EQUIPPED TO
WEATHER TURBULENCE
2020 Annual Report
“As much as our uniquely balanced
profile has proven highly valuable
through growth times in the aerospace
industry, it will undoubtedly prove
critical in our ability to weather the
current storm and emerge faster and
stronger from the downturn.”
Royal Canadian Air Force CC-295
MARTIN BRASSARD, PRESIDENT & CEO
HÉROUX-DEVTEK
AT A GLANCE
— Founded in 1942, Héroux-Devtek now employs some 1,950
dedicated people at its 18 Centers of excellence located in
Canada, the United States, the United Kingdom and Spain.
— Héroux-Devtek is recognized for its forward thinking,
its system integration accomplishments, its engineering
prowess, its world-class service and above all, its excellence
in execution.
— Héroux-Devtek Inc. (traded on the Toronto Stock Exchange
under the symbol “HRX”) is an international aerospace
provider specializing in the design, development,
manufacture, repair and overhaul of aircraft landing gears,
hydraulic and electromechanical flight control actuators,
custom ball screws and fracture-critical components for the
global market.
— Headquartered in Québec, Canada, Héroux-Devtek is the
third-largest landing gear manufacturer in the world,
supplying leading aerospace customers operating in both
the commercial and defence sectors.
— In addition to its ability to manufacture complete landing
gear systems and components to specification, Héroux-
Devtek has built a strong reputation for its ability to
support and service landing gear systems and components
for a wide range of military and civil aircraft, including
several out-of-production aircraft. Service offerings
include complete maintenance, repair and overhaul, spares
provisioning and supply, warranty administration and
support, technical publications, as well as on-site technical
support and training.
Héroux-Devtek
- Annual Report 2020 3
DIVERSIFIED AND
BALANCED REVENUE MIX
(based on Fiscal 2020 sales)
DEFENCE / COMMERCIAL
53.7% Defence
46.3% Commercial
PROPRIETARY / BUILD-TO-PRINT
LONG TERM AGREEMENT
Other
5.7%
Helicopters
10.0%
Fighters
14.1%
Proprietary and Life
of Program Contracts
27.4%
Large Jets
42.2%
Transport
23.9%
5.1%
Business Jets
5.3%
Regional Jets
Helicopters
5.7%
2.8%
Other
Built-to-print
Other
10.8%
Built-to-print
Tier 1
15.7%
31.3%
Built-to-print
OEM
OEM/AFTERMARKET
DIVERSIFIED CUSTOMER BASE
Aftermarket
33.4%
66.6%
OEM
The Corporation serves a broad range of
customers in the different markets in which it
operates, mainly OEMs and second-tier system
suppliers.
Its customers include Airbus, BAE Systems, Boeing,
Dassault Aviation, Embraer, Leonardo, Lockheed
Martin, Safran Landing Systems, Northrop-
Grumman, Saab, Sikorsky, Textron and the U.S.
Government, among others.
FINANCIAL
HIGHLIGHTS
FISCAL YEARS ENDED MARCH 31
2020
2019
2018
2017
2016
OPERATING RESULTS
(in millions of dollars except per share data and ratios)
483.9
386.6
406.5
406.8
Sales
Operating income (loss)
Adjusted operating income (1)
Adjusted EBITDA (1)
Net income (loss)
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
Funded backlog
FINANCIAL POSITION
Cash and cash equivalents
Working capital
Total assets
Long-term debt (2)
Shareholders’ equity
PER SHARE DATA
EPS – basic and diluted (loss)
Adjusted EPS (1)
613.0
(30.1)
52.5
96.2
(50.7)
35.7
52.6
30.3
37.2
41.6
74.2
26.2
30.4
70.0
58.6
23.4
30.3
56.9
13.7
24.2
56.1
50.8
35.6
35.9
61.4
31.8
26.4
56.1
33.0
810.0
624.0
466.0
405.0
45.8
205.4
898.8
292.7
349.4
35.1
173.1
872.8
263.3
404.1
93.2
201.9
632.2
132.0
379.0
42.5
165.1
607.3
134.8
355.9
37.8
39.3
64.1
26.6
27.7
6.8
(66.3)
460.0
19.3
150.5
609.4
147.2
331.1
(1.38)
1.00
0.73
0.84
0.38
0.67
0.88
0.73
0.74
0.77
Average number of shares outstanding (diluted, in 000’s)
36,363
36,437
36,332
36,284
36,119
FINANCIAL RATIOS
Adjusted EBITDA (1) margin
15.7%
15.3%
14.7%
15.1%
15.7%
Working capital ratio
Net debt-to-equity (3)
1.95
0.71
1.93
0.56
2.86
0.10
2.58
0.26
2.34
0.39
[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.
INVESTMENT
HIGHLIGHTS
Héroux-Devtek
- Annual Report 2020 5
SOLID FINANCIAL POSITION TO WITHSTAND TURBULENT TIMES.
AVAILABLE LIQUIDITY, CASH FLOW GENERATION AND IMPROVED DEBT MATURITY PROFILE.
$193 MILLION OF AVAILABLE LIQUIDITY
AS AT MARCH 31, 2020
DEBT MATURITY PROFILE
Revolving Facility
Term Loan Facility
Term Loan Facility
$15 million
Cash and Cash
Equivalents
$46 million
)
M
$
(
s
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n
e
m
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a
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e
R
l
a
t
i
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Revolving facility
$132 million
MAINTAINING STRONG CASH FLOW AND
MAINTAINING STRONG CASH FLOW AND
CONSISTENTLY REIMBURSING DEBT (in millions of dollars)
CONSISTENTLY REIMBURSING DEBT (in millions of dollars)
$96.5 $60.0
2021
2022
2023
2024
2025
2026
Fiscal Year
MAINTAINING STRONG CASH FLOWS
(in millions of dollars)
MAINTAINING STRONG CASH FLOW AND
CONSISTENTLY REIMBURSING DEBT (in millions of dollars)
Cash Flows Related to Operating Activities
Free Cash Flow (1)
$7 ($66)
$56 $33
$56 $51
$70 $59
$53 $30
)
s
r
a
l
l
o
d
f
o
s
n
o
i
l
l
i
m
n
I
(
150
100
50
0
-50
-100
FY16
FY17
FY18
FY19
FY20
[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.
EXECUTIVE
CHAIRMAN
OF THE BOARD
OF DIRECTORS
MESSAGE TO
SHAREHOLDERS
BETTER POSITIONNED THAN EVER
BEFORE TO FACE A CRISIS OF
UNPRECEDENTED MAGNITUDE
Dear Shareholders,
By virtually any metric, the crisis we are currently experiencing is the most
serious and sudden one to have hit the aerospace industry since at least the
early-1980s when I originally entered the sector.
The early 1990s were particularly challenging for the industry, which was hit
on several fronts. The end of the Cold War led to a significant reduction in
the defence budgets of several superpowers globally, while stagflation in the
early 1990s resulted in a 27% decrease in commercial air travel. Following
this, the industry entered a phase of consolidation, resulting in mergers that
spawned many of the large aerospace companies that lead the market today.
In the early 2000s, the events of September 11, 2001 challenged the industry
with a 20% decrease in air traffic due to a loss of passenger confidence and
an increase in air travel costs due to enhanced security which persists today.
Finally, the 2007-2008 financial crisis led to a significant drop in demand
for commercial sector products due to lower air traffic. This drop was short-
lived however, as the super cycle in the aerospace industry that had begun
following the market recovery in 2003 lasted for 18 years until the current
pandemic brought it to an end.
WHAT MAKES THE CURRENT CRISIS DIFFERENT
FOR HÉROUX-DEVTEK
In comparison, the magnitude of the current crisis has been much more
significant. Air traffic all but stopped in April, with a 95% drop in passenger
traffic as compared to April of 2019, and the International Air Transport
Association (IATA) currently forecasts a 48% decline overall in 2020 over 2019.
The measures taken by governments to stop the spread of the COVID-19
virus, such as the closure of borders, have led to this drastic decrease in
air traffic. Deprived of a key portion of their revenues, many airlines are
experiencing financial difficulties, forcing several to delay orders for new
commercial aircrafts. These delays, particularly in the large commercial aircraft
segment, have had an impact on OEMs, which in turn have had to reduce their
production rates by more than 40%.
Beyond the challenges faced in the commercial segment, defence spending
is expected to remain strong in the year ahead, with fighter jets specifically
forecasted to continue to grow. Our presence in this market will help sustain
our operations while the commercial market recovers.
Héroux-Devtek
- Annual Report 2020 7
LARGE COMMERCIAL AIRCRAFT DELIVERIES 1980-2019
1983
1990
Oil shock recession
Gulf War / Recession
2001
9/11
2008
Global Financial Crisis
2020
COVID-19
2019
737-MAX
Sources: Boeing and Airbus
While we are facing a larger crisis, Héroux-Devtek is not the
same business it was when we faced earlier challenges. Our
growth over the last years has brought several key changes
that make me very confident that we will be able to overcome
the current downturn, continuing to generate strong free cash
flows and largely protecting our profitability across each of our
business units.
Today, we commercialize complete landing gear systems and
actuators, as opposed to components of landing gears like in
the past. This means we serve OEMs directly, in addition to key
Tier 1 suppliers, which, along with the higher complexity of our
product, reduces our vulnerability to potential repatriation by
customers. 40% of our sales are now also derived from products
for which we own the intellectual property.
In addition, the diversity of the products we manufacture, which
can equip several types of aircraft in both the defence and
commercial aviation markets and our presence in both North
America and Europe allow us to reach a larger market and gives
us access to a diversity of clienteles. This is exemplified by our
firm order backlog, which reached $810 million at year-end, two
thirds of which is related to the more stable defence segment.
IN THE FACE OF ADVERSITY:
RESILIENCE IS ONE OF OUR CORE VALUES
What’s also historically been a distinctive attribute of the culture
we have built is the resilience of our management team and
employees. As one of our core values, resilience has helped
us weather recessions and downturns in the past. Each time,
we have been able to emerge as a stronger, more experienced
organization.
While the scope and magnitude of the COVID-19 disruptions
may be unprecedented, it still calls for the same disciplined
approach of proactive decision-making, careful planning and
resilience. The clear and decisive actions taken by management
to adjust production capacity, lower costs, and access strong
liquidities are a clear demonstration of this.
Leveraging the strong governance practices and exceptional
multidisciplinary expertise at the Board level, we will remain
on the lookout for market movements caused by the crisis and
will be ready to act in order to take advantage of any strategic
opportunities that arise, including through acquisitions.
A STRONG MANAGEMENT TEAM
I would like to thank Martin Brassard, the entire management
team and our dedicated employees for the excellent fiscal year
that we have just completed and the strategies swiftly deployed
to deal with the turbulence.
I would also like to thank each member of the Board of
Directors for their support and the quality of their contribution
throughout the year, as well as our valued shareholders for their
continued trust.
While we don’t know with certainty the speed at which
passenger traffic demand will return to more normal patterns,
we do know that Héroux-Devtek could not have entered this
downward market with an overall better structure, vision,
market position and team.
GILLES LABBÉ
EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS
PRESIDENT
& CEO
MESSAGE TO
SHAREHOLDERS
EQUIPPED TO FACE MORE CHALLENGING
TIMES ON THE HEELS OF A RECORD YEAR
Dear Shareholders,
In June 2019, I proudly became CEO of Héroux-Devtek. The Company was
in a great position, with strong cash flows and solid orders from our civil
and defence customers around the world. We had recently made acquisitions
which both reinforced our position in our markets and opened up new
avenues for expansion. Fiscal 2020 was also a solid year of organic growth
and, as a result, our sales reached an all-time high at $613 million, an increase
of 26.7% over last year.
And then, the Covid-19 pandemic struck, harming economies around
the world to an unprecedented degree. The civil aviation industry was hurt
tremendously, forcing us to revise our growth forecasts; we therefore recorded
$86 million of non-cash impairment charges, which resulted in a net loss
of $51 million. If we exclude these charges, our earnings per share were at
a record high of $1.00, compared to $0.84 last year.
OUR INDUSTRY REALITY WITH COVID-19
Over a short period of time, we had to make important adjustments to adapt
to the new reality. Our Company was deemed an essential service; so, we
promptly developed security measures to protect our employees while they
worked during the pandemic. Our first operations to face COVID-19 were in
Spain where our local team put in place excellent security measures that we
were able to emulate in our 17 other plants around the world. Thanks to our
quick reaction and effective protocols, I am proud to confirm that we have not
had any virus transmission within any of our facilities.
The pandemic had a huge impact on commercial airlines, which grounded
most of their fleet, facing a year-over year demand decrease of 95% in the
month of April. We had to adjust our manufacturing capacity to the realities
of the market, resulting in a 10% workforce reduction and the closure of
our Montreal facility. These difficult decisions will allow us to maintain our
competitive cost base and remain profitable as we weather the storm.
Héroux-Devtek
- Annual Report 2020 9
Boeing MQ-25 Unmanned Aerial Refueler
LOOKING INTO THE FUTURE:
EQUIPPED TO WEATHER THE STORM
There are four main reasons why Héroux-Devtek is in a strong
position to face this storm and come out stronger than ever.
First, we have a strong financial position and a very healthy
balance sheet. Our liquidity at year-end stood at $195 million
and we expect to continue generating positive cash flow in
fiscal 2021. As well, we extended our revolving credit facility to
December 2024, giving us flexibility we may need in the future.
Second, we have a strong backlog valued at $810 million, with
two thirds coming from the defence market. This sector is
widely expected to be relatively untouched by the effects of the
pandemic. Our defence order book is diversified by segment
and by geography: it includes fighter jets, cargo aircraft and
helicopters from various OEMs and governments across North
America and Europe.
Thirdly, our defence sales should increase year over year as
we are entering the ramp-up phase of several important new
platforms for Héroux-Devtek. We will deliver our first F/A-18
main landing gear system to Boeing later this year, a program
with many opportunities both for new aircraft and aftermarket
requirements. We are also developing the complete landing
gear system for its MQ-25 unmanned tanker. In addition, we
expect growth from programs that are entering into service,
such as the Sikorsky CH 53K and the Saab Gripen E.
Fourthly, the depth and breadth of our management team and
our talented employees will continue to play a key role in the
resilience and success of our Company. Héroux-Devtek was
founded in 1942, and, to this day, its employees have always
been its strength. I want to take this opportunity to thank each
and every one of them for their dedication, commitment and
support.
FINAL WORDS
Taking over from Gilles last year was a humbling experience.
Héroux-Devtek is now the third-largest landing gear
manufacturer in the world and has strong relationships with
aircraft manufacturers, governments and suppliers. This is no
small feat under any circumstances and is the result of Gilles’
efforts, along with the hard work of the senior management
team and dedicated employees. I would like to thank our clients
and suppliers for the trust and partnership that they continue to
place in us.
Finally, I would like to thank our Board members for their
continued support, as well as the quality of their advice as
we continue in this new market environment. Together, we,
including employees, management and board members, will
weather the storm and come out stronger and better than ever.
MARTIN BRASSARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BOARD OF DIRECTORS
Héroux-Devtek’s Board of Directors is composed of eight members from various
sectors, including the aerospace industry and the business world, providing
the management team with a comprehensive and experience-rich perspective.
3
6
1
4
7
2
5
8
1 Gilles Labbé
5 Louis Morin
Executive Chairman of the board
Non-independent board member
since 1985
President, Busrel Inc.
Independent Director since 2008
Chair of the Audit Committee
2 Nathalie Bourque
6 James J. Morris
Corporate Director and consultant
Independent board member since 2015
Member of the Audit Committee
3 Martin Brassard
President and Chief Executive Officer
Non-independent board member
since 2019
4 Paule Doré
Corporate Director
Independent board member since 2010
Chair of the Human Resources and
Corporate Governance Committee
Corporate Director and consultant
Independent Director since 2013
Member of the Human Resources
and Corporate Governance Committee
7 Brian A. Robbins
Executive Chairman, Exco Technologies
Limited
Lead Director, Independent board
member since 2000
Member of the Human Resources and
Corporate Governance Committee
8 Beverly Wyse
Corporate Director and consultant
Independent Director since 2019
Member of the Audit Committee
Héroux-Devtek
- Annual Report 2020 11
One year anniversary of the closing of the CESA acquisition
STRATEGIC PILLARS
AND CORPORATE PRIORITIES
FINANCIAL
MAXIMIZE SHAREHOLDER VALUE
OPERATIONAL
FOCUS ON EXCELLENCE
— Seize growth opportunities even through
— Maintain the best operational track record
challenging times
— Control costs strategically
— Extract operational leverage
— Remain partners of choice for customers
— Deliver excellence
— Implement best-in-class processes and
— Further deleverage our balance sheet
technologies
— Leverage position as global supplier
EMPLOYEES
FOSTER OUR INTRAPRENEURIAL CULTURE
CUSTOMERS
EXCEED EXPECTATIONS
— Resilience
— Respect
— Responsibility
— Recognition
— Reliability
— Quality
— Commitment
— Agility
FEATURED
SUPPLY CONTRACTS
1
2
COMMERCIAL
1 Boeing 777 and 777X
Héroux-Devtek supplies complete landing gear systems and spare
parts for commercial jets. In addition to the ongoing delivery of
the Boeing 777 aircraft to customers worldwide, Boeing has made
significant progress this past year towards the entry into service
slated for 2021 of its much awaited 777X model, which will be
the world’s largest twin-engine jet. The first flight of the Boeing
777X was successfully completed in January 2020 and significant
additional milestones have been reached since.
2 Dassault F6X
Héroux-Devtek supplies the landing gear systems for Dassault
Aviation’s Falcon 6X as part of a design, manufacturing and life cycle
contract. Capable of flying 5,500 nm (10,186 km), the Falcon 6X is
the most spacious, modern and agile jet in business aviation.
DEFENCE
3 Sikorsky CH-53K
6 Saab Gripen E
Héroux-Devtek supplies the landing gear systems for the new
Sikorsky CH-53K King Stallion heavy lift helicopter as part of a
design, manufacturing and life cycle contract. Currently in its final
stage of development test – expected to carry through to the end
of 2020, the CH-53K will be the most powerful and heaviest-lifting
helicopter ever used by the U.S. Marine Corps.
Héroux-Devtek supplies the complete landing gear systems for
Saab’s Gripen E fighter aircraft as part of a design, manufacturing
and life cycle contract. The contract covers a total of 96 aircraft
representing firm orders for Gripen E from the Swedish and Brazilian
Air Forces. The contract also includes the supply of spare parts. The
Gripen E entered into production in 2019.
4 Lockheed Martin C-130J Super Hercules
7 Boeing MQ-25
Engineered and commercialized by Lockheed Martin, the C-130J
Super Hercules is one of the most widely used military transport
aircraft, particularly for humanitarian missions. Héroux-Devtek
has been involved for over three decades in support of Lockheed
Martin’s military program. For the C-130J, Héroux-Devtek
manufactures and assembles the landing gear for Lockheed Martin’s
global production and provides spare parts over a five-year period
which began in January 2020.
5 Boeing F-18
In early Fiscal 2020, Héroux-Devtek concluded a new agreement
to supply the main landing gear for the Boeing F/A-18E/F Super
Hornet and its derived version, the EA-18G Growler. The agreement
includes the supply of spare parts and aftermarket services.
The F-18 delivers cutting edge, next-generation multi-role strike
fighter capability. Delivery of the first shipset is expected in late
calendar 2020.
When it goes into service, the MQ-25 drone will become
the U.S. Navy’s first operational carrier-based unmanned aircraft.
A demonstration of engineering prowess, the MQ-25 was designed
to provide in-flight refuelling capability. Héroux-Devtek’s contract
supports Boeing’s engineering and manufacturing development
program with the initial objective to provide four MQ-25 aircraft
to the U.S. Navy for Initial Operational Capability by 2024. In April
2020, the US Navy has awarded Boeing a new contract to acquire
three more MQ-25 tankers, bringing the program’s total to seven
aircraft.
Héroux-Devtek
- Annual Report 2020 13
.
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5
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7
6
GLOBAL CENTERS
OF EXCELLENCE
12
5
3
4
2
1
6
7
8
13
10
9
11
Through a combination of organic
development and strategic acquisitions
over the years, Héroux-Devtek has built
a strong, industry-leading diversified
production capacity across its 18
Centers of excellence in North America
and Europe. In addition to being ideally
located in close proximity to partner
and supplier plants, our sites are often
within close range of our customers’
assembly or maintenance facilities,
thereby simplifying deliveries and
enabling optimal customer service
experiences.
CANADA
1 St-Hubert, Québec
4 Montréal (Anjou),
Design, engineering and product
support. Technical expertise and
state-of-the-art testing facility
Québec (Alta Précision)
Manufacturing of medium complex
landing gear components
2 Longueuil, Québec
Repair and overhaul activities,
finishing and assembly of landing
gear
3 Laval, Québec
Manufacturing and assembly of
actuators. Manufacturing of high
precision, small and medium
landing gear components
5 Montréal (Pointe aux trembles),
Québec (Tekalia Aeronautik)
Surface treatment services
6 Kitchener, Ontario
Manufacturing of medium to large
complex landing gear components
7 Cambridge, Ontario
Manufacturing of ultra-large-scale
complex landing gear components
8 Scarborough, Ontario
Electronic enclosures, heat
exchangers and cabinets
Héroux-Devtek
- Annual Report 2020 15
14
15
16
18
17
USA
UNITED KINGDOM
SPAIN
14 Nottingham, Nottinghamshire
Manufacturing of small to medium
landing gear components
15 Runcorn, Cheshire
Repair and overhaul activities,
finishing and assembly of landing
gear, product support, testing and
design engineering
16 Bolton, Westhoughton
Design, manufacturing, assembly and
testing of fluid filtration applications
17 Seville (CESA – Compañia Española
de Sistemas Aeronáuticos, S.A.)
Assembly and installation of aircraft
components at customer assembly
lines
18 Getafe (CESA – Compañia Española
de Sistemas Aeronáuticos, S.A.)
Design, engineering, assembly
and support for landing gear and
actuation systems
9 Strongsville, (Greater Cleveland), Ohio
Finishing and assembly of landing gear
10 Springfield, Ohio
Manufacturing of medium to large
complex landing gear and titanium
components
11 Wichita, Kansas
Repair & Overhaul activities and
manufacturing of hydraulic systems
and components
12 Everett, Washington
Final assembly of Boeing 777/777X
landing gear systems
13 Livonia, Michigan
(Beaver Aerospace and Defence)
Design and manufacturing of ball
screws and electro-mechanical linear
actuation systems
FIFTY YEARS
ON THE MOON
The year 2019 marked the 50th
anniversary of Héroux-Devtek’s
presence on the moon. Or rather, the
presence, on the moon, of a landing
gear manufactured by Héroux-Devtek.
The company, then called Héroux
Machine Parts Limited, was retained by
NASA to build the landing gear for the
lunar module that would land on the
moon with astronauts Neil Armstrong
and Buzz Aldrin on board.
The company was awarded the contract at the end of 1965, a contract worth
$350,000. The order was for the construction of the landing gear legs for
the lunar module, which were to be in the shape of “spider legs.” This NASA
specification was based on the dual role that the landing gear would play.
In addition to allowing the lunar module to land on the moon’s surface, the
landing gear was also meant to serve as a launch pad to propel the module to
its rendezvous point.
In all, the Héroux-Devtek team delivered 17 sets of four legs for some 15 lunar
modules. Héroux-Devtek’s landing gear equipped lunar modules for all Apollo
missions. In total, there have been six missions that have brought astronauts
to the lunar surface. Some half a century later, the landing gears used for
these missions are still on the moon in six different locations.
