2022 Annual Report
AN AGILE FORCE
IN A CHANGING WORLD
80TH
ANNIVERSARY
SATISFYING CUSTOMERS
SINCE 1942
HÉROUX-DEVTEK
AT A GLANCE
Founded in 1942, Héroux-Devtek Inc. (traded on the
Toronto Stock Exchange under the symbol “HRX”) is the
third-largest landing gear manufacturer in the world
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 both the
civil and defence sectors.
In addition to its ability to design and manufacture
complete landing gear and actuation systems to
specification, Héroux-Devtek has built a strong
reputation for its ability to support and service landing
gear and actuation systems for a wide range of defence
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.
Headquartered in Québec, Canada, Héroux-Devtek now
employs some 1 800 dedicated people at its 15 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
- Annual Report 2022 3
DIVERSIFIED AND
BALANCED REVENUE MIX
(based on Fiscal 2022 sales)
DEFENCE / CIVIL
PROPRIETARY / BUILD-TO-PRINT
72% Defence
28% Civil
Other
Large Jets
51.8% Proprietary
Proprietary and
Life of Program
48.2% Built-to-print
Built-to-print
Other
Helicopters
5.7%
13.5%
10.9%
5.6%
2.6%
2.1%
4.1%
Business Jets
Regional Jets
Helicopters
Other
51.8%
25.4%
Fighters
30.1%
Transport
8.8%
Built-to-print
Tier 1
10.0%
29.4%
Built-to-print
OEM
OEM/AFTERMARKET
Aftermarket
27.5%
FISCAL 2022 SALES MIX BY END
CUSTOMER LOCATION
Rest of Europe
Spain
United Kindom
7.3%
13.7%
6.8%
Other
7.6%
6.2%
Canada
72.5%
OEM
United States
58.4%
INVESTMENT
HIGHLIGHTS
STRONG FINANCIAL POSITION DESPITE A CHALLENGING BUSINESS ENVIRONMENT
CASH FLOWS
(in millions of dollars)
Cash Flows Related to Operating Activities
Free Cash Flow (1)
Net debt to adjusted EBITDA ratio (1)
3.1
2.6
0.7
$56
$51
$70
$59
$53
$30
1.8
$89
$68
1.8
$63
$46
2018
2019
2020
2021
2022
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$271.4 MILLION OF AVAILABLE LIQUIDITY AS AT MARCH 31, 2022
24-MONTH STOCK PERFORMANCE
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2020
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2021
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[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.
Héroux-Devtek
- Annual Report 2022 5
FINANCIAL
HIGHLIGHTS
FISCAL YEAR ENDED MARCH 31
2022
2021
2020
2019
2018
OPERATING RESULTS
(in millions of dollars except per share data and ratios)
Sales
536.1
570.7
Operating income (loss)
Adjusted operating income (1)
Adjusted EBITDA (1)
44.8
47.1
83.0
34.1
45.2
88.3
613.0
(30.1)
52.5
96.2
483.9
386.6
37.2
41.6
74.2
23.4
30.3
56.9
Adjusted EBITDA (1) margin
15.5%
15.5%
15.7%
15.3%
14.7%
Net income (loss)
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
Funded backlog
PER SHARE DATA
EPS – basic (loss)
Adjusted EPS (1)
Weighted-average number of common diluted shares
outstanding (in 000’s)
32.1
33.8
63.2
45.9
19.8
29.0
89.2
67.7
(50.7)
35.7
52.6
30.3
26.2
30.4
70.0
58.6
13.7
24.2
56.1
50.8
682.0
717.0
810.0
624.0
466.0
0.91
0.95
0.55
0.80
(1.38)
1.00
0.73
0.84
0.38
0.67
36 023
36 523
36 363
36 437
36 332
FINANCIAL POSITION
(in millions of dollars except per share data and ratios)
Cash
Working capital
Total assets
Long-term debt (2)
Net debt to adjusted EBITDA ratio
86.7
235.6
813.4
238.8
1.8
95.5
241.4
854.8
253.0
1.8
45.8
205.4
898.8
292.7
2.6
35.1
173.1
872.8
263.3
3.1
93.2
201.9
632.2
132.0
0.7
Shareholders’ equity
377.3
391.7
349.4
404.1
379.0
[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 current portion but excluding net deferred financing costs.
SUPPLY
CONTRACTS
The diversification of our customer and program portfolio across civil
and defence segments provides us with some degree of shelter from the
current challenges the industry faces.
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Héroux-Devtek
- Annual Report 2022 7
DEFENCE
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Lockheed Martin F-35 Lightning II
Production of the F-35 door uplock system. Designed and qualified
by Héroux-Devtek’s engineering team.
Boeing F-18 Super Hornet
Supply and assemble the main landing gear and side brace production
and spares for the F/A-18E/F Super Hornet and EA-18G Growler.
Sikorsky CH-53K
Design, develop and supply the landing gear system and tail bumpers for
production and spares for the CH-53K King Stallion heavy lift helicopter.
Boeing CH-47 Chinook
Supply and assemble the landing gear for the Boeing CH-47 Chinook for
production and spares requirements.
Lockheed Martin C-130J Super Hercules
Supply and assemble the landing gear for the C-130J Super Hercules for
production and spares requirements.
Boeing F-15EX / Advanced F-15
Supply and assemble the nose and main landing gear for the F-15EX /
Advanced F-15 programs for production and spares requirements.
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Saab Gripen E
Design, develop and supply the complete landing gear system for
the Gripen E fighter aircraft for production and spares requirements.
Boeing MQ-25
Design, develop and supply the complete landing gear system for
the MQ-25 Unmanned Aerial Refueler.
Airbus C295
Supply and assemble the landing gear system for the C-295 production
and spares requirements.
10 Airbus A400M
Supply landing gear components and actuation systems for the A400M
production and spares requirements.
11 Eurofighter Typhoon
Supply actuation systems and components for the Eurofighter
production and spares requirements.
12 KAI KF-21 Boramae
Design, develop and supply the complete landing gear system for
the Korean Fighter KF-21 Boramae.
