TOWARD
THE NEXT EXPANSION PHASE
2018 ANNUAL REPORT
TOWARD
THE NEXT
EXPANSION
PHASE
TRANSFORMATION
In fiscal 2018, we announced the acquisition of Compañia Española
de Sistemas Aeronauticos, S.A. (“CESA”), the largest in our history, and
also of Beaver Aerospace & Defense, Inc (“Beaver”). The combination
of these two acquisitions will have far-reaching strategic benefits and will
propel us toward the next expansion phase. They will further enhance
our leadership and international reach in the market for actuation and
hydraulic systems, landing gear systems and related products.
PROPRIETARY PRODUCTS
Our programs involving proprietary products are on track and are
advancing as expected. Sales of proprietary programs continued to
increase as a proportion of total revenues, reaching nearly 35% of
business activity. This percentage is set to further increase as a result
of the upcoming acquisition of CESA and Beaver.
OPERATIONAL EFFICIENCY
We always strive to increase the efficiency of our operations. We have
had a solid track record of identifying and capturing cross-selling and
operational synergies. We expect more of the same with the upcoming
integration of the CESA and Beaver acquisitions as well as the
in-sourcing of the Boeing 777 surface treatment processes.
LEVERAGING INVESTMENTS AND CAPACITY
We are well positioned to leverage our past investments and sign
new contracts for aircraft programs. We have the specialized
teams, the resources and the available capacity to grow our
business. We want to capitalize on our fully-integrated product
and service offering, leading-edge equipment and international
network spanning two continents.
www.herouxdevtek.com
2018 Annual Report
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1
2018 Annual Report FINANCIAL HIGHLIGHTS
FISCAL YEARS ENDED MARCH 31
(in millions of dollars, except per share data and ratios)
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)
FINANCIAL POSITION
Cash and cash equivalents
Working capital
Total assets
Long-term debt (2)
Shareholders’ equity
PER SHARE DATA
2018
2017
2016
2015
2014
386.6
23.4
30.3
56.9
13.7
24.2
56.1
50.8
93.2
201.9
632.2
132.0
379.0
406.5
406.8
364.9
272.0
35.6
35.9
61.4
31.8
26.4
56.1
33.0
42.5
165.1
607.3
134.8
355.9
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)
(15.0)
19.3
150.5
609.4
147.2
331.1
35.1
109.7
575.5
114.2
293.5
15.6
22.5
35.8
9.2
15.3
26.0
11.0
47.3
160.8
514.0
150.5
240.1
Earnings per share – basic and diluted
Adjusted earnings per share (1)
Average number of shares outstanding (diluted, in 000’s)
0.38
0.67
36,332
0.88
0.73
0.74
0.77
0.09
0.55
0.29
0.48
36,284
36,119
35,016
31,662
FINANCIAL RATIOS
Adjusted EBITDA (1) margin
Working capital ratio
Net debt-to-equity (3)
14.7%
2.86
0.10
15.1%
15.7%
13.1%
13.2%
2.58
0.26
2.34
0.39
1.75
0.27
2.59
0.43
OPERATING INCOME
ADJUSTED EBITDA (1)
(in millions of dollars)
NET INCOME
ADJUSTED NET INCOME (1)
(in millions of dollars)
70
60
50
40
30
20
10
0
14
15
16
17
18
30
25
20
15
10
5
0
14
15
16
17
18
(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.
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Héroux-Devtek Inc.
CHAIRMAN’S MESSAGE
DEAR SHAREHOLDERS,
I HAVE BEEN PRIVILEGED TO HAVE A SEAT ON THE BOARD OF HÉROUX-DEVTEK FOR ALMOST TWO
DECADES. FROM THIS VANTAGE POINT, I HAVE WATCHED GILLES LABBÉ AND HIS TEAM BUILD AN
EXTRAORDINARY GLOBAL ENTERPRISE. IT HAS BEEN MY HONOUR TO PARTICIPATE IN THE STRATEGIC
DISCUSSIONS WHICH HAVE HELPED THIS REMARKABLE ORGANIZATION GROW AND PROSPER. IN
THIS SEVENTY-FIFTH YEAR SINCE THE FOUNDING OF HÉROUX-DEVTEK’S ORIGINAL PRECURSOR, OUR
COMPANY IS PROPERLY CELEBRATED AS ONE OF CANADA’S UNIQUE SUCCESS STORIES.
In my first year as Chairman, I would like to address the importance of corporate governance. In my view, a
properly functioning Board is the basis for good corporate governance. In fact, an important characteristic
behind Héroux-Devtek’s success is the consistent interaction between the Board and Management. Excluding
our President and CEO, it should be noted that all of our board members are independent. Furthermore, our
directors are predominantly from the industry sector with deep related experience. With their understanding of
the aerospace market and general business knowledge, they constitute a key source of counsel.
We regard the past year as a period of transition, considering the impact of reduced production rates announced
by some OEMs for certain aircraft programs. The events of the year clearly underlined Héroux-Devtek’s capacity
to quickly react and adapt itself to a changing environment.
Of particular note were the announcements of two strategic acquisitions, namely Compañia Española de
Sistemas Aeronauticos (“CESA”), a subsidiary of Airbus, in Spain and Beaver Aerospace & Defense Inc. in
Michigan. Both transactions are subject to upcoming regulatory approvals. These highly strategic acquisitions
will enable us to build a broader product offering and grow our customer base.
We occupy a privileged position in the aerospace industry. We have a solid balance sheet and we generate strong
cash flow. Given the multi-year backlog of orders from the world’s leading aircraft manufacturers, sustained
demand for aircraft and increased defense budgets around the world, Héroux-Devtek in my view represents
excellent value for long-term shareholders.
My immense pride in being closely associated with one of the world’s leading manufacturers of landing gear
systems is equally reflected by every member of the Héroux-Devtek family. I am pleased to be part of a highly
engaged Board that is dedicated to the Corporation’s long-term success.
It is the commitment of our people that accounts for our success, and I wish to take this opportunity to express
the Board’s gratitude to each and every one of Héroux-Devtek’s employees. I have no doubt that their skill and
dedication going forward will result in continued success – and still greater achievements.
Brian A. Robbins
Chairman of the Board
2018 Annual Report
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2018 Annual Report PRESIDENT’S MESSAGE
IN THE LAST FISCAL YEAR, HÉROUX-DEVTEK MADE IMPORTANT STRIDES TOWARD
ITS NEXT EXPANSION PHASE BY ANNOUNCING TWO STRATEGIC ACQUISITIONS AND
PURSUING THE OPTIMIZATION OF ITS WORLD-CLASS NETWORK. MORE THAN EVER,
WE ARE WELL POSITIONED TO WIDEN OUR REACH IN THE GLOBAL AEROSPACE
MARKET. GIVEN THESE EXPANDED CAPABILITIES, THE CORPORATION WILL CONTINUE
TO SEEK OPPORTUNITIES TO DEMONSTRATE ITS INDUSTRY-LEADING CAPABILITIES
AND TO CREATE LASTING VALUE FOR SHAREHOLDERS.
During the fiscal year ended March 31, 2018, Héroux-Devtek continued to execute its
business strategy aimed at building a sustainable future for the Corporation. We successfully
met all planned delivery schedules for the large-scale Boeing 777 and 777X contract.
We also made further progress carrying out important contracts awarded in prior years,
including several life-cycle mandates for which we hold intellectual property.
Financial results for fiscal 2018 were relatively in line with our expectations. We had strong
deliveries related to the Boeing 777 program, shipping 13 landing gears in the fourth quarter
alone, bringing the total to 42 deliveries this fiscal year. Operating activities generated a
record high free cash flow enabling Héroux-Devtek to improve an already healthy financial
position.
This financial strength has allowed us to lay the foundation of our next expansion phase.
By announcing two important acquisitions last year, which are pending regulatory approval
as of this writing, Héroux-Devtek is bolstering its status as one of the foremost landing
gear, actuation and hydraulic system designers and manufacturers in the global aerospace
industry.
These pending additions to our international network will further enhance the appeal
of our world-class, fully integrated capabilities that allow us to offer a complete range of
solutions, from initial design and development to the maintenance of existing fleets through
aftermarket products and services.
Gilles Labbé, FCPA, FCA
President and
Chief Executive Officer
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Héroux-Devtek Inc. SOLID FREE CASH FLOW AND STRONG FINANCIAL POSITION
Héroux-Devtek concluded fiscal 2018 with sales of $386.6 million, slightly less than the
year earlier. This decrease stems from the scheduled ending of a Tier-2 contract in the
commercial aerospace market, partially offset by the ramp-up of complete landing gear
system deliveries to Boeing for the 777 program. Sales of proprietary programs continued to
increase as a proportion of total revenues, reaching nearly 35% of business activity.
Operating income was $23.4 million, while adjusted EBITDA* amounted to $56.9 million,
representing an adjusted EBITDA margin* of 14.7%, relatively stable compared to the
previous year. Net income reached $13.7 million, while adjusted net income* totalled
$24.2 million, or $0.67 per share.
HÉROUX-DEVTEK ANNOUNCED
TWO SIGNIFICANT ACQUISITIONS
Operating activities produced a cash flow of $56.1 million, which yielded strong free cash
THAT WILL FURTHER ENHANCE ITS
flow* of $50.8 million and enabled Héroux-Devtek to improve an already healthy financial
LEADERSHIP AND INTERNATIONAL
position at the end of the fiscal year. As we await the closing of our acquisitions, cash and
cash equivalents stood at $93.2 million and we had available borrowing capacity of almost
$146 million on our authorized Credit Facility of $200 million.
REACH IN THE MARKET FOR
LANDING GEAR SYSTEMS AND
RELATED PRODUCTS.
As at March 31, 2018, our firm order backlog, which includes business for which we have
received purchase orders, amounted to $466 million and remains well diversified.
HIGHLY STRATEGIC ACQUISITIONS THAT EXPAND OUR GLOBAL REACH
Héroux-Devtek announced two significant acquisitions that will further enhance its leader-
ship and international reach in the market for landing gear systems and related products.
First, we reached an agreement to acquire the Spanish company Compañia Española
de Sistemas Aeronauticos, S.A. (“CESA”), a subsidiary of Airbus SE. CESA is a leading
European provider of fluid mechanical and electromechanical systems for the aerospace
industry. Its main product lines include actuation and hydraulic systems, and landing gear
systems. CESA provides an integrated product and service offering that includes design and
development, engineering, certification, component manufacturing and assembly, as well
as fleet support for a wide range of customers and aircraft programs. Annual sales amount
to approximately 94 million Euros (approximately Cdn$149 million).
* 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.
2018 Annual Report
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2018 Annual Report
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This acquisition, the largest in Héroux-Devtek’s history, has far-reaching strategic benefits:
• It greatly increases our presence in Europe, including a direct relationship with Airbus,
which could offer more business opportunities. Airbus accounts for approximately
50% of CESA’s sales.
• CESA provides an expansion into complementary actuation and hydraulic systems
m
activities.
• It further diversifies Héroux-Devtek’s customer base, both geographically and on
several key aircraft programs.
• It brings an important portfolio of intellectual property rights and CESA’s sole-source
supply business.
• We expect to generate synergies from cross-selling opportunities by leveraging
our multi-continent customer base and from operating efficiencies in procurement
and technology development activities. The acquisition also strengthens our exposure
to aftermarket sales.
The second acquisition, Michigan-based Beaver Aerospace & Defense Inc. (“Beaver”), is a
vertically integrated manufacturer with a growing portfolio of company-designed products.
It designs and manufactures custom ball screws from a variety of materials based on
customer and application requirements. Beaver also designs, manufactures, assembles
and tests electromechanical actuators. Annual sales were approximately US$30 million
(approximately Cdn$38 million) last year.
This acquisition will broaden our existing product offering, while further expanding our
footprint in North America. It is largely complementary with Héroux-Devtek’s and CESA’s
businesses. As with CESA, we are looking forward to leveraging Beaver’s relationships with
industry-leading OEMs, particularly in the U.S. defence sector, while benefiting from cross-
selling opportunities and operating efficiencies.
FAVOURABLE MARKET TRENDS
According to industry forecasts, passenger air traffic is expected to grow by approximately
6% in calendar 2018. This projected increase, slightly above historical average, should fuel
additional momentum in the commercial aerospace industry.
In calendar 2017, large commercial aircraft manufacturers posted another year of record
new aircraft deliveries, while continuing to adjust production rates for certain models to
reflect the introduction of more fuel-efficient variants over the next few years. This includes
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Héroux-Devtek Inc.
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HÉROUX-DEVTEK HAS LAID
THE FOUNDATION OF ITS
NEXT EXPANSION PHASE. THE
ACQUISITIONS WILL ALLOW
US TO LEVERAGE OUR MULTI-
CONTINENT CUSTOMER BASE,
WHILE FURTHER OPTIMIZING
THE EFFICIENCY AND FLEXIBILITY
OF OUR WIDE MANUFACTURING
FOOTPRINT.
the Boeing 777 program given the forthcoming transition to the 777X variant. The overall
volume of new orders has risen, allowing manufacturers to maintain healthy backlogs.
In the business jet sector, aircraft shipments increased slightly in calendar 2017. Héroux-
Devtek remains well positioned over the mid-term in this market given the projected ramp-
up of certain models for which it has designed the landing gear.
In the defence aerospace market, the U.S. administration is proposing higher funding for
the U.S. government’s 2019 fiscal year and potentially beyond, which could be positive for
certain programs. Additionally, commitments by Canada and several European nations to
increase defence funding bode well for Héroux-Devtek due to its presence on both sides
of the Atlantic.
OUTLOOK
Héroux-Devtek has laid the foundation of its next expansion phase. The acquisitions
will allow us to leverage our multi-continent customer base, while further optimizing
the efficiency and flexibility of our wide manufacturing footprint. Moreover, our ability to
generate free cash flow will enable us to confidently invest in value-creation opportunities
to the benefit of shareholders.
For the fiscal year ending March 31, 2019, excluding the potential contribution from pending
acquisitions, we expect sales to remain relatively stable, as the planned ramp-down of a
contract with the U.S. Air Force will be offset by higher volume from other customers in the
defence market and increased deliveries for the Boeing 777 and 777X contract.
On behalf of Senior Management, I sincerely thank all our employees for their continued
dedication and professionalism. As a world-class OEM supplier, we owe nothing less than
perfection to our valued customers. Our teams allow us to consistently deliver this expertise.
Thank you as well to our business partners and suppliers whose contribution to our success
is key. I express deep gratitude to our Board of Directors for their guidance and to you, our
shareholders, for your continued support.