It took a lot of ingenuity to design and manufacture the parts requested
according to NASA’s very detailed and precise specifications. But Héroux-
Devtek’s team rose to the challenge, a testament to their expertise. This
mission became a calling card for the Company on the international scene
and continues to be part of its identity today.
To mark this event, Canada Post has issued two commemorative stamps in
honour of the 50th anniversary of the Apollo 11 mission and the Canadians
who contributed to the success of this historic accomplishment.
CORPORATE
TEAM
OPERATIONS
MANAGEMENT TEAM
Héroux-Devtek
- Annual Report 2020 17
Gilles Labbé
Executive Chairman of the Board
Martin Brassard
President and Chief Executive
Officer
Patrick Gagnon
Vice-President, Corporate
Controller
Julie Lapointe
Director, Financial Reporting
Stéphane Arsenault
Vice-President and Chief
Financial Officer
Jean Gravel
Vice-President, Sales & Programs
Olivier Perron
Director, Tax
Steve Plourde
Director, Internal Audit
& Corporate Governance
Stéphane Rainville
Vice-President, Human Resources
Jean-Philippe Sanche
Director, Legal Affairs
Alexandre Verdon
Vice-President, Business
Development
Jack Curley
Vice-President,
Central Region
Dominique Dallaire
Vice-President,
Eastern Region
Marc-Olivier Gagnon
Vice-President Product
Support
José Leal
Managing Director, CESA
Mike Meshay
Vice-President, Beaver, Magtron
and Wichita
Daniel Normandin
Vice-President Engineering,
QA & Environments
Gaétan Roy
Managing Director, UK
Héroux-Devtek
- Rapport Annuel 2020 110
SHAREHOLDER
INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
SHARE LISTING
Shares are traded on the Toronto Stock Exchange
Ticker Symbol: HRX
INVESTOR RELATIONS
Héroux-Devtek Inc.
450 679-3330
ir@herouxdevtek.com
Hugo Delorme
514 700-5550, extension 555
hdelorme@mercureconseil.ca
August 7, 2020 at 10:00 A.M. Held virtually via webcast.
The webcast can be accessed through the Events
section of our website
www.herouxdevtek.com/en/news-events/events or
directly at https://web.lumiagm.com/105412381.
REGISTRAR AND TRANSFER AGENT
Computershare Trust
1500 Robert-Bourassa Street, 7th Floor
Montréal (Québec) Canada H3A 3S8
514 982-7555 /1 800 564-6253
AUDITORS
Ernst & Young LLP
900 de Maisonneuve Boulevard West, Suite 2300
Montréal (Québec) H3A 0A8
514 875-6060
HEROUXDEVTEK.COM
CONTACT INFORMATION
1111 Saint-Charles street West, suite 600
West Tower, Saint-Charles Complex
Longueuil (Québec) Canada J4K 5G4
450 679-3330
CONSOLIDATED FINANCIAL STATEMENTS /
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the fiscal year ended March 31, 2020
CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal year ended March 31, 2020
TABLE OF CONTENTS
Management’s report
...................................................................................................................................................................................
Note 8
Note 7
Note 6
Note 5
Note 4
Note 3
Note 2
Note 1
Independent Auditor’s report
........................................................................................................................................................................
Consolidated financial statements ................................................................................................................................................................
Notes to the consolidated financial statements ............................................................................................................................................
Nature of activities and corporate information ........................................................................................................................
Basis of preparation ................................................................................................................................................................
Significant accounting policies ................................................................................................................................................
Significant accounting estimates and assumptions ................................................................................................................
Business acquisitions .............................................................................................................................................................
Sales and backlog ..................................................................................................................................................................
Government assistance ..........................................................................................................................................................
Cost of sales, selling and administrative expenses ................................................................................................................
Note 9
Net financial expenses ...........................................................................................................................................................
Note 10 Non-recurring items ................................................................................................................................................................
Note 11 Earnings per share .................................................................................................................................................................
Note 12
Inventories ..............................................................................................................................................................................
Note 13 Derivative financial instruments ..............................................................................................................................................
Note 14 Other assets ...........................................................................................................................................................................
Note 15 Property, plant and equipment ................................................................................................................................................
Note 16 Finite-life intangible assets .....................................................................................................................................................
Note 17 Goodwill ..................................................................................................................................................................................
Note 18 Accounts payable and accrued liabilities ................................................................................................................................
Note 19 Provisions ...............................................................................................................................................................................
Note 20
Long-term debt .......................................................................................................................................................................
Note 21 Other liabilities ........................................................................................................................................................................
Note 22
.........................................................................................................................................................................
Note 23 Accumulated other comprehensive income ............................................................................................................................
Income taxes ..........................................................................................................................................................................
Note 24
Note 25 Pension and other retirement benefit plans ............................................................................................................................
Note 26 Commitments .........................................................................................................................................................................
Note 27 Contingencies .........................................................................................................................................................................
Note 28 Net change in non-cash items ................................................................................................................................................
Note 29 Geographic information ..........................................................................................................................................................
Note 30 Executive compensation .........................................................................................................................................................
Note 31 Financial instruments ..............................................................................................................................................................
Note 32 Financial risk management .....................................................................................................................................................
Note 33 Capital risk management ........................................................................................................................................................
Note 34 Subsequent Events ................................................................................................................................................................
Issued capital
4
5
7
12
12
12
13
23
24
27
28
28
28
29
29
29
30
30
31
33
34
35
35
35
37
37
40
40
42
45
45
45
46
46
46
47
50
50
MANAGEMENT’S REPORT
The accompanying consolidated financial statements and Management Discussion and Analysis (“MD&A”) of Héroux-Devtek Inc. (the
“Corporation”) are the responsibility of management and have been reviewed and approved by its Board of Directors. The accompanying
consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”).
The MD&A has been prepared in accordance with the requirements of Canadian securities regulators. The consolidated financial statements
and MD&A include items that are based on best estimates and judgments of the expected effects of current events and transactions. Management
has determined such items on a reasonable basis in order to ensure that the consolidated financial statements and MD&A are presented fairly
in all material respects. All figures presented in these consolidated financial statements are expressed in thousands of Canadian dollars unless
otherwise indicated.
Héroux-Devtek Inc.’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed internal controls over financial reporting
(“ICFR”) and disclosure controls and procedures (“DC&P”), or have caused them to be designed under their supervision, to provide reasonable
assurance regarding the reliability of financial reporting, the preparation of consolidated financial statements for external purposes in accordance
with IFRS and that material information related to the Corporation has been made known to them and has been properly disclosed in the
accompanying consolidated financial statements and MD&A. Héroux-Devtek Inc.’s CEO and CFO have also evaluated the effectiveness of such
ICFR and DC&P as of the end of fiscal year 2020. As of March 31, 2020, 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.
Martin Brassard
President and Chief Executive Officer
May 20, 2020
Stéphane Arsenault, CPA, CA
Vice-President and Chief Financial Officer
4 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF HÉROUX-DEVTEK INC.
Opinion
We have audited the consolidated financial statements of Héroux-Devtek Inc. and its subsidiaries (the Group), which comprise the consolidated
balance sheets as at March 31, 2020 and 2019, and the consolidated statements of income (loss), consolidated statements of comprehensive
income (loss), consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended,
and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of
the Group as at March 31, 2020 and 2019, and its consolidated financial performance and its consolidated cash flows for the years then ended
in accordance with International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are
further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent
of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and
we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Other information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider
whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information; we are required to report that fact in this auditor’s report. We have nothing to
report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other
information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for
such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends
to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 5
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group
to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Wajih Chemali.
Ernst & Young LLP
Montréal, Québec
May 20, 2020
_____________________________________________
1 CPA Auditor, CA, public accountancy permit no. A121006
6 – HÉROUX-DEVTEK INC. – Fiscal 2020 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
Provisions
Customers advances and progress billings
Income tax payable
Derivative financial instruments
Current portion of long-term debt
Long-term debt
Provisions
Derivative financial instruments
Deferred income tax liabilities
Other liabilities
Shareholders’ equity
Issued capital
Contributed surplus
Accumulated other comprehensive income
Retained earnings
Total equity attributable to the equity holders of the parent
Non-controlling interests
Total liability and shareholder’s equity
Commitments and Contingencies (notes 26 and 27)
Subsequent event (note 34)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors
Louis Morin
Director
Notes
20
March 31,
2020
March 31,
2019
12
13
14
3, 15
3, 16
13
24
17
14
18
19
13
3, 20
3, 20
19
13
24
21
22
23
$
$
$
$
45,841
112,558
1,291
241,119
28
21,213
422,050
259,641
64,047
3,498
19,698
120,773
9,141
898,848
126,488
27,679
34,885
1,403
9,321
16,857
216,633
272,760
19,527
14,667
8,812
17,001
549,400
79,757
5,792
7,160
255,221
347,930
1,518
349,448
898,848
$
$
$
$
35,128
115,431
2,393
184,035
783
21,349
359,119
227,954
69,377
5,816
14,575
189,012
6,914
872,767
117,990
26,972
21,919
1,911
2,134
15,066
185,992
245,240
16,789
1,317
6,354
12,977
468,669
79,676
4,707
10,502
307,101
401,986
2,112
404,098
872,767
Gilles Labbé
Director
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 7
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands of Canadian dollars, except per share data)
For the fiscal years ended March 31,
Notes
2020
2019
Sales
Cost of sales
Gross profit
Selling and administrative expenses
Non-recurring items
Operating (loss) income
Net financial expenses
Income (loss) before income tax expense
Income tax expense
Net (loss) income
Attributable to:
Equity holders of the parent
Non-controlling interests
6, 29
7, 8, 12
7, 8
10
9, 10
10, 24
(Loss) earnings per share – basic and diluted
11
The accompanying notes are an integral part of these consolidated financial statements.
$
612,996
$
483,877
509,876
103,120
50,572
82,618
(30,070)
7,846
(37,916)
12,742
400,681
83,196
41,633
4,323
37,240
6,811
30,429
4,235
$
(50,658)
$
26,194
(50,113)
(545)
(50,658)
(1.38)
$
$
26,447
(253)
26,194
0.73
$
$
8 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2020
2019
Other comprehensive loss:
Items that may be reclassified to net (loss) income
Gains (losses) arising from conversion of the financial statements of foreign operations
Cash flow hedges:
Net losses on valuation of derivative financial instruments
Net losses on derivative financial instruments transferred to net income
Deferred income taxes
Losses on hedges of net investments in foreign operations
Deferred income taxes
Items that are never reclassified to net (loss) income
Defined benefit pension plans:
Losses from remeasurement
Deferred income taxes
Other comprehensive loss
Comprehensive (loss) income
Net (loss) income
Other comprehensive loss
Comprehensive (loss) income
Attributable to:
Equity holders of the parent
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
23
23
23
25
$
15,579
$
(850)
(17,990)
(3,362)
1,376
4,484
(12,130)
(7,168)
377
(6,791)
(2,398)
631
(1,767)
906
660
(1,796)
(1,221)
152
(1,069)
(2,487)
656
(1,831)
$
(5,109)
$
(5,546)
$ (50,658)
(5,109)
$ (55,767)
$
$
26,194
(5,546)
20,648
(55,222)
(545)
20,901
(253)
$ (55,767)
$
20,648
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 9
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In thousands of Canadian dollars)
Balance as at March 31, 2019
Common shares issued under the
stock option plan
Stock-based compensation
expense
Purchase of minority interests in
Tekalia
Capital contribution from a non-
controlling interest in a
subsidiary
Net loss
Other comprehensive loss
Balance as at March 31, 2020
Balance as at March 31, 2018
Common shares:
Issued under the stock purchase
and ownership incentive plan
Issued under the stock option
plan
Business acquisition
Stock-based compensation
expense
Net income (loss)
Other comprehensive loss
Balance as at March 31, 2019
Notes
Issued
capital
$79,676
Contributed
surplus
$ 4,707
Accumulated
other
comprehensive
income
$10,502
Retained
earnings
$ 307,101
Total equity
attributable to the
equity holders of
the parent
$ 401,986
Non-
Controlling
interests
$ 2,112
Total
Shareholders’
equity
$ 404,098
22
22
5
23
Notes
22
5
22
23
81
—
—
—
—
(23)
1,108
—
—
—
—
—
—
—
—
—
$79,757
—
$ 5,792
(3,342)
$ 7,160
—
—
—
—
58
1,108
—
—
(50,113)
(1,767)
(50,113)
(5,109)
$ 255,221
$ 347,930
—
—
58
1,108
(544)
(544)
495
(545)
—
$ 1,518
495
(50,658)
(5,109)
$ 349,448
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
$78,105
$ 4,227
$14,217
$ 282,485
Total equity
attributable to the
equity holders of
the parent
$ 379,034
Non-
Controlling
interests
$ —
Total
Shareholders’
equity
$ 379,034
470
1,101
—
—
—
—
$79,676
—
(402)
—
882
—
—
$ 4,707
—
—
—
—
—
—
—
—
—
(3,715)
$10,502
26,447
(1,831)
$ 307,101
470
699
—
882
26,447
(5,546)
—
—
2,365
—
(253)
—
470
699
2,365
882
26,194
(5,546)
$ 401,986
$ 2,112
$ 404,098
The accompanying notes are an integral part of these consolidated financial statements.
10 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2020
2019
Cash and cash equivalents provided by (used for):
Operating activities
Net (loss) income
Items not requiring an outlay of cash:
Amortization expense
Deferred income taxes
15, 16
24
Gain on sale of property, plant and equipment and software
Impairment of goodwill, deferred income tax assets and other long-term assets
10, 14, 17, 24
9
22
28
5
15
16
22
20
Non-cash net financial expenses
Stock-based compensation expense
Cash flows from operations
Net change in non-cash items
Cash flows related to operating activities
Investing activities
Cash payment for business acquisitions
Additions to property, plant and equipment
Net (increase) decrease in finite-life intangible assets
Capital contribution from a non-controlling interest in a subsidiary
Proceeds on disposal of property, plant and equipment
Cash flows related to investing activities
Financing activities
Increase of long-term debt
Repayment of long-term debt
Issuance of common shares
Increase in deferred financing costs
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 at beginning of year
Cash and cash equivalents at end of year
Interest and income taxes reflected in operating activities:
Interest paid
Interest received
Income taxes paid
$
(50,658)
$
26,194
43,643
1,300
(141)
85,808
1,041
1,108
82,101
(29,528)
52,573
(17,149)
(20,645)
(1,598)
495
4,053
32,650
(2,019)
(8)
—
2,697
882
60,396
9,573
69,969
(198,149)
(12,858)
2,353
—
35
(34,844)
(208,619)
30,927
(38,024)
58
(897)
(7,936)
920
10,713
35,128
45,841
6,905
100
6,775
117,883
(36,198)
1,169
(2,534)
80,320
249
(58,081)
93,209
35,128
4,914
800
5,965
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 11
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For the fiscal years ended March 31, 2020 and 2019
(In thousands of Canadian dollars, except per share data)
NOTE 1. NATURE OF ACTIVITIES AND CORPORATE INFORMATION
Héroux-Devtek Inc. is incorporated under the laws of Québec. Its head office is domiciled at Complexe St-Charles, 1111 St-Charles Street West,
suite 600, West Tower, Longueuil (Québec), Canada. Héroux-Devtek Inc. and its subsidiaries (“Héroux-Devtek” or the “Corporation”) specialize
in the design, development, manufacture, repair and overhaul of aircraft landing gear, hydraulic and electromechanical flight control actuators,
custom ball screws and fracture-critical components.
The Corporation operates as one reporting segment, which is the Aerospace segment.
The Corporation's common shares are traded on the Toronto Stock Exchange under the symbol "HRX".
NOTE 2. BASIS OF PREPARATION
The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments, which are
measured at fair value, provisions, which are measured based on the best estimates of the expenditures required to settle the obligation and
the pension benefit obligations, which are measured at the present value of the defined benefit obligations and reduced by the fair value of plan
assets. Certain comparative figures for the consolidated balance sheet as at March 31, 2019 have been reclassified to conform to the March 31,
2020 consolidated balance sheet’s presentation.
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 20,
2020.
Basis of consolidation
The consolidated financial statements include the accounts of Héroux-Devtek Inc. and its subsidiaries, all of which are wholly-owned, except
for Tekalia Inc. where the Corporation holds a 67% controlling interest. The principal wholly-owned subsidiaries included in these consolidated
financial statements are the following:
Name
Devtek Aerospace Inc.
Alta Précision Inc.
HDI Landing Gear USA Inc.
APPH Limited
Beaver Aerospace & Defense Inc.
Compañia Española de Sistemas Aeronauticos S.A.
Location
Canada
Canada
United States
United Kingdom
United States
Spain
Subsidiaries are consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated
until the date that such control ceases. Control is achieved when the Corporation has power over the investee; is exposed, or has rights, to
variable returns from its involvement with the investee; and ability to use its power to affect its returns. The Corporation reassesses whether or
not it controls an investee if facts and circumstances indicate that there are changes to one or more of these three elements of control. Changes
in the Corporation’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
The cost of an acquisition is measured as the aggregate of the consideration paid, measured at acquisition date fair value and the amount of
any non-controlling interest in the acquiree. For each business combination, the Corporation measures the non-controlling interests in the
acquiree either at fair value or at the proportionate share of the acquiree’s net identifiable assets.
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.
12 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
A. Foreign currency
The consolidated financial statements are presented in Canadian dollars. Each entity in the Corporation accounts for transactions in its own
functional currency and items included in the consolidated financial statements of each entity are measured using that functional currency.
The functional currency of Héroux-Devtek and of the Canadian operations is the Canadian dollar. The functional currency of the U.S. operations
is the U.S. dollar, the functional currency of the U.K operations is the British pound and the functional currency of Spain operations is the Euro.
The functional currency is the currency that is representative of an operation’s primary economic environment.
Conversion of transactions and account balances
Transactions denominated in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange at the reporting date.
All differences are included in the consolidated statements of income.
Non-monetary items denominated in foreign currencies are translated at the exchange rate at the date of the transactions.
Translation of financial statements of foreign operations
Assets and liabilities of foreign operations are translated into Canadian dollars at the rate of exchange at the reporting date and the statements
of income are translated at the average exchange rate for the fiscal year. Exchange differences arising from the translation are recognized in
other comprehensive income and remain in accumulated other comprehensive income until the disposal of the related net investment, at which
time they are recognized in the consolidated statements of income.
B. Cash and cash equivalents
Cash and cash equivalents comprise cash.
C. Inventories
Inventories include raw materials, direct labour and related manufacturing overhead costs.
Inventories consist of raw materials (including purchased parts), 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).
Buildings and leasehold improvements - 5 to 50 years,
Amortization is calculated on a straight-line basis over the useful life of the asset as follows:
•
• Machinery and equipment - 3 to 25 years,
•
Tooling related to specific contracts - based on pre-determined contract quantities, not exceeding the lower of ten years or the useful life.
Contract quantities are assessed at the beginning of the production stage considering, among other factors, existing firm orders and options.
The Corporation’s management conducts quarterly and annual reviews of the contract quantities,
Standard and general tooling - 3 to 5 years,
•
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 13
Automotive equipment - 3 to 10 years,
Computer and office equipment - 3 to 5 years.
•
•
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or
disposal. The gain or loss on derecognition of the asset (calculated as the difference between the net disposal proceeds and the net carrying
amount of the asset) is included in the consolidated statements of income in the fiscal year the asset is derecognized. The asset’s residual value,
useful life and method of amortization are reviewed and adjusted annually at year-end, or when warranted by specific circumstances.
The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the
recognition criteria for a provision are met. Refer to section L of this note and note 4 - Significant accounting estimates and assumptions for
further information about provisions for asset retirement obligations.
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 15 years.
Software
Software is amortized over 3 to 7 years.
F. Borrowing costs
Borrowing costs are recognized as an expense when incurred, except when they are capitalized as part of the cost of a qualifying asset. Borrowing
costs are capitalized when the Corporation:
incurs expenditures for the asset;
•
incurs borrowing costs; and
•
14 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
•
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.
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”), measured at amortized
cost (“AC”) or fair value through other comprehensive income (“FVTOCI”). The classification is based on two criteria: the Corporation’s business
model for managing the assets; and whether the instruments’ contractual cash flows represent ‘solely payments of principal and interest’ on the
principal amount outstanding (the “SPPI criterion”). The Corporation’s financial assets are held within a business model with the objective to
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 15
hold the financial assets in order to collect contractual cash flows that meet the SPPI criterion are classified and subsequently measured at
amortized cost. They consist of cash and cash equivalents, accounts receivable and certain other current and long-term assets.
When financial assets are recognized initially, they are measured at fair value, plus in the case of a financial asset other than FVTPL, the directly
attributable transaction costs. Purchases and sales of financial assets are recognized on the transaction date, which is the date that the Corporation
commits to purchase or sell the assets.
FVTPL
FVTPL include certain derivative financial instruments, except those that are designated as Hedges. FVTPL are carried at fair value with gains
and losses recognized in the consolidated statements of income. The Corporation assesses whether embedded derivative financial instruments
are required to be separated from host contracts when the Corporation first becomes party to the contract.
AC
AC are non-derivative financial assets with fixed or determinable payments not quoted in an active market. AC are mainly comprised of accounts
receivable and certain other current and long-term assets. AC are carried at amortized cost using the effective interest rate method. An allowance
for doubtful accounts is recorded when an account receivable become impaired. Also, under the forward-looking expected credit loss (“ECL”)
approach, all financial assets, except for those measured at FVTPL, are subject to review for impairment at least at each reporting date. ECLs
are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Corporation
expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate.
The Company considers a financial asset in default when collection of an account receivable is 30 days past due its contractual terms. However,
in certain cases, the Company may also consider a financial asset to be in default when internal or external information indicates that the
Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the
Company. A financial asset is considered at a higher credit risk as soon as it is 30 days past due and the Company regularly monitors these
accounts receivable to ensure its credit risk is not significant with such customers. In some cases, the fact that certain accounts receivable are
past due does not necessarily indicate a higher credit risk and subsequent collection is successful. A financial asset is written off when there is
no reasonable expectation of recovering the contractual cash flows which generally occurs if the account receivable is 90 days past due unless
the Company has reasonable and supportable information to demonstrate that a more lagging criterion is more appropriate.
For accounts receivables, the Corporation has applied the simplified approach and has calculated ECLs based on lifetime
expected credit losses taking into consideration historical credit loss experience, adjusted for forward-looking factors specific to the debtors and
the economic environment. If in a subsequent year, the amount of the estimated impairment loss increases or decreases due to an event occurring
after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the carrying value of
the financial assets. If a past write-off is later recovered, the recovery is recognized in the consolidated statements of (loss) income.
FVTOCI
These include cross-currency interest rate swap agreements that are used to hedge the net investments in certain foreign subsidiaries and
forward foreign exchange contracts. They are carried at fair value. The change in the fair value of the effective portion of hedges is recognized
in other comprehensive income, while the ineffective portion is recognized in the consolidated statements of income, if any.
The Corporation assesses at each reporting date whether any financial asset is impaired.
J. Financial liabilities
Liabilities at fair value
Financial liabilities classified at FVTPL are comprised of derivative financial instruments, except those that are designated as FVTOCI. They are
carried at fair value with gains and losses recognized in the consolidated statements of income. Gains and losses on FVTOCI are recognized
in other comprehensive income.
Amortized costs
All debts, accounts payable, accrued liabilities, provisions and certain other liabilities are initially recognized at fair value less directly attributable
transaction costs when they have not been designated as FVTPL.
After initial recognition, they are subsequently measured at amortized cost using the effective interest method.