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CIVIL
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Boeing 777 and 777X
Supply complete landing gear system and spare components for
the 777 and 777X.
Dassault Falcon 6X
Design, develop and supply the complete landing gear system for
the Falcon 6X.
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Dassault Falcon 10X
Design, develop and supply the complete landing gear system for
the Falcon 10X.
Embraer Praetor 500/600
Design, develop and supply the complete landing gear system for
the Embraer Praetor.
EMERGING AS AN EVEN
STRONGER ORGANIZATION
Dear Shareholders,
This past year, the COVID-19 pandemic has continued to exert a major toll
on passenger travel activity and consumer confidence, resulting in lower
production rates across most civil aerospace programs.
Without a doubt, this downturn – perhaps more than in each of the prior
industry downcycles experienced, has brought challenging circumstances for
aerospace players, testing the resilience of even the most established firms.
Some of Héroux-Devtek’s key advantages are its balance between defence
and civil contracts, its diversified revenues and its strong balance sheet. These
enabled us to further strengthen our company’s profile and reputation while
continuing to build a robust foundation for future growth in line with our
long-term vision and ambitions.
MAXIMIZING VALUE FOR SHAREHOLDERS
Considering the overall environment, we had a strong performance this past
year but our stock fails to reflect the strength of our balance sheet, our highly
diversified profile, the versatility of our production capacity and the strong
competitive advantage we have carved over the years through our business
relations with leading OEMs.
Last year, we initiated a share repurchase program which allowed us to buy
back and cancel 2.4 million shares for a total consideration of $43 million.
Given the success of the program and its positive reception, the Board of
Directors has approved a renewed program to repurchase a maximum of
1.9 million shares representing 5.5% of the outstanding balance.
Notwithstanding this, we will continue to look for growth opportunities, both
organic and acquisition-related, while maintaining our strong financial position.
EXECUTIVE
CHAIRMAN
OF THE BOARD
OF DIRECTORS
MESSAGE TO
SHAREHOLDERS
80 YEARS YOUNG, WITH A PROMISING FUTURE
It has now been 80 years since the founding of Héroux Machine
Parts Limited in Longueuil, Québec. Beginning as a machine
shop for aircraft components, Héroux added landing gear design
to its product offering in the 60s and manufactured the legs
of the Apollo lunar lander. We haven’t looked back since, with
expansion through acquisition and organic growth fuelled by
contract wins that highlight both our design and manufacturing
capabilities. The ingenuity and entrepreneurship that drove
Héroux inc. years ago are still hallmarks of our culture today and
are reflected in the approach to business that Héroux-Devtek
Inc’s customers appreciate so much.
Being a partner of choice to our OEM clients has been a key
priority of our organization for years and being a responsible
corporate citizen must continue to be met by an equal
commitment.
As such, we will continue to invest time, attention and resources
towards achieving a meaningful contribution in the key areas of
governance, social impact and the environment. While we are
proud of our track record on all three fronts, we will continue to
do more and do better, supporting our communities, employees,
and clients in the process.
In closing, I wish to sincerely thank our shareholders for their
continued confidence and support for the past two years. To
the members of our Board of directors, thank you for the quality
of your advice and guidance. Your respective backgrounds and
expertise are valuable assets to the company.
Since early 2020, Héroux-Devtek has adopted a mindset where
we sought ways to become an even stronger, better diversified,
and more agile organization – despite the challenging
environment. We are in the process of achieving just that, in large
part due to the hard work and dedication of our extraordinary
group of employees.
On behalf of our Board, I wish to express our gratitude for the
excellent work and leadership that our CEO Martin Brassard and
his entire team demonstrate; we share your enthusiasm about
what’s to come.
GILLES LABBÉ
EXECUTIVE CHAIRMAN OF THE BOARD
1942
Héroux Machine Parts Limited,
specializing in machine tooling
of aircraft components, is
founded in Longueuil, Québec.
1966
Héroux Inc. manufactures
landing gear for the
Apollo Lunar Module.
1985-1986
Management buyout and
Héroux Inc. becomes a
publicly traded company.
2000
Héroux Inc. acquires Devtek
Corporation to enhance its
landing gear capabilities in the
commercial sector and changes
its name to Héroux-Devtek Inc.
2013
Signing of a long-term
contract with The Boeing
Company to supply
complete landing gear
systems for the Boeing 777
and 777X programs.
2014
Acquisition of APPH, an
integrated provider of landing
gear and hydraulic systems
and assemblies for original
equipment manufacturer and
aftermarket applications.
2018
Agreement to acquire
Beaver and CESA.
2022
The world’s third-largest
landing gear manufacturer,
satisfying customers for
80 years and counting.
AGILITY AND ADAPTABILITY - KEY TO
SUCCEED IN A CHANGING WORLD
Dear Shareholders,
This past year saw the world gain many new tools to fight against and learn to
cope with COVID-19. While unevenly distributed among countries and regions,
these positive developments are gradually encouraging higher consumer
confidence and pushing a more sustainable resumption of air travel. However,
the current environment continues to evolve, making the future difficult to
predict. We understand these new market dynamics and are ready to take on
the related challenges in order to continue building a stronger company in this
changing world.
CONVERTING CHALLENGES INTO OPPORTUNITIES
Until these latest developments translate into an acceleration of civil
production rates – namely for twin-aisle programs, our responsibility is to
continue to display agility and adaptability, while creating value for our clients
and shareholders. This is the approach we have successfully adopted since the
very outset of the pandemic, and the one we are prepared to continue to apply
for as long as necessary.
Indeed, if expansionary cycles are beneficial to business development and
growth generation, challenging times are fruitful to the strengthening and
deepening of business relationships and to looking at ways to improve our
operations. By being responsive to the needs of our customers and working
to find solutions to their challenges, we reinforced our reputation as a trusted
partner of choice in the industry, leaving Héroux-Devtek in an even stronger
competitive position that the one we held when we entered the pandemic.
A NEAR-HISTORIC PERFORMANCE
Our approach to improving efficiency, coupled to our focus on execution and
operational discipline, has enabled us to achieve our financial objectives,
generating healthy growth in defence sales and driving strong profitability for
Héroux-Devtek.