Gilles Labbé, FCPA, FCA
President and Chief Executive Officer
Beaver F-18 progra m
2018 Annual Report
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2018 Annual Report
THE NEXT
EXPANSION PHASE
HÉROUX-DEVTEK ANNOUNCED TWO HIGHLY STRATEGIC ACQUISITIONS THAT WILL
FURTHER ENHANCE ITS LEADERSHIP AND INTERNATIONAL REACH IN THE MARKET
FOR LANDING GEAR SYSTEMS AND RELATED PRODUCTS.
BEAVER AT A GLANCE
Founded in 1952, Beaver operates three facilities totaling 82,200 sq.ft. in Livonia, Michigan
Strong long-standing relationships with industry leading OEMs and their suppliers
Vertically integrated with a growing portfolio of company-designed products
The closing of the Beaver acquisition is expected to occur during the first quarter
of fiscal 2019(1)
~$38M(2)
ANNUAL SALES
~65%
DEFENCE
~35%
COMMERCIAL
8
(1) Subject to customary closing adjustments and certain regulatory approvals.
(2) The sales and segmentation reflect information provided when the Beaver acquisition was announced on
February 27, 2018.
Héroux-Devtek Inc.
OUR GLOBAL REACH
CANADA
UNITED STATES
UNITED KINGDOM
1. Longueuil
2. St-Hubert
3. Laval
7. Strongsville
12. Bolton
8. Livonia
13. Runcorn
9. Springfield
14. Nottingham
4. Toronto
10. Wichita
5. Kitchener
11. Everett
SPAIN
6. Cambridge
15. Madrid
16. Seville
12
13 14
15
16
11
10
3
2
5
4
1
9
8
6
7
CESA AT A GLANCE
Pro Forma Sales
including CESA(5)
Commercial
47%
Defence
53%
Aftermarket
36%
OEM
64%
Proprietary Products
& Life of Program
Contracts
42%
Built to print
58%
(5) The sales and segmentation reflect
information provided when the CESA
acquisition was announced on
October 2, 2017. The pro forma
sales do not include Beaver.
2018 Annual Report
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9
Created in 1989, CESA operates a state-of-the-art industrial complex in Madrid of
366,000 sq.ft. and equipment with minimal investment requirements
Designs, manufactures, assembles and tests high value components for both
commercial and defence segments
Following a longer than anticipated regulatory process(3), the CESA acquisition is now
expected to close during the second quarter of fiscal 2019
~$149M(4)
ANNUAL SALES
~67%
DEFENCE
~33%
COMMERCIAL
(3) The transaction is subject to certain approvals, including by the Spanish Council of Ministers.
(4) The sales and segmentation reflect information provided when the CESA acquisition was announced on October 2, 2017.
The exchange rates used are as of March 31, 2018.
2018 Annual Report
OPERATING REVIEW
IN FISCAL 2018, ALTHOUGH WE FACED A FEW SHORT-TERM HEADWINDS, SEVERAL IMPORTANT
MILESTONES WERE ATTAINED. THESE INCLUDED PROGRESS ON THE BOEING 777 AND 777X
CONTRACTS, THE CESA AND BEAVER ACQUISITION AGREEMENTS, AND THE EVOLUTION OF CURRENT
DESIGN AND DEVELOPMENT PROGRAMS. I WILL REVIEW A FEW OF THE YEAR’S KEY HIGHLIGHTS,
WHICH POSITION US WELL FOR THE FUTURE, AND WHICH CLEARLY REFLECT HÉROUX-DEVTEK’S
LEADING ROLE IN THE GLOBAL AEROSPACE MARKET.
FINAL SURFACE TREATMENT PROCESS EXPECTED TO BE APPROVED IN Q1 OF FISCAL 2019
FOR 777 AND 777X CONTRACT
In fall 2017, we received customer certification in regards to an additional surface treatment process at our
Strongsville, Ohio facility. We anticipate obtaining Boeing’s approval for the final main surface treatment
process in the first quarter of fiscal 2019. This will be a significant accomplishment for Héroux-Devtek.
Martin Brassard
Executive Vice-President
and Chief
Operating Officer
In-sourcing of the related processing from our third-party suppliers will start gradually in the second quarter of
fiscal 2019 and should be completed by the end of fiscal 2019. As a result, we anticipate the effect of margin
enhancements to be fully realized in fiscal 2020.
We will effectively control our own destiny once the surface treatment process is entirely internalized, with
a greater ability to control costs, quality and delivery requirements. This in-house expertise will allow us to
comprehensively leverage the investments we have made in Héroux-Devtek’s finishing and assembly facility
in Strongsville, Ohio. As always, the support from our suppliers has been critical and very much appreciated.
TRANSITION TO THE BOEING 777X PROGRAM PROGRESSING
In addition to working towards obtaining the final surface treatment approval for the Boeing 777 program, our
team has also been manufacturing a new landing gear configuration for the 777X variant while maintaining
the current production schedule for the 777. In fact, in fiscal 2018 we delivered 42 shipsets of the 777
landing gear and expect to deliver the first 777X full shipset in the first quarter of fiscal 2019, in line with the
Boeing 777X
10
Héroux-Devtek Inc. customer’s schedule. This delivery will represent another significant milestone in our involvement with the
777 and 777X programs. Our company-wide concerted effort has generated tremendous pride among all
members of our team.
TOWARD THE NEXT EXPANSION PHASE
We are excited about the upcoming closing of the CESA and Beaver acquisitions and to start the integration
process. We have successfully completed several acquisitions in the past and have a solid track record
of identifying and capturing cross-selling and operational synergies. For example, our investments in our
Runcorn UK facility completed in 2017 led to improved customer service and operating efficiencies which
surpassed our expectations. Our customers have indicated their appreciation of our efforts and of our state-
of-the-art facility. This showcases our ability to bring the operations of our acquisitions in line with Heroux-
Devtek’s world-class standards. We are proud of our engaged and dynamic employees who worked hard to
make this happen.
The successful integration of the
Runcorn facilities has greatly
improved its efficiency.
11
2018 Annual Report F-35
Gripen
KF-X
POSITIONED FOR GROWTH
Many programs involving Héroux-Devtek’s proprietary products are on track and are advancing as expected,
including the CH-53K, F-35, Gripen and KF-X. Furthermore, we recently signed an amended contract with
Dassault Aviation for the design and manufacture of the Falcon 6X landing gear, which demonstrates the
confidence that our customers have in our capabilities. These programs are all very promising and should
generate strong revenues in years to come.
In March 2017, the U.S. Air Force decided not to renew our services. However, in May 2018, we were able
to recapture a portion of the previous contract with a 4-year agreement with AAR Corporation estimated at
over $65 million. This agreement also reconfirms Héroux-Devtek’s status as a world leader in the R&O market
for defence aircraft landing gear and highlights the diversity of our activities in the global defence aerospace
market.
In addition, we have been persistently focused on winning new business, as we seek to capitalize on our
fully-integrated product and service offering, leading-edge equipment and international network spanning two
continents. We have the specialized teams, the resources and the available capacity to grow our business.
Combined with Héroux-Devtek’s excellent reputation and a proven track record in the global aerospace
market, we are well positioned to leverage our past investments and sign new contracts for several aircraft
programs. We are working diligently towards executing our next expansion phase.
A word of thanks to our teams at our various facilities who have helped underline our expertise and further
grow our global reputation. We are very proud of you all.
Martin Brassard
Executive Vice-President and
Chief Operating Officer
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Héroux-Devtek Inc. MANAGEMENT’S DISCUSSION
AND ANALYSIS
FOR THE FISCAL YEAR ENDED
MARCH 31, 2018
TABLE OF CONTENTS
OVERVIEW ................................................................................................................................................................................................
Forward-looking Statements ....................................................................................................................................................................
Highlights of the Year ...............................................................................................................................................................................
Overview of the Business ........................................................................................................................................................................
Agreements to Acquire CESA and Beaver ...............................................................................................................................................
Economic Outlook ....................................................................................................................................................................................
Key Performance Indicators .....................................................................................................................................................................
Guidance .................................................................................................................................................................................................
Risk Management ....................................................................................................................................................................................
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 ...................................................................................................................................................................
Derivative Financial Instruments ..............................................................................................................................................................
Critical Accounting Estimates ...................................................................................................................................................................
Internal Controls and Procedures ............................................................................................................................................................
Future Changes in Accounting Policies ....................................................................................................................................................
Selected Financial Information .................................................................................................................................................................
Additional Information and Continuous Disclosure ...................................................................................................................................
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18
19
20
21
22
27
28
32
34
34
35
35
38
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14 – HÉROUX-DEVTEK INC. – Fiscal 2018 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, 2017 and March 31,
2018. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2018 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, 2018, 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, 2018 and 2017 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 2018 MD&A – 15
HIGHLIGHTS OF THE YEAR
Fiscal year
Sales
Operating income
Adjusted operating income*
Adjusted EBITDA*
Net income
Adjusted net income*
Cash flows related to operating activities
Free cash flow*
In dollars per share
EPS - basic and diluted
Adjusted EPS*
In millions of dollars
Funded backlog**
$
2018
386,564
23,378
30,325
56,904
13,674
24,213
56,122
50,811
$
0.38
0.67
466
$
2017
406,536
35,552
35,880
61,448
31,768
26,353
56,148
32,979
0.88
0.73
405
$
$
$
* 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.
** Represents firm orders as at March 31 of the fiscal year.
Key Events
The Corporation achieved sales of $386.6 million, operating income of $23.4 million and Adjusted EBITDA of $56.9 million in fiscal 2018
compared to $406.5 million, $35.6 million and $61.4 million in fiscal 2017. See Operating Results for further details.
Backlog increased to $466.0 million, compared to $405.0 million as at March 31, 2017.
Héroux-Devtek generated cash flows related to operating activities of $56.1 million and record free cash flow of $50.8 million during fiscal
2018, compared to $56.1 million and $33.0 million in fiscal 2017.
During the fiscal year, the Corporation announced two strategic acquisition agreements:
*
*
In October 2017, Héroux-Devtek signed an agreement to acquire Compañia Española de Sistemas Aeronauticos, S.A., a leading
European manufacturer of actuation, hydraulic and landing gear systems; and,
In February 2018, the Corporation signed an agreement to acquire Beaver Aerospace and Defense, U.S. manufacturer of ball
screws and actuation systems, and its wholly-owned subsidiary PowerTHRU Inc.
Both acquisitions are currently undergoing regulatory approvals. Refer to Agreements to Acquire CESA and Beaver for further details.
In March 2018, following the non-renewal of services provided to the US Air Force (“USAF”) announced on March 27, 2017, the Corporation
announced workforce adjustments of about 60 employees at its Longueuil facility. This initiative, which will be completed throughout the
current calendar year, resulted in a non-recurring charge of $5.0 million which was accounted for during the fourth quarter.
On May 16th, subsequent to the end of the fiscal year, Héroux-Devtek announced the signing of a contract with AAR Corporation to perform
the remanufacturing of landing gear assemblies of the KC-135 aircraft, the manufacturing of spare parts for the C-130 and KC-135 aircraft
and the manufacturing of other landing gear components, all in support of a contract AAR was recently awarded by USAF. The contract’s
total value could exceed $65.0 million.
16 – HÉROUX-DEVTEK INC. – Fiscal 2018 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 of
landing gear and actuation systems and components for the aerospace market. 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 and St-Hubert); Kitchener, Cambridge and Toronto, Ontario; Springfield and Cleveland, Ohio; Wichita, Kansas; Everett, Washington; as
well as Bolton, Runcorn and Nottingham in the United Kingdom. All facilities are involved in the design and fabrication of landing gear systems
and components with the exception of the Toronto facility, which manufactures electronic enclosures, heat exchangers and cabinets for airborne
radar, electro-optic systems and aircraft controls, and the Bolton facility, which manufactures fluid filters for aircraft engines.
Héroux-Devtek sells to Original Equipment Manufacturers (“OEMs”) such as Boeing, Lockheed Martin, Leonardo Helicopters and BAE Systems;
to Tier 1 suppliers such as Safran Landing Systems; and to end users in the aftermarket where its largest customer is the US Air Force. In fiscal
2018, sales to these six customers represented approximately 60% of total consolidated sales. More specifically, the Corporation has two
customers representing 26% and 11% of its consolidated sales. In March 2017, USAF selected a competing bidder for a comprehensive
Performance Based Logistics contract related to repair and overhaul of landing gears. As a result, Héroux-Devtek anticipates that its related
sales will gradually decrease over the course of Fiscal 2019, though this will be partially offset by the contract signed with AAR Corporation in
May 2018, whose scope covers a portion of the volume Héroux-Devtek had with USAF.
History
The Corporation was founded in 1942 as Héroux Machine Parts Limited, and later changed its name to Héroux Inc. The Corporation became
public in 1986. In 2000, it acquired Devtek Corporation and was renamed Héroux-Devtek Inc.
On April 28, 2010, the Corporation concluded the acquisition of U.S. based Eagle Tool & Machine Co. and its subsidiary, All Tool Inc., two privately-
held Ohio-based manufacturers located in Springfield and Cleveland, which were involved in landing gear products mainly for the defence
aerospace industry.
On February 3, 2014, the Corporation acquired U.K.-based APPH Limited and U.S.-based APPH Wichita, Inc. (collectively “UK and Wichita").
The UK and Wichita operations are integrated providers of landing gear and hydraulic systems and assemblies for OEMs and aftermarket
applications. Their main operations are based in Runcorn, Nottingham and Bolton, United Kingdom and in Wichita, Kansas.
* BTP: Build to Print
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 17
AGREEMENTS TO ACQUIRE CESA AND BEAVER
Agreement to Acquire CESA
On October 2, 2017, the Corporation announced an agreement to acquire Compañia Española de Sistemas Aeronauticos S.A. (“CESA”), a
subsidiary of Airbus SE (the “Transaction”), for €140 million ($222 million). Headquartered in Madrid, Spain, CESA is a leading European provider
of fluid mechanical and electromechanical systems for the aerospace industry with annual sales of approximately €94 million ($149 million). Its
main product lines include landing gear, actuation and hydraulic systems. This strategic and accretive acquisition will significantly enhance the
Corporation’s reach in Europe and will provide access to a direct, long term business relationship with Airbus.
CESA provides an integrated product and service offering comprised of design and development engineering, certification, manufacturing,
assembly and fleet support to a broad range of customers and aircraft programs. It has cultivated long-term relationships with customers across
several key platforms. It operates a 366,000 square foot state-of-the-art industrial complex in Madrid, as well as another facility in Seville. CESA
employs a skilled workforce of approximately 340 employees.
The Transaction will be financed through:
A $50.0 million, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
The assumption of debt amounting to approximately $46.0 million;
The Corporation’s existing credit facility, whose limit will be increased to a fully committed amount of $250.0 million; and,
The Corporation’s available cash balance.