Derecognition of financial liabilities
A financial liability is derecognized when the obligation underlying the liability is discharged, cancelled or has expired.
16 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
K. Derivative financial instruments and hedges
Derivative financial instruments
The Corporation uses derivative financial instruments such as forward foreign exchange contracts, cross-currency interest rate swap agreements
and equity swap agreements to hedge its risks associated with foreign currency, interest rate and other price fluctuations. Such derivative financial
instruments are initially recognized at fair value on the date on which a derivative contract is entered into. They are subsequently measured at
fair value. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair
value is negative.
Cash flow hedges
For the purpose of hedge accounting, all hedges are classified as cash flow hedges except for hedges of net investments in foreign operations
(see below). Hedging exposure to variability in cash flows is attributable to a risk associated with a recognized liability or a highly probable
forecast transaction in foreign currency.
At the inception of a hedge relationship, the Corporation formally designates and documents the hedge relationship to which the Corporation
wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes
identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the
hedging instrument’s effectiveness. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are
assessed quarterly to determine that they actually have been highly effective throughout the designated periods.
The change in the fair value of the effective portion of hedges is recognized in other comprehensive income, while the ineffective portion is
recognized in the consolidated statements of income. Amounts recognized in other comprehensive income are transferred to the consolidated
statements of income when the hedged transaction affects income, such as when the hedged financial income or financial expense is recognized
or when a forecast sale occurs. In the event that the forecast transaction or firm commitment is no longer expected to occur, amounts previously
recognized in accumulated other comprehensive income are transferred to the consolidated statements of income.
Hedges of net investments in foreign operations
The Corporation designates certain long-term debt as a hedge of its net investments in foreign operations. The portion of gains or losses from
the hedging item that is determined to be an effective hedge is recognized in other comprehensive income, while the ineffective portion is
recorded in the consolidated statements of income. The amounts recognized in other comprehensive income are reclassified in the consolidated
statements of income upon disposal of the related net investments.
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 2020 Consolidated Financial Statements – 17
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 estimated risks associated with these litigations.
Restructuring provisions are recognized when the Corporation has put in place a detailed restructuring plan which has been communicated in
sufficient detail to create a constructive obligation. Restructuring provisions include only costs directly related to the restructuring plan, and are
measured at the best estimate of the amount required to settle the Corporation’s obligations.
M. Progress billings
Progress billings represent amounts received from customers for costs incurred on specific contracts. These amounts are reversed to sales at
such time as the related units are delivered and billed to customers.
N. Deferred financing costs
Deferred financing costs related to long-term debt are amortized using the effective interest rate method over the period that represents the
duration of the related long-term debt.
O. Pensions and other retirement benefits
The Corporation has defined contribution pension plans as well as funded and unfunded defined benefit pension plans that provide pension
benefits to its employees. The current and past service costs of these pension plans are recorded within the cost of sales and selling and
administrative expenses under “Employee costs” in the consolidated statements of income while the administrative costs related to these pension
plans are included in selling and administrative expenses. The net interest income or expense on the net surplus or deficit is recorded in financial
expenses.
The actuarial determination of the defined benefit obligations for pensions uses the projected unit credit method which incorporates management’s
best estimate of future salary levels, when applicable, other cost escalations, retirement ages of employees, discount rates and other actuarial
factors.
The Pension and other retirement benefit plans liabilities included in Other liabilities in the consolidated balance sheets represent the present
value of the defined benefit obligations reduced by the fair value of plan assets.
Remeasurements on defined benefit plans include actuarial gains and losses, changes in the effect of the asset ceiling and the return on plan
assets, excluding the amount included in net interest on the net defined liability or assets. Remeasurements are charged or credited to other
comprehensive income in the period in which they arise.
Past service costs arising from the plan amendments are recognized in full immediately in the consolidated statements of income.
P. Share-based payments
Stock option plan
The Corporation has a stock option plan in which options to purchase common shares are issued to officers and key employees. The Corporation
uses a binomial valuation model to determine the fair value of stock options when granted. The resulting fair value is amortized to income over
their earned period using the graded amortization method. The related compensation expense is included in selling and administrative expenses
and its counterpart is accounted for in contributed surplus.
Stock purchase and ownership incentive plan
The Corporation has a stock purchase and ownership incentive plan allowing key members of management to purchase, by payroll deductions
of a maximum of 10% of their annual base salary, to a number of common shares of the Corporation on the TSE. The Corporation matches a
portion of such employee contributions in the form of additional common shares acquired on the TSE at market price. The Corporation’s matching
award cannot exceed 5.25% of the employee’s annual base salary. Common shares purchased by the Corporation on behalf of the employee
are accounted for in selling and administrative expenses.
18 – HÉROUX-DEVTEK INC. – Fiscal 2020 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 measured at the fair value of the consideration received or receivable, net of estimated discounts, and after eliminating intercompany
sales. Revenue from the sale of goods is recognized in a manner that depicts the transfer of promised goods to a customer and at an amount
that reflects the consideration expected to be received in exchange for transferring those goods. This is achieved by applying the following five
steps:
1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when (or as) the entity satisfies a performance obligation, which is generally achieved upon the delivery of
the products.
Revenues from the sale of new or overhauled aerospace components are considered a single performance obligation and are recognized at
the point in time when the customer has obtained control of the component and the Corporation has satisfied its performance obligation. Generally,
these conditions are met upon delivery of the goods.
R. Government assistance
Government assistance, which mainly includes investment and other tax credits, grants and the discount portion of the governmental authorities
loans, is recognized when there is reasonable assurance that it will be received and all related conditions will be complied with. When the
government assistance relates to an expense item, it is recognized as a reduction of expense over the period necessary to match the government
assistance on a systematic basis to the costs that it is intended to subsidize. Where government assistance relates to an asset, it is deducted
from the cost of the related asset.
Forgivable loans from governmental authorities are accounted for as government assistance when there is reasonable assurance that the entity
will meet the terms for forgiveness of the loan.
Benefits derived from government authority loans with below-market interest rates are measured at the inception of the loans as the difference
between the cash received and the amount at which the loans are initially recognized in the consolidated balance sheet. At initial recognition,
the fair value of a loan with a below-market rate of interest is estimated at the present value of all future cash disbursements, discounted using
a prevailing market rate of interest for a similar instrument with a similar credit rating.
After initial recognition, the loan is accounted for as a financial liability measured at amortized cost using the effective interest method. Repayments
are mainly based on the Corporations sales growth, or sales of specific programs. Assumptions underlying expected sales are reviewed at least
annually, and are used to derive expected repayment schedules. When expected repayment schedule changes, the Corporation recalculates
the carrying value of the loan using the original effective interest rate, with the corresponding gain or loss accounted for in financial expenses.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 19
S. Taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax
rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax
relating to items recognized directly in shareholders’ equity is recognized in shareholders’ equity and not in the consolidated statements of
income or in the consolidated statements of comprehensive income.
Deferred income tax
Deferred income tax is provided for using the liability method on temporary differences at the reporting date between the tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are recognized for all deductible
and taxable temporary differences, except:
•
where the deferred income tax asset or liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that
is not a business combination and, at the time of the transaction, affects neither the accounting income or loss nor taxable income or loss;
in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
•
Deferred income tax assets are recognized for all other deductible temporary differences, carry forward or unused tax credits and unused tax
losses to the extent that it is probable that taxable income will be available against which the deductible temporary differences and the carry
forward of unused tax credits and unused tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the
deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date. Deferred income
tax assets and liabilities are measured at the income tax rates that are expected to apply to the fiscal year when the asset is realized or the
liability is settled, based on income tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Deferred income
tax relating to items recognized directly in shareholders’ equity is recognized directly in shareholders’ equity and not in the consolidated statements
of income or in the consolidated statements of comprehensive income. Deferred income tax assets and liabilities are offset if a legally enforceable
right exists to set off current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable
entity and the same taxation authority. All deferred income tax assets and liabilities are classified as non-current.
Sales tax
Sales, expenses and assets are recognized net of the amount of sales tax, except where the sales tax incurred on a purchase of assets or
services is not recoverable from the taxation authorities, in which case the sales tax is recognized as part of the cost of acquisition of the asset
or as part of the expense item as applicable.
Receivables and payables are stated with the amount of sales tax included, if applicable.
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of other current assets or accounts payable
and accrued liabilities in the consolidated balance sheet.
T. Earnings per share
Basic and diluted earnings per share is computed based on net income attributable to equity holders of the Corporation. It is also determined
using the weighted-average number of common shares outstanding during the year. The calculation of diluted earnings per share takes into
consideration the exercise of all dilutive elements. This method assumes that the proceeds of the Corporation’s in-the-money stock options
would be used to purchase common shares at the average market price during the year.
U. Adoption of the new accounting standard IFRS 16 - Leases
Prior to April 1, 2019
The Corporation followed IAS 17 where a lease was classified as a finance lease if it transferred substantially all the risks and rewards incidental
to ownership to the Corporation. A finance lease was 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 were
apportioned between interest expense and the reduction of the lease obligation. Interest expense is reflected in the consolidated statements of
income. Capitalized leased assets were accounted for in the categories of property, plant and equipment corresponding to their nature. Capitalized
leased assets were 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 was classified as an operating lease if it did not transfer substantially all the risks and rewards incidental to ownership. Operating lease
payments were recognized as an expense on a straight-line basis over the related lease term.
20 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
Effective April 1, 2019
Effective April 1, 2019, the Corporation adopted IFRS 16, which replaces IAS 17, represents a major revision of the way in which companies
account for leases. It 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 are recognized on the Corporation’s consolidated balance sheet. Certain exemptions apply for short-term leases and leases
of low-value assets. The right-of-use asset and lease liability are recognized at the lease commencement date.
Right-of-use of assets
Right-of-use assets are measured at cost. The cost is based on the initial amount of the lease liability plus initial direct costs incurred and estimate
of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located adjusted for any lease
payments made at or before the commencement date, less any lease incentives received, if any.
The cost of right-of-use assets are periodically reduced by depreciation expenses and impairment losses, if any, and adjusted for certain
remeasurement of the lease liability. Right-of-use assets are amortized to the lesser of the useful life or the lease term using the straight-line
method as this reflects the expected pattern of consumption of the future economic benefits. The lease term includes the renewal option only if
it is reasonably certain to exercise that option. Lease terms range from 1 to 20 years for buildings and 1 to 6 years for machinery, equipment
and tooling.
Lease liabilities
At the commencement date of the lease, the Corporation recognizes lease liabilities measured at the present value of lease payments to be
made over the lease term. Lease payments mainly include fixed payments less any lease incentives receivable and the exercise price of a
purchase option reasonably certain to be exercised. Variable lease payments that do not depend on an index or a rate are recognized as an
expense in the period during which the event or condition that triggers the payment occurs. In calculating the present value of lease payments,
the Corporation uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily
determinable. After the commencement date, the amount of lease liabilities is increased to reflect accretion of interest and reduced for lease
payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change
in the in-substance fixed lease payments or a change in the assessment of whether the underlying asset will be purchased.
The Corporation determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend
the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to
be exercised. After the commencement date, the Corporation reassesses the lease term if there is a significant event or change in circumstances
that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
Effect of adopting IFRS 16
The adoption of IFRS 16 had an impact on the consolidated balance sheet and statement of (loss) income as operating leases have been
capitalized, corresponding lease liabilities have been recognized, rent expense has been replaced by the amortization expense of the right to
use the related assets and the interest accretion expense from the liability recorded. In addition, the principal repayments of lease liabilities are
now presented as financing activities in the consolidated statements of cash flows, whereas under the previous standard these payments were
presented as operating activities prior to April 1, 2019.
The Corporation applied this standard using the modified retrospective approach (without restating comparative figures) for the fiscal year
beginning April 1, 2019. Certain leases were not brought on the Corporation's consolidated balance sheet as they are covered by practical
expedients. The Corporation has elected to apply the following practical expedients:
•
•
Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases; and
Recognize short-term leases and low value leases on a straight line basis as part of operating expenses in the consolidated statements
of income.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 21
The adoption of IFRS 16 had the following impacts on the consolidated statement of income (loss) for the year ended March 31, 2020:
Increase (decrease)
Cost of sales, Selling and administrative expenses
Depreciation and amortization
Other (rent expense)
Operating income
Financial expenses
Deferred income tax expense
Net income and comprehensive income
Increase (decrease)
Property, plant and equipment, net
Long-term debt (1)
March 31, 2020
$
3,098
(3,679)
581
1,283
(175)
(527)
$
As of
April 1, 2019
$
14,892
14,892
(1) The current portion of long-term debt impact corresponds to $2,520 as at April 1, 2019
The following table presents the reconciliation between the operating leases commitments as of March 31, 2019 and the additional lease liabilities
as of April 1, 2019:
Operating lease commitments as at March 31, 2019
Discounting operating leases as at April 1, 2019 (1)
Commitments relating to the change in the lease term assumptions and inclusion of non-lease components
Leases committed but not yet commenced as at April 1, 2019
Additional lease liabilities as at April 1, 2019
Pre-existing capital leases as at April 1, 2019
Total lease liabilities as at April 1, 2019
(1) At the date of adoption of IFRS 16, the weighted average incremental borrowing rate was 4.2%
$
16,823
(1,068)
1,002
(1,865)
14,892
20,411
35,303
$
$
22 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
NOTE 4. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTION
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:
Impact of COVID-19
A.
The uncertainties around the outbreak of the COVID-19 pandemic required the use of significant judgments and estimates. As at March 31,
2020, the Corporation performed an assessment of the asset impairment risk including a detailed review of the credit risk over its accounts
receivable, its inventory levels for risks over obsolescence or excess inventory, goodwill and other intangible assets. Following this assessment,
the Corporation recorded a non-cash impairment charge of $85,808 (note 10) affecting mainly goodwill. The uncertain future impact of COVID-19
could generate, in future reporting periods, a significant risk of material adjustment to the carrying amounts of the following: accounts receivable,
inventories, property, plant & equipment, finite-life intangible assets, deferred income tax assets, goodwill, provision for onerous contracts,
government authorities loans and net defined benefit obligations. As an emerging risk, the duration and full financial effect of the COVID-19
pandemic is unknown at this time, and accordingly estimates of the extent to which the COVID-19 may materially and adversely affect the
Corporation’s consolidated financial condition, operations and consolidated financial results are subject to significant uncertainty.
Impairment of non-financial assets
B.
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset. The
value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget and
strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that may
enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the discounted cash
flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used to determine the
recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17.
C. 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.
D. 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.
E. 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.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 23
F. 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.
G. 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.
H. Customer relationships
Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon
acquisition using valuation methodologies which rely on many underlying assumptions, including:
•
•
•
•
•
Expected future order intake;
Operational execution and cost management;
Stability of economic conditions, including foreign exchange rates;
Production rates;
Government spending.
They are recorded at cost less accumulated impairment and amortization and are amortized on a straight-line basis over their useful lives without
exceeding 15 years.
NOTE 5. BUSINESS ACQUISITIONS
Fiscal 2020 acquisition
Acquisition of Alta Précision
On June 7, 2019, the Corporation completed the acquisition of all of the shares of Alta Précision Inc. (“Alta”), for $18,552, including a $500
balance of sale and the assumption of Alta’s net outstanding debt amounting to $903. Located in Montreal, Canada, Alta is a manufacturer of
high-precision landing gear components. This acquisition expands the Corporation's portfolio of commercial products by providing both access
to new programs and additional content on existing platforms. The acquisition was financed with the Corporation's available credit facilities and
was treated as a business combination.
Alta was a minority shareholder of Tekalia. As a result of the acquisition, the Corporation increased its participation in Tekalia to 67% from 60%
as at March 31, 2019. In connection with this acquisition, the Corporation incurred acquisition-related costs that are presented in note 10.
Refer to note 34 - Subsequent event for additional information.
Purchase Price
The purchase price allocation that reflects the fair value of the assets acquired and liabilities assumed during Fiscal 2020 with any excess
allocated to goodwill was prepared using the acquisition method as follows:
Cash payment
Long-term debt assumed (1)
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price
(1) Excludes lease liabilities
$
$
17,149
903
—
500
18,552
24 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
Purchase Price Allocation
Accounts receivable
Inventories
Other current assets
Property, plant and equipment, including right-of-use assets
Finite-life intangible assets
Deferred income tax assets
Other long-term assets
Investment in Tekalia
Total identifiable assets
Accounts payable and accrued liabilities
Customer advances and progress billings
Provisions
Long-term debt (1)
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
(1) Corresponds to lease liabilities
Purchase
price
allocation
1,455
$
11,567
376
13,398
19,546
2,797
1,858
264
544
38,407
6,629
2,872
6,918
6,844
23,263
15,144
3,408
18,552
$
$
$
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 25
Fiscal 2019 acquisitions
Acquisition of CESA
On October 1, 2018, the Corporation completed the acquisition of all of the shares of Compañia Española de Sistemas Aeronauticos S.A.
("CESA"), a subsidiary of Airbus SE, for €130,370 ($195,816). Headquartered in Madrid, Spain, CESA is a leading European provider of fluid
mechanical and electromechanical systems for the aerospace industry. This acquisition allows the Corporation to broaden its existing aerospace
and product offering into actuation, landing gear, and hydraulic systems. The transaction was treated as a business combination.
The acquisition of CESA was financed as follows:
A $50,000, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
A US$50,000 ($65,205) drawing on the Corporation’s credit facility; and,
The Corporation’s available cash balance.
In addition, the Corporation assumed CESA’s net outstanding debt amounting to approximately €23,697 ($35,594) upon closing.
For the period between October 1, 2018 and March 31, 2019, the Corporation’s consolidated sales and net income included €42,086 ($63,519)
and €2,674 ($4,047), respectively, generated by CESA. If the acquisition had closed on April 1, 2018, the consolidated sales and net income of
CESA would have amounted to $117,277 and $2,806, respectively for the fiscal year ended March 31, 2019.
Acquisition of Beaver
On July 2, 2018, the Corporation completed the acquisition of all the shares of Beaver Aerospace & Defense Inc. and its wholly-owned subsidiary
PowerTHRU Inc. ("Beaver") from Phillips Service Industries Inc. for a purchase price of US$21,617 ($28,466). This price included a working
capital adjustment received in April 2019 of US$295 ($388) and a US$3,500 ($4,609) balance of sale payable over the two years following the
acquisition which bears interests at 3%. The transaction was financed through the Corporation’s cash and was treated as a business combination.
This acquisition allows the Corporation to broaden its existing aerospace and product offering into ball screws and actuation systems as well
as expand its footprint in North America.
For the period between July 2, 2018 and March 31, 2019, the Corporation's consolidated sales and net income included US$18,871 ($24,839)
and US$1,395 ($1,828), generated by Beaver, respectively. If the acquisition had closed on April 1, 2018, the consolidated sales and net income
of Beaver would have amounted to $33,223 and $2,243, respectively.
Acquisition of Tekalia
On January 23, 2019, the Corporation completed the acquisition of 60% of the shares of Tekalia Aeronautik (2010) Inc. (“Tekalia”), a supplier of
surface treatment services to the aerospace sector, with annual sales of approximately $12,000, for a purchase price of $6,529. The transaction
was financed through the Corporation’s cash and was treated as a business combination. The acquisition of Tekalia allows the Corporation to
further secure surface treatment capacity to support its North American customers’ growth.
In connection with these acquisitions, the Corporation incurred acquisition-related costs which are presented in note 10.
Purchase Prices
The purchase prices allocations that reflects the fair value of the assets acquired and liabilities assumed with any excess allocated to goodwill
were determined using the acquisition method as follows:
Cash payment
Long-term debt assumed (1)
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price for the Corporation’s interest
Non-controlling interests
(1) Excludes lease liability related to IFRS 16
CESA
$ 170,930 $
35,594
(10,708)
—
$ 195,816 $
—
$ 195,816 $
Beaver
23,671 $
574
(388)
4,609
28,466 $
—
28,466 $
Tekalia
Total
3,548 $ 198,149
39,149
2,981
(11,096)
—
4,609
—
6,529 $ 230,811
2,365
2,365
8,894 $ 233,176
26 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
Purchase Price Allocations
During the fiscal year ended March 31, 2020, the Corporation completed its final assessment of the fair value of assets acquired and liabilities
assumed of CESA and of Tekalia. Adjustments and reclassifications mainly relate to the final assessment of costs and liabilities associated to
specific Aerospace programs of the CESA purchase price allocation and are presented below as follows:
CESA -
Originally
reported Adjustments
Accounts receivable
Inventories
Income tax receivable
Other current assets
Property, plant and equipment
Finite-life intangible assets
Deferred income tax assets
Other long-term assets - Tax credits receivable
Total identifiable assets
Accounts payable and accrued liabilities
Provisions
Customer advances and progress billings
Provisions
Deferred income tax liabilities
Other liabilities - long-term accounts payable
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
NOTE 6. SALES AND BACKLOG
$
28,293
36,692
505
596
66,086
44,923
40,407
—
7,843
$ 159,259
16,773
11,897
4,188
32,858
4,308
3,465
4,365
44,996
$
114,263
81,553
$ 195,816
$
$
$
$
CESA -
Final
28,293 $
36,692
505
596
66,086
Beaver
Tekalia
6,787 $ 2,406 $
10,165
—
50
17,002
1,105
—
182
3,693
Total
37,486
47,962
505
828
86,781
— $
—
—
—
—
44,923
40,407
—
7,843
57,124
3,635
—
44,633
4,050
—
2,774
2,774
—
—
7,843
—
— $ 159,259 $ 27,461 $ 12,435 $ 199,155
8,566
176
—
—
—
4,506
—
4,506
16,773
16,403
4,188
37,364
2,588
2,118
450
5,156
4,833
—
—
4,833
—
(1,126)
—
3,380 $
8,549
4,308
—
2,339
4,365
—
48,376 $ 13,705 $ 4,833 $
—
—
—
24,194
18,521
4,638
47,353
12,857
2,339
4,365
66,914
(3,380)
3,380
110,883
84,933
132,241
100,935
— $ 195,816 $ 28,466 $ 8,894 $ 233,176
13,756
14,710
7,602
1,292
The amount of sales recognized in the following sectors was as follow for fiscal year:
Commercial
Defense
Total sales
2020
283,737
329,259
612,996
$
$
2019
236,283
247,594
483,877
$
$
The Corporation’s funded backlog represents the aggregate amount of the revenues expected to be realized within a period of 24 months, from
partially or fully unsatisfied performance obligations as at March 31, 2020 as we perform under contracts at delivery. The amounts in funded
backlog include only the value of firm orders. Such orders may be subject to future modifications that might impact the amount and/or timing of
revenue recognition. At March 31, 2020, the Corporation had a funded backlog of $810,283.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 27
NOTE 7. GOVERNMENT ASSISTANCE
Government assistance deducted from the cost of the related assets or recognized as a reduction of expenses, was as follows, for fiscal year:
Finite-life intangible assets (note 16)
Property, plant and equipment (note 15)
Cost of sales and, selling and administrative expenses
Government assistance includes research and development tax credits, other credits and grants.
