in market rates of interest would decrease the discount rate used to calculate the present value of defined benefit
obligations, thus increasing it. This would be partially offset by the resulting increase in the value of the plans’ bond holdings.
•
Investment risk
Investment risk is the risk that the return on plan assets is lower than the corporate bond interest rate used to determine the
discount rate. Currently, the plans have an investment mix of 61% in equity funds, 31% in debt securities and 8% in other
funds. Due to the long-term nature of the plans’ defined benefit obligations, the Corporation considers it appropriate that a
reasonable portion of the plans’ assets is invested in equity securities and other funds in order to generate additional long-
term return on plan assets.
The reconciliation of the present value of the defined benefit obligations and the fair value of plan assets to the amounts recognized in the
consolidated balance sheets is as follows:
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 89
As at
Present value of defined benefit obligations of funded plans
Fair value of plan assets
Funded status of the plans – deficit
Present value of defined benefit obligations of unfunded plan
Amount recognized in other long-term liabilities
$
March 31, 2019 March 31, 2018
61,216
$
58,974
(2,242)
(1,716)
(3,958)
65,962
60,710
(5,252) $
(1,398)
(6,650) $
$
$
Defined benefit pension expense recognized in the consolidated statements of income is as follows, for fiscal year:
Current service cost
Interest on net defined benefit obligations (note 9)
Past service cost
Administrative cost
Defined benefit pension expense recognized in the consolidated statements of income
The total amount recognized in other comprehensive income is as follows, for fiscal year:
Remeasurements
Losses from changes in demographic assumptions
Losses from changes in financial assumptions
Experience gains
Return on plan assets, excluding interest income on plan assets
Other comprehensive income
The actual return on the fair value of plan assets is as follows, for fiscal year:
Actual return on the fair value of plan assets
The variation in present value of the defined benefit obligations were as follows, for fiscal year:
Defined benefit obligations, beginning of year
Current service cost
Interest expense
Contributions by plans’ participants
Losses from change in demographic assumptions
Losses from changes in financial assumptions
Experience gains
Benefits paid
Past service benefits
Defined benefit obligations, end of year
The fair value of plan assets is as follows:
$
$
2019
1,192
150
—
198
1,540
2019
(326) $
(2,855)
255
439
(2,487) $
2018
1,459
153
325
161
2,098
2018
(2)
(915)
1,257
(79)
261
2019
2,547
$
2018
2,038
2019
62,932 $
1,192
2,258
675
326
2,855
(255)
(2,623)
—
67,360
$
2018
61,106
1,459
2,270
731
2
915
(1,257)
(2,619)
325
62,932
$
$
$
$
$
$
$
90 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
As at
Fair value of plans’ assets, beginning of year
Interest income on plans’ assets
Return on plans’ assets, excluding interest income on plans’ assets
Contributions by the employer
Contributions by plans’ participants
Benefits paid
Administrative costs
Fair value of plans’ assets, end of year
The plans’ assets consist of:
As at
Equity securities
Debt securities
Other
Total
Significant assumptions
The significant weighted-average assumptions used at the reporting date are as follows, for fiscal year:
Defined benefit obligations as at March 31:
Discount rate
Rate of compensation increase
Average life expectancies based on a pension at 65 years of age:
Male, 45 years of age at reporting date
Female, 45 years of age at reporting date
Male, 65 years of age at reporting date
Female, 65 years of age at reporting date
$
March 31, 2019 March 31, 2018
57,496
$
2,117
(79)
1,489
731
(2,619)
(161)
58,974
58,974
2,108
439
1,335
675
(2,623)
(198)
60,710
$
$
March 31, 2019 March 31, 2018
63%
29%
8%
100%
61%
31%
8%
100%
2019
3.30%
3.50%
86
89
87
90
2018
3.60%
3.50%
86
89
87
90
The following table summarizes the effects of the changes in these actuarial assumptions on the pension expense and the defined benefit
obligations for the fiscal year ended and as at March 31, 2019:
Increase (Decrease)
Discount rate
Increase of 0.5%
Decrease of 0.5%
Rate of compensation
Increase of 0.5%
Decrease of 0.5%
Average life expectancies
Increase of 1 year
Decrease of 1 year
Pension
expense
%
Defined
benefit
obligations
%
(25.1)
24.9
0.1
(0.1)
7.6
(7.7)
(7.0)
7.8
—
—
2.7
(2.7)
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 91
Corporation’s pension benefits future cash flows
The cash contributions expected to be made to these plans in fiscal year 2020 amount to $1,653.