While revenues totalled $536.1 million compared to $570.7 million last year,
gross profit as a percentage of sales grew from 16.6% to 17.0%, and adjusted
EBITDA reached $83.0 million, or 15.5% of sales, in line with the year prior.
Net income for the year reached $32.1 million, from $19.8 million last year,
PRESIDENT
& CEO
MESSAGE TO
SHAREHOLDERS
Héroux-Devtek
- Annual Report 2022 11
Our reputation for meeting customers’ expectations during the
entire life cycle of our products has led us to conclude several
agreements with important long-time clients.
Early in Fiscal 2022, we announced the inking of a major life-
cycle agreement with Dassault Aviation to design, develop and
manufacture the complete landing gear system of its new Falcon
10X aircraft, further strengthening our posture in the business jet
market. Dassault Aviation’s renewed trust towards our company
as a partner of choice on such a key program testifies, once again,
to the strength of our design and development engineering team.
In October, we announced a new contract for the development of
landing gears for Lockheed Martin’s next generation of defence
aircraft, building on the 30-year strong business relationship
between our respective organizations. This strategic contract opens
an unlimited area of new collaboration between our organizations.
Finally, later in the third quarter, Boeing extended our contract
for the provision of the complete landing gears for the 777/777x
programs for six years. We are extremely proud of Boeing’s
confidence since the award of the contract in 2013.
Even while COVID-19 plagued economies worldwide, global
defence budgets continued to grow in 2021, reaching an all-time
high of $2.1 trillion. Since then, military conflicts and growing
geopolitical tensions have resulted in further increases and
fleet renewal programs in both NATO and non-NATO countries,
bringing new opportunities for the years ahead.
While our industry continues to face uncertainties and production
system disruptions, we are optimally positioned to seize growth
opportunities that will arise, and we are fully prepared to support
our clients in achieving their objectives.
THANK YOU
Irrespective of the sector, manufacturing facilities worldwide
faced significant challenges this past year. Our employees and
management teams across every single one of our facilities
impressed us with their resilience and hard work. Recognition
is among the values we strive to promote every day and we are
humbled to see them caring as much for the success of our clients
as we care for our teammates.
As a management team, we are truly fortunate for the support
of our Chairman Gilles Labbé and the members of our board. I
wish to thank them for their continued contribution towards the
success of Héroux-Devtek.
A promising future lies ahead and while it may not always be
smooth sailing, we are fully prepared to face the challenges
brought by the current environment and are determined to
continue to make our foundation even stronger.
MARTIN BRASSARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
while earnings per share rose to $0.91, from $0.55. On an adjusted
basis, EPS increased 18.8% to $0.95, compared to $0.80 last year.
This overall performance is the direct result of our efficient cost
structure and organizational focus.
Management also continued to apply the same disciplined
approach to optimize profitability and cash flows in 2022 as our
shareholders have been accustomed to in the past. Cash flow
from operations grew to $69.7 million, enabling us to repay debt,
repurchase shares and continue to invest in our future. As a result,
our net debt to EBITDA ratio sits at a very healthy 1.8 ratio.
This, combined with the favorable credit conditions strategically
renegotiated by our management team ahead of the recent
inflationary cycle, provides us with the financial wherewithal and
flexibility to seize opportunities for future growth. We remain fully
committed towards our two-pronged organic and acquisition-
driven growth strategy.
SEIZING BUSINESS DEVELOPMENT
OPPORTUNITIES ACROSS SEGMENTS
The cornerstone of our business development approach has been
our strategic diversification, with a strong footprint in virtually
all civil and defence market segments, balancing proprietary
products and build-to-print contracts – constantly leveraging our
strong internal engineering and manufacturing capabilities.
BOARD OF DIRECTORS
Héroux-Devtek’s Board of Directors is composed of 9 members from various
sectors, including the aerospace industry and the business world, providing the
management team with a comprehensive and experience-rich perspective.
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Gilles Labbé
Executive Chairman of the board
Non-independent Director since 1985
Didier Evrard
Corporate Director and Consultant
Independent Director since 2021
Member of the Audit Committee
Brian A. Robbins
Executive Chairman,
Exco Technologies Limited
Independent Director since 2000
Member of the Human Resources and
Corporate Governance Committee
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8
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Nathalie Bourque
Corporate Director and Consultant
Independent Director since 2015
Member of the Audit Committee
Louis Morin
President, Busrel Inc.
Independent Director since 2008
Chair of the Audit Committee
Annie Thabet
Partner, Celtis Capital Inc.
Independent Director since 2021
Member of the Human Resources and
Corporate Governance Committee
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Martin Brassard
President and Chief Executive Officer
Non-independent Director since 2019
James J. Morris
Corporate Director and Consultant
Independent Director since 2013
Chair of the Human Resources and
Corporate Governance Committee
Beverly Wyse
Corporate Director and Consultant
Lead director and member
of the Audit Committee
Héroux-Devtek
- Annual Report 2022 13
CORPORATE TEAM
Gilles Labbé
Executive Chairman
of the Board
Martin Brassard
President and
Chief Executive Officer
Stéphane Arsenault
Vice-President and
Chief Financial Officer
Jean Gravel
Vice-President,
Sales & Programs
Stéphane Rainville
Vice-President,
Human Resources
Alexandre Verdon
Vice-President, Business
Development, Mergers
and Acquisitions
Patrick Gagnon
Vice-President,
Corporate Controller
Guy Delisle
Vice-President, IT
Jean-Philippe Sanche
Vice-President, Legal Affairs
Guillaume Lamy
Director, Financial Reporting
Olivier Perron
Director, Tax
Katie Nolan
Director, Internal Audit &
Corporate Governance
Sylvie Hébert
Director, Human Resources
OPERATIONS
MANAGEMENT TEAM
Dominique Dallaire
Vice-President,
Central Region
Anne-Marie Bertrand
Vice-President,
Eastern Region
Marc-Olivier Gagnon
Vice-President,
Product Support
Pedro Sallent
Vice-President, Spain
Mike Meshay
Vice-President,
Toronto and Livonia
Daniel Normandin
Vice-President, Engineering,
QA & Environment
Hugo Lorrain
Vice-President, UK
HÉROUX-DEVTEK
IN THE COMMUNITY
A POSITIVE FORCE FOR CHANGE FOR THE
ENVIRONMENT AND OUR COMMUNITIES
The global aviation industry accounts for slightly over 2%
of human-induced carbon emissions and around 4% of the
global GDP. While this may seem like a positive ratio Héroux-
Devtek believes that every single industry stakeholder has the
responsibility to commit resources and efforts to further improve
this metric, namely by reducing the reliance of manufacturing
processes on non-renewable energy sources and resources.