NOTE 8. COST OF SALES, SELLING AND ADMINISTRATIVE EXPENSES
The main components of these expenses were as follows, for fiscal year:
Raw materials and purchased parts
Employee costs
Amortization of property, plant and equipment and finite-life intangible assets (notes 15, 16)
Others
Included in cost of sales, selling and administrative expenses:
Foreign exchange gains resulting from the conversion of net monetary items denominated in foreign
currencies
NOTE 9. NET FINANCIAL EXPENSES
Net financial expenses comprise the following, for fiscal year:
Interest accretion on governmental authorities loans
Revision of governmental authorities loans repayment estimates (note 20)
Amortization of deferred financing costs
Interest on net defined benefit obligations (note 25)
Net losses on certain derivative financial instruments (note 10)
Other non-cash financial expenses
Non-cash net financial expenses
Interest expense
Standby fees
Interest income on cash and cash equivalents
28 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
$
2020
833
30
4,065
2019
$
1,125
497
3,903
2020
2019
$
221,456
$
179,395
201,675
43,643
93,674
154,406
32,650
75,863
$
560,448
$
442,314
478
718
2020
2019
$
2,380
$
2,361
(3,153)
(1,036)
756
238
—
820
1,041
6,327
578
(100)
505
150
391
326
2,697
4,461
453
(800)
$
7,846
$
6,811
NOTE 10. NON-RECURRING ITEMS
Non-recurring items comprise the following, for fiscal year:
Non-recurring items in operating income
Goodwill impairment (note 17)
Write-down of investment tax credits receivable (note 14)
Acquisition-related costs (note 5)
Non-recurring items in net financial expenses
Net losses on certain derivative financial instruments
Non-recurring items in income tax expense
Write-down of deferred income tax assets (note 24)
2020
$
79,736
2,267
615
82,618
—
—
3,805
3,805
$
$
$
$
$
2019
—
—
4,323
4,323
391
391
—
—
$
$
$
$
$
$
Goodwill impairment and write-down of investment tax credits receivable and deferred income tax assets
Management evaluates the recoverability of assets using the budget and strategic plan which covers a five-year period. The budget and strategic
plan is prepared based on the published production rates of aircraft manufacturers, aerospace industry forecasts, general economic forecasts,
and past experience.
The significant decrease in expected demand for commercial aerospace products caused by the ongoing COVID-19 pandemic was quantified
in these estimates, including production rate cuts such as the 40% reduction in large commercial aircraft volume already announced by Airbus
and Boeing.
The downward revision of these forecasts resulted in non-cash impairment charges of goodwill, investment tax credits receivable and deferred
income tax assets.
Acquisition-related costs
These costs mainly pertain to professional fees and expenses related to the acquisition of Alta this fiscal year and the acquisitions of CESA,
Beaver and Tekalia last fiscal year.
Net losses on certain derivative financial instruments (note 9)
These losses relate to derivative financial instruments acquired in order to mitigate foreign currency and interest rate risks arising from the
purchase price and financing related to the acquisition of CESA. Refer to the Derivatives section under Additional Information below for further
details.
NOTE 11. EARNINGS PER SHARE
The following table sets forth the elements used to compute basic and diluted earnings per share, for fiscal year:
Weighted-average number of common shares outstanding
Effect of dilutive stock options of the Corporation
Weighted-average number of common diluted shares outstanding
Options excluded from diluted earnings per share calculation(1)
(1) Excluded from diluted earnings per share calculation due to anti-dilutive impact.
NOTE 12. INVENTORIES
As at
Raw materials and purchased parts
Work-in-progress
Finished goods
2020
2019
36,362,702
36,307,708
—
36,362,702
1,497,595
129,344
36,437,052
526,500
March 31, 2020 March 31, 2019
$ 121,528
116,627
2,964
$ 241,119
$
97,976
84,752
1,307
$ 184,035
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 29
The amount of inventories recognized as cost of sales for the fiscal year ended March 31, 2020 is $397,614 ($333,917 in 2019).
Reserves related to inventories are as follows, for fiscal year:
Reserves recognized as cost of sales
Reversal of prior-period reserves
2020
2019
$ 9,113
$ 8,118
4,205
9,116
For fiscal year 2020, the reversal of prior-period reserves includes charges of $3,951 ($1,705 in 2019) 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, future demand and production
costs. The revaluation takes into consideration the variations in selling price and number of units to deliver for contracts signed and also the
reduction in production costs resulting from improvements in manufacturing processes.
NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS
As at
Current Assets
Forward foreign exchange contracts
Cross-currency interest rate swap agreements
Long-term Assets
Forward foreign exchange contracts
Cross-currency interest rate swap agreements
Equity swap agreements
Current Liabilities
Forward foreign exchange contracts
Long-term Liabilities
Forward foreign exchange contracts
Cross-currency interest-rate swap agreements
Equity swap agreements
NOTE 14. OTHER ASSETS
As at
Working capital adjustment receivable (note 5)
Investment and other tax credits receivable
Prepaid expenses
Sales tax receivable
Others
Other current assets
Tax credits receivable (note 10)
Long-term receivable
Other long-term assets
30 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
March 31, 2020 March 31, 2019
$
$
$
$
$
$
28
—
28
—
3,498
—
3,498
9,321
9,321
$ 12,540
1,211
916
$
$
$
$
$
$
$
399
384
783
190
1,735
3,891
5,816
2,134
2,134
1,317
—
—
$ 14,667
$
1,317
March 31, 2020 March 31, 2019
5,347
3,595
$
$
7,371
5,904
2,629
1,714
$ 21,213
5,737
3,404
9,141
$
6,366
5,171
3,415
1,050
$ 21,349
6,914
—
$
6,914
NOTE 15. PROPERTY, PLANT AND EQUIPMENT
Cost:
As at March 31, 2019
Adoption of IFRS 16 (note 3)
As at April 1, 2019
Additions
Business acquisitions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Total
$ 19,029
$ 115,756
$ 268,685
$ 18,221
$
—
19,029
30
—
—
(1,975)
488
12,969
128,725
9,302
7,036
—
(2,620)
2,358
652
269,337
16,245
12,316
(30)
(642)
8,227
1,271
19,492
2,699
194
—
(28)
443
2,133
—
2,133
772
—
—
—
135
$
423,824
14,892
438,716
29,048
19,546
(30)
(5,265)
11,651
As at March 31, 2020
$ 17,572
$ 144,801
$ 305,453
$ 22,800
$
3,040
$
493,666
Accumulated amortization:
As at March 31, 2019
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2020
$
$
—
—
—
—
—
$
34,349
$ 150,511
$ 11,010
7,975
(352)
1,306
21,889
(631)
4,802
3,269
(370)
267
$
43,278
$ 176,571
$ 14,176
Net book value as at March 31, 2020
$ 17,572
$ 101,523
$ 128,882
$
8,624
$
$
$
— $
—
—
—
195,870
33,133
(1,353)
6,375
— $
234,025
3,040
$
259,641
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Total
Cost:
As at March 31, 2018
Additions
Business acquisitions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Accumulated amortization:
As at March 31, 2018
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Net book value as at March 31, 2019
$ 19,029
$
6,500
$
90,089
$ 235,411
$ 14,574
$
$
348,882
124
12,487
—
—
1,981
22,622
(23)
(10)
10,845
19,380
(420)
(1,157)
2,127
1,568
(54)
(94)
(82)
$ 19,029
1,097
$ 115,756
4,626
$ 268,685
100
$ 18,221
2,308
(1,201)
1,067
—
7
(48)
$
2,133
$
13,876
57,124
(497)
(1,254)
5,693
423,824
$
$
—
—
—
—
—
$
29,432
$ 130,981
$
4,638
(6)
285
17,636
(1,128)
3,022
8,966
2,079
(93)
58
$
$
34,349
81,407
$ 150,511
$ 11,010
$ 118,174
$
7,211
$
$
$
— $
—
—
—
169,379
24,353
(1,227)
3,365
— $
195,870
2,133
$
227,954
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 31
Right of use assets:
The following tables reconciles the right-of-use assets for the Company as at March 31, 2020 that is included in Property, Plant and Equipment:
Building and
leasehold
improvements
Machinery,
equipment and
tooling (1)
Other
Total
$
12,969
$
41,368
$
1,271
$
Cost:
At April 1, 2019
Additions
Business acquisition
Effect of changes in exchange rates
As at March 31, 2020
Accumulated amortization:
At April 1, 2019
Amortization expense
Effect of changes in exchange rates
As at March 31, 2020
Net book value as at March 31, 2020
6,498
6,844
418
3,454
—
5
$
26,729
$
44,827
$
$
$
—
$
(10,006)
(2,201)
(49)
(2,250)
24,479
(5,741)
(1)
(15,748)
29,079
$
$
206
—
49
55,608
10,158
6,844
472
$
$
$
$
1,526
$
73,082
—
(513)
(19)
(532)
994
$
(10,006)
(8,455)
(69)
(18,530)
54,552
$
$
2020
2019
$
29,048
$
13,876
(30)
29,018
(10,158)
1,785
(497)
13,379
—
(521)
$
20,645
$
12,858
(1) Includes the pre-existing assets under capital leases (net book value of $30,710 as at April 1, 2019)
Additions to property, plant and equipment shown above can be reconciled as follows, for fiscal year:
Gross additions
Government assistance (note 7)
Additions to property, plant and equipment
Non-cash additions to right-of-use assets
Variation in unpaid additions included in Accounts payable and accrued liabilities at year-end
Additions, as per statements of cash flows
As at March 31, 2020 and 2019, construction in progress included mainly the cost related to machinery and equipment. As at March 31, 2020,
the cost of property, plant and equipment still in use and fully depreciated is $110,782 ($91,109 as at March 31, 2019).
32 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
NOTE 16. FINITE-LIFE INTANGIBLE ASSETS
Cost:
As at March 31, 2019
Additions
Business acquisitions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2020
Accumulated amortization:
As at March 31, 2019
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2020
Net book value as at March 31, 2020
Cost:
As at March 31, 2018
Additions
Business acquisitions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Accumulated amortization:
As at March 31, 2018
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2019
Net book value as at March 31, 2019
Capitalized
development
costs
Customer
relationships
and contracts
Software
Total
$
26,356
$
21,912
$
68,086
$ 116,354
5,740
—
(5,399)
(833)
—
91
25,955
12,466
808
—
135
13,409
12,546
$
$
$
$
2,090
431
—
—
(321)
232
24,344
15,778
2,513
(321)
584
18,554
5,790
$
$
$
$
—
2,366
—
—
—
1,651
72,103
18,733
7,189
—
470
26,392
45,711
$
$
$
$
7,830
2,797
(5,399)
(833)
(321)
1,974
$ 122,402
$
46,977
10,510
(321)
1,189
58,355
64,047
$
$
Capitalized
development
costs
Customer
relationships
and contracts
Software
Total
$
31,160
$
18,641
$
25,404
$
75,205
3,165
—
(7,142)
(1,046)
—
219
26,356
11,493
948
—
25
12,466
13,890
$
$
$
$
2,749
1,693
—
(79)
(480)
(612)
21,912
14,152
2,226
(480)
(120)
15,778
6,134
$
$
$
$
—
42,940
—
—
—
(258)
68,086
13,704
5,124
—
(95)
18,733
49,353
$
$
$
$
5,914
44,633
(7,142)
(1,125)
(480)
(651)
$ 116,354
$
39,349
8,298
(480)
(190)
$
$
46,977
69,377
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 33
NOTE 17. GOODWILL
Goodwill varied as follows, during fiscal year:
Balance at beginning of the year
Business acquisitions (note 5)
Impairment
Effect of changes in exchange rates
Balance, end of year
The net carrying amount of goodwill was allocated to the following CGUs, as at:
North America
U.K.
Spain
Goodwill
2020
$ 189,012
3,408
(79,736)
8,089
$ 120,773
$
2019
91,137
100,930
—
(3,055)
$ 189,012
$
March 31, 2020
24,799
65,735
30,239
$ 120,773
The following assumptions were used to measure recoverable amounts (value in use) for the impairment tests performed as at March 31, 2020:
North America
U.K.
Spain
Pre-tax discount rate
Perpetual growth rate
13.8%
13.8%
14.9%
2.3%
2.3%
2.3%
Impairment testing of goodwill performed as at March 31, 2020 resulted in impairment charges of $53,035 and $26,701, respectively, for the
North America and Spain CGUs.
The recoverable amount is determined using management’s budget and strategic plan which covers a five-year period. Management prepares
the budget and strategic plan based on the published production rates of aircraft manufacturers, aerospace industry forecasts, general economic
forecasts, and past experience.
The significant decrease in expected demand for commercial aerospace products caused by the ongoing COVID-19 pandemic was quantified
in these estimates, including production rate cuts such as the 40% reduction in large commercial aircraft volume already announced by Airbus
and Boeing. The downward revision of these forecasts is the main contributing factor to the impairment charges.
The immediate and long-term impacts of the pandemic including related government and central bank interventions are unknown at this time,
and any estimate thereof is subject to significant uncertainty. The effects of the COVID-19 pandemic may therefore differ from those used in
the impairment calculation.
Sensitivity of recoverable amounts
Given the impairment charge at March 31, 2020, any unfavourable deviation from assumptions could result in further impairment. 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, 2020:
North America
U.K.
Spain
Incremental increase
in pre-tax discount rate
N/A
1.0%
Incremental decrease in
perpetual growth rate
N/A
1.4%
N/A
N/A
34 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
NOTE 18. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at
Trade payables (1)
Accrued liabilities (2)
Other
Accounts payable and accrued liabilities
(1) Trade payables are normally settled on 30 to 60 day terms.
(2) Accrued liabilities mainly include employees-related liabilities.
NOTE 19. PROVISIONS
$
March 31, 2020
81,771
41,007
3,710
126,488
$
$
March 31, 2019
76,749
37,403
3,838
117,990
$
Onerous
contracts
12,076
$
285
5,680
—
(3,974)
—
—
822
14,889
4,352
10,537
$
$
Asset retirement
obligations
Product
warranty
Other
(note 26)
$
6,096
$
16,199
$
—
—
157
(59)
(56)
305
—
6,443
867
5,576
$
$
$
$
3,607
—
—
(1,251)
(2,966)
(190)
379
15,778
12,597
3,181
$
$
9,391
3,130
1,238
—
(2,574)
(1,167)
(5)
83
10,096
9,863
233
Total
$
43,762
7,022
6,918
157
(7,858)
(4,189)
110
1,284
47,206
27,679
19,527
$
$
As at March 31, 2019
Arising during the year
Business acquisitions (note 5)
Interest accretion expense
Utilized
Reversed
Discount rate adjustment
Effect of changes in exchange rates
As at March 31, 2020
Less: current portion
Long-term portion
NOTE 20. LONG-TERM DEBT
As at
Senior Secured Syndicated Revolving Credit Facility (“Revolving Facility“)
Governmental authorities loans
Unsecured Subordinated Term Loan Facility ("Term Loan")
Lease liabilities (note 3)
Balance of sale - Acquisitions (note 5)
Secured loans - Tekalia
Deferred financing costs, net
Less: current portion
Long-term debt
Senior Secured Syndicated Revolving 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
$
March 31, 2020
96,472
88,590
60,000
44,665
2,983
—
(3,093)
289,617
16,857
$ 272,760
$
March 31, 2019
94,877
89,701
50,000
20,411
4,677
3,592
(2,952)
260,306
15,066
$ 245,240
March 31, 2020
250,000
$
March 31, 2019
250,000
$
US$ 68,000
Libor + 1.5%
2.5%
US$ 71,000
Libor + 2.0%
4.5%
(1) Includes an accordion feature to increase the Credit Facility up to $350 million during the term of the credit agreement, subject to lenders’ approval.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 35
In December 2019, the Corporation reached an agreement with its syndicate of banks to extend the term of its Revolving Facility through
December 2024. Most of the other terms remained unchanged. Financing costs totaling $897 ($1,699 in fiscal 2019) were deferred and will be
amortized over the term of the Revolving Facility using the effective interest rate method. The Credit Facility is secured by essentially 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 Canadian federal and provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refund. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest rate.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in the consolidated statements of income as financial expense.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2020, the Corporation updated the estimated repayment
schedule of its government authorities loans, taking into account revised assumptions mainly related to the reduced sales forecasts. This resulted
in a non-cash gain of $3,153 ($1,036 in fiscal 2019), which was included in Net financial expenses (see note 9).
The effective interest rates for these loans were in the range of 0.0% to 6.8% as at March 31, 2020 (0.0% to 6.6% as at March 31, 2019).
Unsecured Subordinated Term Loan Facility
The Corporation has a Term Loan Facility provided by the Fonds de solidarité FTQ (“FSTQ”) for an amount of up to $75,000. A first tranche of
$50,000 was drawn to finance the acquisition of CESA in October 2018 and a second of $10,000 was drawn in June 2019 for the acquisition of
Alta Précision.
The initial $50,000 loan bears interest at 5.70% and the second tranche of $10,000 bears interest at 4.73%. All the tranches are repayable at
maturity on September 30, 2025, and starting on September 30, 2021, the Corporation will have the option to make early repayments subject
to certain fees. In fiscal 2019, financing costs totaling $835 were incurred and are amortized over the term of the related loans using the effective
interest rate method.
Subsequent to year-end, on April 1, 2020, the Corporation has drawn an additional $45,000 tranche on its Revolving Facility and an additional
$15,000 tranche on its Term Loan Facility with FSTQ as a preventive measure to secure additional liquidities and prevent from unfavorable
market effects related to bank liquidities.
Lease liabilities
The incremental borrowing rate applied to lease liabilities recognized at the date of initial application and at March 31, 2020 ranged between
2.8% and 7.0% for leases. Refer to note 3 for further details about the adoption of IFRS 16.
The following table presents the reconciliation between the opening and the closing balances of the lease liabilities:
Balance as at March 31, 2019
Adoption of IFRS 16 (Notes 3 and 15)
Balance at April 1, 2019
Additions
Business acquisition
Lease payments
Interest expense on lease liabilities
Effect of changes in exchange rates
Balance as at March 31, 2020
Lease liabilities
$
$
20,411
14,892
35,303
10,158
6,844
(9,566)
1,819
107
$
44,665
The expense related to short-term leases and low-value assets leases during the year ended March 31, 2020 was immaterial.
36 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
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 of its subsidiaries. The Corporation complied with all covenants as at March 31, 2020.
Minimum repayments
Minimum repayments of long-term debt during the next five years are as follows:
Fiscal years
2021
2022
2023
2024
2025
Beyond 5 years
Sub-Total
Less: Interest
Debt balance (1)
$
Revolving
Facility
2,411
2,411
2,411
2,411
98,280
—
107,924
11,452
96,472
$
$
Governmental
authorities loans
5,785
7,969
11,184
10,173
9,704
67,926
112,741
24,151
88,590
$
Term Loan
3,323
$
3,323
3,323
3,323
3,323
61,662
78,277
18,277
60,000
$
Lease
liabilities
10,173
9,460
7,055
4,528
3,179
24,259
58,654
13,989
44,665
$
$
Other (2)
3,057
—
—
—
—
—
3,057
74
2,983
$
$
$
$
Total
24,749
23,163
23,973
20,435
114,486
153,847
360,653
67,943
292,710
(1) Before net deferred financing costs.
(2) Includes the balance of sales related to a business acquisition.
The following table presents reconciliation between the opening and closing balances for the Long-term debt.
Long-term debt, at beginning of the fiscal year
Adoption of IFRS 16 (note 3)
Increase in long-term debt
Repayment of long-term debt
Debt acquired through business acquisitions (note 5)
Amortization of deferred financing costs (note 9)
Fees incurred to amend or renew the Credit Facility
Interest accretion and adjustments on governmental authorities loans (note 9)
Effects of fluctuations in exchange rates
March 31, 2020
March 31, 2019
$ 260,306
$ 131,041
14,892
41,085
(38,024)
8,247
756
(897)
(773)
4,025
—
117,883
(36,198)
43,758
505
(2,534)
1,325
4,526
Long-term debt, at end of the fiscal year
$ 289,617
$ 260,306
NOTE 21. OTHER LIABILITIES
As at
Net defined benefit obligations (note 25)
Customer advances and progress billings
Deferred revenue
Other
Other Liabilities
NOTE 22. ISSUED CAPITAL
$
$
March 31, 2020 March 31, 2019
6,650
2,913
1,468
1,946
12,977
10,079
3,890
1,019
2,013
17,001
$
$
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
Unlimited
Unlimited
Unlimited
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 37
No preferred shares are outstanding.
Variations in common shares issued and fully paid were as follows, for fiscal year:
Balance at the beginning of the year
Issued for cash on exercise of stock options
Issued for cash under the stock purchase and ownership incentive plan
Balance at the end of the year
Stock-based compensation
Number
36,362,210
$
5,000
—
2020
Issued
capital
79,676
81
—
Number
36,218,572
$
107,450
2019
Issued
capital
78,105
1,101
36,188
470
36,367,210
$
79,757
36,362,210
$
79,676
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 at the beginning of the year
Granted
Exercised
Cancelled / forfeited
Balance at the end of the year
Stock-based compensation expense
Number of
stock options
1,167,095
341,500
(5,000)
(6,000)
1,497,595
2020
Weighted-
average
exercise price
$
$
$
13.23
16.03
11.71
16.03
13.86
1,108
Number of
stock options
1,105,295
207,500
(107,450)
(38,250)
1,167,095
2019
Weighted-
average
exercise price
$
$
$
12.09
16.21
6.50
15.24
13.23
882
The weighted-average share price at the date of exercise of stock options in fiscal 2020 was $18.10 ($15.86 in 2019).
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
2020
2019
341,500
4.33
1,479
$
$
207,500
4.25
882
$
$
5.4 years
4.8 years
25%
3.5%
None
1.6%
24%
4.2%
None
2.3%
As at March 31, 2020, 2,808,257 common shares are reserved for issuance upon exercise of stock options, of which 2,757,507 remained to be
issued, compared to 2,762,507 as at March 31, 2019.
38 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
As at March 31, 2020, 1,497,595 stock options were issued and outstanding and can be detailed as follows:
Exercisable price
$10.71 to $11.71
$14.93 to $16.22
Outstanding options
Weighted-average
years to maturity
1.26
5.25
3.58
Number
635,595
862,000
1,497,595
Weighted-average
exercise price
$11.43
15.66
$13.86
Vested options
Number
635,595
297,625
933,220
Weighted-average
exercise price
$11.43
15.16
$12.62
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
2020
2019
—
58,019
36,188
24,622
$
364
$
227
As at March 31, 2020 and 2019, 340,000 shares are reserved for issuance under the stock purchase and ownership incentive plan, of which
22,678 remained to be issued.