Closing of the Transaction is expected during Héroux-Devtek’s second quarter of fiscal 2019 and is subject to certain approvals, including
authorization by the Spanish Council of Ministers. The Transaction exposes the Corporation to new foreign exchange and interest rate risks.
Please refer to Derivative Financial Instruments under Additional Information for further information about these risks and the derivative financial
instruments the Corporation has acquired to mitigate them.
Agreement to Acquire Beaver
On February 27, 2018, the Corporation announced an agreement to acquire the shares of Beaver Aerospace & Defense Inc. and its wholly owned
subsidiary PowerTHRU Inc. (“Beaver”), from Phillips Service Industries Inc., for a purchase price of approximately US$23.5 million ($30 million).
Founded in 1952, Beaver is a vertically integrated manufacturer with annual sales of approximately US$30 million ($38 million) and a growing
portfolio of company-designed products. It designs and manufactures custom ball screws from a variety of materials based on customer and
application requirements as well as designs, manufactures, assembles and tests electromechanical actuators. Beaver operates three
facilities totaling 82,200 square feet in Livonia, Michigan and employs approximately 100 people.
The transaction will be financed through the Corporation’s existing revolving credit facility, and is expected to close during the Corporation’s
first quarter of fiscal 2019, subject to customary closing adjustments and certain regulatory approvals.
Acquisition Financing
Héroux-Devtek’s financial situation on March 31, 2018 was very
healthy, with available short-term capital resources totaling
$239.0 million, comprised of $93.2 million of cash and cash
equivalents and $145.8 million of available capacity in its Credit
Facility, while long term debt totaled $132.0 million.
The following graph presents the Corporation’s pro forma net debt as
at March 31, 2018, prepared utilizing the following assumptions:
•
•
•
Acquisitions close on March 31, 2018, under the pricing and
financing terms described above;
All outstanding cash is used to finance the transactions;
Credit facility size is increased to $250 million as per above;
This pro forma financial information is provided for illustrative
purposes in order to assist in projecting the Corporation’s financial
situation after acquisitions, and is not appropriate for other purposes.
Please refer to Forward-Looking Statements for further considerations
regarding such projections.
18 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
ECONOMIC OUTLOOK(1)
In the commercial aerospace market, the International Air Transport Association’s (“IATA”) most recent forecast calls for demand to remain
healthy in calendar 2018 in both the passenger and cargo volume. Passenger traffic expressed in revenue passenger kilometers (“RPK”) rose
7.2% on a year-over-year basis in the first quarter of calendar 2018 and is expected to grow by 6.0% for the full calendar year, a figure above
the average annual growth of 5.6% recorded in the previous 20-year period. This performance will be driven by solid GDP growth, which is
expected to reach 3.9% according to the International Monetary Fund. Meanwhile, air cargo volume measured in freight ton kilometers (“FTK”)
increased 5.4% in the first quarter of calendar 2018 and is expected to rise by 4.5% for the entire calendar year, which is broadly in line with its
five-year average(2).
In the large commercial aircraft sector, Boeing and Airbus are proceeding with production rate adjustments ahead of introducing certain more
fuel efficient aircraft variants on several leading programs through calendar 2020. Both manufacturers recorded higher year-over-year new order
intake in the first quarter of calendar 2018 and their order backlogs remain strong. New order intake remains more robust in the single-aisle
market, but relatively less important for twin-aisle aircraft, a category that includes the Boeing 777 and 777X programs.(3)
In the business jet market, aircraft shipments increased slightly in calendar 2017 and 1.5% in the first quarter of calendar 2018, according to
data published by the General Aviation Manufacturers Association (“GAMA”). Looking ahead, while the number of new jets entering service is
expected to increase at a modest pace, the trend towards larger, long-range business aircraft is expected to continue.(4)
In the defence aerospace market, the new U.S. administration has indicated its intention to increase funding for the Department of Defense
(DOD) over the next several years. Supporting the above, the initial fiscal 2019 President’s Budget calls for a 12.1% funding increase over
annualized continuing resolution funding for fiscal 2018 provided in the Bipartisan Budget Act of 2018. In Canada, the new defence policy calls
for a rise in defence spending, from $18.9 billion in the 2017 fiscal year to $32.7 billion in the 2027 fiscal year. Europe is also committing more
funds to defence, as evidenced by a 4.1% overall spending increase by members of NATO for 2017 (expressed in US dollars, assuming constant
prices and exchange rates) in an effort to reach a target of defence spending set at 2% of GDP(5).
The Corporation’s UK operations provide a more geographically diversified defence portfolio, which reduces its relative exposure to the U.S.
market. The balance between new component manufacturing and aftermarket products and services in the Corporation’s defence portfolio and
its leading program content also promote stability.
(1) Refer to Forward-Looking Statements in Overview for further information regarding forward-looking statements and related risks.
(2) Source: Economic Performance of the Airline Industry, IATA, December 2017; World Economic Outlook, International Monetary Fund, April 2018
(3) Sources: Airbus press releases January 15, 2018; October 18, 2017; July 12, 2016; February 24, 2016; Boeing press releases April 25, 2018; January 9,
2018; January 21, 2016.
(4) Source: GAMA press releases May 10, 2018; February 21, 2018; Business Jet Aviation Forecast, Honeywell, October 2017; Business Aviation Market
Forecast, Jetcraft, October 2017.
(5) Sources: DOD press release February 12, 2018; NATO Secretary General’s 2017 Annual Report, March 15, 2018; International Institute for Strategic
Studies press release February 15, 2018.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 19
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.
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.
20 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
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.
During the fiscal year, guidance for additions to property, plant and equipment (“PP&E”) for fiscal 2018 issued with the fiscal 2017 third quarter
results, which previously forecasted approximately $20 million of additions, was revised to $15 million due to lower expected investments related
to a customer contract.
As such, revised guidance for fiscal 2018 was as follows:
Metric
Fiscal 2018 sales growth
Long-term sales growth
Fiscal 2018 additions to PP&E
Fiscal 2018 adjusted EBITDA* margin
Initial Fiscal 2018 Guidance
Revised Fiscal 2018 Guidance
Low single-digit decrease
Low single-digit decrease
Sales of $480-$520 million for FY2021
Sales of $480-520 million for FY2021
Approximately $20 million
Approximately $15 million
None provided
Stable as compared to fiscal 2017
FISCAL 2018 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 2018 sales were slightly below guidance, decreasing in the mid-single digits at 4.9%, versus guidance of a low single-digit decrease,
due mainly to lower than expected aftermarket requirements and the timing of certain deliveries in the defence sector.
Adjusted EBITDA margin was largely in line with guidance, with a variance of 40 basis points.
Additions to property, plant and equipment totaled $10.1 million, compared to guidance of $15 million due mainly to the timing of certain
investment initiatives.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 21
FISCAL 2019 GUIDANCE
Metric
Fiscal 2019 sales growth
Fiscal 2019 additions to PP&E
Long-term sales growth
Fiscal 2019 Guidance
Stable as compared to Fiscal 2018
Approximately $15 million
To be updated after closing of acquisitions
This guidance excludes the contributions of CESA and Beaver as regulatory approvals of the two transactions are still pending.
Sales are expected to be stable in Fiscal 2019 due to the ramp-down of the USAF contract, offset by higher defense volume from other
customers and increased deliveries related to the Boeing 777 and 777X programs.
Long-term sales growth guidance is not being provided at this time as it will be materially impacted by the acquisitions of CESA and Beaver. New
long-term sales guidance will be provided after the closing of these two transactions.
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, particularly versus the U.S. dollar; and,
The Corporation’s ability to deliver on key contract initiatives.
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.
•
•
•
22 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
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.
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 6 of Héroux-Devtek’s customers represent
approximately 60% of consolidated sales, including two
customers representing 26% and 11% 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 2018 MD&A – 23
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, 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
24 – HÉROUX-DEVTEK INC. – Fiscal 2018 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 2018 MD&A – 25
Environmental Risks
Environmental 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.
26 – HÉROUX-DEVTEK INC. – Fiscal 2018 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 and the United Kingdom, and thus incurs costs denominated in the respective currencies of these three countries,
the Canadian dollar (“CAD”), United States dollar (“USD”) and British pound (“GBP”). In addition to costs denominated in their local currencies,
a large portion of materials costs of the Canadian 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)
GBP (Canadian equivalent of £1.0)
March 31, 2018 March 31, 2017
1.2894
1.8106
1.3299
1.6662
The foreign exchange rates used to translate revenues and expenses into Canadian dollars were as follows:
Quarters ended March 31,
Fiscal years ended March 31,
2018
1.2648
1.7607
2017
1.3230
1.6399
2018
1.2834
1.7022
2017
1.3126
1.7144
USD (Canadian equivalent of US$1.0)
GBP (Canadian equivalent of £1.0)
Héroux-Devtek is most exposed to the USD to CAD and GBP to CAD
exchange rates due to the prevalence of USD in Aerospace market
transactions and the geographical location of operations. Fiscal 2018
featured a notable increase in the value of the GBP, the main impact of
which was growth in the value of the Corporation’s U.K. denominated
sales and assets. Héroux-Devtek’s GBP sales incur substantial GBP
denominated costs, which partially hedges gross profit from currency
impacts. Over 80% of the Corporation’s sales, however, are
denominated in USD, compared to only a bit more than half of the related
costs, which creates more significant net inflows of USD, the value of
which fluctuate with the USD/CAD 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.
The acquisition of CESA also exposes the Corporation to new risks
related to the Euro. See the Derivative Financial Instruments section
under Additional Information for further details.
The following table presents the notional amount and exchange rate of outstanding FFEC:
As at
Notional amount outstanding (USD ‘000s)
Average exchange rate
March 31, 2018 March 31, 2017 March 31, 2016
110,050
1.3046
152,350
1.3178
165,200
1.2900
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.
Foreign exchange had a net positive impact of 0.6% on Héroux-Devtek’s gross margin, mainly related to the higher FX rate of FFEC delivered
in fiscal 2018 as compared to fiscal 2017. As at March 31, 2018, a 1% strengthening of the CAD versus the USD would result in a $0.2 million
decrease in the Corporation’s fiscal 2018 net income.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 27
OPERATING RESULTS
Sales
Gross profit
Selling and administrative expenses
Adjusted operating income(1)
Non-recurring items
Operating income
Financial expenses (income)(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)
Quarters ended March 31,
Fiscal years ended March 31,
2018
2017
Variance
2018
2017
Variance
$
113,024
$
120,886
$
(7,862)
$
386,564
$
406,536
$
(19,972)
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%
$
$
20,786
8,474
12,312
3,634
8,678
(1,736)
1,519
8,895
9,077
17.2%
7.0%
7.2%
10.2%
$
$
(1,828)
(1,605)
(223)
1,758
(1,981)
1,347
(291)
(3,037)
1,362
-40 bps
-90 bps
-130 bps
50 bps
61,276
30,951
30,325
6,947
23,378
2,537
7,167
13,674
24,213
$
$
67,969
32,089
35,880
328
35,552
(546)
4,330
31,768
26,353
(6,693)
(1,138)
(5,555)
6,619
(12,174)
3,083
2,837
$
$
(18,094)
(2,140)
$
$
15.9%
8.0%
6.0%
7.8%
16.7%
7.9%
8.7%
8.8%
-80 bps
10 bps
-270 bps
-100 bps
0.16
0.29
$
$
0.25
0.25
$
$
(0.09)
0.04
$
$
0.38
0.67
$
$
0.88
0.73
$
$
(0.50)
(0.06)
$
$
$
$
(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
28 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
Sales can be broken down by sector as follows:
Commercial
Defence(1)
Total
Commercial
Defence(1)
Total
2018
57,509
55,515
113,024
2018
195,101
191,463
386,564
$
$
$
$
$
$
$
$
Quarters ended March 31,
2017
FX impact
Net variance
60,764
60,122
120,886
$
$
(716) $
(699)
(1,415) $
(2,539)
(3,908)
(6,447)
(4.2)%
(6.5)%
(5.3)%
Fiscal years ended March 31,
2017
FX impact
Net variance
210,788
195,748
406,536
$
$
(1,230) $
(14,457)
(1,207)
(2,437) $
(3,078)
(17,535)
(6.9)%
(1.6)%
(4.3)%
(1) Includes defence sales to civil customers and governments.
Commercial
The $14.5 million and $2.5 million respective net decreases in commercial sales for the fiscal year and fourth quarter were mainly due to lower
large commercial programs sales, including the scheduled ending of a Tier-2 contract, and lower aftermarket customer requirements for regional
aircraft.
These negative factors were partly offset by increased Boeing 777 deliveries.
Defence
The $3.1 million net decrease in defence sales compared to last fiscal year was mainly due to:
Lower spare parts requirements from the U.S. Government; and,
Lower repair and overhaul (“R&O”) sales on the P-3 program.
These negative factors were partially offset by higher manufacturing sales to civil customers.
The $3.9 million net decrease in defence sales for the quarter compared to the same quarter last fiscal year was mainly driven by lower spare
parts requirements from the U.S. Government.
Gross Profit
The decrease in gross profit from 16.7% to 15.9% this fiscal year compared to last fiscal year was mainly due to higher under-absorption,
including excess processing and finishing costs related to the Boeing 777 program.These excess processing and finishing costs are expected
to normalize upon completion of the customer qualification and approval of Héroux Devtek’s surface treatment processes. This negative factor
was partially offset by favourable U.S. dollar exchange rate fluctuations, representing 0.6% of sales.
The decrease in gross profit margin from 17.2% to 16.8% this quarter compared to the same quarter last fiscal year was mainly driven by
unfavourable product mix, mainly related to lower sales of spares and aftermarket requirements for regional aircraft.
Selling and Administrative Expenses
When excluding gains on translation of net monetary items, selling and administrative expenses represented 8.0% and 7.6% of sales for the
fiscal year and the quarter, respectively, compared to 8.6% and 7.5% for the same periods last fiscal year.
The decrease this fiscal year versus last was mainly related to lower employee-related costs while the selling and administrative expenses were
fairly stable as a percentage of sales during the fourth quarter compared to the same period last year.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 29
Non-Recurring Items
Non-recurring items comprise the following:
Non-recurring items in operating income
Restructuring charges
Acquisition-related costs
Gain on settlement of a litigation
Legal and other professional fees
Non-recurring items in financial expenses
Net losses on certain derivative financial instruments
Revision of governmental authorities loans repayment estimates
Non-recurring items in income tax expense
Impact of US Tax Reform
Quarters ended
March 31,
2017
2018
Fiscal years ended
March 31,
2017
2018
4,990
402
—
—
5,392
698
—
698
$
$
$
$
$
3,634
—
—
—
— $
— $
(3,426)
(3,426) $
4,990
1,957
—
—
6,947
89
—
89
— $
— $
— $
— $
4,912
4,912
$
$
$
$
$
$
3,634
—
(5,247)
1,941
328
—
(6,375)
(6,375)
—
—
$
$
$
$
$
$
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 quarter, 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 $2.5 million as at March 31, 2018.