While the manufacturing of landing gears and actuator systems are
by nature not among the most carbon-emitting processes, Héroux-
Devtek prides itself in being a positive force for change among
the aerospace industry, having adopted its first environmental
plans decades ago and making the reduction of CO2 emissions
a systematic component of every single capital and equipment
project across each of the Corporation’s 15 manufacturing sites in
Canada, the United States, Spain and the United Kingdom.
In recent years, Héroux-Devtek has laid the groundwork for
enhanced sustainability initiatives, such as exhaustive reporting
of indirect GHG emissions and improved measurement of
environmental footprint performance indicators. Héroux-Devtek
has also expanded its environmental regulatory compliance
management process by implementing a new companywide
procedure for proactive environmental compliance and has
increased training of environmental officers to adopt compliance
best practices.
Our long-term vision is one of carbon neutrality. In keeping
with this ambition, we covert equipment to renewable sources
of energy, including hydroelectricity, whenever we replace
manufacturing equipment or update our processes – including
for the safe management of manufacturing byproducts and
waste materials. We also continue to support the development of
improved practices by mobilizing our engineering expertise across
various R&D projects and automation endeavours.
As a case in point, a new wastewater treatment process was
recently installed at one of our sites to improve the quality of our
sanitary discharges and new risk management procedures were
introduced to enhance control and reduction of risks surrounding
the use of chemical products.
ENVIRONMENTAL LEADERSHIP AT THE
EXECUTIVE LEVEL
Additionally, to foster and support a culture of community
engagement throughout our entire organization, Héroux-Devtek
created and awarded the President’s Environmental Awards to three
company sites that distinguished themselves in the last year: Spain,
Strongsville and Montreal. Héroux-Devtek is making a financial
contribution to community organizations active at each winning site
to support local environmental protection and awareness with the
objective to honour the winning teams. The Corporation also issues
a quarterly CEO Environmental Report and carries out Environmental
Compliance Audits to review compliance to all applicable
environmental legislation as well as to corporate requirements based
on industry recognized ESG management principles. These reports
and audits results are shared with our directors and discussed at
Héroux-Devtek’s corporate leadership team forums.
BUILDING BETTER COMMUNITIES STARTS WITH OUR
CURRENT AND FUTURE EMPLOYEES
While ESG practices at Héroux-Devtek are largely focused on
sustainability initiatives, we are also strongly committed to creating a
positive influence in communities where we operate, by supporting
community groups, academic institutions, and the arts and cultural
sectors. This vision reflects our organizational culture, which is centred
on four fundamental values of respect, responsibility, recognition, and
resilience. As such, we believe that that our success as an organization
is first defined by the well-being of our employees – current and
future, by the health of the local communities in which we operate,
and the planet we will leave to future generations.
This past year once again, Héroux-Devtek made financial contributions
to food banks and to organizations that promote a world free of sexual
violence. Other donations were made to accelerate heart disease
research, while our employees, unions, and executives continue to
support the annual United Way of Greater Montreal (Centraide) major
fundraising campaign, ultimately making a difference for some 350
community organizations and projects.
Determined to promote entrepreneurship in Canada,
Héroux-Devtek also continues to support women leadership initiatives.
We provided funding to Réseau des femmes d’affaires du Québec, a
non-profit organization working to inspire, connect and encourage
women’s business enterprises. The Corporation also supports Women
in Aerospace (WIA) to develop women’s leadership capabilities and
visibility in the aerospace community.
PROVIDING A SAFE WORKING ENVIRONMENT
The safety of our people also remains a key priority. While adherence to
applicable legal requirements is a must, we prefer to set standards that
may entail even more strict duties. Senior management thinks it is also
critical to create and foster a culture that supports occupational health
and safety programs and activities.
As a result, we are dedicated to preventing any job-related injuries
and illnesses by creating a safe and healthy work environment and
proactively recognizing and resolving all inherent hazards. In all phases
of our operations, our health and safety plans include clear leadership
from management, engagement from all workers and roles, and the use
of suitable safety equipment and technology.
INVESTING TO ATTRACT AND TRAIN THE BEST
TALENTS TO AEROSPACE
We support and invest in initiatives that promote a strong aerospace
workforce locally such as Quebec’s Comité sectoriel de développement de
la main-d’œuvre pour le secteur aérospatial (CAMAQ).
We are also involved with the professional development of future
aerospace engineers and technicians, for example, through
our longstanding association to support the École nationale
d’aérotechnique (ENA) at Cégep Édouard-Montpetit, North America’s
premier aero technical training school. Finally, as a multi-year donor
to the new National Integrated Center of Intelligent Manufacturers
Pavilion at the Université du Québec à Trois-Rivières, we are pleased to
see progress in its construction.
Héroux-Devtek
- Annual Report 2022 15
GOVERNANCE
Héroux-Devtek is committed to staying at the forefront
of corporate governance standards and all employees
adhere to a Code of Business Conduct that establishes
the highest standards of ethical behavior at all levels of
the organization. It provides mandatory guidance and
frameworks concerning all our business activities, and is
divided into 12 sections:
1 Employees and human rights
2 Environment, health & safety
3 Government business
4 Supplier relationships
5 Bribery and corruption
6 Conflicts of interest
7 Exports, imports, and trade compliance
8 Fair dealings with other people and organizations
9 Confidential information and other assets
10 Data privacy and digital ethics
11 Insider trading and dealing and stock tipping
12 Financial stewardship/controllership
In addition, a Whistleblower Policy is in place to
encourage and enable employees to raise any serious
concerns within the Corporation without fear of any
reprisals or discrimination. Disclosure mechanisms are
regularly reminded to employees, who may confidentially
contact the Chairperson of the Audit Committee of the
Board of Directors, if warranted.