C. Deferred Share Unit (“DSU”) and Performance Share Unit (“PSU”) plans
Movements in outstanding DSUs and related expense were as follows, for fiscal year:
In number of DSUs
Balance, beginning of year
Issued
Settled
Cancelled/Forfeited
Closing balance of DSUs outstanding
DSU (income) 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
Settled
Cancelled/forfeited
Closing balance of PSUs outstanding
PSU expense
Fair value of vested outstanding PSUs, end of year
2020
2019
166,334
136,170
21,671
(33,055)
—
36,008
(4,512)
(1,332)
154,950
166,334
$
$
(325) $
640
1,599
$
2,534
2020
2019
212,450
119,300
(16,100)
(37,200)
187,948
81,350
(38,392)
(18,456)
278,450
212,450
$
$
764
2,316
$
$
1,505
1,850
Liabilities related to PSUs and DSUs plans are presented under the Accounts payable and accrued liabilities caption on the Consolidated
Balance Sheets.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 39
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
Balance as at March 31, 2019
Other comprehensive loss
Balance as at March 31, 2020
Balance as at March 31, 2018
Other comprehensive loss
Balance as at March 31, 2019
NOTE 24. INCOME TAXES
Income tax expense is as follows, for fiscal year:
Consolidated statements of (loss) income
Current income tax expense
Deferred income tax expense (recovery)
Exchange
differences on
conversion of
foreign
operations
$
$
19,266
15,579
34,845
Exchange
differences on
conversion of
foreign
operations
$
$
20,116
(850)
19,266
Cash flow
hedges
(1,772)
(12,130)
(13,902)
Cash flow
hedges
24
(1,796)
(1,772)
$
$
$
$
Hedge of net
investments in
foreign
operations
$
$
(6,992)
(6,791)
(13,783)
Hedge of net
investments in
foreign
operations
$
$
(5,923)
(1,069)
(6,992)
Total
10,502
(3,342)
7,160
Total
14,217
(3,715)
10,502
$
$
$
$
2020
2019
$
$
$
$
7,637
5,105
12,742
$
$
6,254
(2,019)
4,235
(631) $
(5,808)
(656)
(557)
(6,439) $
(1,213)
2020
$ (10,030) $
(3,733)
21,130
3,805
1,227
343
12,742
$
$
2019
8,124
(4,788)
—
—
1,018
(119)
4,235
Income tax expense reported in the consolidated statements of income
Consolidated statements of changes in shareholders’ equity
Recovery related to items charged or credited directly to retained earnings
Recovery related to items charged or credited directly to other comprehensive income
Income tax recovery 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 26.5% (26.6% in fiscal 2019)
Income tax rate differential – foreign subsidiaries
Non deductible goodwill impairment
Write-down of deferred tax asset
Permanent differences
Other items
Income tax expense
40 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
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
Lease liabilities
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
Total deferred income tax liabilities
Net deferred income tax assets
March 31, 2020 March 31, 2019
$
10,785
$
10,975
5,625
14
4,707
3,837
15
23,538
48,521
(59)
(25,793)
(11,783)
(37,635)
10,886
$
$
5,345
20
113
—
10
22,185
38,648
(729)
(16,903)
(12,795)
(30,427)
8,221
$
$
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, 2020 March 31, 2019
$
19,698
$
14,575
(8,812)
(6,354)
$
10,886
$
8,221
As at March 31, 2020, net deferred income tax assets of $12,162 were recognized ($13,330 as at March 31, 2019) in jurisdictions that incurred
losses in current and prior fiscal years. Based upon the level of historical taxable income and projections for future taxable income, the Corporation’s
management believes it is probable that the Corporation will realize the full benefits of these deductible temporary differences and non-capital
losses carried forward.
As at March 31, 2020, operating losses carried forward or other temporary differences for which related deferred income tax assets have not
been recognized in the consolidated financial statements amounted to $28,354 ($3,329 as at March 31, 2019).
The Corporation had the following non-capital losses and undeducted interest expenses available for carry-forward:
As at
Canada
United States
United Kingdom
Spain
March 31, 2020
March 31, 2019
$
26,094
73,198
1,802
24,357
$
19,520
64,219
1,456
18,874
$
125,451
$
104,069
As at March 31, 2020, deferred income tax assets of $12,526 and deferred income tax liabilities of $1,644 are expected to be recovered or
settled in less than one year.
Deferred income tax is not recognized on the unremitted earnings of subsidiaries where the Corporation is able to control the timing of the
remittance and it is probable that there will be no remittance in the foreseeable future. As at March 31, 2020, the temporary differences associated
with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $28,850 ($21,614 in 2019).
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 41
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 2020, 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 $1,417 ($1,335
in 2019) while the cash contributed to its defined contribution plans amounted to $3,425 ($3,492 in 2019).
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 58% in equity funds, 41% in debt securities and 1% 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 (note 21)
$
March 31, 2020
64,234
55,117
(9,117)
(962)
(10,079)
$
$
March 31, 2019
65,962
60,710
(5,252)
(1,398)
(6,650)
$
Defined benefit pension expense recognized in the consolidated statements of income is as follows, for fiscal year:
Current service cost
Interest on net defined benefit obligations (note 9)
Past service cost
Administrative cost
Defined benefit pension expense recognized in the consolidated statements of income
42 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
2020
1,408
238
543
259
2,448
$
$
2019
1,192
150
—
198
1,540
$
$
The total amount recognized in other comprehensive income is as follows, for fiscal year:
Remeasurements
Losses from changes in demographic assumptions
Gains (losses) from changes in financial assumptions
Experience (losses) gains
Return on plan assets, excluding interest income on plan assets
Other comprehensive loss
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:
2020
2019
(59) $
(326)
4,494
(486)
(6,347)
(2,398) $
(2,855)
255
439
(2,487)
2020
(4,364) $
2019
2,547
$
$
$
As at
Defined benefit obligations at the beginning of the year
Current service cost
Interest expense
Contributions by plans’ participants
Losses from changes in demographic assumptions
(Gains) losses from changes in financial assumptions
Experience losses (gains)
Benefits paid
Past service benefits
Defined benefit obligations at the end of the year
The fair value of plan assets is as follows:
As at
Fair value of plans’ assets at the beginning of the 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 at the end of the year
The plans’ assets consist of:
As at
Equity securities
Debt securities
Other
Total
$
March 31, 2020
67,360
1,408
2,221
694
59
(4,494)
486
(3,081)
543
65,196
$
$
March 31, 2020
60,710
1,983
(6,347)
1,417
694
(3,081)
(259)
55,117
$
$
March 31, 2019
62,932
1,192
2,258
675
326
2,855
(255)
(2,623)
—
67,360
$
$
March 31, 2019
58,974
2,108
439
1,335
675
(2,623)
(198)
60,710
$
March 31, 2020 March 31, 2019
61%
31%
8%
100%
58%
41%
1%
100%
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 43
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
2020
2019
3.80%
3.50%
3.30%
3.50%
87
89
88
90
86
89
87
90
The following table summarizes the effects of the changes in these actuarial assumptions on the defined benefit obligations for the fiscal year
ended and as at March 31, 2020:
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
Defined
benefit
obligations
%
(6.3)
7.2
—
—
2.2
(2.3)
Corporation’s pension benefits future cash flows
The cash contributions expected to be made to these plans in fiscal year 2021 amount to $1,358.
The duration of the defined benefit obligations at March 31, 2020 is 14.7 years (14.8 years in 2019). 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
Defined contribution pension plans
The defined contribution pension plans’ costs are as follows, for fiscal year:
Defined contribution pension plan costs
$
March 31, 2020
1,860
2,096
7,071
150,545
$ 161,572
$
March 31, 2019
1,783
1,834
6,125
168,987
$ 178,729
2020
3,425
$
2019
3,492
$
44 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
NOTE 26. COMMITMENTS
Commitments
The Corporation has commitments for 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:
Building, machinery and equipment acquisition commitments
$ 5,975 $ 1,466
—
—
—
— $ 7,441 $ 6,796
2021
2022
2023
2024
2025 Thereafter
Total
2020
Total
2019
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, 2020, the duration of these indemnification agreements could extend
up to fiscal year 2024. As at March 31, 2020, an amount of $4,804 ($5,012 in 2019) 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, 2020, the Corporation has outstanding letters of credit amounting to $22,590 ($26,153 in 2019).
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 Corporation’s consolidated financial position and operating results.
NOTE 28. NET CHANGE IN NON-CASH ITEMS
The net change in non-cash items is detailed as follows, for fiscal year:
Accounts receivable
Income tax receivable
Inventories
Other current and long-term assets
Accounts payable and accrued liabilities and other liabilities
Provisions
Customers advances and progress billings
Income tax payable
Effect of changes in exchange rates(1)
$
$
2020
4,328
1,102
(45,517)
116
3,320
(8,822)
11,072
(508)
5,381
$ (29,528) $
2019
(5,624)
(385)
(1,746)
(2,245)
20,013
(5,377)
4,655
(2,404)
2,686
9,573
(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.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 45
NOTE 29. GEOGRAPHIC INFORMATION
The geographic segmentation of the Corporation’s assets is as follows:
As at
Property, plant and equipment, net
Finite-life intangible assets, net
Goodwill
As at
Property, plant and equipment, net
Finite-life intangible assets, net
Goodwill
March 31, 2020
Canada
U.S.
U.K.
Spain
Total
$ 115,058
$ 80,245
$ 20,873
$ 43,465
$ 259,641
15,802
5,404
4,225
19,395
6,119
65,735
37,901
64,047
30,239
120,773
March 31, 2019
Canada
U.S.
U.K.
Spain
Total
$ 97,210
$ 72,872
$ 13,987
$ 43,885
$ 227,954
14,785
14,344
6,433
53,217
9,254
65,041
38,905
56,410
69,377
189,012
Geographic sales based on the customers’ location are detailed as follows, for fiscal year:
United States
United Kingdom
Spain
Rest of Europe
Canada
Other countries
2020
$ 326,860
62,734
48,049
67,647
57,472
50,234
$ 612,996
2019
$ 260,397
53,589
26,036
58,837
39,668
45,350
$ 483,877
NOTE 30. EXECUTIVE COMPENSATION
Key management includes directors (executive and non executive) and members of the Executive Committee. The executive compensation
expense to key management is as follows, for fiscal year:
Short-term employee benefits and other benefits
Pension and other post-retirement benefits
Share-based payments
Total compensation to key management personnel
NOTE 31. FINANCIAL INSTRUMENTS
2020
4,019
173
1,301
5,493
$
$
2019
3,622
84
1,421
5,127
$
$
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.
46 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
The classifications of financial instruments as well as their carrying amounts and fair values are summarized as follows:
As at
Financial assets
Cash and cash equivalents
Derivative financial instruments
Financial liabilities
Derivative financial instruments
Long-term debt, including current portion
March 31, 2020
March 31, 2019
Fair value
hierarchy
Carrying
amount
Fair Value
Fair value
hierarchy
Carrying
amount
Fair Value
Level 1
Level 2
Level 2
Level 2
$
$
$
45,841
3,526
49,367
23,988
292,710
$
$
$
45,841
3,526
49,367
Level 1
Level 2
23,988
318,456
Level 2
Level 2
$
$
$
35,128
6,599
41,727
3,451
$
$
$
35,128
6,599
41,727
3,451
263,258
270,716
$
316,698
$
342,444
$
266,709
$
274,167
Derivative financial instruments - The fair value of derivative financial instruments recognized in the consolidated balance sheets has been
determined using the Corporation’s valuation models and compared to the fair value information provided by the financial institutions using
exchange rates or interest rates quoted in the active market and adjusted for the credit risk added by the financial institution. These models
project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative financial instruments
and factors observable in external markets data, such as period-end interest rate swap and foreign exchange rates.
Long-term debt – The fair value of long-term debt has been determined by calculating the present value of long-term debt using the rate that
would be negotiated under the economic conditions at year-end.
NOTE 32. FINANCIAL RISK MANAGEMENT
The Corporation is exposed primarily to market risk, credit and credit concentration risks, and liquidity risk as a result of holding financial
instruments.
Market Risk
Market risk is the risk of fluctuations in the fair value or future cash flows of financial instruments following changes in market prices, whether
those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments
traded in the market. The Corporation is primarily exposed to the following market risks:
Foreign exchange risk
The Corporation is exposed to risks resulting from foreign currency fluctuations arising either from carrying on business in Canada in foreign
currencies or through operations in the United States of America, Spain and the United Kingdom.
In an effort to mitigate the foreign currency fluctuation exposures, the Corporation makes use of derivative contracts to hedge this exposure,
essentially to the U.S. currency and arising from its Canadian, Spanish and United Kingdom operations.
The Corporation’s foreign exchange policy requires the hedging of 50% to 100% of the identified foreign currency exposure, mainly over the
next two fiscal years, of the forecasted cash inflows generated by sales in U.S. currency made by its Canadian, Spanish and United Kingdom
operations and related to sales contracts, net of the forecasted cash outflows in U.S. currency made by its Canadian, Spanish and United
Kingdom operations and related essentially to raw materials and certain other material costs.
As at March 31, 2020, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $404,728 denominated in
USD, EUR and GBP. This amount includes mainly contracts with nominal value of US$266,355 convertible into Canadian dollars at an average
rate of 1.3243. These contracts mature at various dates between April 2020 and March 2025, with the majority maturing fiscal years 2021 and
2022.
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 47
As at March 31, 2020, 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:
Increase in net loss
Increase (decrease) in other comprehensive income (loss)
U.S. dollar
impact
$
(275)
448
British pound
impact
$
(122)
(1,755)
Euro
impact
$
(138)
(766)
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 80% of long-term debt,
excluding lease liabilities and government loans.
Cross-currency interest rate swaps
The acquisition of CESA (see note 5) exposed the Corporation to foreign currency and interest rate risks related to the investment in Euros. A
decrease in value of the Euro compared to the Canadian dollar would decrease the value of the foreign investment, and an increase in interest
rates underlying debt would increase related net financial expenses.
In order to mitigate these risks, as at March 31, 2020, the Corporation had entered into the following cross-currency interest rate swap agreements
in order to manage foreign exchange and interest rate risks:
Notional
US$ 29,370
C$ 50,000
US$ 17,523
C$ 10,000
Fixed EUR equivalent
€
€
€
€
25,000
34,110
15,000
6,658
Interest rate
1.86 %
3.40 %
Inception
October 2017
Maturity
May 2022
October 2017
September 2025
Euribor 1 month + 1.74%
September 2018
May 2022
2.68 %
June 2019
September 2025
A 100 basis point variation in interest rates would have affected the Corporation’s financial results for fiscal 2020 as follows:
Impact on net income related to floating rate long-term debt
Impact on comprehensive income related to cross-currency interest-rate swap agreements
100 bps increase
$
(116)
846
100 bps decrease
$
116
(846)
The interest rate sensitivity analysis shown above is calculated on the floating-rate liability at the end of the fiscal year and assumes all other
variables remain fixed.
Other price risk
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs and PSUs (see note 22). In order to mitigate this
exposure, the Corporation has entered into an equity swap agreement with a financial institution.
Pursuant to this agreement, upon settlement, the Corporation receives payment for any share price appreciation while providing payment to
the financial institution for any share price depreciation. The net effect of the equity swap partly offsets movements in the Corporation’s share
price which impacts the expense of the DSUs and PSUs included in the Corporation’s selling and administrative expenses.
As at March 31, 2020, the equity swap agreement covered 300,000 common shares of the Corporation at a price of $13.52. This agreement is
a derivative instrument that is not part of a designated hedging relationship and matures in June 2021.
48 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
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 2020 sales are made to only nine customers
(61% to nine customers in 2019). More specifically, in fiscal 2020, the Corporation had one customer representing 22% of its consolidated sales
(one customer representing 22% in 2019).
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 3.7% in fiscal 2020 (4.2% in 2019) of the Corporation’s consolidated sales.
As at March 31, 2020, 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.
In response to the COVID-19 pandemic, the Corporation has increased the frequency of its close monitoring of the credit quality of the accounts
receivable. In certain circumstances, cash-on-delivery arrangements were made with certain customers. There were no material increases in
allowance for doubtful accounts following the COVID-19 pandemic as the quality of the accounts receivable based on the Corporation’s
assessment until this date has not materially decreased. The effects of COVID-19 pandemic are still evolving and certain customers’ credit
situation is difficult to assess given the immaterial bad debt experience with these customers.
Changes in the allowance for doubtful accounts were as follows for the fiscal year ended March 31, 2020:
Balance, beginning of year
Arising during the year
Balance at the end of the 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 at the end of the year
2020
192
996
1,188
$
$
March 31, 2020
March 31, 2019
$ 103,099
$ 105,402
7,820
2,264
563
113,746
(1,188)
8,866
1,163
192
115,623
(192)
$ 112,558
$ 115,431
Estimated credit losses based on expected loss rates were insignificant as at March 31, 2020 and 2019.
Cash and cash equivalents and derivative financial instruments
The credit and credit concentration risks related to these financial instruments are limited due to the fact that the Corporation deals mainly with
high-grade financial institutions such as Canadian chartered banks and their U.S. subsidiaries or branches or with a Canadian branch of a U.S.
bank, based on the Corporation’s investment policy. On that basis, the Corporation does not anticipate any breach of agreements by counterparties.
As at March 31, 2020, 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.
FVTPL
FVTOCI (1)
$
— $
—
—
— $
—
3,526
A.C.
45,841
112,558
—
HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements – 49
Liquidity risk
The Corporation is exposed to the risk of being unable to honour its financial commitments by the deadlines set, under the terms of such
commitments and at a reasonable price. The Corporation manages its liquidity risk by forecasting cash flows from operations and anticipated
investing and financing activities. Senior management is also actively involved in the review and approval of long-term sales contracts and
planned capital expenditures.
As at March 31, 2020, the maturity analysis of financial liabilities represented the following:
Accounts payable and accrued liabilities
$
Customer advances
Long-term debt, including current portion (note 20)
Derivative financial instruments
< 1 year
126,488
14,501
24,749
9,321
1 to 3 years
$
— $
4 to 5 years
> 5 years
—
47,136
10,921
— $
—
— $
—
134,921
2,535
153,847
1,211
Total
126,488
14,501
360,653
23,988
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, 2020, 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, 2020
16,857
$
March 31, 2019
15,066
$
272,760
3,093
45,841
246,869
349,448
0.71:1
$
245,240
2,952
35,128
228,130
404,098
0.56:1
$
The Corporation is not subject to any regulatory capital requirements.
NOTE 34. SUBSEQUENT EVENT
On May 5, 2020, the Corporation announced restructuring initiatives driven by lower production rates in the commercial aerospace market due
to the ongoing COVID-19 pandemic. These initiatives will result in a 10% workforce reduction or approximately 225 employees which include
the closing of Alta facilities. These initiatives will be competed over the current fiscal year and will result in a non-recurring charges of up to
$12,000 before taxes.
50 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the fiscal year ended March 31, 2020
TABLE OF CONTENTS
OVERVIEW ................................................................................................................................................................................................
Forward-looking Statements ....................................................................................................................................................................
Highlights of the Year ...............................................................................................................................................................................
Overview of the Business ........................................................................................................................................................................
Impact of COVID-19 .................................................................................................................................................................................
Economic Outlook ....................................................................................................................................................................................
Guidance .................................................................................................................................................................................................
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 ...................................................................................................................................................................
Business Acquisition ................................................................................................................................................................................
Foreign Exchange ....................................................................................................................................................................................
Risk Management ....................................................................................................................................................................................
Key Performance Indicators .....................................................................................................................................................................
Derivative Financial Instruments ..............................................................................................................................................................
Internal Controls and Procedures ............................................................................................................................................................
Critical Accounting Estimates ...................................................................................................................................................................
New Accounting Standards ......................................................................................................................................................................
Selected Financial Information .................................................................................................................................................................
Shareholder Information ..........................................................................................................................................................................
Additional Information and Continuous Disclosure ...................................................................................................................................
53
53
54
55
56
57
59
60
64
66
66
67
68
70
71
72
72
72
73
74
75
75
78
79
84
84
85
86
87
90
91
91
52 – HÉROUX-DEVTEK INC. – Fiscal 2020 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, 2019 and March 31,
2020. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2020 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, 2020, 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, 2020 and 2019 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 effect of the ongoing COVID-19 pandemic on Héroux-Devtek’s operations, customers, supply
chain, the aerospace industry and the economy in general; the impact of other 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 Impact
of COVID-19 section under Overview and the Risk Management section under Additional Information. 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 2020 MD&A – 53
HIGHLIGHTS OF THE YEAR
Fiscal year
Sales
Operating (loss) income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net (loss) income
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
In dollars per share
(Loss) Earnings per share - basic and diluted
Adjusted EPS (1)
As at
Funded backlog (2)
2020
$ 612,996
(30,070)
52,548
96,191
(50,658)
35,666
52,573
30,330
2019
$ 483,877
37,240
41,563
74,213
26,194
30,352
69,969
58,642
$
(1.38) $
1.00
March 31,
2020
$ 810,000
0.73
0.84
March 31,
2019
$ 624,000
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
(2) Represents firm orders.
Key Events
The Corporation generated sales of $613.0 million resulting in an operating loss of $30.1 million, mainly due to the impairment charges
mentioned below, and Adjusted EBITDA of $96.2 million in fiscal 2020. These results compared to sales of $483.9 million, operating income
of $37.2 million and Adjusted EBITDA of $74.2 million in fiscal 2019.
Héroux-Devtek generated cash flows related to operating activities of $52.6 million and free cash flow of $30.3 million during fiscal 2020,
compared to $70.0 million and $58.6 million in fiscal 2019.
Funded backlog increased to $810.0 million, compared to $624.0 million as at March 31, 2019, mainly due to increased demand for defence
products under long-term contracts.
Héroux-Devtek’s operations are being affected by the ongoing COVID-19 pandemic:
*
*
*
All of our facilities remain operational and the Corporation continues to have a strong financial position with available liquidity
totaling $193 million as at March 31, 2020. Refer to Liquidity and Capital Resources for more information.
Significant reduction in expected demand for commercial aerospace products, causing the Corporation to record non cash
impairment charges totaling $85.8 million, $79.7 million of which related to goodwill. Refer to Non-recurring Items under Operating
Results for further details.
Subsequent to the end of the fiscal year, on May 5, 2020, Héroux-Devtek announced restructuring initiatives in light of the ongoing
COVID-19 pandemic. These initiatives will be completed over the remainder of the fiscal year, will affect 10% of the workforce,
or approximately 225 employees, and will include the closure of the business unit formerly known as Alta Precision. These
measures will result in a non-recurring charge of up to $12.0 million before taxes.
Refer to the Impact of COVID-19 section for more information on the effects of the pandemic on Héroux-Devtek.
On May 21, 2019, the Corporation announced the extension of the scope of the F-18 agreement with Boeing to include the manufacturing
of the nose and main landing gears for the Advanced F-15 program.
On December 5, 2019 the Corporation reached an agreement to extend the term of its Revolving Facility from May 2022 to December
2024.
54 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
OVERVIEW OF THE BUSINESS
Profile
Héroux-Devtek Inc. (TSX: HRX) is an international company specializing in the design, development, manufacture and repair and overhaul
(R&O) of landing gear, hydraulic and electromechanical flight control actuators, custom ball screws and fracture-critical components. The
Corporation has also built a strong, well-recognized design engineering team. Héroux-Devtek is the third largest landing gear company in the
world based on sales, supplying both the commercial and defence sectors.
In the commercial sector, the Corporation is active in the large commercial and business jet, regional aircraft and helicopter markets. On the
defence side, the Corporation provides parts and services for major military aircraft in the United States and Europe. As a result, a significant
portion of the Corporation’s sales are made to a limited number of customers located in Canada, the United States and Europe.
The Corporation's head office is located in Longueuil, Québec while operating facilities are located in the Greater Montreal area (Longueuil,
Laval, St-Hubert and Montreal); Kitchener, Cambridge and Toronto, Ontario; Springfield and Cleveland, Ohio; Wichita, Kansas; Everett,
Washington; Livonia, Michigan; Seville and Madrid, Spain; as well as Bolton, Runcorn and Nottingham in the United Kingdom.
Héroux-Devtek sells to Original Equipment Manufacturers (“OEMs”) such as Boeing, Airbus, Lockheed Martin, Leonardo, Embraer and BAE
Systems; to Tier 1 suppliers such as Safran Landing Systems and AAR; and to end users in the aftermarket where its largest customer is the
U.S. Air Force (“USAF”). In fiscal 2020, sales to these nine customers represented approximately 60% of total consolidated sales. More specifically,
the Corporation has one customer representing 22% of its consolidated sales.
The following charts describe Héroux-Devtek’s revenue segmentation in terms of intellectual property and destination:
* BTP: Build to Print
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 55
IMPACT OF COVID-19
The COVID-19 pandemic is having an unprecedented impact on the aviation and aerospace industry, particularly for commercial air travel.
Global flights were down 80% in early April 2020, and the fallout of global lockdowns is widely expected to result in the worst economic downturn
since the Great Depression.