In February 2017, following production rate reductions for certain aircraft programs announced by OEMs, Héroux-Devtek announced workforce
adjustments of approximately 90 employees throughout its offices and plants. This initiative, which was completed in calendar 2017, resulted
in restructuring charges of $3.6 million, mainly comprised of employee-related costs.
Acquisition-related costs
During the twelve-month and quarter period ended March 31, 2018, the Corporation's incurred acquisition-related costs of $2.0 million and $0.4
million, respectively. These costs mainly pertain to professional fees and expenses in connection with the agreements to acquire CESA and
Beaver.
Gain on settlement of a litigation, Legal and other professional fees
In January 2016, the Corporation filed an arbitration claim related to representations and warranties made to it in the context of a completed
business acquisition. During fiscal 2017, the Corporation reached an agreement outside of arbitration with the counterparty resulting in a
favourable $US 4.0 million ($5.2 million) settlement. Non-recurring legal and other professional fees incurred during fiscal 2017 totaled $1.9
million.
Net losses on certain derivative financial instruments
These losses are related to derivative financial instruments acquired in order to mitigate foreign currency and interest rate risks related to the
purchase price and financing of CESA. Refer to the Derivative Financial Instruments section under Additional Information for further details.
Revision of governmental authorities loans repayment estimates
Refer to Government Authorities Loans under Liquidity and Capital Resources for the description of these revisions.
Impact of US Tax Reform
This one-time tax expense of $4.9 million recorded during fiscal 2018 is related to US Tax Reform enacted on December 22, 2017. Refer to
the Income Tax Expense section for further details.
30 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
Operating Income
The decreases in operating income from 8.7% to 6.0% of sales (decrease from 8.8% to 7.8% excluding non-recurring items) for the fiscal year
and from 7.2% to 5.9% of sales (increase from 10.2% to 10.7% 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 negative impact of $0.6 million on operating income, while it had a positive impact of $0.8 million during
the fourth quarter of fiscal 2018 compared to the same period last fiscal year.
Financial Expenses
Interest on long-term debt
Net interest related to government loans
Interest income (expense) related to financial instruments
Other interest income (expense)
Quarters ended March 31,
Fiscal years ended March 31,
2018
2017 Variance
2018
2017
Variance
$
536
$
746
$
(210) $
2,614
$
2,829
$
(215)
(1,189)
(2,868)
1,679
441
(177)
(18)
404
459
(581)
466
(491)
(52)
(4,122)
(34)
781
4,588
(457)
(833)
$
(389) $
(1,736) $
1,347
$
2,537
$
(546) $
3,083
The $3.1 million increase during the fiscal year compared to last mainly reflects the lower gains resulting from revisions of the repayment
schedules of governmental authorities loans, described in Government Authorities Loans under Liquidity and Capital Resources, partly offset
by higher interest income from cash and cash equivalents and lower other non-cash financial expenses.
Financial expenses increased by $1.3 million during the quarter compared to the same period last fiscal year, mainly reflecting lower gains
resulting from revisions of the repayment schedules of governmental authorities loans, described in Government Authorities Loans under Liquidity
and Capital Resources.
Income Tax Expense
Income before income tax expense
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
$
$
Quarters ended
March 31,
Fiscal years ended
March 31,
2018
2017
2018
2017
7,086
$
10,414
$
20,841
$
36,098
1,228
17.3%
1,519
14.6%
— $
— $
1,228
17.3%
26.6%
1,519
14.6%
26.7%
$
7,167
34.4%
4,912
2,255
10.8%
26.6%
4,330
12.0%
—
4,330
12.0%
26.7%
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 the fiscal year ended March 31, 2018.
For the fiscal year, the Corporation’s effective income tax rate, excluding the US Tax Reform impact, mainly reflects the favourable impact of
earnings in lower tax rate jurisdictions ($4.3 million), partially offset by non-deductible acquisition-related costs ($0.5 million) and permanent
differences ($0.3 million). The Corporation’s effective tax rate for fiscal year ended 2017 mainly reflected the favourable impact of earnings in
lower tax rate jurisdictions ($4.7 million) and the non-taxable gain on settlement of a litigation ($0.8 million), partially offset by permanent
differences ($0.3 million).
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 31
The effective income tax rate for this quarter mainly reflects the favourable impact of earnings in lower tax rate jurisdictions ($0.9 million), partially
offset by non-deductible acquisition-related costs ($0.2 million) and permanent differences ($0.1 million). The Corporation’s effective tax rate for
the quarter ended March 31, 2017 mainly reflected the favourable impact of earnings in lower tax rate jurisdictions ($1.3 million) partially offset
by permanent differences ($0.1 million).
Net Income
Earnings decreased from $31.8 million to $13.7 million (or decreased from $26.4 million to $24.2 million excluding non-recurring items net of
taxes) this fiscal year compared to last and decreased from $8.9 million to $5.9 million (or increased from $9.1 million to $10.4 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 decreased from $0.88 to $0.38 per share (or decreased from $0.73 to $0.67 per share excluding
non recurring items net of taxes), while they decreased from $0.25 to $0.16 per share (or increase from $0.25 to $0.29 excluding non recurring
items net of taxes) during the quarter compared to the same quarter last fiscal year.
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,
2018
6,697
5,392
12,089
$
$
2017
8,678
3,634
12,312
$
$
2018
23,378
6,947
30,325
$
$
2017
35,552
328
35,880
$
$
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.
32 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
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,
2018
5,858
1,228
(389)
7,280
13,977
5,392
19,369
$
$
$
2017
8,895
1,519
(1,736)
6,869
15,547
3,634
19,181
$
$
$
2018
13,674
7,167
2,537
26,579
49,957
6,947
56,904
$
$
$
2017
31,768
4,330
(546)
25,568
61,120
328
61,448
$
$
$
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.
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,
2017
8,895
182
9,077
$
$
2018
5,858
4,581
10,439
0.16
0.13
0.29
$
$
0.25
—
0.25
$
$
$
$
Fiscal years ended
March 31,
2017
31,768
(5,415)
26,353
2018
13,674
10,539
24,213
$
$
0.38
0.29
0.67
$
$
0.88
(0.15)
0.73
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 33
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY AND CASH AND CASH EQUIVALENTS
In May 2017, the Corporation renewed its Senior Secured Syndicated Revolving Credit Facility (“Credit Facility”) and extended it through May
2022, with the terms and conditions remaining substantially the same. Related financing costs totaling $0.5 million were deferred and are
amortized over the term of the related loans using the effective interest rate method.
As at March 31, 2018, this Credit Facility allowed the Corporation and its subsidiaries to borrow up to $200.0 million, either in Canadian dollars,
US dollars, British Pounds, Euro or equivalent currencies. It also included an accordion feature to increase the Credit Facility by an additional
$100.0 million during the term of this agreement, subject to the approval of the lenders. This accordion feature was increased from $75.0 million
during the renewal process.
As at March 31, 2018, the Corporation had $54.2 million drawn against the Credit Facility, compared to $55.9 million as at March 31, 2017.
Considering the Corporation’s cash and cash equivalents position, its available Credit Facility and level of expected capital investments and
results, the Corporation’s management does not expect any significant liquidity risk in the foreseeable future.
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, 2018 March 31, 2017
$
$
131,964
$
134,776
93,209
38,755
$
42,456
92,320
(1) Excluding net deferred financing costs of $0.9 million as at March 31, 2018 and $0.6 million as at March 31, 2017.
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, 2018 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 financing needs.
34 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
GOVERNMENT AUTHORITIES LOANS
Héroux-Devtek has a portfolio of refundable loans received from various government agencies for the purchase of certain equipment or tooling,
for the modernization or additions to facilities or for development costs capitalized or expensed for aerospace programs. They were granted as
incentives under certain federal and provincial industrial programs to promote industry development.
The terms of these agreements are such that, in certain cases, the Corporation is effectively paying less interest than would be expected under
a market rate. As a result, under IFRS, the present value of the calculated benefit of these loans is applied either as a reduction of certain assets
or expenses as government assistance.
These loans have varying terms governing the timing and amount to be refunded. Repayments are mainly based on sales of specific programs
or the growth in sales of all or certain of Héroux-Devtek’s product lines. Assumptions underlying loan repayments are reviewed at least annually.
During fiscal 2018, updating these estimates resulted in a non-cash gain of $1.8 million, representing a reversal of accretion.
Last fiscal year, the Corporation recorded a $3.4 million non-cash gain related to an agreement with a government authority extending the
duration of the investment period of a loan by three years. Héroux-Devtek also recorded $3.0 million of non-cash gains last fiscal year related
to the revision of assumptions underlying the repayment schedule estimates and other adjustments. The total $6.4 million of gains in fiscal 2017
were classified as a non-recurring item.
As at March 31, 2018, the Corporation had a present value of $52.5 million outstanding under these agreements ($49.1 million as at March 31,
2017), bearing effective interest rates of 2.2% to 7.2%. These loans have repayment terms extending to fiscal 2033 at the latest.
VARIATIONS IN CASH AND CASH EQUIVALENTS
Quarters ended
March 31,
2017
2018
Fiscal years ended
March 31,
2017
2018
Cash and cash equivalents at beginning of periods
$
70,642
$
18,856
$
42,456
$
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
18,521
3,121
20
905
29,149
(5,442)
(38)
(69)
56,122
(4,996)
(565)
192
19,268
56,148
(24,103)
(8,736)
(121)
Cash and cash equivalents at end of periods
$
93,209
$
42,456
$
93,209
$
42,456
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,
2017
2018
Fiscal years ended
March 31,
2017
2018
$
$
11,961
6,560
18,521
$
$
13,117
16,032
29,149
$
$
42,624
13,498
56,122
$
$
52,842
3,306
56,148
The respective $1.2 million and $10.2 million decreases in cash flows from operations for the quarter and fiscal year ended March 31, 2018
when compared to the same periods last fiscal year are mainly explained by lower EBITDA.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 35
The net change in non-cash items can be summarized as follows:
Accounts receivable
Income tax receivable
Inventories
Other current assets
Accounts payable and accrued liabilities,
Accounts payable – other and other liabilities
Provisions
Progress billings
Customer advances
Income tax payable
Effect of changes in exchange rates
Net change in non-cash items
Quarters ended
March 31,
2017
2018
Fiscal years ended
March 31,
2017
2018
$
(19,305) $
48
7,520
417
4,165
209
(388)
9,301
1,744
2,849
(6,589) $
6
14,518
5,597
3,920
2,140
(1,534)
(2,403)
590
(213)
(2,335) $
(184)
9,539
(869)
719
(3,335)
961
6,136
1,916
950
$
6,560
$
16,032
$
13,498
$
4,106
2,325
2,855
2,605
(5,115)
(471)
(2,969)
2,587
(178)
(2,439)
3,306
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.
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.
For the fiscal year ended March 31, 2017, non-cash items remained relatively stable, while for the quarter ended March 31, 2017, the positive
net change in non-cash items mainly reflected a decrease in inventories following a high level of deliveries during the quarter.
Investing Activities
The Corporation’s investing activities were as follows:
Additions to property, plant and equipment
Net decrease (increase) in finite-life intangible assets
Proceeds on disposal of property, plant and equipment
Cash flows related to investing activities
Quarters ended
March 31,
2017
2018
Fiscal years ended
March 31,
2017
2018
$
$
(3,744) $
(4,121) $
(9,930) $
(20,633)
6,799
66
(1,355)
34
4,761
173
(3,774)
304
3,121
$
(5,442) $
(4,996) $
(24,103)
The net decrease in finite-life intangible assets during the fiscal year and fourth quarter ended March 31, 2018 is due to the timing of certain
customer funding for capitalized development costs during the current period.
36 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
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
Deposits reclassified to property, plant and equipment upon completion(1)
Additions, as per statements of cash flows
Quarters ended
March 31,
2017
2018
Fiscal years ended
March 31,
2017
2018
$
$
5,696
(352)
5,344
(1,600)
—
$
$
6,046
(1,018)
5,028
(1,096)
189
10,691
(619)
10,072
$
$
(142)
—
20,894
(1,499)
19,395
1,238
—
3,744
$
4,121
$
9,930
$
20,633
$
$
$
(1) Includes machinery financed through finance leases for which deposits had been made.
The decrease in additions to property, plant and equipment this fiscal year compared to fiscal 2017 is due to the completion of planned investments
related to the Boeing 777 and 777X contract and the timing of certain investment initiatives.
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,
2017
2018
Fiscal years ended
March 31,
2017
2018
1,603
$
715
$
3,821
$
23,021
(1,264)
205
(524)
(993)
240
—
(4,634)
(32,797)
772
(524)
1,040
—
20
$
(38) $
(565) $
(8,736)
$
$
The net decrease in long-term debt over fiscal 2017 was mainly the result of net repayments of $16.2 million of the Credit Facility, partially offset
by additions to finance leases totaling $9.8 million.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 37
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,
2018
2017
2018
18,521
$
29,149
$
56,122
$
(5,344)
6,799
(5,028)
(1,355)
(10,072)
4,761
19,976
$
22,766
$
50,811
$
2017
56,148
(19,395)
(3,774)
32,979
$
$
(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 as a result of lower additions to property, plant and
equipment and timing of customer funding received for capitalized
development costs, as described in Investing Activities above under
Variations in Cash and Cash Equivalents.
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, 2018:
Contractual obligations
Governmental authorities loans
Finance leases
Credit facility
Purchase obligations
Accounts payable
Building, machinery and equipment acquisition commitments
Operating leases - Buildings and facilities
Payments due by period
Total
1 year
2-3 years
4-5 years
> 5 years
$
72,855 $
208 $
5,008 $
11,373 $
56,266
27,197
60,891
160,943
115,855
41,645
2,952
11,737
5,839
1,625
7,672
101,268
41,645
2,952
1,502
11,380
3,250
19,638
13,788
—
—
8,759
56,016
76,148
453
—
—
1,219
—
57,485
346
—
—
2,408
2,397
5,430
Total contractual obligations(1)
$
333,132 $
155,039 $
35,834 $
78,998 $
63,261
(1) Excluding defined benefit pension plan obligations presented in the Pension Plans section.
38 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
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, 2018, 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
March 31, 2018 March 31, 2017
6,792
$
5,356
$
125,685
923
93,209
38,755
379,034
0.10:1
$
127,347
637
42,456
92,320
355,868
0.26:1
$
The decrease in net debt this fiscal year is essentially related to positive free cash flow.