The duration of the defined benefit obligations at March 31, 2019 is 14.8 years (14.8 years in 2018). The expected maturity of undiscounted
pension benefits for the Unionized Pension Plan is presented as follows:
As at
Less than a year
Between 1-2 years
Between 2-5 years
Over 5 years
Total
$
March 31, 2019 March 31, 2018
1,689
$
1,747
5,753
100,542
109,731
1,783
1,834
6,125
99,741
109,483
$
$
Defined contribution pension plans
The defined contribution pension plans’ costs are as follows, for fiscal year:
Defined contribution pension plan costs
NOTE 26. COMMITMENTS
2019
3,492
$
2018
3,200
$
The Corporation has commitments under operating leases for buildings and facilities and outstanding purchases orders relating to machinery
and equipment which have not been delivered yet to the Corporation’s facilities. The minimum payments over the next five years are as follows:
2020
2021
2022
2023
2024 Thereafter
Total
2019
Total
2018
Operating leases - Buildings and facilities(1)
$ 2,517
2,424
2,261
2,014
1,623
5,984 $16,823 $ 11,737
Building, machinery and equipment acquisition commitments
$ 6,624
126
46
—
—
— $ 6,796 $ 2,952
(1) Excluding escalation clauses.
Guarantees
The Corporation executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business
disposition and the sale of assets.
These indemnification undertakings and guarantees may require the Corporation to compensate the counterparties for costs or losses incurred
as a result of various events including breaches of representations and warranties, intellectual property right infringement, loss of or damage to
property, environmental liabilities, changes in or in the interpretation of laws and regulations (including tax legislations), valuation differences or
as a result of litigations that may be suffered by the counterparties.
In the sale of all or a part of a business or assets, in addition to possible indemnification relating to failure to perform covenants and breach of
representations and warranties, the Corporation may have to indemnify against claims related to past conduct of the business. The nature of
these indemnification agreements prevents the Corporation from estimating the maximum potential liability that could be required under
guarantees, since these events have not occurred yet. As at March 31, 2019, the duration of these indemnification agreements could extend
up to fiscal year 2024. As at March 31, 2019, an amount of $5,012 ($5,012 in 2018) was provided for in the Corporation’s provisions in respect
to these items and is classified as short-term provision (note 19) given the undetermined date of settlement.
Letters of credit
As at March 31, 2019, the Corporation has outstanding letters of credit amounting to $26,153 ($3,302 in 2018).
NOTE 27. CONTINGENCIES
The Corporation is involved in litigations and claims in the normal course of business. Management is of the opinion that any resulting settlements
would not materially affect the financial position and operating results of the Corporation.
92 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
NOTE 28. NET CHANGE IN NON-CASH ITEMS
The net change in non-cash items is detailed as follows, for fiscal year:
Accounts receivable
Income tax receivable
Inventories
Other current and long-term assets
Accounts payable and accrued liabilities and other liabilities
Provisions
Customers advances and progress billings
Income tax payable
Effect of changes in exchange rates(1)
2019
(5,624) $
(385)
(1,746)
(2,245)
20,013
(5,377)
4,655
(2,404)
2,686
9,573
$
2018
(2,335)
(184)
9,539
(869)
719
(3,335)
7,097
1,916
950
13,498
$
$
(1) Reflects the total impact of changes in exchange rates during the period on non-cash items listed above for the Corporation’s foreign subsidiaries.
NOTE 29. GEOGRAPHIC INFORMATION
The geographic segmentation of the Corporation’s assets is as follows:
As at
Canada
Property, plant and equipment, net $ 97,210
Finite-life intangible assets, net
14,785
U.S.
U.K.
March 31, 2019
Total
Spain
Canada
U.S.
U.K.