We have also adopted formal mandates for each
committee of our Board of Directors and roles, including
a Board of Directors charter, an Audit committee
mandate, and a charter for the Human Resources and
Corporate Governance committee. As well, we have
a description of the role of executive chairman of the
board and of the lead director.
Today, three women are members of our Board out of a
total of nine directors. Women hold the key functions of
Lead Independent Director, and Vice-President, Eastern
Region. We look forward to attracting and promoting
more women and people from diverse cultural
backgrounds to various roles across our organization in
the years ahead.
Héroux-Devtek continues to closely monitor the
changing business and regulatory environment and
will adjust its governance and disclosure practices
accordingly.
GLOBAL CENTERS
OF EXCELLENCE
CANADA
USA
St-Hubert, Québec
Design, engineering, and product support.
Montréal, Québec
Surface treatment services
Strongsville, Ohio
Finishing and assembly of landing gear
Technical expertise and state-of-the-art testing
facility
Laval, Québec
Manufacturing and assembly of small to
medium landing gear components and systems
Longueuil, Québec
Repair and overhaul activities, finishing and
assembly of landing gear
Kitchener, Ontario
Manufacturing of medium to large complex
landing gear components
Springfield, Ohio
Manufacturing of medium to large complex
landing gear and titanium components
Cambridge, Ontario
Manufacturing of ultra-large-scale complex
Everett, Washington
Final assembly of Boeing 777/777X landing
landing gear components
gear systems
Scarborough, Ontario
Electronic enclosures, heat exchangers and
cabinets
Livonia, Michigan
Design and manufacturing of ball screws and
electro-mechanical linear actuation systems
Our 15 Centers of Excellence worldwide have showcased their agility and their resilience
over the past year as they manoeuvred in a changing business environment.
UNITED KINGDOM
SPAIN
Nottingham, Nottinghamshire
Manufacturing of small to medium landing gear components
Getafe
Design, engineering, assembly and support for landing gear and
Runcorn, Cheshire
Repair and overhaul activities, finishing and assembly of landing
gear, product support, testing and design engineering
actuation systems
Seville
Assembly and installation of aircraft components at customer
assembly lines
SHAREHOLDER
INFORMATION
ANNUAL MEETING OF
SHAREHOLDERS
REGISTRAR
AND TRANSFER AGENT
Friday, August 5, 2022, at 10:00 A.M.
Westin Montreal
270 Saint-Antoine W Street
Montréal, Québec H2Y 0A3
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
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
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, 2022
CONSOLIDATED FINANCIAL STATEMENTS
For the fiscal years ended March 31, 2022 and 2021
TABLE OF CONTENTS
Note 6
Note 8
Note 3
Note 7
Note 2
Note 4
Note 1
Note 5
Management’s report ..................................................................................................................................................................... 24
Independent Auditor’s report ........................................................................................................................................................... 25
Consolidated financial statements ................................................................................................................................................... 28
Notes to the consolidated financial statements .................................................................................................................................. 33
Nature of activities and corporate information ............................................................................................................... 33
Basis of preparation ................................................................................................................................................... 33
Significant accounting policies .................................................................................................................................... 34
Significant accounting estimates and assumptions ........................................................................................................ 41
Divestiture and purchase of minority interest ................................................................................................................ 43
Sales ........................................................................................................................................................................ 43
Government assistance .............................................................................................................................................. 43
Cost of sales, selling and administrative expenses ........................................................................................................ 44
Non-recurring items ................................................................................................................................................... 44
Note 9
Note 10 Net financial expenses ............................................................................................................................................... 44
Note 11 Earnings per share..................................................................................................................................................... 45
Inventories ................................................................................................................................................................ 45
Note 12
Note 13 Derivative financial instruments ................................................................................................................................... 46
Note 14 Other assets .............................................................................................................................................................. 46
Note 15 Property, plant and equipment .................................................................................................................................... 47
Finite-life intangible assets .......................................................................................................................................... 49
Note 16
Note 17 Goodwill .................................................................................................................................................................... 50
Note 18 Accounts payable and accrued liabilities ...................................................................................................................... 51
Note 19 Provisions ................................................................................................................................................................. 51
Long-term debt .......................................................................................................................................................... 51
Note 20
Note 21 Other liabilities ........................................................................................................................................................... 53
Issued capital ............................................................................................................................................................ 53
Note 22
Note 23 Accumulated other comprehensive income .................................................................................................................. 55
Income taxes ............................................................................................................................................................. 56
Note 24
Note 25 Pension and other retirement benefit plans .................................................................................................................. 57
Note 26 Commitments and contingencies ................................................................................................................................. 60
Note 27 Net change in non-cash items ..................................................................................................................................... 61
Note 28 Geographic information .............................................................................................................................................. 61
Note 29 Executive compensation ............................................................................................................................................. 61
Financial instruments ................................................................................................................................................. 62
Note 30
Financial risk management ......................................................................................................................................... 62
Note 31
Note 32 Capital risk management ............................................................................................................................................ 65
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 23
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”) as issued by the International Accounting Standards Board (“IASB”). 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 at the end of fiscal year 2022. As at March 31, 2022, 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 18, 2022
Stéphane Arsenault, CPA
Vice-President and Chief Financial Officer
24 – HÉROUX-DEVTEK INC. – Fiscal 2022 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, 2022 and 2021, and the consolidated statements of income, consolidated statements of
comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years
then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position
of the Group as at March 31, 2022 and 2021, 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.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial
statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For the matter below, our description
of how our audit addresses the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of
our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the
procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying consolidated financial
statements.