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, 2018
Issued
capital
Fiscal year ended
March 31, 2018
Issued
capital
Number of
shares
Number of
shares
36,169,757
$
77,835
36,122,050
$
77,217
37,500
11,315
115
155
48,750
47,772
298
590
36,218,572
$
78,105
36,218,572
$
78,105
As at May 23, 2018, the number of common shares outstanding stood at 36,226,243.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 39
Stock options varied as follows:
Opening balance
Granted
Exercised
Cancelled / forfeited
Ending balance
Quarter ended
March 31, 2018
Weighted-
average
exercise price
Fiscal year ended
March 31, 2018
Weighted-
average
exercise price
Number of
stock options
Number of
stock options
899,295
$
243,500
(37,500)
—
1,105,295
$
10.87
14.93
1.31
—
12.09
914,295
$
243,500
(48,750)
(3,750)
1,105,295
$
10.88
14.93
3.71
11.71
12.09
As at March 31, 2018, 1,514,481 common shares remained reserved for issuance upon exercise of stock options compared to 1,563,231 at
March 31, 2017 and 58,866 common shares remained reserved for issuance under the stock purchase and ownership incentive plan
compared to 106,638 at March 31, 2017.
As at May 23, 2018, the number of stock options outstanding stood at 1,105,295.
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.
CONSOLIDATED BALANCE SHEETS
Working Capital
The Corporation’s working capital was as follows, as at:
Current assets
Current liabilities
Net working capital
Working capital ratio
March 31, 2018 March 31, 2017
Variance
$
$
$
$
310,649
108,750
201,899
2.86
269,559
104,436
165,123
2.58
$
$
41,090
4,314
36,776
15.2%
4.1%
22.3%
The $41.1 million increase in current assets is mainly the result of a $50.8 million increase in cash and cash equivalents as detailed in the
Liquidity and Capital Resources section, partly offset by a decrease in inventories.
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, 2018 March 31, 2017
Variance
$
321,513
$
337,727
$ (16,214)
144,378
379,034
146,982
355,868
(2,604)
23,166
(4.8)%
(1.8)%
6.5 %
The $16.2 million decrease in long-term assets is mainly explained by:
Amortization of tangible and intangible assets; and,
Customer funding received for capitalized development costs.
These positive items were partly offset by the increase in converted value of the Corporation’s U.K. assets following the increase in value of the
British pound this fiscal year and net additions to property, plant and equipment.
40 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
The increase in shareholder’s equity is mainly explained by comprehensive income of $21.8 million, mainly comprised of net income of
$13.7 million and the effect of foreign exchange fluctuations of $7.9 million included in other comprehensive income. For further details, see the
statement of comprehensive income in the consolidated financial statements for the fiscal year ended March 31, 2018.
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.
The net defined benefit obligations varied as follows, during fiscal year:
Net defined benefit obligations, beginning of year
Gains 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
2018
$
(3,610) $
261
1,489
(1,459)
(153)
(486)
$
(3,958) $
2017
(8,670)
5,078
2,078
(1,500)
(330)
(266)
(3,610)
March 31, 2018 March 31, 2017
59,064
$
57,496
61,216
58,974
$
96.3%
97.3%
The Corporation made contributions of $1.5 million and $3.2 million to its defined benefit and defined contribution benefit plans, respectively,
during fiscal 2018, and expects to make respective contributions of $1.5 million and $3.2 million during fiscal 2019.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 41
ADDITIONAL INFORMATION
DERIVATIVE FINANCIAL INSTRUMENTS
Héroux-Devtek makes use of certain derivative financial instruments as tools for risk management purposes in order to mitigate certain foreign
exchange, interest rate or other price risks to which it is exposed. Management uses these derivatives within the guidelines laid out by the
Corporation’s risk management policy. See the Risk Management section under Overview for further details of Héroux-Devtek’s risk management
practices.
As at March 31, 2018, these derivative financial instruments are as follows:
Forward foreign exchange contracts
See Foreign Exchange under Overview for information about the Corporation’s exposure to foreign exchange risks as well as the derivative
financial instruments used to mitigate it. See also note 31 to the Consolidated financial statements.
Interest-rate swap agreements
The Corporation is exposed to interest rate fluctuations primarily due to its variable interest rate on its long-term debt's Credit Facility (see note
20 to the Consolidated financial statements). In addition, interest rate fluctuations could also have an impact on the Corporation’s interest income
which is derived from its cash and cash equivalents.
The Corporation’s interest rate policy requires maintaining an appropriate mix of fixed and variable interest rates debt to mitigate the net impact
of fluctuating interest rates. Management as such may use derivatives to maintain a fixed debt ratio of between 40% and 70% of long-term debt,
excluding government authorities loans.
The following interest-rate swaps were used to this end during fiscal 2018 and 2017:
Notional
US$
US$
5,000
10,000
Fixed rate
1.65%
2.38%
Inception
March 2014
December 2015
Maturity
December 2018
December 2018
The interest-rate swap rates mentioned above exclude the additional bank relevant margin (see note 20 to the Consolidated financial statements).
The cash flows related to the interest-rate swaps are expected to occur in the same periods as they are expected to affect net income.
Derivatives related to the agreement to acquire CESA
The agreement to acquire CESA exposes the Corporation to new foreign currency and interest rate risks related to the purchase price and
related financing. An increase in value of the Euro compared to the Canadian dollar would increase the anticipated transaction price, and an
increase in interest rates underlying expected debt would increase related financial expenses.
In order to mitigate these risks, the Corporation acquired €85.0 million (approximately $123.8 million) of foreign exchange collars which were
settled during the fiscal year. (refer to the Non-recurring items section under Operating results).
As at March 31, 2018, the Corporation had also entered into the following cross-currency interest rate swap agreements in order to mitigate
foreign exchange and interest rate risks:
Notional
US$
C$
Fixed EUR equivalent
Euro fixed rate
29,370
50,000
€25,000
€34,110
1.86%
3.32%
Inception
October 2017
October 2017
Maturity
May 2022
June 2025
42 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
Equity swap agreement
On June 22, 2015, the Corporation entered into an equity swap agreement with a financial institution to mitigate its income exposure to fluctuations
in its share price related to the Deferred share unit (“DSU”) and Performance share unit (“PSU”) compensation plans.
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, 2018, the equity swap agreement covered 150,000 common shares of the Corporation at a price of $11.45. This agreement is
a derivative that is not part of a designated hedging relationship and matures in June 2019.
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.
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 16 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.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 43
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.
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, 2018, 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, 2018, 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.
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, 2018 that have materially
affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
44 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
FUTURE CHANGES IN ACCOUNTING POLICIES
The standards issued but not yet effective that may apply to the Corporation are the following:
IFRS 9 - Financial Instruments
In July 2014, the International Accounting Standards Board (“IASB”) completed a three-phased approach to replace IAS 39 - Financial Instruments:
Recognition and Measurement with IFRS 9 - Financial Instruments.
The first phase, Classification and Measurement, introduces a logical approach for the classification of financial assets, which is driven by cash
flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based
requirements that are generally considered to be overly complex and difficult to apply.
The second phase, Impairment, introduces a new, expected-loss impairment model that will require more timely recognition of expected credit
losses.
The third phase, Hedge Accounting, represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk
management activities, enabling entities to better reflect these activities in their financial statements.
The Corporation has completed its assessment of IFRS 9 and concluded that it will not have a significant impact on the consolidated financial
statements. The Corporation will incorporate the new disclosure requirements of IFRS 9 upon its adoption on April 1, 2018.
IFRS 15 - Revenue from Contracts with Customers
In May 2015, the IASB released IFRS 15 - Revenue from Contracts with Customers. The core principle of the new standard is for companies
to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company
expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide
guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and
improve guidance for multiple-element arrangements.
The Corporation is required to apply this standard retrospectively for its fiscal year beginning April 1, 2018. In fiscal 2018, the Corporation
completed its analysis of the impact of IFRS 15 adoption. The new standard will not result in material changes aside from disclosure requirements
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 retrospectively 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 other operating leases will be required to
be brought on balance sheet. The Corporation continues to assess the impact of adopting this standard on its consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A – 45
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
2018
First
quarter
2017
First
quarter
$113,024 $ 97,006 $ 89,677 $ 86,857 $120,886 $ 98,489 $ 91,571 $ 95,590
7,596
8,001
14,321
5,179
5,584
6,697
12,089
19,369
5,858
10,439
6,629
7,238
13,563
626
5,690
8,678
12,312
19,181
8,895
9,077
5,408
5,408
11,940
4,027
4,027
7,694
7,694
13,851
8,175
6,015
11,584
7,873
14,095
9,519
5,677
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
0.16
0.29
0.02
0.16
0.09
0.11
0.11
0.11
0.25
0.25
0.23
0.17
0.26
0.16
0.14
0.15
36.4
36.4
36.3
36.3
36.3
36.3
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 second quarter is usually slower than the others due to seasonality such as plant shutdowns and summer vacations,
whereas the fourth quarter is usually the strongest.
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)
2018
2017
$
386,564
$
406,536
$
23,378
30,325
56,904
13,674
24,213
0.38
0.67
93,209
632,162
137,388
35,552
35,880
61,448
31,768
26,353
0.88
0.73
42,456
607,286
138,257
2016
406,812
37,783
39,263
64,070
26,641
27,650
0.74
0.77
19,268
609,403
156,267
(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.
46 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE
This MD&A was approved by the Audit Committee and by the Board of Directors on May 23, 2018. 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 2018 MD&A – 47
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48 – HÉROUX-DEVTEK INC. – Fiscal 2018 MD&A
CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE FISCAL YEAR ENDED
MARCH 31, 2018
TABLE OF CONTENTS
Note 8
Note 7
Note 6
Note 5
Note 4
Note 3
Note 2
Note 1
Management’s report .................................................................................................................................................................................
Independent Auditors’ 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 .............................................................................................................................................................
Government assistance ..........................................................................................................................................................
Cost of sales, selling and administrative expenses ................................................................................................................
Net financial expenses (income) .............................................................................................................................................
Note 9
Non-recurring items ................................................................................................................................................................
Note 10 Earnings per share .................................................................................................................................................................
Inventories ..............................................................................................................................................................................
Note 11
Note 12 Derivative financial instruments ..............................................................................................................................................
Note 13 Other assets ...........................................................................................................................................................................
Note 14 Property, plant and equipment ................................................................................................................................................
Note 15 Finite-life intangible assets .....................................................................................................................................................
Note 16 Goodwill ..................................................................................................................................................................................
Note 17 Accounts payable and accrued liabilities ................................................................................................................................
Note 18 Accounts payable - other and other 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
51
52
53
58
58
58
58
67
68
69
69
69
70
71
71
72
72
73
74
75
76
76
76
77
78
79
81
81
83
86
86
86
87
87
87
88
91
50 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
MANAGEMENT’S REPORT
The accompanying consolidated financial statements and Management Discussion and Analysis (“MD&A”) of Héroux-Devtek Inc. (the
“Corporation”) and all other information in this Annual Report 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. Financial information presented elsewhere in the Annual Report is consistent
with that in the consolidated financial statements. 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 2018. As of March 31, 2018, 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.
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 23, 2018
Stéphane Arsenault, CPA, CA
Chief Financial Officer
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 51
INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF HÉROUX-DEVTEK INC.
We have audited the accompanying consolidated financial statements of Héroux-Detek Inc., which comprise the consolidated balance sheets
as at March 31, 2018 and 2017 and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash
flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as Management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Héroux-Devtek Inc. as at
March 31, 2018 and 2017 and its financial performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Montréal, Québec
May 23, 2018
______________________________________________
1 CPA Auditor, CA, public accountancy permit no. A121006
52 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
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
Accounts payable - other and other liabilities
Provisions
Customers advances
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
Notes
March 31, 2018 March 31, 2017
20
11
12
13
6, 14
6, 15
12
24
16
13
17
18
19
12
20
20
19
12
24
21
22
23
$
$
$
$
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
65,057
2,534
16,869
12,577
2,945
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
632,162
$
$
$
$
42,456
71,135
1,228
143,866
3,509
7,365
269,559
192,847
45,467
292
9,964
86,049
3,108
607,286
63,391
2,556
20,170
6,442
1,924
1,106
2,055
6,792
104,436
127,347
6,398
508
5,942
6,787
251,418
77,217
3,735
6,298
268,618
355,868
607,286
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
Louis Morin
Director
Gilles Labbé
Director
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 53
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars, except per share data)
For the fiscal years ended March 31,
Notes
2018
2017
Sales
Cost of sales
Gross profit
Selling and administrative expenses
Non-recurring items
Operating income
Net financial expenses (income)
Income before income tax expense
Income tax expense
Net income
Earnings per share – basic and diluted
$
386,564
$
6, 7, 11
325,288
6, 7
9
8, 9
9, 24
10
$
$
61,276
30,951
6,947
23,378
2,537
20,841
7,167
13,674
0.38
$
$
406,536
338,567
67,969
32,089
328
35,552
(546)
36,098
4,330
31,768
0.88
The accompanying notes are an integral part of these consolidated financial statements.
54 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2018
2017
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:
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 from remeasurement
Deferred income taxes
Other comprehensive income (loss)
Comprehensive income
Net income
Other comprehensive income (loss)
Comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
23
23
23
25
$
5,860
$
(11,435)
4,450
(3,704)
(201)
545
1,701
(187)
1,514
261
(68)
193
8,112
$
(3,378)
3,536
(36)
122
(1,310)
133
(1,177)
5,078
(1,355)
3,723
(8,767)
13,674
8,112
21,786
$
$
31,768
(8,767)
23,001
$
$
$
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 55
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In thousands of Canadian dollars)
Balance as at March 31, 2017
Common shares:
Issued under the stock purchase and
ownership incentive plan
Issued under the stock option plan
Notes
23
22
Stock-based compensation expense
22
Net income
Other comprehensive income
Balance as at March 31, 2018
$
$
Issued
capital
77,217
Contributed
surplus
3,735
$
Accumulated
other
comprehensive
income
6,298
$
Retained
earnings
268,618
Shareholders’
equity
355,868
$
$
590
298
—
—
—
(116)
608
—
—
—
—
—
—
78,105
$
—
4,227
$
7,919
14,217
$
—
—
—
13,674
193
282,485
590
182
608
13,674
8,112
$
379,034
Balance as at March 31, 2016
Common shares:
Issued under the stock purchase and
ownership incentive plan
Issued under the stock option plan
Stock-based compensation expense
22
Net income
Other comprehensive income (loss)
Balance as at March 31, 2017
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
Shareholders’
equity
$
75,916
$
3,283
$
18,788
$
233,127
$
331,114
Notes
23
22
571
730
—
—
—
(261)
713
—
—
—
—
—
—
77,217
$
$
—
3,735
$
(12,490)
6,298
$
—
—
—
571
469
713
31,768
3,723
268,618
$
31,768
(8,767)
355,868
The accompanying notes are an integral part of these consolidated financial statements.