Airlines facing travel bans, grounded fleets and negative demand outlooks are delaying deliveries and canceling orders of new commercial
aircraft, which in turn is pushing OEMs to reduce production rates. Worldwide, supply chains are also disrupted by varying degrees of government-
imposed lockdowns as well as the direct impact on manufacturing facilities of virus outbreaks.
These conditions combine for a rarely-before-seen degree of uncertainty in any financial projections as it is almost impossible to estimate the
length or severity of either the pandemic or the economic disruption caused by the efforts to contain it. For a detailed review of potential risks
and mitigation strategies implemented, refer to the Risk Management section under Additional Information.
The impact on Héroux-Devtek so far
The Corporation’s operations in Spain were the first to be affected by the pandemic given its East-to-West progression. As the virus began to
spread at the end of February, our Spanish operations developed protocols to prevent the spread of the disease within Héroux-Devtek’s facilities.
These measures were implemented across all of our business units (U.K., U.S.A. and Canada) in order to create a safe working environment
and have proven to be very effective. To date, there has not been a single case of transmission within any of our offices or factories.
Héroux-Devtek’s operations were deemed essential in whole or in part in all jurisdictions where we operate since we are an aerospace
manufacturer supplying both the defence and commercial sectors. The protocols that we put in place have largely allowed our team to work
normally during this extraordinary period. All of our facilities have remained open and, including people working from home, we have maintained
a physical attendance rate of approximately 85% throughout the crisis. Under the exceptional circumstances, this allowed us to remain relatively
efficient.
We also enhanced communication with our supply chain in order to assess the pandemic’s effects on our critical suppliers and share our best
practices with them. While some suppliers have temporarily suspended operations and several will be impacted financially, our operations on
the supply side have only been affected minimally to date. We will continue to monitor developments closely in order to respond quickly to any
perceived disruptions.
To date, the pandemic has had a larger operational impact on our clients than our suppliers, with several OEMs such as Boeing, Airbus and
Embraer temporarily shutting down facilities, delaying some deliveries.
In spite of these obstacles, our employees’ extraordinary response and hard work allowed us to achieve strong financial results. We exceeded
the sales guidance that we had revised upwards in the third quarter, delivered strong margins, and generated cash flows that will help us weather
the storm.
Looking Ahead
Airbus and Boeing announced production rate cuts totaling approximately 40% of their large commercial aircraft volume. Industry analysts do
not expect rates to increase over the next two or three years. This decrease and the uncertainty of its duration have led us to withdraw our long-
term sales guidance and to record a non-cash impairment charge of $79.7 million on goodwill.
In response to the significant downward revision of market perspectives over the medium-term, we needed to adjust our cost structure and
manufacturing capacity rapidly. As a result, on May 5 2020, in order to reduce our fixed and variable cost base, we announced a restructuring
plan including the closure of our Alta Precision business unit in addition to a reduction of our workforce of approximately 10% or 225 employees.
We also revised our budgeted capital expenditures downwards and realigned our manufacturing resources towards the defence sector. We
believe these measures will help us remain competitive and profitable during this challenging period.
Equipped to weather turbulence
Despite these very challenging conditions, the good news for us is that the diversification of our business should provide us with some degree
of protection from the impact of the pandemic and economic downturn. More than two thirds of our $810 million funded backlog as at March 31,
2020 is comprised of orders for defence programs and, so far, we expect that it should see only minimal disruption. This should allow us to avoid
what could otherwise have been a greater reduction in business volume.
56 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
Furthermore, we are entering fiscal 2021 in a strong financial
position. We closed fiscal 2020 with just over $45 million of cash-
on-hand and almost $150 million in combined borrowing capacity
on our Revolving and Term loan facilities. We drew an amount of
$60 million on these facilities in early April as a precautionary
measure.
We have no capital repayment requirements on these facilities until
December 2024, following the extension of our credit facility in
December 2019. We also sit well below our bank covenants and
we expect them to remain stable over the next twelve months, in
spite of the expected decrease in our commercial volume, given
positive free cash flow.
The flexibility of our operations to focus on defence products,
prudent management of capital, the dedication of our workforce and
our strong balance sheet all make us well-equipped to weather the
turbulence.
ECONOMIC OUTLOOK
The following is the latest update of the economic outlook presented annually in Corporation’s fourth quarter and fiscal year-end MD&A. This
section is intended to present some of the primary industry and macroeconomic trends or indicators monitored by the Corporation.
After having recorded continued growth over an 18-year super cycle, the aerospace industry has been severely impacted by the ongoing
COVID-19 global pandemic(1, 2). Specifically, while defence spending is expected to remain relatively immune to the pandemic, the negative
impact on the commercial market - particularly on passenger travel - should continue to be felt at all levels of the supply chain throughout Fiscal
2021.
In accordance with the forecasts presented below, drawn from recent reports issued by key industry associations and analysts, the Corporation
expects a slow, yet gradual recovery of passenger demand beginning in the quarters ahead. Héroux-Devtek does not expect that pre-COVID-19
levels of passenger demand will be met before calendar 2023.
Sudden, Steep Decline in Commercial Aerospace Activity Expected to Only Resume Gradually
Revenue passenger kilometers (“RPK”) fell by a steep 52.9% year-over-year in March at the height of the COVID-19 pandemic, the largest
decline in recent history according to the International Air Transport Association (“IATA”)(3).
Indeed, after recording double-digit growth in the month of January and being flat in February, the number of flights has decreased almost 80%
by early April vs. the prior year, also according to IATA(2). Airlines have continued to operate domestic flights in the USA, some European markets
and Asia, but international passenger travel has yet to resume meaningfully at this time.
IATA forecasts a 48% decline in RPKs in 2020 over 2019, on the basis that domestic travel gradually starts resuming in calendar Q3 and that
international travel gradually starts resuming in calendar Q4(2). The latest IATA projections for 2021 forecast a global RPK level 32-42% below
the pre-COVID-19 growth trajectory(4)
In addition to generating delays in the delivery of new aircrafts from manufacturers to airlines, the Company expects a significant decrease in
the demand for aftermarket (lower ASMs, de-stocking, deferred maintenance/upgrades), due to the high percentage of grounded fleet - estimated
at 80% at the peak of the pandemic.(2)
While it remains early to determine the speed and extent of the full recovery, most industry analysts expect to see air travel start resuming
gradually in some Asian markets by the end of calendar Q2, with a more substantial recovery - perhaps to 30-50% of historic levels in calendar
Q3. The latest Teal Group forecast calls for a 24% contraction of the overall civil aviation market in 2020(4).
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 57
A More Modest Contraction of Air Cargo Volumes
Air cargo volume, measured in cargo tonne kilometers (“CTK”), contracted 15.2% year-over-year in March 2020(5), marking the twelfth consecutive
month of year-over-year decline, due to the recent COVID-19 impact and exacerbated by the ongoing trade disputes and other geopolitical
factors.
According to IATA, air cargo capacity has trended at approximately 70-90% of historic levels across regions(6) and should remain relatively
immune to COVID-19 going forward(4). However, as it had customarily been the case in prior recessions, air cargo activity should reflect the
more modest economic activity and overall reduced consumer spending forecasted in the quarters ahead. The most recent IATA forecasts,
which are based on the WTO’s latest world trade scenarios, call for a decline of 14 to 31% of cargo volumes (CTK) for 2020(6).
Although supported in part by a surge in the transportation of medical and pharmaceutical supplies, the air cargo market is expected to continue
to face a somewhat challenging business environment with significant regional performance differences(6) driven by the timing at which economies
re-open and depending namely on the potential for future COVID-19 waves of epidemic resurgence(5).
Customers’ Commercial Order Backlogs Remain Relatively Strong
Meanwhile, in the large commercial aircraft sector, Boeing’s commercial airplanes order backlog stood at nearly 5,000 airplanes in the first
quarter of 2020, down approximately 9% over pre-COVID-19 levels(7).
Airbus’ commercial aircraft order book stood at 7,650 aircrafts at the end of the first quarter of 2020, up 4% year-over-year(8).
Defence Seen as Strongest Market Amid COVID-19 and Upcoming Recession
According to the Stockholm International Peace Research Institute (Sipri), global defence expenditures reached over US$1.9 trillion in 2019,
the single largest year-over-year increase in over a decade(9). Also according to Sipri, defence spending by the United States grew by 5.3 %
to a total of US$732 billion in 2019(9).
The Teal Group forecasts that fighter jets, which account for a key portion of the Corporation’s defence sales, is the defence aerospace subcategory
that is expected to grow the fastest in 2020, with a 2.9% growth target year-over-year(10). Overall, the Teal Group expects the entire defence
aerospace market to be flat in 2020 and notes that it remains a “relatively stable” market due to the rising global tensions and an aging fleet.(10)
Additionally, the defence aftermarket is expected to remain strong in 2020, with de-stocking, combat missions, training programs and humanitarian
missions all unlikely to decline(11).
Refer to Forward-Looking Statements for further information regarding forward-looking statements and related risks.
(1) Source: Commercial Aerospace Faces Turbulence, Boston Consulting Group, November 18, 2019.
(2) Source: COVID-19 Updated Impact Assessment, IATA, report issued April 14, 2020.
(3) Source: Air Passenger Monthly Market Analysis, IATA, March 2020, issued April 29, 2020.
(4) Source: COVID-19 Outlook for air travel in the next 5 years, IATA, May 13, 2020.
(5) Source: Air Cargo Market Analysis, IATA, March 2020, published April 28, 2020.
(6) Source: COVID-19 Assessing prospects for air cargo, IATA, April 28, 2020
(7) Source: Boeing Reports First Quarter Results press releases issued April 24, 2020 and April 24, 2019.
(8) Source: Airbus Key Figures on www.airbus.com/investors for Q1 2020 and Q1 2019.
(9) Source: Stockholm International Peace Institute, World Military Expenditures, press release issued April 27, 2020.
(10) Source: COVID-19 And Civil Aviation Markets, Teal Group, May 4, 2020.
(11) Source: COVID-19 And Military Aerospace Markets, Teal Group, March 2020.
58 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
GUIDANCE
See Forward-Looking Statements for cautionary notice regarding Guidance and Risk Management under Additional Information for discussion
of certain factors which may cause future results to differ from guidance included in this section.
Fiscal 2020 financial performance as compared to guidance
Management revised guidance for fiscal 2020 sales twice throughout the year, from an initial projection of $560-$580 million to $600-$610 million,
to reflect the acquisition of Alta as well as stronger than expected growth.
Long-term sales guidance for fiscal 2022 was withdrawn in April 2020 as a result of limited visibility over the long-term impact that the COVID-19
pandemic will have on the commercial aerospace sector.
As such, initial and revised financial guidance stands as follows:
Metric
Fiscal 2020 sales
Long-term sales growth
Initial guidance
Revised guidance
Sales of $560 to $580 million
Sales of $600 to $610 million
Fiscal 2022 sales of $620 to $650 million
Withdrawn
Fiscal 2020 sales totaling $613 million exceeded guidance slightly and resulted from a strong year of deliveries.
As a result of the unprecedented volatility brought to the global aerospace market, management is not issuing any financial guidance for fiscal
2021.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 59
OPERATING RESULTS
Sales
Gross profit
Selling and administrative expenses
Adjusted operating income(1)
Non-recurring items
Operating (loss) income
Net financial (gains) expenses(2)
Income tax expense(2)
Net (loss) income
Adjusted net income(1)
As a percentage of sales
Gross profit
Selling and administrative expenses
Operating (loss) income
Adjusted operating income(1)
In dollars per share
(Loss) Earnings per share(3)
Adjusted EPS(1)
2020
$ 166,800
29,852
12,275
17,577
82,003
(64,426)
(533)
8,220
$ (72,113)
$ 13,695
$
$
Quarters ended March 31,
Fiscal years ended March 31,
2019
Variance
2020
2019
Variance
$ 157,914
29,730
13,522
16,208
1,018
15,190
1,402
1,830
11,958
12,794
$
8,886
$ 612,996
$ 483,877
$ 129,119
122
103,120
(1,247)
1,369
80,985
50,572
52,548
82,618
(79,616)
(30,070)
(1,935)
6,390
7,846
12,742
$ (84,071)
$ (50,658)
$
901
$ 35,666
$
$
83,196
41,633
41,563
4,323
37,240
6,811
4,235
26,194
30,352
19,924
8,939
10,985
78,295
(67,310)
1,035
8,507
$ (76,852)
$
5,314
17.9 %
7.4 %
(38.6)%
10.5 %
18.8%
8.6%
-90 bps
-120 bps
9.6% -4820 bps
10.3%
20 bps
16.8 %
8.2 %
(4.9)%
8.6 %
17.2%
8.6%
-40 bps
-40 bps
7.7% -1260 bps
8.6%
0 bps
$
$
(1.98)
0.38
$
$
0.34
0.36
$
$
(2.32)
0.02
$
$
(1.38)
1.00
$
$
0.73
0.84
$
$
(2.11)
0.16
(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
(3) Basic and diluted
Sales
60 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
Sales can be broken down by sector as follows:
Commercial
Defence(1)
Total
Commercial
Defence(1)
Total
Quarters ended March 31,
2020
2019
Acquisitions
FX impact
Net variance
$
71,955
$
78,004
94,845
$ 166,800
79,910
$ 157,914
$ 6,830
1,277
$ 8,107
$
$
37
$ (12,916)
(16.6)%
128
165
13,530
614
$
16.9 %
0.4 %
Fiscal years ended March 31,
2020
2019
Acquisitions
FX impact
Net variance
$ 283,737
$ 236,283
329,259
$ 612,996
247,594
$ 483,877
$49,957
49,670
$99,627
$ 1,634
$
(4,137)
1,896
$ 3,530
30,099
$ 25,962
(1.8)%
12.2 %
5.4 %
(1) Includes defence sales to civil customers and governments.
The following analysis excludes the impact of acquisitions and foreign exchange which are itemized in the table above.
Commercial
Over the fiscal year, organic commercial sales were relatively stable as a decrease in aftermarket requirements for regional aircraft programs
and lower deliveries for certain business jets was mostly offset by higher deliveries for the Boeing 777 and 777X programs.
The $12.9 million decrease in commercial sales during the fourth quarter this year compared to the last is mainly the result of lower deliveries
of components for large commercial programs, namely for the Boeing 787 following the expiry of a contract, as well as lower aftermarket
requirements for regional aircraft programs.
Defence
The $30.1 million and $13.5 million respective net increases in defence sales for the fiscal year and fourth quarter were mainly driven by:
Increased aftermarket demand for the C-130, KC-135 and Sikorsky H-60 programs;
The production rate increase of the Lockheed Martin F-35 program; and,
Higher spares demand for the Northrop Grumman Global Hawk program.
Gross Profit
The decrease in gross profit from 17.2% to 16.8% this fiscal year was mainly driven by inefficiencies and delayed deliveries brought on by the
impact of COVID-19 as well as higher manufacturing costs at our Longueuil facility over the first six months of this fiscal year compared to last.
The decrease in gross profit from 18.8% to 17.9% for the quarter compared to the same period last fiscal year was mainly driven by inefficiencies
and delayed deliveries caused by the impact of COVID-19.
The net impact of Foreign exchange fluctuations had a positive net impact of 0.2% of sales on the quarter ended March 31, 2020, while having
a negligible impact (less than 0.1% of sales) on the fiscal year.
Selling and Administrative Expenses
When excluding gains on translation of net monetary items, selling and administrative expenses represented 8.3% and 8.0% of sales for the
fiscal year and the quarter, respectively, compared to 8.8% and 8.5% for the same periods last fiscal year, mainly as a result of higher volume
without a corresponding increase in fixed costs.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 61
Non-Recurring Items
Non-recurring items comprise the following:
Non-recurring items in operating income
Acquisition-related costs
Goodwill impairment
Write-down of investment tax credits receivable
Impairment of finite-life intangible assets
Non-recurring items in financial expenses
Net losses on certain derivative financial instruments
Non-recurring items in income tax expense
Write-down of deferred income tax assets
Total
Quarters ended
March 31,
2019
2020
Fiscal years ended
March 31,
2019
2020
$
$
$
$
$
$
$
— $
79,736
2,267
—
82,003
$
1,018
—
—
—
1,018
$
$
615
79,736
2,267
—
82,618
$
$
— $
— $
— $
— $
— $
— $
3,805
3,805
85,808
$
$
$
— $
— $
3,805
3,805
1,018
$
86,423
$
$
$
4,323
—
—
—
4,323
391
391
—
—
4,714
Goodwill impairment and write-down of investment tax credits receivable and deferred income tax assets
Management evaluates the recoverability of assets using the budget and strategic plan which covers a five-year period. The budget and strategic
plan are prepared based on the published production rates of aircraft manufacturers, aerospace industry forecasts, general economic forecasts,
and past experience.
The significant decrease in expected demand for commercial aerospace products caused by the ongoing COVID-19 pandemic was quantified
in these estimates, including production rate cuts such as the 40% reduction in large commercial aircraft volume already announced by Airbus
and Boeing.
The downward revision of these forecasts resulted in non-cash impairment charges of goodwill, investment tax credits receivable and deferred
income tax assets.
Acquisition-related costs
These costs mainly pertain to professional fees and expenses related to the acquisition of Alta Precision this fiscal year and the acquisitions of
CESA, Beaver and Tekalia last fiscal year.
Net losses on certain derivative financial instruments
These losses relate to derivative financial instruments acquired in order to mitigate foreign currency and interest rate risks arising from the
purchase price and financing related to the acquisition of CESA.
Operating Income
Operating (loss) income
Non-recurring items
Adjusted operating income
As a percentage of sales
Operating (loss) income
Adjusted operating income(1)
Quarters ended
March 31,
Fiscal years ended
March 31,
2020
$ (64,426)
82,003
$ 17,577
$
$
2019
15,190
1,018
16,208
2020
$ (30,070)
82,618
$ 52,548
$
$
2019
37,240
4,323
41,563
(38.6)%
10.5 %
9.6%
10.3%
(4.9)%
8.6 %
7.7%
8.6%
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
62 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
During the quarter, the Corporation recorded $82.0 million of non-cash impairment charges, driving operating losses to 38.6% and 4.9% of sales
for the quarter and fiscal year respectively, compared to operating income of 9.6% and 7.7% last year.
Excluding non-recurring charges, adjusted operating income stood at 10.5% and 8.6% for the quarter and fiscal year, compared to 10.3% and
8.6% last fiscal year.
Year over year, foreign exchange had positive impacts of $0.6 million and $2.2 million on operating income, respectively, for the fiscal year and
fourth quarter.
Net financial Expenses
Quarters ended March 31,
Fiscal years ended March 31,
2020
2019 Variance
2020
2019 Variance
Interest on long-term debt
$
1,909
$
1,644
$
265
$
6,905
$
4,914
$
1,991
Net interest expense (income) related to government loans
Interest income
Other interest expense
(2,999)
(26)
583
(549)
(46)
353
(2,450)
20
230
(773)
(100)
1,814
1,325
(2,098)
(409)
981
309
833
$
(533) $
1,402
$
(1,935) $
7,846
$
6,811
$
1,035
The $2.0 million increase in interest on long-term debt this fiscal year compared to the last mainly reflects the impact of the adoption of IFRS
16 Leases on April 1, 2019 ($1.3 million for the fiscal year). Refer to New accounting standards under Additional Information for further details.
It also includes higher interest charges on new debt incurred to finance four acquisitions completed since June 30, 2018.
For the fourth quarter and fiscal year, the respective $2.5 million and $2.1 million decreases in interest income related to government loans
results from gains on revision of repayment calendar estimates. Refer to Government Authorities Loans under Liquidity and Capital Resources
for further details.
The increases in other interest expense for the fourth quarter and fiscal year mainly relate to lower rates used to discount provisions at the end
of the period.
Income Tax Expense
Quarters ended
March 31,
Fiscal years ended
March 31,
2020
2019
2020
2019
(Loss) income before income tax expense
$ (63,893)
$ 13,788
$ (37,916)
$ 30,429
Income tax expense
Effective tax rate
Canadian blended statutory income tax rate
8,220
(12.9)%
26.5 %
1,830
13.3%
26.6%
12,742
(33.6)%
26.5 %
4,235
13.9%
26.6%
During the fourth quarter and fiscal year, the Corporation accounted for impairment of goodwill and a write-down of tax credits receivable totaling
$82.0 million, as well as a write-down of deferred income tax assets totaling $3.8 million. The following analysis excludes the impact of these
factors, in order to simplify analysis of the effective tax rate as compared to the Canadian blended statutory income tax rate.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 63
Quarters ended
March 31,
Fiscal years ended
March 31,
2020
2019
2020
2019
(Loss) income before income tax expense
$ (63,893)
$
13,788
$ (37,916)
$
30,429
Impairment of goodwill and write-down of tax credits receivable
Income before income tax expense and impairment
Income tax expense
Write-down of deferred tax asset
Income tax expense excluding write down of deferred tax asset
82,003
18,110
8,220
(3,805)
4,415
—
13,788
1,830
—
1,830
82,003
44,087
12,742
(3,805)
8,937
—
30,429
4,235
—
4,235
Effective tax rate excluding impairment and write-downs
Canadian blended statutory income tax rate
24.4%
26.5%
13.3%
26.6%
20.3%
26.5%
13.9%
26.6%
For fiscal 2020, the Corporation’s effective income tax rate excluding impairment is lower than the Canadian blended statutory rate by 6.2%
primarily due to the favourable impact of earnings in lower tax rate jurisdictions of $3.7 million ($4.8 million in fiscal 2019), partially offset by
permanent differences of $1.2 million ($0.5 million in fiscal 2019). The effective tax rate of fiscal 2019 was also negatively impacted by non-
deductible acquisition-related costs totaling $0.7 million.
The effective income tax rate for the quarter mainly reflects the $1.2 million favourable impact of earnings in lower tax rate jurisdictions ($1.7 million
in fiscal 2019), partially offset by permanent differences totaling $0.9 million ($0.1 million in fiscal 2019).
Net Income
Earnings decreased from $26.2 million to a loss of $50.7 million (or increased from $30.4 million to $35.7 million excluding non-recurring items
net of taxes) this fiscal year compared to last and decreased from earnings of $12.0 million to a loss of $72.1 million (or increased from $12.8
million to $13.7 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 $0.73 to a loss of $1.38 per share (or increased from $0.84 to $1.00 per share excluding
non recurring items net of taxes), while they decreased from $0.34 to a loss of $1.98 per share (or increased from $0.36 to $0.38 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.
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, 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.
64 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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 (loss) income
Non-recurring items
Adjusted operating income
Quarters ended
March 31,
Fiscal years ended
March 31,
2020
$ (64,426)
82,003
17,577
$
2019
$ 15,190
1,018
$ 16,208
2020
$ (30,070)
82,618
52,548
$
2019
$ 37,240
4,323
$ 41,563
Management believes adjusted operating income provides investors with a figure that provides an alternative assessment of the Corporation’s
future profitability by excluding from operating income the impact of events which are not in the expected course of future operations, or which
are not a result of operations.