Impairment of goodwill and other non-financial assets
How our audit addressed the key audit matter
As at March 31, 2022, the Group had goodwill amounting to $108
million on the consolidated balance sheet. As disclosed in Note 3,
Significant Accounting Policies and Note 17, Goodwill, for each cash
generating unit (“CGU”), to which goodwill has been allocated,
management assesses at least annually, or at any time if an indicator
of impairment exists, whether there has been an impairment loss in
the carrying value of the CGU. Management determined the
recoverable amount under a value in use approach using a
discounted cash
requires significant
flow calculation, which
estimation on the part of management.
Recoverable amounts are based on management’s estimates of key
variables including sales projections, expected future growth rates in
sales, and the discount rates. The existence of COVID-19 pandemic
has added complexity and subjectivity to the sales projections
prepared by management for the next 5 years and thereafter. The
presence of commercial and defence programs impacted differently
by the COVID-19 pandemic, affect the sales projections. This
combined with the significance and sensitivity of other assumptions
such as the discount rates and annual/perpetual growth rates led us
to conclude
the goodwill and other non-financial assets
impairment test for the Group’s CGUs is a key audit matter.
that
Our audit procedures included reviewing management’s assumptions
relating to the cash flow projections including overall sales projections
and sales related to certain significant programs in comparison to
publicly available data including analysts’ reports covering aerospace
and airlines, and existing customers’ contracts.
With the assistance of our internal valuation specialists, we evaluated
the Group’s discounted cash flow model, valuation methodology, and
certain significant assumptions. We assessed the selection and
application of the discount rates by evaluating the inputs and
mathematical accuracy of the calculation. We assessed the historical
accuracy of management’s estimates on cash flow projections,
revenue growth
rate and earnings margins by comparing
management’s past projections to actual and historical performance.
We compared management’s revenue projections for each of the
next 5 years to market data and analysts’ expectation of the industry
recovery timeframe from COVID, when available. We performed a
sensitivity analysis on the key assumptions such as revenue
projections, perpetual growth rate and discount rates to assess their
effects on the determination of the recoverable amount.
We also assessed the adequacy of the Group’s disclosures included
in Note 17 of the accompanying consolidated financial statements in
relation to this matter.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 25
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.
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.
26 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit
of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine
that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Wajih Chemali.
Ernst & Young LLP
Montréal, Québec
May 18, 2022
_____________________________________________
1 CPA Auditor, public accountancy permit no. A121006
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 27
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
As at
Assets
Current assets
Cash
Accounts receivable
Income tax receivable
Inventories
Derivative financial instruments
Other current assets
Property, plant and equipment
Finite-life intangible assets
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 (note 26)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors
Louis Morin
Director
28 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
Notes
20
March 31,
2022
March 31,
2021
12
13
14
15
16
13
24
17
14
18
19
13
20
20
19
13
24
21
22
23
5
$
86,692
105,389
1,108
200,342
5,500
16,419
415,450
208,838
47,320
14,329
6,557
108,200
12,664
$ 813,358
$ 114,508
21,925
29,875
826
1,852
10,835
179,821
225,691
14,828
830
8,567
6,339
436,076
82,189
5,767
6,865
282,461
377,282
—
377,282
$ 813,358
$
95,470
99,724
1,708
216,441
4,903
16,523
434,769
227,621
51,996
9,374
8,485
115,970
6,616
$ 854,831
$ 109,809
25,271
40,867
2,107
—
15,315
193,369
235,384
17,548
544
9,383
6,871
463,099
86,222
5,126
16,279
282,831
390,458
1,274
391,732
$ 854,831
Gilles Labbé
Director
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars, except per share data)
For the fiscal years ended March 31,
Notes
2022
2021
Sales
Cost of sales
Gross profit
Selling and administrative expenses
Non-recurring items
Operating income
Net financial expenses
Income before income tax expense
Income tax expense
Net income
Attributable to:
Equity holders of the parent
Non-controlling interests
Earnings per share – basic and diluted
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
6, 28
7, 8, 12
7, 8
9
10
24
11
$ 536,087
$ 570,685
444,992
91,095
44,028
2,309
44,758
4,270
475,768
94,917
49,706
11,115
34,096
7,909
40,488
26,187
8,348
6,374
$ 32,140
$ 19,813
32,525
20,057
(385)
(244)
$ 32,140
$ 19,813
$
0.91
0.90
$
0.55
0.55
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2022
2021
Other comprehensive income (loss):
Items that may be reclassified to net income
Losses arising from conversion of the financial statements of foreign operations
Cash flow hedges:
Net gains (losses) on valuation of derivative financial instruments
Net (gains) losses on derivative financial instruments transferred to net income
Deferred income taxes
Gains on hedges of net investments in foreign operations
Deferred income taxes
Items that are never reclassified to net income
Defined benefit pension plans:
Gains from remeasurement
Deferred income taxes
23
23
23
25
$ (11,059)
$ (20,781)
(817)
(4,471)
1,394
(3,894)
6,378
(839)
5,539
5,507
(1,455)
4,052
29,197
1,425
(8,189)
22,433
8,547
(1,080)
7,467
10,262
(2,709)
7,553
Other comprehensive income (loss)
$
(5,362)
$ 16,672
Comprehensive income
Net income
Other comprehensive income (loss)
Comprehensive income
Attributable to:
Equity holders of the parent
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
$ 32,140
$ 19,813
(5,362)
16,672
$ 26,778
$ 36,485
27,163
(385)
36,729
(244)
$ 26,778
$ 36,485
30 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In thousands of Canadian dollars)
Notes
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
$ 86,222
2,031
$ 5,126
(532)
$ 16,279 $ 282,831
—
—
Total equity
attributable to the
equity holders of
the parent
$ 390,458
1,499
Non-
Controlling
interests
$ 1,274
—
Total
Shareholders’
equity
$ 391,732
1,499
(6,064)
—
—
(36,936)
(43,000)
—
—
—
(11)
—
—
(43,000)
1,173
1,173
(11)
(889)
(900)
Balance as at March 31, 2021