Total
March 31, 2018
$ 72,872
$ 13,987
$ 43,885
$227,954
$ 95,492
$ 71,183
$ 12,828
$179,503
6,433
9,254
38,905
81,671
69,377
186,352
21,166
13,838
1,973
9,691
12,717
67,608
35,856
91,137
Goodwill
14,344
25,296
65,041
Geographic sales based on the customers’ location are detailed as follows, for fiscal year:
United States
United Kingdom
Spain
Rest of Europe
Canada
Other countries
2019
260,397
53,589
26,036
58,837
39,668
45,350
483,877
$
$
2018
240,377
43,713
—
39,009
39,244
24,221
386,564
$
$
NOTE 30. EXECUTIVE COMPENSATION
Key management includes directors (executive and non executive) and members of the Executive Committee. The executive compensation
expense to key management is as follows, for fiscal year:
Short-term employee benefits and other benefits
Pension and other post-retirement benefits
Share-based payments
Total compensation to key management personnel
2019
3,622
84
1,421
5,127
$
$
2018
3,458
156
1,655
5,269
$
$
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 93
NOTE 31. FINANCIAL INSTRUMENTS
Fair value hierarchy
Financial assets and financial liabilities measured at fair value in the consolidated balance sheets are grouped into three levels of a fair value
hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, and
Level 3: unobservable inputs for the asset or liability.
The classifications of financial instruments as well as their carrying amounts and fair values are summarized as follows:
As at
March 31, 2019
March 31, 2018
Fair value
hierarchy
Carrying
amount
Fair Value
Fair value
hierarchy
Carrying
amount
Fair Value
Financial assets
Cash and cash equivalents
Derivative financial instruments
Financial Liabilities
Level 1 $
35,128 $
Level 2
6,599
$
41,727 $
Derivative financial instruments
Level 2 $
3,451 $
Long-term debt, including current portion
Level 2
263,258
$
266,709 $
35,128
6,599
41,727
3,451
270,716
274,167
Level 1
Level 2
Level 2
Level 2
$
$
$
$
93,209
5,197
98,406
2,778
131,964
134,742
$
$
$
$
93,209
5,197
98,406
2,778
137,493
140,271
Derivative financial instruments - The fair value of derivative financial instruments recognized in the consolidated balance sheets has been
determined using the Corporation’s valuation models and compared to the fair value information provided by the financial institutions using
exchange rates or interest rates quoted in the active market and adjusted for the credit risk added by the financial institution. These models
project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative financial instruments
and factors observable in external markets data, such as period-end interest rate swap and foreign exchange rates.
Long-term debt – The fair value of long-term debt has been determined by calculating the present value of long-term debt using the rate that
would be negotiated under the economic conditions at year-end.
NOTE 32. FINANCIAL RISK MANAGEMENT
The Corporation is exposed primarily to market risk, credit and credit concentration risks, and liquidity risk as a result of holding financial
instruments.
Market Risk
Market risk is the risk of fluctuations in the fair value or future cash flows of financial instruments following changes in market prices, whether
those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments
traded in the market. The Corporation is primarily exposed to the following market risks:
Foreign exchange risk
The Corporation is exposed to risks resulting from foreign currency fluctuations arising either from carrying on business in Canada in foreign
currencies or through operations in the United States of America, Spain and the United Kingdom.
In an effort to mitigate the foreign currency fluctuation exposures, the Corporation makes use of derivative contracts to hedge this exposure,
essentially to the U.S. currency and arising from its Canadian, Spanish and United Kingdom operations.
The Corporation’s foreign exchange policy requires the hedging of 50% to 100% of the identified foreign currency exposure, mainly over the
next two fiscal years, of the forecasted cash inflows generated by sales in U.S. currency made by its Canadian, Spanish and United Kingdom
operations and related to sales contracts, net of the forecasted cash outflows in U.S. currency made by its Canadian, Spanish and United
Kingdom operations and related essentially to raw materials and certain other material costs.
94 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
As at March 31, 2019, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $228,374 denominated in
USD, EUR and GBP. This amount includes mainly contracts with nominal value of US$146,885 convertible into Canadian dollars at an average
rate of 1.3060. These contracts mature at various dates between April 2019 and March 2023, with the majority maturing this fiscal year and the
next.
As at March 31, 2019, a 1% strengthening of the Canadian dollar over foreign currencies, while all other variables would remain fixed, would
have impacted the consolidated net income and the other comprehensive income as follows:
Decrease in net income
Increase (decrease) in other comprehensive income
U.S. dollar
impact
(428)
508
British pound
impact
(110)
(1,678)
Euro
impact
(42)
(734)
The foreign exchange rate sensitivity analysis shown above is calculated by aggregation of the net foreign exchange rate exposure of the
Corporation’s financial instruments including the forward foreign exchange contracts as at the consolidated balance sheet date.