The Corporation’s Adjusted EBITDA is calculated as follows:
Operating income
Amortization expense
Non-recurring items in operating income
Adjusted EBITDA
Quarters ended
March 31,
Fiscal years ended
March 31,
2020
$ (64,426)
11,032
82,003
28,609
$
2019
$ 15,190
9,702
1,018
$ 25,910
2020
$ (30,070)
43,643
82,618
96,191
$
2019
$ 37,240
32,650
4,323
$ 74,213
Management believes 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 (loss) income
Non-recurring items net of taxes
Adjusted net income
Non-controlling interests
Adjusted net income attributable to the equity holders of the parent
In dollars per share
(Loss) Earnings per share - basic and diluted
Non-recurring items net of taxes
Adjusted earnings per share
$
Quarters ended
March 31,
2019
11,958
836
12,794
(253)
13,047
$
$
2020
$ (72,113)
85,808
13,695
(88)
13,783
$
$
Fiscal years ended
March 31,
2019
26,447
4,158
30,352
(253)
30,605
2020
$ (50,658)
86,324
35,666
(545)
36,211
$
$
$
$
$
$
$
(1.98)
2.36
0.38
$
$
0.34
0.02
0.36
$
$
(1.38)
2.38
1.00
$
$
0.73
0.11
0.84
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 2020 MD&A – 65
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITIES AND CASH AND CASH EQUIVALENTS
Senior Secured Syndicated Revolving Credit Facility (“Revolving Facility”)
The Corporation has a Revolving Facility with a syndicate of five Canadian banks and their U.S. affiliates or branches and a Canadian branch
of a U.S. bank. This facility allows the Corporation and its subsidiaries to borrow up to $250.0 million, either in Canadian dollars, US dollars,
British Pounds, Euro or equivalent currencies. It also includes an accordion feature to increase available credit by an additional $100.0 million
during the term of this agreement, subject to the approval of the lenders.
In December 2019, the Corporation reached an agreement with its syndicate of banks to extend the term of its Revolving Facility from May 2022
to December 2024.
As at March 31, 2020, the Corporation had $96.5 million drawn against the Revolving Facility, compared to $94.9 million as at March 31, 2019.
Unsecured Subordinated Term Loan Facility (“Term Loan Facility”)
The Corporation has a Term Loan Facility provided by the Fonds de solidarité FTQ for an amount of up to $75.0 million. A first tranche of $50.0
million was drawn to finance the acquisition of CESA in October 2018 and a second of $10.0 million was drawn in June 2019 for the acquisition
of Alta Precision.
The initial $50.0 million loan bears interest at 5.70% and the second tranche of $10.0 million bears interest at 4.73%. All the tranches are
repayable at maturity on September 30, 2025, and starting on September 30, 2021, the Corporation will have the option to make early repayments
subject to certain fees.
Net Debt Position
The Corporation’s net debt position is calculated as follows, as at:
Long-term debt, including current portion(1)
Less: Cash and cash equivalents
Net debt position
March 31, 2020
April 1, 2019 (2)
March 31, 2019
$
292,710
$
278,150
$
263,258
45,841
35,128
35,128
$
246,869
$
243,022
$
228,130
(1) Excluding net deferred financing costs of $3.1 million as at March 31, 2020 and $3.0 million as at March 31, 2019.
(2) Pro-forma including the effect of the adoption of IFRS 16, Leases.
66 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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,
2020 and expects to continue to comply with these restrictive
financial covenants through the current fiscal year. In general terms,
the Corporation has a healthy financial situation and is well
positioned to face its financial needs.
In April 2020, the Corporation drew $60.0 million on its credit
facilities, comprised of $45.0 million on the Revolving Facility and
$15.0 million on the Term Loan Facility. These drawings were made
as a precaution for potential liquidity requirements related to the
COVID-19 pandemic and have not been utilized.
As shown in this graphic, the Corporation has no capital repayments
required on its credit facilities until December of 2024.
GOVERNMENT AUTHORITIES LOANS
Governmental authorities’ loans represent government assistance for the purchase of certain equipment or tooling, for the modernization or
additions to the Corporation’s facilities or for development costs capitalized or expensed for aerospace programs. They were granted as incentives
under Canadian federal and provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refund. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest rates.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in the consolidated statements of income as financial expense.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2020, the Corporation updated the estimated repayment
schedule of its government authorities’ loans, taking into account revised assumptions mainly related to the reduced sales forecasts. As sales
forecasts were negatively impacted by the ongoing pandemic, this resulted in a non-cash gain of $3,153 ($1,036 in fiscal 2019), which was
included in net financial expenses.
As at March 31, 2020, the Corporation had a present value of $88.6 million outstanding under these agreements ($89.7 million as at March 31,
2019), bearing effective interest rates of 0.0% to 6.8% as at March 31, 2020 (0.0% to 6.6% as at March 31, 2019). These loans have repayment
terms extending to fiscal 2035 at the latest.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 67
VARIATIONS IN CASH AND CASH EQUIVALENTS
Quarters ended
March 31,
2019
2020
Fiscal years ended
March 31,
2019
2020
Cash and cash equivalents at beginning of periods
$
25,346
$
28,639
$
35,128
$
93,209
Cash flows related to operating activities
Cash flows related to investing activities
Cash flows related to financing activities
Effect of changes in exchange rates on cash and cash equivalents
26,710
(9,951)
2,128
1,608
37,181
52,573
69,969
(7,926)
(34,844)
(208,619)
(22,096)
(7,936)
80,320
(670)
920
249
Cash and cash equivalents at end of periods
$
45,841
$
35,128
$
45,841
$
35,128
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,
2019
$ 19,116
2020
$ 25,497
1,213
18,065
$ 26,710
$ 37,181
Fiscal years ended
March 31,
2019
$ 60,396
2020
82,101
(29,528)
9,573
52,573
$ 69,969
$
$
The strong adjusted EBITDA generation of legacy activities as well as the contributions of Héroux-Devtek’s recent acquisitions drove the respective
$21.7 million and $6.4 million increases in cash flows from operations for the fiscal year and fourth quarter ended March 31, 2020 when compared
to the same periods last fiscal year.
The net change in non-cash items can be summarized as follows:
Quarters ended
March 31,
2019
2020
Fiscal years ended
March 31,
2019
2020
Accounts receivable
Income tax receivable
Inventories
Other assets
Accounts payable and accrued liabilities and other liabilities
Provisions
Customer advance and progress billings
Income tax payable
Effect of changes in exchange rates
Net change in non-cash items
$
(5,624)
$
(9,616)
2,040
(10,153)
$
(5,546)
(40)
$
4,328
1,102
74
(45,517)
(225)
9,692
(6,644)
6,934
94
9,091
1,213
$
(3,063)
21,233
(1,204)
7,264
(794)
141
116
3,320
(8,822)
11,072
(508)
5,381
$ 18,065
$
(29,528)
$
(385)
(1,746)
(2,245)
20,013
(5,377)
4,655
(2,404)
2,686
9,573
For the fiscal year ended March 31, 2020, the negative net change in non-cash items mainly reflected:
An increase in inventory due to the upcoming organic growth of defence programs, including the Boeing F-18 and MQ-25, as well as
the effect of foreign exchange rate fluctuations; and
A decrease in provisions following the utilization of provisions, including onerous contracts.
These negative elements were partially offset by an increase in customer advances and progress billings associated to defence contracts.
For the fiscal year ended March 31, 2019, the positive net change in non-cash items mainly reflected:
An increase in accounts payable due to the higher level of activity in the fourth quarter and the timing of cash outflows; and,
An increase in customer advances following cash receipt, offset by revenue recognition.
68 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
These positive elements were partially offset by an increase in accounts receivable due to higher deliveries in the fourth quarter and an increase
in inventories mainly related to the ramp-up of the Boeing 777 and 777X contract and a decrease in provisions mainly due to utilization of the
restructuring and product warranty provisions.
For the quarter ended March 31, 2020, the positive net change in non-cash items mainly reflected a higher volume of activity in the fourth quarter
resulting increases in accounts payable and accounts receivable, as well as the increase in inventory driven by foreign exchange rate fluctuations.
For the quarter ended March 31, 2019, the positive net change in non-cash items mainly reflected:
An increase in accounts payable due to timing of cash outflows; and,
An increase in customer advances following cash receipt, offset by revenue recognition.
These positive elements were partially offset by the timing of receivable collections and by the negative effect of change in exchange rates.
Investing Activities
The Corporation’s investing activities were as follows:
Additions to property, plant and equipment
Cash payments for business acquisitions
Net (increase) decrease in finite-life intangible assets
Proceeds on disposal of property, plant and equipment
Net proceeds from sale of discontinued operations
Quarters ended
March 31,
2019
2020
Fiscal years ended
March 31,
2019
2020
$ (7,338)
—
(2,641)
28
—
$ (4,513)
(3,548)
$
130
5
—
(20,645)
(17,149)
(1,598)
4,053
495
$
(12,858)
(198,149)
2,353
35
—
Cash flows related to investing activities
$ (9,951)
$ (7,926)
$
(34,844)
$ (208,619)
Cash payments for business acquisitions in fiscal 2020 relate to the acquisition of Alta Precision, while in fiscal 2019 they were related to the
$170.9 million payment for the acquisition of CESA and the $23.7 million payment made for the acquisition of Beaver, and $3.5 million for the
acquisition of Tekalia.
Additions to property, plant and equipment shown above can be reconciled as follows:
Gross additions to property, plant and equipment(1)
Government assistance
Additions to property, plant and equipment
Variation in unpaid additions included in Accounts payable
Additions, as per statements of cash flows
(1) Net of non-cash additions to right-of-use assets
Quarters ended
March 31,
2019
2020
$
$
$
5,553
—
5,553
1,785
7,338
$
$
$
5,286
(497)
4,789
(276)
4,513
Fiscal years ended
March 31,
2019
2020
$ 18,890
$ 13,876
(30)
(497)
$ 18,860
$ 13,379
1,785
(521)
$ 20,645
$ 12,858
The net (increase) decrease in finite-life intangible assets shown above can be reconciled as follows:
Decrease (increase) in finite-life intangible assets
Variation in unpaid additions included in Accounts payable
Net (increase) decrease, as per statements of cash flows
Quarters ended
March 31,
2019
2020
Fiscal years ended
March 31,
2019
2020
(2,641)
—
$ (2,641)
(692)
822
130
$
(1,598)
—
$ (1,598)
1,531
822
2,353
$
Additions to finite-life intangible assets over the fiscal year mainly relate to capitalized product development costs.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 69
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,
2019
2020
Fiscal years ended
March 31,
2019
2020
$
4,977
$
1,278
$
30,927
$ 117,883
(2,827)
(23,652)
(38,024)
58
(80)
245
33
58
(897)
(36,198)
1,169
(2,534)
$
2,128
$ (22,096)
$
(7,936)
$
80,320
The increase in long-term debt during the fiscal year ended March 31, 2020 is mainly related to a US$9.0 million ($12.1 million) drawing on the
Revolving Facility and a $10.0 million drawing on the Term Loan Facility, both used to finance the acquisition of Alta Precision. The balance is
related to new lease agreements and government authorities loans.
In Fiscal 2019, the increase in long-term debt was mainly related to a US$50.0 million ($65.2 million) drawing on the Revolving facility and a
$50.0 million drawing on the Term Loan Facility, both in order to finance the CESA acquisition.
Long-term debt repayments during the fourth quarter ended March 31, 2019 mainly relate to a US16.0 million ($21.3 million) repayment of the
Revolving Facility, while no such capital repayments were made in the fourth quarter of fiscal 2020.
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,
2020
2019
2020
2019
$
26,710
$
37,181
$
52,573
$
69,969
(7,338)
(2,641)
(4,513)
(20,645)
(12,858)
(692)
(1,598)
1,531
$
16,731
$
31,976
$
30,330
$
58,642
(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.
The decreases in free cash flow over the fourth quarter and fiscal year
compared to the same periods last fiscal year are mainly explained
by investments in inventory related to organic growth in the defence
sector.
70 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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, 2020:
Contractual obligations
Governmental authorities’ loans
Lease liabilities
Revolving Facility
Term Loan Facility
Others
Purchase obligations
Accounts payable
Building, machinery and equipment acquisition commitments
Payments due by period
Total
1 year
2-3 years
4-5 years
> 5 years
$ 112,741 $
5,785 $
19,153 $
19,877 $
67,926
58,654
10,173
16,515
7,707
24,259
107,924
78,277
3,057
2,411
3,323
3,057
360,653
24,749
275,707
215,081
81,771
7,441
81,771
5,975
4,822
6,646
—
47,136
56,684
—
1,466
100,691
—
6,646
61,662
—
—
134,921
153,847
3,908
—
—
34
—
—
Total contractual obligations(1)
$ 725,572 $ 327,576 $ 105,286 $ 138,829 $ 153,881
(1) Excluding defined benefit pension plan obligations presented in the Pension Plans section.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 71
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, 2020, 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:
Long-term debt
Deferred financing costs, net
Less: Cash and cash equivalents
Net debt
Shareholders’ equity
Net debt-to-equity ratio
(1) Pro-forma including the effect of the adoption of IFRS 16, Leases.
March 31, 2020
289,617
$
April 1, 2019 (1)
275,198
$
March 31, 2019
260,306
$
$
3,093
45,841
246,869
349,448
0.71:1
$
2,952
35,128
243,022
404,098
0.60:1
$
2,952
35,128
228,130
404,098
0.56:1
The increase in net debt-to-equity ratio over the fiscal year mainly relates to the non-cash impairment charges recorded during the period.
Excluding these charges, the net debt-to-equity ratio would have stood at 0.57:1.
ISSUED CAPITAL
Capital stock varied as follows:
Opening balance
Issued for cash on exercise of stock options
Ending balance
Quarter ended
March 31, 2020
Issued
capital
Number of
shares
Fiscal year ended
March 31, 2020
Issued
capital
Number of
shares
36,362,210
5,000
36,367,210
$
$
79,676
36,362,210
81
5,000
79,757
36,367,210
$
$
79,676
81
79,757
As at May 20, 2020, the number of common shares outstanding remained at 36,367,210.
72 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
Stock options varied as follows:
Opening balance
Granted
Exercised
Cancelled / forfeited
Ending balance
Quarter ended
March 31, 2020
Weighted-
average
exercise price
Fiscal year ended
March 31, 2020
Weighted-
average
exercise price
Number of
stock
options
$
13.87
1,167,095
$
13.23
—
341,500
11.71
16.03
(5,000)
(6,000)
16.03
11.71
16.03
Number of
stock
options
1,508,595
—
(5,000)
(6,000)
1,497,595
$
13.86
1,497,595
$
13.86
As at March 31, 2020, 2,757,507 common shares remained reserved for issuance upon exercise of stock options compared to 2,762,507 at
March 31, 2019. As a result, the Corporation may issue a further 1,259,912 stock options within the current reserve.
As at May 20, 2020, the number of stock options outstanding stood at 1,497,595.
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
The acquisition of Alta Precision contributed assets and liabilities to the Corporation’s balance sheet as at March 31, 2020 as detailed in the
Business Acquisitions section under Overview.
Working Capital
The Corporation’s working capital was as follows, as at:
Current assets
Current liabilities
Net working capital
Working capital ratio
March 31, 2020
April 1, 2019 (1) March 31, 2019
Variance
$
$
422,050
216,633
205,417
1.95
$
$
359,119
188,512
170,607
1.91
$
$
359,119
$ 62,931
185,992
28,121
173,127
$ 34,810
17.5%
14.9%
20.4%
1.93
(1) Pro-forma including the effect of the adoption of IFRS 16 Leases.
The $62.9 million increase in current assets is mainly due to:
$13.4 million of current assets acquired through the acquisition of Alta Precision; and,
$44.3 million of increase in inventory due to the upcoming organic growth of defence programs.
The $28.1 million increase in current liabilities is mainly due to $12.0 million assumed through the acquisition of Alta Precision and an increase
of $13.0 million in progress billings following the receipt of funding for defence contracts.
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
(1) Pro-forma including the effect of the adoption of IFRS 16 Leases.
March 31, 2020
April 1, 2019 (1) March 31, 2019
Variance
$ 476,798
$
527,791
$
513,648
$ (50,993)
(9.7)%
332,767
349,448
295,049
404,098
282,677
404,098
37,718
12.8 %
(54,650)
(13.5)%
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 73
The decrease in long-term assets of $51.0 million over the fiscal year mainly related to the $79.7 million impairment charge of goodwill recorded
during the fourth quarter as a result of the significant reduction in demand for commercial aerospace products caused by the ongoing COVID-19
pandemic. This negative factor was partially offset by $28.4 million of long-term assets acquired with Alta Precision.
The increase in long-term liabilities is mainly due to the financing of the acquisition of Alta Precision, including the assumption of $6.8 million of
related lease liabilities.
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
Net gains (losses) from remeasurement
Employer contributions
Current service cost
Interest on net defined benefit obligations
Other
Net defined benefit obligations, end of year
The funding status of the Corporation’s pension plans was as follows, as at:
Present value of defined benefit obligations of funded plans
Fair value of plan assets
Funding ratio
2020
2019
$
(6,650) $
(3,958)
(2,398)
1,417
(1,408)
(238)
(802)
(2,487)
1,335
(1,192)
(150)
(198)
$ (10,079) $
(6,650)
March 31, 2020
64,234
55,117
$
March 31, 2019
65,962
60,710
$
85.8%
92.0%
The Corporation made contributions of $1.4 million and $3.4 million to its defined benefit and defined contribution benefit plans, respectively,
during fiscal 2020, and expects to make respective contributions of $1.4 million and $3.5 million during fiscal 2021. The decrease in fair value
of plan assets mainly resulted from the volatility cause in financial markets by the COVID-19 pandemic at the end of the fiscal year.
74 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
ADDITIONAL INFORMATION
BUSINESS ACQUISITIONS
Fiscal 2020 acquisition
Acquisition of Alta Precision
On June 7, 2019, the Corporation completed the acquisition of all of the shares of Alta Précision Inc. (“Alta”), for $18.6 million, including a $0.5
million balance of sale and the assumption of Alta’s net outstanding debt amounting to $0.9 million. Located in Montreal, Canada, Alta is a
manufacturer of high-precision landing gear components. This acquisition expands the Corporation's portfolio of commercial products by providing
both access to new programs and additional content on existing platforms. The acquisition was financed with the Corporation's available credit
facilities and was treated as a business combination.
Alta was a minority shareholder of Tekalia. As a result of the acquisition, the Corporation increased its participation in Tekalia to 67% from 60%
as at March 31, 2019.
Purchase Price
The preliminary purchase price allocation that reflects the fair value of the assets acquired and liabilities assumed during Fiscal 2020 with any
excess allocated to goodwill was prepared using the acquisition method as follows:
Cash payment
Long-term debt assumed (1)
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price
(1) Excludes lease liabilities
Purchase Price Allocation
Accounts receivable
Inventories
Other current assets
Property, plant and equipment, including right-of-use assets
Finite-life intangible assets
Deferred income tax assets
Other long-term assets
Investment in Tekalia
Total identifiable assets
Accounts payable and accrued liabilities
Customer advances and progress billings
Provisions
Long-term debt (1)
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
(1) Corresponds to lease liabilities
$ 17,149
903
—
500
$ 18,552
Purchase
price
allocation
1,455
$
11,567
376
13,398
19,546
2,797
1,858
264
544
$ 38,407
6,629
2,872
6,918
6,844
$ 23,263
15,144
3,408
$ 18,552
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 75
Fiscal 2019 acquisitions
Acquisition of CESA
On October 1, 2018, the Corporation completed the acquisition of all of the shares of Compañia Española de Sistemas Aeronauticos S.A.
("CESA"), a subsidiary of Airbus SE, for €130.4 million ($195.8 million). Headquartered in Madrid, Spain, CESA is a leading European provider
of fluid mechanical and electromechanical systems for the aerospace industry. This acquisition allows the Corporation to broaden its existing
aerospace and product offering into actuation, landing gear, and hydraulic systems. The transaction was treated as a business combination.
The acquisition of CESA was financed as follows:
A $50.0 million, seven-year unsecured subordinated term loan provided by the Fonds de solidarité FTQ;
A US$50.0 million ($65.2 million) drawing on the Corporation’s credit facility; and,
The Corporation’s available cash balance.
In addition, the Corporation assumed CESA’s net outstanding debt amounting to approximately €23.7 million ($35.6 million) upon closing.
For the period between October 1, 2018 and March 31, 2019, the Corporation’s consolidated sales and net income included €42.1 million ($63.5
million) and €2.7 million ($4.0 million), respectively, generated by CESA. If the acquisition had closed on April 1, 2018, the consolidated sales
and net income of CESA would have amounted to $117.3 million and $2.8 million, respectively for the fiscal year ended March 31, 2019.
Acquisition of Beaver
On July 2, 2018, the Corporation completed the acquisition of all the shares of Beaver Aerospace & Defense Inc. and its wholly-owned subsidiary
PowerTHRU Inc. ("Beaver") from Phillips Service Industries Inc. for a purchase price of US$21.6 million ($28.5 million). This price included a
working capital adjustment received in April 2019 of US$0.3 million ($0.4 million) and a US$3.5 million ($4.6 million) balance of sale payable
over the next two years which bears interests at 3%. The transaction was financed through the Corporation’s cash and was treated as a business
combination. This acquisition allows the Corporation to broaden its existing aerospace and product offering into ball screws and actuation systems
as well as expand its footprint in North America.
For the period between July 2, 2018 and March 31, 2019, the Corporation's consolidated sales and net income included US$18.9 million ($24.8
million) and US$1.4 million ($1.8 million), generated by Beaver, respectively. If the acquisition had closed on April 1, 2018, the consolidated
sales and net income of Beaver would have amounted to $33.2 million and $2.2 million, respectively.
Acquisition of Tekalia
On January 23, 2019, the Corporation completed the acquisition of 60% of the shares of Tekalia Aeronautik (2010) Inc. (“Tekalia”), a supplier of
surface treatment services to the aerospace sector, with annual sales of approximately $12.0 million, for a purchase price of $6.5 million. The
transaction was financed through the Corporation’s cash and was treated as a business combination. The acquisition of Tekalia allows the
Corporation to further secure surface treatment capacity to support its North American customers’ growth.
Purchase Prices
The purchase prices allocations that reflects the fair value of the assets acquired and liabilities assumed with any excess allocated to goodwill
were determined using the acquisition method as follows:
Cash payment
Long-term debt assumed (1)
Working capital adjustment receivable
Balance of purchase price payable
Total purchase price for the Corporation’s interest
Non-controlling interests
(1) Excludes lease liability related to IFRS 16
CESA
$ 170,930 $
35,594
(10,708)
—
195,816
—
195,816
Beaver
23,671 $
574
(388)
4,609
28,466
—
28,466
Tekalia
3,548 $
2,981
—
—
6,529
2,365
8,894
Total
198,149
39,149
(11,096)
4,609
230,811
2,365
233,176
76 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
Purchase Price Allocations
During the fiscal year ended March 31, 2020, the Corporation completed its final assessment of the fair value of assets acquired and liabilities
assumed of CESA and of Tekalia. Adjustments and reclassifications mainly relate to the final assessment of costs and liabilities associated to
specific Aerospace programs of the CESA purchase price allocation and are presented below as follows:
Accounts receivable
Inventories
Income tax receivable
Other current assets
Property, plant and equipment
Finite-life intangible assets
Deferred income tax assets
Other long-term assets - Tax credits receivable
Total identifiable assets
Accounts payable and accrued liabilities
Provisions
Customer advances and progress billings
Provisions
Deferred income tax liabilities
Other liabilities - long-term accounts payable
Total identifiable liabilities
Net identifiable assets and liabilities
Goodwill
Total purchase price
16,773
11,897
4,188
32,858
—
4,506
—
4,506
16,773
16,403
4,188
37,364
2,588
2,118
450
5,156
4,833
—
—
4,833
CESA -
Originally
reported Adjustments
$
28,293 $
36,692
505
596
66,086
44,923
40,407
—
7,843
$ 159,259 $
4,308
3,465
4,365
44,996 $
$
114,263
81,553
$ 195,816 $
CESA -
Final
28,293 $
36,692
505
596
66,086
Beaver
Tekalia
6,787 $
10,165
—
50
17,002
2,406 $
1,105
—
182
3,693
Total
37,486
47,962
505
828
86,781
— $
—
—
—
—
44,923
40,407
—
7,843
57,124
3,635
—
44,633
4,050
—
2,774
2,774
—
7,843
—
—
— $ 159,259 $ 27,461 $ 12,435 $ 199,155
8,566
176
—
—
24,194
18,521
4,638
47,353
12,857
2,339
4,365
66,914
—
(1,126)
—
3,380 $
4,308
2,339
4,365
48,376 $ 13,705 $
8,549
—
—
—
—
—
4,833 $
(3,380)
3,380
110,883
84,933
13,756
14,710
— $ 195,816 $ 28,466 $
132,241
7,602
1,292
100,935
8,894 $ 233,176
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 77
FOREIGN EXCHANGE
As a Corporation with operations in various countries which deals with customers from across the world, Héroux-Devtek’s financial position and
results of operations are partly influenced by movements in foreign exchange (“FX”) rates. More specifically, the Corporation has operations in
Canada, the United States, Spain and the United Kingdom, and thus incurs costs denominated in the respective currencies of these four countries,
the Canadian dollar (“CAD”), United States dollar (“USD”) Euros (“EUR”) and British pound (“GBP”). In addition to costs denominated in their
local currencies, a large portion of materials costs of the Canadian, Spanish and British operations are denominated in USD, as is a large portion
of their sales.