Common shares issued under the
stock option plan
Repurchase and cancellation of
common shares
Stock-based compensation
expense
Transactions with minority
interests
Net income (loss)
Other comprehensive income
(loss)
22
22
22
23
Balance as at March 31, 2022
$ 82,189
—
—
—
—
1,173
—
—
—
$ 5,767
—
32,525
32,525
(385)
32,140
(9,414)
4,052
(5,362)
—
(5,362)
$ 6,865 $ 282,461
$ 377,282
$ —
$ 377,282
Balance as at March 31, 2020
Common shares issued under the
stock option plan
Stock-based compensation
expense
Net income (loss)
Notes
22
22
Other comprehensive income
23
Balance as at March 31, 2021
$ 86,222
Issued
capital
$ 79,757
6,465
Contributed
surplus
$ 5,792
(1,811)
Accumulated
other
comprehensive
income
Retained
earnings
$ 7,160 $ 255,221
—
—
Total equity
attributable to the
equity holders of
the parent
$ 347,930
4,654
Non-
Controlling
interests
$ 1,518
—
Total
Shareholders’
equity
$ 349,448
4,654
—
—
—
1,145
—
—
$ 5,126
—
—
1,145
—
1,145
—
20,057
9,119
7,553
20,057
16,672
(244)
19,813
—
16,672
$ 16,279 $ 282,831
$ 390,458
$ 1,274
$ 391,732
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Cash provided by (used for):
Operating activities
Net income
Items not requiring an outlay of cash:
Amortization expense
Deferred income taxes
(Gain) loss on disposal of property, plant and equipment
Net non-cash financial expenses
Stock-based compensation expense
Cash flows from operations
Net change in non-cash items
Cash flows related to operating activities
Investing activities
Net additions to property, plant and equipment
Proceeds on disposal of property, plant and equipment
Net increase in finite-life intangible assets
Proceeds from a business divestiture
Purchase of minority interest
Cash flows related to investing activities
Financing activities
Increase of long-term debt
Repayment of long-term debt
Increase in deferred financing costs
Repurchase and cancellation of shares
Issuance of common shares
Cash flows related to financing activities
Effect of changes in exchange rates on cash
Change in cash during the year
Cash at beginning of year
Cash at end of year
Interest and income taxes reflected in operating activities:
Interest paid
Interest received
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
32 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
Notes
2022
2021
15, 16
24
10
22
27
15
16
5
5
20
20
20
22
22
$ 32,140
$ 19,813
35,982
43,086
71
(850)
1,139
1,173
69,655
(6,489)
63,166
225
492
2,820
1,145
67,581
21,607
89,188
(17,306)
(21,259)
2,881
(2,847)
2,041
(900)
379
(643)
—
—
(16,131)
(21,523)
3,145
(16,310)
(555)
(43,000)
1,499
(55,221)
(592)
68,113
(89,616)
—
—
4,654
(16,849)
(1,187)
(8,778)
95,470
49,629
45,841
$ 86,692
$ 95,470
$
$
$
7,460
522
4,895
$
$
$
1,127
761
2,257
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For the fiscal years ended March 31, 2022 and 2021
(In thousands of Canadian dollars, except per share data)
NOTE 1. NATURE OF ACTIVITIES AND CORPORATE INFORMATION
Héroux-Devtek Inc. is incorporated under the laws of Québec. Its head office is domiciled at Complexe St-Charles, 1111 St-Charles Street
West, suite 600, West Tower, Longueuil (Québec), Canada. Héroux-Devtek Inc. and its subsidiaries (“Héroux-Devtek” or the “Corporation”)
specialize in the design, development, manufacture, repair and overhaul of aircraft landing gear, hydraulic and electromechanical flight
control actuators, custom ball screws and fracture-critical components.
The Corporation operates as one reporting segment, which is the Aerospace segment.
The Corporation's common shares are traded on the Toronto Stock Exchange under the symbol "HRX".
NOTE 2. BASIS OF PREPARATION
The consolidated financial statements have been prepared on the historical cost basis, except for derivative financial instruments, which are
measured at fair value, provisions, which are measured based on the best estimates of the expenditures required to settle the obligation and
the pension benefit obligations, which are measured at the present value of the defined benefit obligations and reduced by the fair value of
plan assets.
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”) and were approved for issue by the Board of Directors of the Corporation on
May 18, 2022.
Basis of consolidation
The consolidated financial statements include the accounts of Héroux-Devtek Inc. and its subsidiaries, all of which are wholly-owned. The
principal wholly-owned subsidiaries included in these consolidated financial statements are the following:
Name
Devtek Aerospace Inc.
HDI Landing Gear USA Inc.
APPH Limited
Beaver Aerospace & Defense Inc.
Compañia Española de Sistemas Aeronauticos S.A.
Location
Canada
United States
United Kingdom
United States
Spain
Subsidiaries are consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be
consolidated until the date that such control ceases. Control is achieved when the Corporation has power over the investee; is exposed, or
has rights, to variable returns from its involvement with the investee; and ability to use its power to affect its returns. The Corporation
reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of these three
elements of control. Changes in the Corporation’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as
equity transactions.
The cost of an acquisition is measured as the aggregate of the consideration paid, measured at acquisition date fair value and the amount of
any non-controlling interest in the acquiree. For each business combination, the Corporation measures the non-controlling interests in the
acquiree either at fair value or at the proportionate share of the acquiree’s net identifiable assets.
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.
Certain comparatives figures from the previous year were reclassified to conform with fiscal 2022 presentation.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 33
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 the 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.
Inventories
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.
Work in process includes raw materials, applied direct labor and manufacturing overhead costs.
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.
C. Property, plant and equipment
Assets acquired
Property, plant and equipment are stated at cost less accumulated amortization and accumulated impairment losses, if any (see F). 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.
Amortization is calculated on a straight-line basis over the useful life of the asset as follows:
•
•
•
Buildings and leasehold improvements - 5 to 50 years,
Machinery and equipment - 3 to 25 years,
Tooling related to specific contracts - based on pre-determined contract quantities, not exceeding the lower of ten years or the useful life.