56 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2018
2017
Cash and cash equivalents provided by (used for):
Operating activities
Net income
Items not requiring an outlay of cash:
Amortization expense
Deferred income taxes
Losses (gains) on sale of property, plant and equipment and software
Write-down of property, plant and equipment
Non-cash net financial expenses (income)
Stock-based compensation expense
Cash flows from operations
Net change in non-cash items
Cash flows related to operating activities
Investing activities
Additions to property, plant and equipment
Net decrease (increase) in finite-life intangible assets
Proceeds on disposal of property, plant and equipment
Cash flows related to investing activities
Financing activities
Increase in long-term debt
Repayment of long-term debt
Fees incurred to renew the Credit Facility
Issuance of common shares
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.
$
13,674
$
31,768
14, 15
24
9, 14
8
22
28
14
15
20
22
26,579
67
52
886
758
608
42,624
13,498
56,122
(9,930)
4,761
173
(4,996)
3,821
(4,634)
(524)
772
(565)
192
50,753
42,456
93,209
2,359
580
5,282
$
$
$
$
$
$
$
$
25,568
(1,604)
(262)
—
(3,341)
713
52,842
3,306
56,148
(20,633)
(3,774)
304
(24,103)
23,021
(32,797)
—
1,040
(8,736)
(121)
23,188
19,268
42,456
2,829
34
3,609
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 57
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For the fiscal years ended March 31, 2018 and 2017
(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 658, East 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 flight control actuators and fracture-critical
components. It also includes the manufacture of electronic enclosures, heat exchangers and cabinets for airborne radar, electro-optic systems
and aircraft controls through its Magtron operations as well as fluid filters products through its Bolton operations.
The Corporation operates as one reporting segment, which is the Aerospace segment.
NOTE 2. BASIS OF PREPARATION
The consolidated financial statements have been prepared on the historical cost basis, except for cash and cash equivalents and for derivative
financial instruments that have been measured at fair value.
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 23,
2018.
Reclassification of prior year presentation
Certain comparative figures have been reclassified to conform to the March 31, 2018 presentation.
Basis of consolidation
The consolidated financial statements include the accounts of Héroux-Devtek Inc. and its subsidiaries, all of which are wholly-owned. 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
Location
Canada
United States
United Kingdom
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. 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.
58 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
The functional currency of Héroux-Devtek Inc. and of the Canadian operations is the Canadian dollar. The functional currency of the U.S.
operations is the U.S. dollar and the functional currency of the U.K. operations is the British pound. 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).
Amortization is calculated on a straight-line basis over the useful life of the asset as follows:
•
•
•
Buildings and leasehold improvements - 5 to 50 years,
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 59
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 as incurred.
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.
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 12 years.
60 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
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.
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 61
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
Initial recognition
At initial recognition, financial assets are classified either as financial assets at fair value through profit or loss (“FVTPL”), loans and receivables
(“L&R”) or effective hedging instruments (“Hedges”).
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 are acquired for the purpose of selling in the near term. They include cash and cash equivalents and 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.
L&R
L&R are non-derivative financial assets with fixed or determinable payments not quoted in an active market. L&R are mainly comprised of
accounts receivable. L&R are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in the
consolidated statements of income. In the event that there is objective evidence that an impairment loss on L&R has been incurred (such as
the probability of insolvency or significant financial difficulties of the debtor), the amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s effective interest rate (i.e. the
effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance for doubtful
accounts and the loss is recognized in the consolidated statements of income.
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.
Hedges
These include forward foreign exchange contracts and interest rate swap agreements. 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.
The Corporation assesses at each reporting date whether any financial asset is impaired.
J. Financial liabilities
Liabilities at fair value
Financial liabilities classified at fair value through profit or loss (FVTPL) are comprised of derivative financial instruments, except those that are
designated as Hedges. They are carried at fair value with gains and losses recognized in the consolidated statements of income. Gains and
losses on Hedges are recognized in other comprehensive income.
Other financial liabilities
All debts, accounts payable and accrued 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.
62 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
K. Derivative financial instruments and hedges
Derivative financial instruments
The Corporation uses derivative financial instruments such as forward foreign exchange contracts, interest rate swap agreements, 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.
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 63
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 a five-year period which 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.
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 subscribe, by payroll deductions
of a maximum of 10% of their annual base salary, to a number of common shares issued by the Corporation. The subscription price of the
common shares represents 90% of the average closing quoted price (based on the five preceding days) of the Corporation’s common share on
the Toronto Stock Exchange (“TSE”). Common shares thus issued are accounted for as issued capital. The Corporation matches 50% 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 4% 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.
64 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
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
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Corporation and the revenue can be reliably
measured. Revenue is measured at the fair value of the consideration received, excluding sales tax and duties. However specific recognition
criteria must also be met before revenue is recognized. Revenue from the sale of goods, which includes repair and overhaul works, is recognized
when the significant risks and rewards of ownership of the goods have passed to the buyer, the sales price is determinable and collectability is
reasonably assured. Generally these conditions are met upon delivery of 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.
Income 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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 65
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.
•
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
The earnings per share amounts are 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 9 - Financial Instruments
In July 2014, the International Accounting Standards Board (“IASB”) completed a three-phased approach to replace IAS 39 - Financial Instruments:
Recognition and Measurement with IFRS 9 - Financial Instruments.
The first phase, Classification and Measurement, introduces a logical approach for the classification of financial assets, which is driven by cash
flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based
requirements that are generally considered to be overly complex and difficult to apply.
The second phase, Impairment, introduces a new, expected-loss impairment model that will require more timely recognition of expected credit
losses.
The third phase, Hedge Accounting, represents a significant overhaul of hedge accounting that aligns the accounting treatment with risk
management activities, enabling entities to better reflect these activities in their financial statements.
The Corporation has completed its assessment of IFRS 9 and concluded that it will not have a significant impact on the consolidated financial
statements. The Corporation will incorporate the new disclosure requirements of IFRS 9 upon its adoption on April 1, 2018.
66 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
IFRS 15 - Revenue from Contracts with Customers
In May 2015, the IASB released IFRS 15 - Revenue from Contracts with Customers. The core principle of the new standard is for companies
to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company
expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide
guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and
improve guidance for multiple-element arrangements.
The Corporation is required to apply this standard retrospectively for its fiscal year beginning April 1, 2018. In fiscal 2018, the Corporation
completed its analysis of the impact of IFRS 15 adoption. The new standard will not result in material changes aside from disclosure requirements.
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 retrospectively 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 other operating leases will be required
to be brought on balance sheet. The Corporation continues to assess the impact of adopting this standard on its 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 16.
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 67
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.
NOTE 5. BUSINESS ACQUISITIONS
Agreement to acquire CESA
On October 2, 2017, the Corporation announced an agreement to acquire Compañia Española de Sistemas Aeronauticos S.A. (“CESA”), a
subsidiary of Airbus SE, for €140,000 ($222,000). Headquartered in Madrid, Spain, CESA is a leading European provider of fluid mechanical
and electromechanical systems for the aerospace industry with annual sales of approximately €94,000 ($149,000). Its main product lines include
landing gear, actuation and hydraulic systems.
The transaction will be financed through:
A $50,000, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
The assumption of debt amounting to approximately $46,000;
The Corporation’s existing credit facility, whose limit will be increased to a fully committed amount of $250,000; and,
The Corporation’s available cash balance.
Closing of the transaction is expected during the Corporation’s second quarter of fiscal 2019 and is subject to certain approvals, including
authorization by the Spanish Council of Ministers.
Agreement to acquire Beaver
On February 27, 2018, the Corporation announced an agreement to acquire the shares of Beaver Aerospace & Defense Inc. and its wholly-
owned subsidiary PowerTHRU Inc. (“Beaver”), from Phillips Service Industries Inc., for a purchase price of approximately US$23,500 ($30,000).
The transaction will be financed through the Corporation’s existing revolving credit facility and is expected to close during the Corporation’s first
quarter of fiscal 2019, subject to customary closing adjustments and certain regulatory approvals.
These transactions expose 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. In connection with these acquisitions, the Corporation incurred acquisition-related costs which are
presented in note 9.
68 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
NOTE 6. 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 7. 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 14, 15)
Others
$
2018
332
619
1,929
2017
197
1,499
2,828
2018
140,361
$
126,292
26,579
63,007
2017
144,135
135,769
25,568
65,184
356,239
$
370,656
$
$
$
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, 2018, the foreign exchange gain amounted to $148
($2,874 in 2017).
NOTE 8. NET FINANCIAL EXPENSES (INCOME)
Net financial expenses (income) comprise the following, for fiscal year:
Interest accretion on governmental authorities loans
Net losses on certain derivative financial instruments (note 9)
Revision of governmental authorities loans repayment estimates (notes 9, 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 (income)
Interest expense
Net gains on certain derivative financial instruments (note 9)
Standby fees
Interest income on cash and cash equivalents
2018
2,300
$
$
344
(1,834)
153
238
(443)
758
2,299
(255)
315
(580)
$
2,537
$
2017
2,253
—
(6,375)
330
319
132
(3,341)
2,447
—
382
(34)
(546)
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 69
NOTE 9. NON-RECURRING ITEMS
Non-recurring items comprise the following, for fiscal year:
Non-recurring items in operating income
Restructuring charges
Acquisition-related costs
Gain on settlement of a litigation
Legal and other professional fees
Non-recurring items in net financial expenses (income)
Net losses on certain derivative financial instruments
Revision of governmental authorities loans repayment estimates
Non-recurring items in income tax expense
Impact of US Tax Reform
2018
2017
4,990
$
1,957
—
—
6,947
89
—
89
4,912
4,912
$
$
$
$
$
3,634
—
(5,247)
1,941
328
—
(6,375)
(6,375)
—
—
$
$
$
$
$
$
Restructuring Charges
In March 2018, the Corporation announced workforce adjustments of about 60 employees at its Longueuil facility following the non-renewal of
the U.S. Air Force contract. These adjustments along with other costs related to the decrease in volume resulted in restructuring charges totaling
$4,990 accounted for during the 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, which amounted to $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.
In February 2017, following production rate reductions for certain aircraft programs announced by OEMs, the Corporation announced workforce
adjustments of approximately 90 employees throughout its offices and plants. This initiative, which was completed in calendar 2017, resulted
in restructuring charges of $3,634, mainly comprised of employee-related costs.
Acquisition-related costs
During fiscal year 2018, the Corporation's incurred acquisition-related costs of $1,957. These costs mainly pertain to professional fees and
expenses in connection with the agreements to acquire CESA and Beaver. Refer to note 5 for further details.
Gain on settlement of a litigation, legal and other professional fees
In January 2016, the Corporation filed an arbitration claim related to representations and warranties. During fiscal 2017, the Corporation reached
an agreement outside of arbitration with the counterparty resulting in a favourable $US 4,000 ($5,247) settlement. Non-recurring legal and other
professional fees incurred during fiscal 2017 totaled $1,941.
Net losses on certain derivative financial instruments
These losses are related to certain financial instruments acquired in order to mitigate foreign currency and interest rate risks related to the
purchase price and financing of CESA. Refer to note 32 for further details.
Government authorities loans
Refer to note 20 for details regarding the revision of assumptions underlying the valuation of government authorities loans during fiscal 2017.
Other tax impact from non-recurring items
During fiscal year 2018, the Corporation income tax expense included a tax rate adjustment related to the US Tax Reform of $4,912. Refer to
note 24 for further details.
70 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
NOTE 10. 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.
2018
2017
36,154,272
36,071,025
177,342
213,282
36,331,614
36,284,307
356,500
113,000
NOTE 11. INVENTORIES
As at
Raw materials
Work-in-progress
Finished goods
March 31, 2018 March 31, 2017
$
62,902
$
69,118
2,307
$
134,327
$
63,879
76,662
3,325
143,866
The amount of inventories recognized as cost of sales for the fiscal year ended March 31, 2018 is $267,753 ($284,689 in 2017).
Reserves related to inventories are as follows, for fiscal year:
Reserves recognized as cost of sales
Reversal of prior-period reserves
$
2018
7,312
$
13,639
2017
8,502
12,364
For fiscal year 2018, the reversal of prior-period reserves includes charges of $5,568 ($5,411 in 2017) 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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 71
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS
As at
Current Assets
Forward foreign exchange contracts
Equity swap agreement
Long-term Assets
Forward foreign exchange contracts
Equity swap agreement
Current Liabilities
Forward foreign exchange contracts
Interest rate swap agreements
Long-term Liabilities
Forward foreign exchange contracts
Cross-currency interest-rate swap agreements
NOTE 13. OTHER ASSETS
As at
Investment and other tax credits receivable
Sales tax receivable
Prepaid expenses
Others
Other current assets
Tax credits receivable
Others
Other long-term assets
March 31, 2018 March 31, 2017
$
$
$
$
$
$
$
$
1,776
—
1,776
1,172
2,249
3,421
382
7
389
76
2,313
2,389
$
$
$
$
$
$
$
$
1,766
1,743
3,509
292
—
292
1,905
150
2,055
396
112
508
March 31, 2018 March 31, 2017
$
$
$
523
$
1,676
3,614
643
6,456
$
3,165
1,043
4,208
$
1,371
1,028
3,917
1,049
7,365
3,108
—
3,108
72 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
NOTE 14. PROPERTY, PLANT AND EQUIPMENT
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 6)
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
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 9)
Retirements and disposals
Effect of changes in exchange rates
$
— $
26,769
$
121,797
$
8,346
$
—
—
—
—
3,770
—
(1,005)
(102)
15,234
886
(6,979)
43
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
$
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Cost:
As at March 31, 2016
$ 6,530
$
75,660
$
231,424
$
13,184
$
Additions
Government assistance (note 6)
Retirements and disposals
Effect of changes in exchange rates
—
—
—
(28)
14,921
(127)
(415)
514
13,918
(1,363)
(10,927)
130
1,512
(9)
(107)
27
$
14,448
(9,457)
—
—
(76)
156,912
20,815
886
(9,153)
(81)
169,379
179,503
Total
341,246
20,894
(1,499)
(11,449)
567
As at March 31, 2017
$ 6,502
$
90,553
$
233,182
$
14,607
$
4,915
$
349,759
Accumulated amortization:
As at March 31, 2016
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
$
— $
23,731
$
117,625
$
—
—
—
3,472
(476)
42
15,077
(10,824)
(81)
As at March 31, 2017
Net book value as at March 31, 2017
$
— $
$ 6,502
$
26,769
63,784
$
$
121,797
111,385
$
$
6,747
1,684
(107)
22
8,346
6,261
$
$
$
— $
—
—
—
— $
4,915
$
148,103
20,233
(11,407)
(17)
156,912
192,847
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 73
Additions to property, plant and equipment shown above can be reconciled as follows, for fiscal year:
Gross additions
Government assistance (note 6)
Additions to property, plant and equipment
Variation in unpaid additions included in Accounts payable - other and other liabilities at year-end
(note 18)
Additions, as per statements of cash flows
2018
10,691
$
(619)
10,072
(142)
9,930
$
2017
20,894
(1,499)
19,395
1,238
20,633
$
$
As at March 31, 2018, cost of machinery, equipment and tooling includes assets acquired through finance leases amounting to $40,151 ($40,184
as at March 31, 2017) with accumulated amortization of $6,847 ($4,038 as at March 31, 2017).