The Corporation must convert foreign-denominated revenues, expenses, assets and liabilities into CAD for financial reporting purposes. Gains
and losses occur as a result of the fluctuations of these foreign currencies against the CAD between balance sheet periods, or between the
date of a transaction and the reporting date.
Transactions denominated in foreign currencies are initially recorded at the functional currency rate of exchange at the date of the transactions,
excluding the impact of forward foreign exchange contracts (“FFEC”), while the statement of income of foreign operations is translated at the
average exchange rate for the period. Balance sheet items are translated at the spot rate on the reporting date.
The foreign exchange rates used to translate assets and liabilities into Canadian dollars were as follows, as at:
USD (Canadian equivalent of US$1.0)
EUR (Canadian equivalent of €1.0)
GBP (Canadian equivalent of £1.0)
March 31, 2020 March 31, 2019
1.4187
1.5584
1.7604
1.3363
1.5002
1.7418
The foreign exchange rates used to translate revenues and expenses into Canadian dollars were as follows:
USD (Canadian equivalent of US$1.0)
EUR (Canadian equivalent of €1.0)
GBP (Canadian equivalent of £1.0)
Quarters ended March 31,
Fiscal years ended March 31,
2020
1.3442
1.4811
1.7185
2019
1.3292
1.5094
1.7315
2020
1.3306
1.4784
1.6915
2019
1.3122
1.5192
1.7228
Héroux-Devtek is most exposed to the performance of the USD versus CAD, GBP and EUR due to the prevalence of USD in Aerospace market
transactions and the geographical location of operations. Fiscal 2020 featured an increase in the value of the USD compared to CAD, EUR and
GBP, the main impact of which was growth in the value of the Corporation’s U.S. denominated sales and assets. Approximately 70% of the
Corporation’s sales are denominated in USD, compared to only a bit less than half of the related costs, which creates significant net inflows of
USD.
In order to manage this risk, the Corporation has put in place a foreign currency hedging policy whereby Héroux-Devtek contracts FFEC to sell
USD in amounts equivalent to expected net inflows. This policy requires that the Corporation hedge between 50% and 100% of the identified
net exposure, mainly over the next two fiscal years. See the Derivative Financial Instruments section for further details.
As at March 31, 2020, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $404.7 million denominated
in USD, EUR and GBP. This amount includes contracts with nominal value of US$266.4 million convertible into Canadian dollars at an average
rate of 1.3243. These contracts mature at various dates between April 2020 and March 2025, with the majority maturing in fiscal years 2021
and 2022.
Consistent with hedge accounting under IFRS, gains and losses on these FFEC are accounted for in other comprehensive income until settlement,
at which point they are realized in the consolidated statement of income along with the opposing gain or loss on translation of the related financial
instruments. As at March 31, 2020, a 1% strengthening of the CAD versus the USD would result in a 0.3 million decrease in the Corporation’s
fiscal 2020 net income.
78 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
RISK MANAGEMENT
Héroux-Devtek operates in an industry which exposes it to a variety of risk factors and uncertainties that may have a material adverse effect on
the business, financial condition and results. The Corporation is also subject to more general economic or natural risks which could have
widespread, cross-industry impacts.
Héroux-Devtek’s general philosophy is to avoid unnecessary risk and to limit, to the extent practicable, any risk associated with business activities.
Taking any risk unrelated to normal business activities is considered inappropriate.
It is ultimately the responsibility of the Board of Directors and its committees to identify material risks to the business and ensure management
performs adequate risk management duties. Their role in this regard is largely one of high-level decisions, oversight and review. In order to
succeed, the Board of Directors entrusts the bulk of risk prevention, detection and mitigation to management.
It is corporate management’s responsibility to ensure that systems and procedures are in place to identify and assess risk exposures and manage
them within tolerable limits. In order to do so, management has set out the following objectives:
•
•
•
identify and evaluate risk exposures and, when practicable, reduce exposures to a tolerable level;
use the most effective and efficient methods to eliminate, reduce or transfer risk exposures; and,
consider risks associated with operating decisions and structure transactions in such a fashion as to avoid risks whenever possible.
The most significant risk management methods used by management have entity-wide impacts. Such entity-wide efforts include, but are not
limited to:
•
the establishment of a corporate culture which fosters responsible management and integrity by adhering to strict hiring policies and
emitting strong tone from the top;
the application of a code of ethical conduct and a whistleblower policy in order to assure the quality of the Corporation's corporate
governance, and the integrity of the Corporation's functioning;
the establishment and ongoing alignment of company-wide quality organizations and systems, including supply chain, quality assurance
and continuous improvement; and,
the company-wide establishment of a strong internal control environment in order to manage risks associated with financial reporting,
fraud, treasury and operations.
•
•
•
The paragraphs and 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.
COVID-19 Pandemic Risks
The COVID-19 pandemic has created a period of unprecedented volatility and uncertainty in global economic conditions.
The spread of the virus has caused governments worldwide to enact wide-ranging methods in order to contain the spread of the virus, both
locally and internationally, including travel bans, closure of borders, voluntary and compulsory quarantine, self-isolation and social distancing
measures, closure of non-essential businesses and curfews.
These measures have resulted in an unprecedented decrease in commercial travel and significant disruption of commercial activity. This
significant reduction in activity is resulting in financial market volatility and financial duress for companies and individuals. The duration and
breadth of these effects is currently very difficult to predict.
The impact on the aerospace sector in particular is detailed in the Economic Outlook section under Overview, and the specific impacts on
Héroux-Devtek are detailed in the Impact of COVID-19 section under Overview.
The COVID-19 pandemic is a catalyst to many of the risk factors enumerated further below, and more specifically may cause:
•
•
•
•
•
An isolated outbreak at one of Héroux-Devtek’s facilities, disrupting operations, delaying deliveries, and causing financial losses;
Operational inefficiencies and additional costs brought on by the effect of the pandemic and related mitigation methods on the
workforce
Closure or reduction of production of key suppliers, disrupting Héroux-Devtek’s supply chain;
Closure or reduction of production of customers, delaying deliveries;
Financial duress for suppliers or customers, rendering key inputs unavailable or more costly or receivables uncollectible or subject
to longer payment cycles;
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 79
•
•
•
•
Global reduction in the demand for commercial aerospace products, resulting in production rate cuts by Airbus, Boeing and other
OEMs;
Significant volatility and weakness in global financial markets, resulting in a negative impact on our share price, our ability to access
capital markets, our ability to complete business acquisitions as part of our growth strategy, and the value of our pension plan
assets;
Deferral of bid activities;
Diversion of management attention.
Héroux-Devtek has put in place several measures in order to mitigate these risks, including:
•
•
•
•
•
•
•
The creation of a steering committee to coordinate response;
Local management teams at each of the Corporation’s facilities;
Restriction on all travel;
Protocols at each location in order to mitigate transmission, including but not limited to:
Physical distancing measures;
Issuance of personal protective equipment;
Staggering of shifts;
Quarantine policies;
Hygiene reinforcement; and,
Work from home enhancements.
Enhanced communication with customers in order to better forecast disruptions in demand;
Enhanced communication with suppliers in order to secure the supply chain;
Additional scrutiny of credit assessments, review of overdue accounts, and provisioning of inventory.
In spite of these measures, the immediate and long-term impacts of the pandemic including related government and central bank
interventions are unknown at this time, and any estimate thereof is subject to significant uncertainty. The COVID-19 pandemic may therefore
have negative consequences, either directly or indirectly, on the Corporation’s operations, cash flows, financial condition or profitability in the
future that are currently unforeseen.
Strategic Risks
Strategic risks have company-wide impacts and are typically related to the Corporation’s overall direction.
RISK
Reliance on large
customers
DESCRIPTION
The top 9 of Héroux-Devtek’s customers represent
approximately 60% of consolidated sales, including one
customer representing 22% of its consolidated sales.
The loss of one of these customers would have a
material adverse impact on current and forecasted
financial results.
As a growth strategy, the Corporation at times engages
in business acquisitions. Such acquisitions increase the
size and scale of the Corporation, and may expose it to
new geographical, political, operational and financial
risks.
Acquisitions furthermore may place significant demand
on management or cause subsequent difficulties related
to the integration of new operations. The integration of
new operations poses risks, which are difficult to
forecast, that may adversely affect the Corporation's
growth and profitability, and may include the inability to
successfully integrate acquired operations.
Acquisitions and
integrations
RISK MANAGEMENT APPROACH
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.
80 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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 MANAGEMENT APPROACH
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.
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.
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.
RISK
Foreign currency
fluctuations
Liquidity, capital
resources and
related covenants
Changing interest
rates
Héroux-Devtek has access to such financing from its
banking syndicate, unsecured subordinated term loan
facility as well as from loans from government authorities
and capital lease facilities. These agreements subject
the Corporation to the financial covenants as described
in the Liquidity and capital resources section. They
furthermore restrict the Corporation's ability to sell all or
substantially all of its assets, incur secured or certain
other indebtedness, engage in mergers or consolidations
or engage in transactions with affiliates.
These restrictions and covenants could impede access
to capital or prevent the Corporation from engaging in
business activities that may be in its interest.
The Corporation is exposed to fluctuations in interest
rates through the floating rate of its credit facility as well
as the impact on the cost of future capital requirements.
Fluctuations in interest rates may also negatively impact
profitability by their impact on rates used by Héroux-
Devtek to discount provisions and pension obligations,
among other balances. Lower interest rates would result
in higher present obligations, with resulting adjustments
impacting financial results.
In order to 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.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 81
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
82 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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.
External Risks
External risks are generally outside of management’s control and mostly result from external factors.
RISK
Competition and
innovation
Availability and
cost of raw
materials
General economic
conditions
Defence spending
Environmental
matters
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.
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 global
pandemics, political instability, terrorist activity, or natural
disasters. Such unfavourable conditions could negatively
particular, which could lead the Corporation to incur
significant costs associated with temporary layoffs and
termination.
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.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 83
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
Gross profit
Adjusted operating income(1)
Adjusted net income(1)
Adjusted EPS(1)
Adjusted EBITDA(1)
Cash flow from operations
Free cash flow(1)
Sales
Funded backlog
Working capital
Return on net assets (“RONA”)
Return on investment
MEASURES
Manufacturing performance
Operating performance
Global profitability
Global profitability and shareholder return
Overall liquidity generation
Operating liquidity generation
Net liquidity generation
Growth
Outstanding firm orders
Available liquidity
Indebtedness
Overall capital structure
Financial position
Net debt to Adjusted EBITDA ratio
Net debt to equity ratio
(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.
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, 2020, these derivative financial instruments are as follows:
Forward foreign exchange contracts
See Foreign Exchange under Overview for information about the Corporation’s exposure to foreign exchange risks as well as the derivative
financial instruments used to mitigate it. See also note 32 to the Consolidated financial statements.
84 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
Cross-currency interest rate swaps
The acquisition of CESA exposed the Corporation to new foreign currency and interest rate risks related to the investment in Euros. A decrease
in value of the Euro compared to the Canadian dollar would decrease the value of the foreign investment, and an increase in the interest rates
of the underlying debt would increase related the net financial expenses.
As at March 31, 2020, the Corporation had entered into the following cross-currency interest rate swap agreements in order to mitigate foreign
exchange and interest rate risks:
Notional
29,370
50,000
17,523
10,000
US$
C$
US$
C$
EURO equivalent
€
€
€
€
25,000
34,110
15,000
6,658
Interest rate
1.86 %
3.40 %
Inception
October 2017
October 2017
Maturity
May 2022
September 2025
Euribor 1 month + 1.74%
September 2018
May 2022
2.68 %
June 2019
September 2025
Equity swap agreement
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs and PSUs (see note 22 to the consolidated financial
statements). In order to mitigate this exposure, the Corporation has entered into an equity swap agreement with a financial institution.
Pursuant to this agreement, upon settlement, the Corporation receives payment for any share price appreciation while providing payment to the
financial institution for any share price depreciation. The net effect of the equity swap partly offsets movements in the Corporation’s share price
which impacts the expense resulting from the DSUs and PSUs included in the Corporation’s selling and administrative expenses.
As at March 31, 2020, the equity swap agreement covered 300,000 common shares of the Corporation (245,000 at March 31, 2019) at a price
of $13.52 ($12.68 at March 31, 2019). This agreement is a derivative that is not part of a designated hedging relationship and matures in June
2021.
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, 2020, 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, 2020, 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.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 85
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, 2020 that have materially
affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
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:
Impact of COVID-19
The uncertainties around the outbreak of the COVID-19 pandemic required the use of significant judgments and estimates. As at March 31,
2020, the Corporation performed an assessment of the asset impairment risk including a detailed review of the credit risk over its accounts
receivable, its inventory levels for risks over obsolescence or excess inventory, goodwill and other intangible assets. Following this assessment,
the Corporation recorded a non-cash impairment charge of $ $85.8 million. The uncertain future impact of COVID-19 could generate, in future
reporting periods, a significant risk of material adjustment to the carrying amounts of the following: accounts receivable, inventories, property,
plant & equipment, finite-life intangible assets, deferred income tax assets, goodwill, provision for onerous contracts, government authorities
loans and net defined benefit obligations. As an emerging risk, the duration and full financial effect of the COVID-19 pandemic is unknown at
this time, and accordingly estimates of the extent to which the COVID-19 may materially and adversely affect the Corporation’s consolidated
financial condition, operations and consolidated financial results are subject to significant uncertainty.
Impairment of non-financial assets
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset. The
value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget and
strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that may
enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the discounted cash
flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used to determine the
recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17 to the Consolidated financial statements.
Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that taxable
income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is required to
determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable income
together with future tax planning strategies.
Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about
discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the interest rates
of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. The significant
assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity analysis, are further explained
in note 25 to the Consolidated financial statements.
86 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
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.
Customer Relationships
Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon
acquisition using valuation methodologies which rely on many underlying assumptions, including:
•
•
•
•
•
Expected future order intake;
Operational execution and cost management;
Stability of economic conditions, including foreign exchange rates;
Production rates;
Government spending.
They are recorded at cost less accumulated impairment and amortization and are amortized on a straight-line basis over their useful lives
without exceeding 15 years.
NEW ACCOUNTING STANDARDS
Effective April 1, 2019, the Corporation adopted IFRS 16, which replaces IAS 17, represents a major revision of the way in which companies
account for leases. It 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 are recognized on the Corporation’s consolidated balance sheet. Certain exemptions apply for short-term leases and leases
of low-value assets.
Right-of-Use Assets
Right-of-use assets are measured at cost. The cost is based on the initial amount of the lease liability plus initial direct costs incurred and estimate
of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located adjusted for any lease
payments made at or before the commencement date, less any lease incentives received, if any.
The cost of right-of-use assets are periodically reduced by depreciation expenses and impairment losses, if any, and adjusted for certain
remeasurement of the lease liability. Right-of-use assets are amortized to the lesser of the useful life or the lease term using the straight-line
method as this reflects the expected pattern of consumption of the future economic benefits. The lease term includes the renewal option only if
it is reasonably certain to exercise that option. Lease terms range from 1 to 20 years for buildings and 1 to 6 years for machinery, equipment
and tooling.
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 87
Lease Liabilities
At the commencement date of the lease, the Corporation recognizes lease liabilities measured at the present value of lease payments to be
made over the lease term. Lease payments mainly include fixed payments less any lease incentives receivable and the exercise price of a
purchase option reasonably certain to be exercised. Variable lease payments that do not depend on an index or a rate are recognized as an
expense in the period during which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Corporation uses the incremental borrowing rate at the lease commencement date if the
interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect
accretion of interest and reduced for lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a
modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment of whether the
underlying asset will be purchased.
The Corporation determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend
the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to
be exercised. After the commencement date, the Corporation reassesses the lease term if there is a significant event or change in circumstances
that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
Effect of adopting IFRS 16
The adoption of IFRS 16 had an impact on the consolidated balance sheet and statement of income as operating leases have been capitalized,
corresponding lease liabilities have been recognized, rent expense has been replaced by the amortization expense of the right to use the related
assets and the interest accretion expense from the liability recorded. In addition, the principal repayments of lease liabilities are now presented
as financing activities in the consolidated statements of cash flows, whereas under the previous standard these payments were presented as
operating activities prior to April 1, 2019.
The Corporation has applied this standard using the modified retrospective approach (without restating comparative figures) for the fiscal year
beginning April 1, 2019. Certain leases were not brought on the Corporation's consolidated balance sheet as they are covered by practical
expedients. The Corporation has elected to apply the following practical expedients:
•
•
Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases; and
Recognize short-term leases and low value leases on a straight line basis as part of operating expenses in the consolidated statements
of income.
The adoption of IFRS 16 had the following impacts on the consolidated statement of income:
Increase (decrease)
Cost of sales, Selling and administrative expenses
Depreciation and amortization
Other (rent expense)
Operating income
Financial expenses
Deferred income tax expense
Net income and comprehensive income
Increase (decrease)
Property, plant and equipment, net
Long-term debt (1)
(1) The current portion of long-term debt impact corresponds to $2,520 as at April 1, 2019
88 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
March 31,
2020
$
3,098
(3,679)
581
1,283
(175)
(527)
$
As of
April 1, 2019
$
14,892
14,892
The following table presents the reconciliation between the operating leases commitments as of March 31, 2019 and the additional lease liabilities
as of April 1, 2019:
Operating lease commitments as at March 31, 2019
Discounting operating leases as at April 1, 2019 (1)
Commitments relating to the change in the lease term assumptions and inclusion of non-lease components
Leases committed but not yet commenced as at April 1, 2019
Additional lease liabilities as at April 1, 2019
Pre-existing capital leases as at April 1, 2019
Total lease liabilities as at April 1, 2019
(1) At the date of adoption of IFRS 16, the weighted average incremental borrowing rate was 4.2%
The following tables reconciles the right-of-use assets for the Company as at March 31, 2020:
$ 16,823
(1,068)
1,002
(1,865)
$ 14,892
20,411
$ 35,303
Cost:
At April 1, 2019
Additions
Business acquisition
Effect of changes in exchange rates
As at March 31, 2020
Accumulated amortization:
At April 1, 2019
Amortization expense
Effect of changes in exchange rates
As at March 31, 2020
Net book value as at March 31, 2020
Building and
leasehold
improvements
Machinery,
equipment and
tooling (1)
Other
Total
$ 12,969
$
41,368
$ 1,271
$
55,608
6,498
6,844
418
3,454
—
5
206
—
49
10,158
6,844
472
$ 26,729
$
44,827
$ 1,526
$
73,082
$
—
$
(10,006)
(2,201)
(49)
$
(2,250)
$ 24,479
(5,741)
(1)
(15,748)
29,079
$
$
$
$
$
—
(513)
(19)
(532)
994
$
(10,006)
(8,455)
(69)
(18,530)
54,552
$
$
(1) Includes the pre-existing assets under capital leases (net book value of $30,710 as at April 1, 2019)
The following table presents the lease liabilities for the Company as at March 31, 2020:
Balance as at March 31, 2019
Adoption of IFRS 16 (Notes 3 and 26)
Balance at April 1, 2019
Additions
Business acquisition
Lease payments
Interest expense on lease liabilities
Effect of changes in exchange rates
Balance as at March 31, 2020
Lease liabilities
$
$
20,411
14,892
35,303
10,158
6,844
(9,566)
1,819
107
$
44,665
HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A – 89
SELECTED FINANCIAL INFORMATION
Selected financial information is as follows, for the quarters ended:
Fiscal year
Sales
Operating (loss) income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net (loss) Income
Adjusted Net Income (1)
In dollars per share
Third
quarter
Fourth
quarter
Fourth
quarter
Second
quarter
2020
First
quarter
2019
First
quarter
$166,800 $157,253 $145,516 $143,427 $157,914 $144,528 $ 95,665 $ 85,770
4,857
5,217
12,244
3,552
3,786
(64,426)
17,577
28,609
(72,113)
13,695
15,190
16,208
25,910
11,958
12,794
10,371
10,986
21,509
6,443
6,959
10,519
10,519
21,510
6,307
6,307
13,466
13,466
24,563
8,705
8,705
11,904
13,973
22,883
7,390
9,367
5,289
6,165
13,176
3,294
4,405
Second
quarter
Third
quarter
(Loss) Earnings per share - basic and diluted
Adjusted Earnings per share (1)
$
(1.98) $
0.38
0.24 $
0.24
0.18 $
0.18
0.18 $
0.19
0.34 $
0.36
0.20 $
0.26
0.09 $
0.12
0.10
0.10
In millions of shares
Weighted average number of common diluted
shares outstanding
In millions, as at period end
36.4
36.7
36.7
36.6
36.5
36.4
36.5
36.4
Funded backlog
$
810 $
839 $
769 $
747 $
624 $
629 $
479 $
454
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
Seasonal trends
Héroux-Devtek’s first semester is usually slower than the last one due to seasonality such as plant shutdowns and summer vacations.
Selected financial information is as follows, for fiscal years:
Sales
Operating (loss) income
Adjusted operating income(1)
Adjusted EBITDA(1)
Net (loss) income
Adjusted net income(1)
(Loss) Earnings per share ($) - basic and diluted
Adjusted earnings per share(1) ($)
Cash and cash equivalents
Total assets
Long-term financial liabilities(2)
2020
2019
$
612,996
$
483,877
$
(30,070)
52,548
96,191
(50,658)
35,666
(1.38)
1.00
45,841
898,848
314,363
37,240
41,563
74,213
26,194
30,352
0.73
0.84
35,128
872,767
268,273
2018
386,564
23,378
30,325
56,904
13,674
24,213
0.38
0.67
93,209
632,162
137,388
(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.
90 – HÉROUX-DEVTEK INC. – Fiscal 2020 MD&A
SHAREHOLDER INFORMATION
Expected issuance date of financial results
Fiscal 2021
First quarter
Second quarter
Third quarter
Fourth quarter
August 7, 2020
November 13, 2020
February 5, 2021
May 20, 2021
ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE
This MD&A was approved by the Audit Committee and by the Board of Directors on May 20, 2020. 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 2020 MD&A – 91
HEROUXDEVTEK.COM
CONTACT INFORMATION
1111 Saint-Charles street West, suite 600
West Tower, Saint-Charles Complex
Longueuil (Québec) Canada J4K 5G4
450 679-3330