Interest-rate risk
The Corporation is exposed to interest rate fluctuations primarily due to its variable interest rate on its long-term debt’s Credit Facility (see note
20). In addition, interest rate fluctuations could also have an impact on the Corporation’s interest income which is derived from its cash and cash
equivalents.
The Corporation’s interest rate policy requires maintaining an appropriate mix of fixed and variable interest rates debt to mitigate the net impact
of fluctuating interest rates. Management as such may use derivatives to maintain a fixed debt ratio of between 40% and 70% of long-term debt,
excluding government loans.
Cross-currency interest rate swaps
The acquisition of CESA (see note 5) exposed the Corporation to new foreign currency and interest rate risks related to the investment in Euros.
A decrease in value of the Euro compared to the Canadian dollar would decrease the value of the foreign investment, and an increase in interest
rates underlying debt would increase related net financial expenses.
In order to mitigate these risks, as at March 31, 2019, the Corporation had entered into the following cross-currency interest rate swap agreements
in order to manage foreign exchange and interest rate risks:
Notional
US$ 29,370
C$ 50,000
US$ 17,523
US$ 17,100
Fixed EUR equivalent
€
€
€
€
25,000
34,110
15,000
15,000
Interest rate
1.86 %
3.40 %
Inception
October 2017
Maturity
May 2022
October 2017
September 2025
Euribor 1 month + 1.74%
September 2018
Euribor 1 month + 1.76%
November 2018
May 2022
March 2020
A 100 basis point variation in interest rates would have affected the Corporation’s financial results for fiscal 2019 as follows:
Impact on net income related to floating rate long-term debt
Impact on comprehensive income related to cross-currency interest-rate swap agreements
100 bps increase
(69)
209
100 bps decrease
69
(209)
The interest rate sensitivity analysis shown above is calculated on the floating-rate liability at the end of the fiscal year and assumes all other
variables remain fixed.
Other price risk
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs and PSUs (see note 22). In order to mitigate this
exposure, the Corporation has entered into an equity swap agreement with a financial institution.
Pursuant to this agreement, upon settlement, the Corporation receives payment for any share price appreciation while providing payment to
the financial institution for any share price depreciation. The net effect of the equity swap partly offsets movements in the Corporation’s share
price which impacts the expense of the DSUs and PSUs included in the Corporation’s selling and administrative expenses.
As at March 31, 2019, the equity swap agreement covered 245,000 common shares of the Corporation at a price of $12.68. This agreement is
a derivative instrument that is not part of a designated hedging relationship and matures in June 2020.
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 95
Credit and credit concentration risks
The credit and credit concentration risks represent counterparty risks where the parties with which the Corporation enters into agreements or
contracts could be unable to fulfill their commitments.
Credit risks are primarily related to the potential inability of customers to discharge their obligations with regards to the Corporation’s accounts
receivable and of financial institutions with regards to the Corporation’s cash and cash equivalents and derivative financial instruments.
Credit concentration risks are related to the fact that approximately 61% of the Corporation’s fiscal 2019 sales are made to only nine customers
(60% to six customers in 2018). More specifically, in fiscal 2019, the Corporation had one customer representing 22% of its consolidated sales
(two customers representing 26% and 11% in 2018).
Accounts receivable
The credit and credit concentration risks related to these financial instruments are limited due to the fact that the Corporation deals generally
with large corporations and Government agencies, with the exception of sales made to private small businesses which represent together
approximately 4.2% in fiscal 2019 (5.3% in 2018) of the Corporation’s consolidated sales.
As at March 31, 2019, the Corporation has historically not made any significant write-off of accounts receivable and the number of days in
accounts receivable was at acceptable levels in the industry in which the Corporation operates.
The credit quality of accounts receivable is monitored on a regular basis.
Changes in the allowance for doubtful accounts were as follows for the fiscal year ended March 31, 2019:
Balance, beginning of year
Arising during the year
Balance, end of year
The details of the Corporation’s trade receivables are the following:
As at
Not past due
Past due less than 90 days
Past due more than 90 days
Impaired
Allowance for doubtful accounts
Balance, end of year
2019
39
153
192
$
$
March 31, 2019 March 31, 2018
$
105,402
$
66,613
8,866
1,163
192
115,623
(192)
5,777
1,079
39
73,508
(39)
$
115,431
$
73,469
Estimated credit losses based on expected loss rates were insignificant as at March 31, 2019 and 2018.