As at March 31, 2018 and 2017, construction in progress included mainly the cost related to machinery and equipment. As at March 31, 2018,
the cost of property, plant and equipment still in use and fully depreciated is $87,188 ($84,826 as at March 31, 2017).
NOTE 15. FINITE-LIFE INTANGIBLE ASSETS
Cost:
As at March 31, 2017
Additions
Customers funding
Government assistance (note 6)
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
$
$
$
$
$
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
74 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
Cost:
As at March 31, 2016
Additions
Customers funding
Government assistance (note 6)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2017
Accumulated amortization:
As at March 31, 2016
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2017
Net book value as at March 31, 2017
$
$
$
$
$
Capitalized
development costs
Customer
relationships and
contracts
Software
35,365
$
16,211
$
26,061
$
2,026
(320)
—
—
2
37,073
10,122
785
—
—
10,907
26,166
$
$
$
$
2,265
—
(197)
(295)
(211)
17,773
11,865
1,339
(295)
(7)
12,902
4,871
$
$
$
$
—
—
—
—
(2,143)
23,918
6,905
3,211
—
(628)
9,488
14,430
$
$
$
$
Total
77,637
4,291
(320)
(197)
(295)
(2,352)
78,764
28,892
5,335
(295)
(635)
33,297
45,467
NOTE 16. GOODWILL
Goodwill varied as follows, during fiscal year:
Balance at beginning of the year
Effect of changes in exchange rates
Balance, end of year
The net carrying amount of goodwill was allocated to the following CGUs, as at:
Aerospace - Landing Gear CGU
Aerospace - Other CGUs
Goodwill
2018
86,049
5,088
91,137
$
$
2017
93,253
(7,204)
86,049
$
$
March 31, 2018 March 31, 2017
82,301
$
3,748
86,049
87,282
3,855
91,137
$
$
$
The following key assumptions were used to determine recoverable amounts for the impairment tests performed as at March 31, 2018:
Aerospace - Landing Gear CGU
Aerospace - Other CGUs
Pre-tax discount rate
Perpetual growth rate
15.0%
15.5% and 16.2%
2.8%
2.8%
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, 2018:
Aerospace - Landing Gear CGU
Aerospace - Other CGUs
Incremental increase
in pre-tax discount rate
1.6%
0.1% and 24%
Incremental decrease in
perpetual growth rate
1.5%
0.1% and -%
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 75
NOTE 17. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at
Trade payables (1)
Accrued liabilities (2)
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 18. ACCOUNTS PAYABLE - OTHER AND OTHER LIABILITIES
March 31, 2018 March 31, 2017
40,966
$
22,425
63,391
41,645
23,412
65,057
$
$
$
As at
Unpaid machinery and equipment
Deferred revenue
Other payables
Accounts payable - other and other liabilities
NOTE 19. PROVISIONS
As at March 31, 2017
Arising during the year (note 9)
Interest accretion expense
Utilized
Reversed
Discount rate adjustment
Effect of changes in exchange rates
As at March 31, 2018
Less: current portion
Long-term portion
$
March 31, 2018 March 31, 2017
2,222
$
129
205
2,556
2,364
154
16
2,534
$
$
Onerous
contracts
110
$
Asset
retirement
obligations
6,056
$
Product
warranty
Other
(notes 9, 26)
$
8,409
$
11,993
$
199
—
(70)
—
—
4
243
243
$
— $
118
139
(110)
—
(433)
—
5,770
—
5,770
$
$
1,238
—
(892)
(1,679)
—
380
7,456
7,456
$
— $
3,122
—
(4,214)
(1,627)
—
47
9,321
9,170
151
$
$
$
$
Total
26,568
4,677
139
(5,286)
(3,306)
(433)
431
22,790
16,869
5,921
76 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
NOTE 20. LONG-TERM DEBT
As at
March 31, 2018 March 31, 2017
Senior Secured Syndicated Revolving Credit Facility (“Credit Facility“)
$
54,155
$
Governmental authorities loans
Obligations under finance leases
Deferred financing costs, net
Less: current portion
Long-term debt
Credit 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
52,540
25,269
(923)
131,041
5,356
125,685
$
$
55,856
49,133
29,787
(637)
134,139
6,792
127,347
March 31, 2018 March 31, 2017
$
200,000
$
200,000
US$
42,000
US$
42,000
Libor + 1.125%
Libor + 1.4%
3.0%
2.4%
(1) Includes an accordion feature to increase the Credit Facility up to $300 million during the term of the credit agreement, subject to lenders’ approval.
During fiscal 2018, the Corporation reached an agreement with its syndicate of banks to extend the term of the Credit Facility through May 24,
2022. The authorized amount remains $200,000 and most other key terms remain unchanged, though the amount of the accordion feature,
which is subject to lenders approval, has increased from $75,000 to $100,000. Financing costs totaling $524 were deferred and are amortized
over the term of the related loans using the effective interest rate method. The Credit Facility is secured by all assets of the Corporation and its
subsidiaries.
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 certain federal and provincial industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refunded. Repayments are mainly based on sales of specific programs
or the growth in sales of all or certain of Héroux-Devtek’s product lines. Assumptions underlying loan repayments are reviewed at least annually.
During fiscal 2018 and 2017, the following adjustments were made to these assumptions:
As at March 31, 2018, the Corporation updated the estimated repayment schedule for certain of its government authorities loans, taking
into account revised assumptions mainly related to sales forecasts. This resulted in a non-cash gain of $1,834, which was included in Net
financial expenses (income) (see note 8).
As at March 31, 2017, the Corporation updated the estimated repayment schedule for one of its government authorities loans, mainly taking
into account an agreement with the related government authority extending the duration of the investment period of the loan by three years.
These adjustments resulted in a non-cash gain of $6,375 which were included in Net financial expenses (income) (see note 8) and classified
by management as a Non-recurring item (see note 9).
Governmental authorities loans usually bear no or below-market interest. 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 a financial expense.
The effective interest rates for these loans were in the range of 2.2% to 7.2% as at March 31, 2018 (2.5% to 7.2% as at March 31, 2017).
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 77
Finance leases
Obligations under finance leases bear fixed interest rates between 2.4% and 3.7% as at March 31, 2018 and March 31, 2017, 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 $1,928 ($2,178 as at March 31, 2017).
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 during the fiscal year ended March 31, 2018.
Minimum repayments
Minimum repayments of long-term debt during the next five years are as follows:
Fiscal years
2019
2020
2021
2022
2023
Beyond 5 years
Sub-Total
Less: Interest
Debt balance (1)
Finance leases
5,839
$
5,732
5,648
5,420
3,339
1,219
Governmental
authorities loans
208
$
2,256
2,752
5,458
5,915
56,266
27,197
1,928
25,269
$
$
72,855
20,315
52,540
Credit Facility
1,625
1,625
1,625
1,625
54,391
—
60,891
6,736
54,155
$
$
$
$
Total
7,672
9,613
10,025
12,503
63,645
57,485
160,943
28,979
131,964
(1) Before net deferred financing costs.
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
Amortization of financing costs (note 8)
Fees incurred to renew the Credit Facility
Interest accretion and adjustments on governmental authorities loans (note 8)
Effects of fluctuations in exchange rates
March 31, 2018
March 31, 2017
$
134,139
$
3,821
(4,634)
238
(524)
466
(2,465)
146,284
23,021
(32,797)
319
—
(4,122)
1,434
Long-term debt, at end of the fiscal year
$
131,041
$
134,139
NOTE 21. OTHER LIABILITIES
As at
Deferred revenue
Net defined benefit obligations (note 25)
Progress billings
Other Liabilities
78 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
$
March 31, 2018 March 31, 2017
3,099
$
3,610
78
6,787
2,639
3,958
19
6,616
$
$
NOTE 22. ISSUED CAPITAL
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
36,122,050
$
48,750
47,772
2018
Issued
capital
77,217
298
590
Number
36,006,935
$
70,750
44,365
2017
Issued
capital
75,916
730
571
36,218,572
$
78,105
36,122,050
$
77,217
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
2018
Weighted-
average
exercise price
Number of
stock options
2017
Weighted-
average
exercise price
Number of
stock options
914,295
$
243,500
(48,750)
(3,750)
1,105,295
$
$
10.88
14.93
3.71
11.71
12.09
608
879,545
$
113,000
(70,750)
(7,500)
914,295
$
$
10.02
15.01
6.63
11.71
10.88
713
The weighted-average share price at the date of exercise of stock options in fiscal 2018 was $14.44 ($14.70 in 2017).
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
Expected volatility
Expected forfeiture
Expected dividend distribution
Compounded risk-free interest rate
2018
2017
243,500
113,000
$
$
3.84
935
$
$
4.76
538
4.9 years
3.9 years
25%
4.5%
None
1.6%
38%
—%
None
0.6%
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 79
As at March 31, 2018, 2,808,257 common shares are reserved for issuance of stock options, of which 1,514,481 remained to be issued, compared
to 1,563,231 as at March 31, 2017.
As at March 31, 2018, 1,105,295 stock options were issued and outstanding and can be detailed as follows:
Exercisable price
$3.01 to $4.09
$10.71 to $11.71
$14.93 to $15.01
Outstanding options
Weighted-average
years to maturity
0.36
3.24
6.41
4.09
Number
65,200
683,595
356,500
1,105,295
Weighted-average
exercise price
$3.08
11.45
14.95
$12.09
Vested options
Number
65,200
592,571
92,625
750,396
Weighted-average
exercise price
$3.08
11.53
14.96
$11.22
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
2018
2017
47,772
18,800
$
260
$
44,365
16,755
239
As at March 31, 2018, 340,000 shares are reserved for issuance under the stock purchase and ownership incentive plan, of which 58,866
remained to be issued, compared to 106,638 as at March 31, 2017.
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
Closing balance of DSUs outstanding
DSU expense
Fair value of outstanding DSUs, end of year
Movements in outstanding PSUs and related expense were as follows, for fiscal year:
In number of PSUs
Balance, beginning of year
Issued
Cancelled/forfeited
Settled
Closing balance of PSUs outstanding
PSU expense
Fair value of vested outstanding PSUs, end of year
80 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
2018
2017
135,815
32,588
(32,233)
136,170
$
$
910
1,962
$
$
124,333
33,740
(22,258)
135,815
273
1,517
2018
2017
114,434
100,650
(3,802)
(23,334)
187,948
$
$
163
842
$
$
151,392
58,500
(1,941)
(93,517)
114,434
635
1,004
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
Balance as at March 31, 2017
Other comprehensive income
Balance as at March 31, 2018
Balance as at March 31, 2016
Other comprehensive income (loss)
Balance as at March 31, 2017
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)
Exchange
differences
on translation
of foreign
operations
$
$
14,256
5,860
20,116
$
$
Exchange
differences
on translation
of foreign
operations
Hedge of net
investments
in foreign
operations
Cash flow
hedges
(521) $
(7,437) $
545
1,514
Total
6,298
7,919
24
$
(5,923) $
14,217
Hedge of net
investments
in foreign
operations
Cash flow
hedges
Total
$
$
25,691
(11,435)
14,256
$
$
(643) $
122
(521) $
(6,260) $
18,788
(1,177)
(7,437) $
(12,490)
6,298
Income tax expense reported in the consolidated statements of income
Consolidated statements of changes in shareholders’ equity
Expense 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
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% (26.7% in 2017)
Income tax rate differential – foreign subsidiaries
Permanent differences
Impact of US Tax Reform (note 9)
Other items
Income tax expense
2018
7,100
67
7,167
68
826
894
2018
5,554
(4,251)
827
4,912
125
7,167
$
$
$
$
$
$
2017
5,934
(1,604)
4,330
1,355
(166)
1,189
2017
9,651
(4,672)
(505)
—
(144)
4,330
$
$
$
$
$
$
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.
Income tax expense includes an unfavourable amount of $125 ($144 favourable in 2017) with respect to the resolution of income tax matters
and a reduction in deferred income tax liabilities in light of changes in tax audit matters.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 81
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, 2018 March 31, 2017
$
$
$
$
4,126
$
3,872
10
—
—
14,012
22,020
$
(557)
(14,863)
(2,891)
(64)
(24)
(18,399) $
3,621
$
2,948
7,120
36
189
61
21,076
31,430
(566)
(22,929)
(3,913)
—
—
(27,408)
4,022
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, 2018 March 31, 2017
$
$
7,388
(3,767)
3,621
$
$
9,964
(5,942)
4,022
As at March 31, 2018, net deferred income tax assets of $8,790 were recognized ($10,961 as at March 31, 2017) 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 benefits of these deductible temporary differences and non-capital losses
carried forward.
As at March 31, 2018 and 2017, there were no operating losses carried forward or other temporary differences for which related deferred income
tax assets have not been recognized in the consolidated financial statements.
The Corporation had the following non-capital losses available for carry-forward:
As at
Canada
United States
United Kingdom
March 31, 2018 March 31, 2017
$
$
19,943
$
53,506
—
73,449
$
12,797
55,688
3,219
71,704
As of March 31, 2018, the Corporation had non-capital losses in Canada and United States which expire in the years 2036 to 2038.
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, 2018, the temporary differences associated
with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $25,151 ($14,808 in 2017).
82 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
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 2018, 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 $1,489 ($2,078
in 2017) while the cash contributed to its defined contribution plans amounted to $3,200 ($3,401 in 2017).