Cash and cash equivalents and derivative financial instruments
The credit and credit concentration risks related to these financial instruments are limited due to the fact that the Corporation deals mainly with
high-grade financial institutions such as Canadian chartered banks and their U.S. subsidiaries or branches or with a Canadian branch of a U.S.
bank, based on the Corporation’s investment policy. On that basis, the Corporation does not anticipate any breach of agreements by counterparties.
As at March 31, 2019, the maximum exposure to credit and credit concentration risks for financial instruments represented the following (see
note 31):
Cash and cash equivalents
Accounts receivable
Derivative financial instruments
FVTPL
FVTOCI (1)
$
— $
—
3,891
— $
—
2,708
A.C.
35,128
115,431
—
(1) Represents the fair value of derivative financial instruments designated in a hedging relationship.
96 – HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements
Liquidity risk
The Corporation is exposed to the risk of being unable to honour its financial commitments by the deadlines set, under the terms of such
commitments and at a reasonable price. The Corporation manages its liquidity risk by forecasting cash flows from operations and anticipated
investing and financing activities. Senior management is also actively involved in the review and approval of long-term sales contracts and
planned capital expenditures.
As at March 31, 2019, the maturity analysis of financial liabilities represented the following:
Accounts payable and accrued liabilities
$
Customer advances
Long-term debt, including current portion (note 20)
Derivative financial instruments
< 1 year
117,990
$
14,502
23,212
2,134
1 to 3 years
4 to 5 years
> 5 years
— $
2,050
46,485
1,171
— $
—
— $
—
128,595
146
121,380
—
Total
117,990
16,552
319,672
3,451
NOTE 33. CAPITAL RISK MANAGEMENT
The general objectives of the Corporation’s management, in terms of capital management, reside in the preservation of the Corporation’s capacity
to continue operating, providing benefits to its stakeholders and in providing an adequate return on investment to its shareholders by selling its
products and services at a price commensurate with the level of operating risk assumed by the Corporation.
The Corporation thus determines the total amount of capital required consistent with risk levels. This capital structure is adjusted on a timely
basis depending on changes in the economic environment and risks of the underlying assets.
In order to maintain or adjust its capital structure, the Corporation can, for example:
•
•
•
•
Issue new common shares;
Repurchase common shares;
Sell certain assets to reduce indebtedness;
Return capital to shareholders.
The net debt-to-equity ratio, represented by net debt divided by shareholders’ equity, is the overriding factor in the Corporation’s capital
management and monitoring practices.
During fiscal year ended March 31, 2019, the Corporation pursued the same capital management strategy as last year, which consists in generally
maintaining a sufficient net debt-to-equity ratio to allow access to financing at a reasonable or acceptable cost.
The Corporation’s net debt-to-equity ratio was as follows:
As at
Current portion of long-term debt
Long-term debt
Deferred financing costs, net
Less: Cash and cash equivalents
Net debt
Shareholders’ equity
Net debt-to-equity ratio
The Corporation is not subject to any regulatory capital requirements.
March 31, 2019 March 31, 2018
5,356
$
15,066
$
245,240
2,952
35,128
228,130
404,098
0.56:1
$
125,685
923
93,209
38,755
379,034
0.10:1
$
HÉROUX-DEVTEK INC. – Fiscal 2019 Consolidated Financial Statements – 97
SHAREHOLDER INFORMATION
H ér o ux-De vt ek 2019 [ (cid:26) (cid:25) ]
ANNU AL ME E T I NG
OF S H AR E H OLDE R S
August 9, 2019 at 10:00 A.M.
Westin Montreal
Salon les Fortifications, 9th Floor
270 Saint-Antoine Street West
Montreal (Québec) Canada H2Y 0A3
R E GI S T R AR AND
T R ANS F E R AGE NT
Computershare Trust
1500 University Street, 7th Floor
Montreal (Québec) Canada H3A 3S8
514 982-7555 /1 800 564-6253
AUDI TOR S
Ernst & Young LLP
900 de Maisonneuve Boulevard West, Suite 2300
Montreal (Québec) H3A 0A8
514 875-6060
S H AR E LI S T I NG
Shares are traded on the Toronto Stock Exchange
Ticker Symbol: HRX
I NV E S TOR R E LAT I ONS
450 679-3330 / ir@herouxdevtek.com
Ste-Marie Strategy & Communications Inc.
514 465-6701 / danielle@ste-m.ca
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