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 63% in equity funds, 29% 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:
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, 2018 March 31, 2017
59,064
$
57,496
(1,568)
(2,042)
(3,610)
61,216
58,974
(2,242) $
(1,716)
(3,958) $
$
$
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 8)
Termination benefits (note 9)
Administrative costs
Defined benefit pension expense recognized in the consolidated statements of income
2018
1,459
153
325
161
2,098
$
$
2017
1,500
330
143
123
2,096
$
$
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 83
The total amount recognized in other comprehensive income is as follows, for fiscal year:
Remeasurements
Gain (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
Loss (gain) from change in demographic assumptions
Losses from changes in financial assumptions
Experience gains
Benefits paid
Termination benefits
Past service benefits
Defined benefit obligations, end of year
The fair value of plan assets is as follows:
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
84 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
2018
2017
(2) $
(915)
1,257
(79)
261
$
2,109
(1,588)
505
4,052
5,078
2018
2,038
$
2017
6,057
2018
61,106 $
1,459
2,270
731
2
915
(1,257)
(2,619)
—
325
62,932
$
2017
60,055
1,500
2,335
629
(2,109)
1,588
(505)
(2,530)
143
—
61,106
$
$
$
$
$
$
March 31, 2018 March 31, 2017
51,385
$
2,005
4,052
2,078
629
(2,530)
(123)
57,496
57,496
2,117
(79)
1,489
731
(2,619)
(161)
58,974
$
$
March 31, 2018 March 31, 2017
62%
31%
7%
100%
63%
29%
8%
100%
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
2018
3.60%
3.50%
86
89
87
90
2017
3.70%
3.50%
87
89
86
89
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, 2018:
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
%
(17.7)
18.9
0.1
(0.1)
5.6
(5.6)
(7.0)
7.8
—
—
2.6
(2.6)
Corporation’s pension benefits future cash flows
The cash contributions expected to be made to these plans in fiscal year 2019 amount to $1,453.
The duration of the defined benefit obligations at March 31, 2018 is 14.8 years (13.3 years in 2017). 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, 2018 March 31, 2017
1,656
$
1,668
5,369
98,870
107,563
1,689
1,747
5,753
100,542
109,731
$
$
Defined contribution pension plans
The defined contribution pension plans’ costs are as follows, for fiscal year:
Defined contribution pension plan costs
2018
3,200
$
2017
3,401
$
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 85
NOTE 26. COMMITMENTS
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:
2019
2020
2021
2022
2023 Thereafter
Total
2018
Total
2017
Operating leases - Buildings and facilities(1)
1,502
1,214
1,194
1,197
1,200
5,430 $11,737 $ 11,630
Building, machinery and equipment acquisition commitments
2,952
—
—
—
—
— $ 2,952 $ 2,157
(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, 2018, the duration of these indemnification agreements could extend
up to fiscal year 2024. As at March 31, 2018, an amount of $5,012 ($5,153 in 2017) 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, 2018, the Corporation has outstanding letters of credit amounting to $3,302 ($5,027 in 2017).
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.
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,
Accounts payable – other and other liabilities
Provisions
Progress billings
Customer advances
Income tax payable
Effect of changes in exchange rates(1)
2018
(2,335) $
(184)
9,539
(869)
719
(3,335)
961
6,136
1,916
950
13,498
$
$
$
2017
4,106
2,325
2,855
2,605
(5,115)
(471)
(2,969)
2,587
(178)
(2,439)
3,306
(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.
86 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
NOTE 29. GEOGRAPHIC INFORMATION
The geographic segmentation of the Corporation’s assets is as follows:
As at
Canada
U.S.
March 31, 2018
Total
U.K.
Canada
U.S.
U.K.
Total
March 31, 2017
Property, plant and equipment, net
$ 95,492
$ 71,183
$ 12,828
$ 179,503
$ 104,201
$ 77,111
$ 11,535
$ 192,847
Finite-life intangible assets, net
Goodwill
21,166
13,838
1,973
9,691
12,717
67,608
35,856
91,137
28,536
13,838
3,010
9,995
13,921
62,216
45,467
86,049
Geographic sales based on the customers’ location are detailed as follows, for fiscal year:
Canada
United States
United Kingdom
Other countries
2018
39,244
240,377
43,713
63,230
386,564
$
$
NOTE 30. EXECUTIVE COMPENSATION
The executive compensation expense to key management personnel and the board of directors 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
NOTE 31. FINANCIAL INSTRUMENTS
2018
3,458
156
1,655
5,269
$
$
2017
77,537
234,592
39,528
54,879
406,536
2017
3,342
167
1,378
4,887
$
$
$
$
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 87
The classifications of financial instruments as well as their carrying amounts and fair values are summarized as follows:
As at
March 31, 2018
March 31, 2017
Financial assets
Cash and cash equivalents
Derivative financial instruments(1)
Equity swap instrument
Financial Liabilities
Fair value
hierarchy
Carrying
amount
Fair Value
Fair value
hierarchy
Carrying
amount
Fair Value
Level 1 $
93,209 $
93,209
Level 1
$
42,456
$
42,456
Level 2
Level 1
2,948
2,249
2,948
2,249
Level 2
Level 1
$
98,406 $
98,406
2,058
1,743
46,257
2,563
134,776
137,339
$
$
$
2,058
1,743
46,257
2,563
142,396
144,959
$
$
$
Derivative financial instruments
Level 2 $
2,778 $
Long-term debt, including current portion
Level 2
131,964
$
134,742 $
2,778
137,493
140,271
Level 2
Level 2
(1) Excluding equity swap instrument
Derivative financial instruments - The fair value of derivative financial instruments recognized in the consolidated balance sheets has been
determined using Corporation’s valuation models. 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 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 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 and United Kingdom operations
and related to sales contracts, net of the forecasted cash outflows in U.S. currency made by its Canadian and United Kingdom operations and
related essentially to raw materials and certain other material costs.
As at March 31, 2018, in accordance with this policy, the Corporation held forward foreign exchange contracts to sell US$110.1 million at a
weighted-average rate of 1.3046 (Canadian dollar over U.S. dollar, “cad/usd”). As at March 31, 2017, these contracts totalled US$152.4 million
at a weighted-average rate of 1.3178 cad/usd. As at March 31, 2018, these contracts mature at various dates between April 2018 and March 2021,
with the majority maturing over the next fiscal year.
As at March 31, 2018, a 1% strengthening of the Canadian dollar over foreign currencies, while all other variables would remain fixed, would
have impacted the consolidated net income and the other comprehensive income as follows:
88 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
Decrease in net income
Increase (decrease) in other comprehensive income
U.S. dollar impact
(204)
638
British pound
impact
(2)
(1,250)
The foreign exchange rate sensitivity analysis shown above is calculated by aggregation of the net foreign exchange rate exposure of the
Corporation’s financial instruments including the forward foreign exchange contracts as at the consolidated balance sheet date.
Interest-rate risk
The Corporation is exposed to interest rate fluctuations primarily due to its variable interest rate on its long-term debt’s Credit Facility (see note
20). In addition, interest rate fluctuations could also have an impact on the Corporation’s interest income which is derived from its cash and cash
equivalents.
The Corporation’s interest rate policy requires maintaining an appropriate mix of fixed and variable interest rates debt to mitigate the net impact
of fluctuating interest rates. Management as such may use derivatives to maintain a fixed debt ratio of between 40% and 70% of long-term debt,
excluding government loans.
The following interest-rate swaps were used to this end during fiscal 2018 and 2017:
Notional
US$ 5,000
US$ 10,000
Fixed rate
1.65 %
2.38 %
Inception
March 2014
December 2015
Maturity
December 2018
December 2018
The interest-rate swap rates mentioned above exclude the additional bank relevant margin (see note 20). The cash flows related to the interest-
rate swaps are expected to occur in the same periods as they are expected to affect net income.
Derivatives related to business acquisition
The agreement to acquire CESA (see note 5) exposes the Corporation to new foreign currency and interest rate risks related to the purchase
price and financing. An increase in value of the Euro compared to the Canadian dollar would increase the anticipated transaction price, and an
increase in interest rates underlying expected debt would increase related net financial expenses (income).
In order to mitigate these risks, as at March 31, 2018, the Corporation had also 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
Fixed EUR equivalent
Euro fixed rate
€
€
25,000
34,110
1.86 %
3.32 %
Inception
October 2017
October 2017
Maturity
May 2022
June 2025
A 100 basis point variation in interest rates would have affected the Corporation’s financial results for fiscal 2018 as follows:
Impact on net income related to floating rate long-term debt
Impact on comprehensive income related to interest-rate and cross-currency interest-rate
swap agreements
100 bps increase
(255)
100 bps decrease
255
4,024
(4,542)
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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 89
As at March 31, 2018, the equity swap agreement covered 150,000 common shares of the Corporation at a price of $11.45. This agreement is
a derivative instrument that is not part of a designated hedging relationship and matures in June 2019.
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 60% of the Corporation’s fiscal 2018 sales are made to only six customers
(58% in 2017). More specifically, in fiscal 2018, the Corporation had two customers representing 26% and 11% of its consolidated sales (18%
and 13% in 2017).
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 5.3% in fiscal 2018 (5.8% in 2017) of the Corporation’s consolidated sales.
As at March 31, 2018, 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, 2018:
Balance, beginning of year
Reversed
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
2018
69
(30)
39
$
$
March 31, 2018 March 31, 2017
$
66,613
$
5,777
1,079
39
73,508
(39)
62,590
8,262
283
69
71,204
(69)
$
73,469
$
71,135
90 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
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 exclusively
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, 2018, 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
$
(1) Represents the fair value of derivative financial instruments designated in a hedging relationship.
Liquidity risk
$
FVTPL Hedging items (1)
93,209
—
2,249
— $
—
2,948
Loans and
receivables
—
73,469
—
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, 2018, the maturity analysis of financial liabilities represented the following:
Accounts payable and accrued liabilities
Accounts payable – other and other liabilities
Customer advances
Long-term debt, including current portion (note 20)
Derivative financial instruments
< 1 year
65,057
$
$
1 to 3 years
4 to 5 years
> 5 years
— $
— $
— $
2,534
12,577
7,672
389
—
—
19,638
1,215
—
—
76,148
644
—
—
57,485
530
Total
65,057
2,534
12,577
160,943
2,778
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, 2018, 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.
HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements – 91
March 31, 2018 March 31, 2017
6,792
$
5,356
$
125,685
923
93,209
38,755
379,034
0.10:1
$
127,347
637
42,456
92,320
355,868
0.26:1
$
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.
92 – HÉROUX-DEVTEK INC. – Fiscal 2018 Consolidated Financial Statements
CORPORATE INFORMATION
BOARD OF DIRECTORS
Brian A. Robbins
Chairman of the Board
Toronto, Ontario
Gilles Labbé
President and
Chief Executive Officer
Montreal, Québec
CORPORATE MANAGEMENT
Gilles Labbé
President and Chief
Executive Officer
Réal Bélanger
Executive Vice President,
Business Development and
Special Projects
LANDING GEAR OPERATIONS
Louis Morin
Corporate Director
Montreal, Québec
Paule Doré
Corporate Director
Montreal, Québec
James J. Morris
Corporate Director
Palm Desert, California
Andrew John Stevens
Corporate Director
Cheltenham, U.K.
Nathalie Bourque
Corporate Director
Montreal, Québec
Pierre Fitzgibbon
Corporate Director
Montreal, Québec
Martin Brassard
Executive Vice President and
Chief Operating Officer
Stéphane Arsenault
Chief Financial Officer
Stéphane Rainville
Vice President, Human Resources
Jean Gravel
Vice President, Sales and
Program Management
Patrick Gagnon
Director, Internal Audit and
Corporate Governance
Jean-Philippe Sanche
Director, Legal Affairs
Annie Goudreault
Vice President, Corporate Controller
Rémy Langelier
Director, Business Development
Eric Sauvageau
Director, Financial Reporting
Cambridge
47 Heroux Devtek Drive
Cambridge, Ontario
Canada N3E 0A7
519 576-8910
Saint-Hubert
4925, Chemin de la Savane
Saint-Hubert, Québec
Canada J3Y 9G1
450 646-9432
Everett
6301, 36th Avenue West,
Building A. Unit #140.
Everett, Washington
U.S.A. 98203
440 783-5255
Strongsville
15900 Foltz
Industrial Parkway
Strongsville, Ohio
U.S.A. 44149
440 783-5255
Springfield
663 Montgomery Ave.
Springfield, Ohio
U.S.A. 45506
937 325-1586
Wichita
1445 Sierra Drive,
Wichita, Kansas
U.S.A. 67209
316 943-5752
Nottingham
Urban Rd
Kirkby in Ashfield,
Nottingham
Nottinghamshire
NG17 8AP
United Kingdom
+44(0) 1623 754355
Runcorn
8 Pembroke Court,
Manor Park,
Runcorn, Cheshire
WA7 1TG
United Kingdom
+44(0) 1928 530530
Longueuil
755 Thurber Street
Longueuil, Québec
Canada J4H 3N2
450 679-5454
Laval
3675 Industrial Blvd.
Laval, Québec
Canada H7L 4S3
450 629-3454
Kitchener
1665 Highland Rd. W.
Kitchener, Ontario
Canada N2N 3K5
519 576-8910
OTHER OPERATIONS
ELECTRONIC ENCLOSURES
FLUID FILTERS
Toronto
1480 Birchmount Rd.
Toronto, Ontario
Canada M1P 2E3
416 757-2366
Bolton
Unit 1003
Wingates Industrial Estate
Westhoughton, Lancashire
BL5 3XU
United Kingdom
+44(0) 1928 530530
2018 Annual Report
93
NOTES
94
Héroux-Devtek Inc. SHAREHOLDER INFORMATION
MAISONBRISON COMMUNICATIONS
514 731-0000
info@maisonbrison.com
www.maisonbrison.com
DESIGNED AND WRITTEN BY
MaisonBrison Communications
Pour obtenir la version française de ce rapport,
veuillez contacter les relations avec les investisseurs.
ANNUAL MEETING OF SHAREHOLDERS
Friday, August 10, 2018 at 10:00 A.M.
Salon Pierre de Coubertin
Hôtel Omni Mont-Royal
1050 Sherbrooke Street West
Montreal, Québec
Canada
REGISTRAR AND TRANSFER AGENT
Computershare Trust
1500 University Street, 7th Floor
Montreal, Québec
Canada H3A 3S8
514 982-7555 /
1-800-564-6253
AUDITORS
Ernst & Young LLP
800 René Lévesque Blvd. West,
Suite 1900
Montreal, Québec
Canada H3B 1X9
514 875-6060
SHARE LISTING
Shares are traded on the Toronto
Stock Exchange
Ticker Symbol: HRX
INVESTOR RELATIONS
450 679-3330
ir@herouxdevtek.com
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HÉROUX-DEVTEK INC.
1111 Saint-Charles Street West
Suite 658, East tower
Complexe Saint-Charles
Longueuil, Québec
Canada J4K 5G4
450 679-3330
www.herouxdevtek.com