Contract quantities are assessed at the beginning of the production stage considering, among other factors, existing firm orders and
options. The Corporation’s management conducts quarterly and annual reviews of the contract quantities,
Standard and general tooling - 3 to 5 years,
Automotive equipment - 3 to 10 years,
Computer and office equipment - 3 to 5 years.
•
•
•
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or
disposal. The gain or loss on derecognition of the asset (calculated as the difference between the net disposal proceeds and the net carrying
amount of the asset) is included in the consolidated statements of income in the fiscal year the asset is derecognized. The asset’s residual
value, useful life and method of amortization are reviewed and adjusted annually at year-end, or when warranted by specific circumstances.
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 J of this note and Note 4 - Significant accounting estimates and assumptions for
further information about provisions for asset retirement obligations.
34 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
D. 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 the expected quantity to be sold. They are presented net of related government assistance and amounts contributed by
customers.
The expected quantity to be sold is 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, options, and customer and industry forecasts. Management
conducts quarterly reviews of the contract quantities, 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 up to 15 years.
Software
Software is amortized over 3 to 7 years.
E. 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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 35
F.
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.
G. 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 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, 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 financial assets include certain derivative financial instruments, except those that are designated as hedging instruments and
classified as FVTOCI as a result. 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 financial assets are non-derivatives 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 of the asset’s original effective interest
rate.
36 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
The Corporation considers a financial asset in default when collection of an account receivable is 30 days past its contractual terms. The
Corporation may also consider a financial asset to be in default when internal or external information indicates that the Corporation is unlikely
to receive the outstanding contractual amounts in full. Overdue accounts receivable are considered to be at a higher credit risk, and
management monitors these receivables closely in order to assess whether ultimate collection is at risk. 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 Corporation has reasonable and supportable information to demonstrate that a more lagging criterion is more appropriate.
For accounts receivable, 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 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.
H. 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 cost
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.
I. 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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 37
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.
J. 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, when the effect is material. 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 contracts in progress or firm customer purchase orders in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it. The unavoidable costs are the cost of fulfilling the contracts and
comprise all costs related directly to the contract and include incremental costs such as direct labour and material and allocation of other cost
such as allocation of depreciation charges.
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 represents a
reasonable estimate of the present value 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. Changes in estimates
of these costs, accretion and changes in the relevant discount rate are recognized in the consolidated statement of income in the period in
which they occur.
Product warranty
This provision covers the cost of remedying known or anticipated defects on products under terms of warranties.
Litigations and other
Due to the nature of its business activities including the purchase or sale of businesses, the Corporation is exposed to the risks of technical
and business litigations. On the basis of information at its disposal at the reporting date, the Corporation carried out a review of the financial
risks to which the Corporation could be exposed. The recorded provision covers the 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.
K. 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.
L. 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.
M. 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.
38 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
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.
The pension and other retirement benefit plans assets included in other long term assets in the consolidated balance sheets represent the
fair value of plan assets reduced by the present value of the defined benefit obligations.
The pension and other retirement benefit plan assets are measured at the lower of the surplus in the defined benefit plan and the asset
ceiling.
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.
N. 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.
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 generally 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.
O. 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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 39
P. Government assistance
Government assistance, which mainly includes investment and other tax credits and grants, 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.
Q. 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.
40 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
R. Earnings per share
Basic and diluted earnings per share are computed based on net income attributable to equity holders of the Corporation, 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 from the exercise of in-the-money stock options would be used to
purchase common shares at the average market price during the year.
S. Leases
The right-of-use asset and lease liability are recognized at the lease commencement date. Certain exemptions apply for short-term leases
and leases of low-value assets.
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 7 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).
T. New accounting standards and interpretations issued but not yet effective
A number of amendments to existing standards have been published by the IASB and their adoption is mandatory for future periods. The
Corporation does not anticipate that these changes will have a significant impact on its consolidated financial statements.
NOTE 4. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date.
Uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the Corporation’s financial
results or the carrying amount of assets or liabilities.
Key estimates and assumptions are as follows:
Impairment of goodwill and other non-financial assets
A.
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset.
The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget
and strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that
may enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the
discounted cash flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used
to determine the recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 41
B. Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that
taxable income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is
required to determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future
taxable income together with future tax planning strategies.
C. Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions
about discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the
interest rates of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant
uncertainty. The significant assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity
analysis, are further explained in note 25.
D. Capitalized development costs
Development costs are capitalized in accordance with the accounting policy described in note 3. In determining the amounts to be
capitalized, management makes assumptions regarding the expected future cash generation of the assets, discount rates to be applied, the
expected period of benefits and contract quantities. For purpose of impairment testing, the Corporation exercises judgment to identify the
cash inflows and outflows. The recoverable amount is based on fair value less costs of disposal, generally determined using a discounted
cash flow model. Other assumptions used to determine the recoverable amount include the applicable discount rate and the expected future
cash flows which include costs to complete the development activities.
E. Provisions
The Corporation has recorded provisions to cover cost exposures that could materialize in future periods. In determining the amount of the
provisions, assumptions and estimates are made in relation to discount rates and the expected cost to settle such liabilities.
F. Government authorities loans
The Corporation has outstanding loans with government authorities with variable repayment schedules. Annual repayments of these loans
generally vary based on the sales of certain of the Corporation’s programs or segments. In order to account for the present value of these
loans under the effective interest method, or for government assistance upon initial recognition, management must estimate the future sales
growth of these programs or segments over the expected duration of the loan. These forecasts are used to determine effective interest rates
and expected repayment schedules. In determining these amounts, management must rely on market rates of interest and assumptions such
as, but not limited to, current and future order intake, industry order backlogs, Original Equipment Manufacturer (“OEM”) production rates,
expected economic conditions, the stability of foreign exchange rates and the Corporation’s ability to deliver on key contract initiatives.
G. Customer relationships
Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon
acquisition using valuation methodologies which rely on many underlying assumptions, including:
•
•
•
•
•
Expected future order intake;
Operational execution and cost management;
Stability of 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.
42 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
NOTE 5. DIVESTITURE AND PURCHASE OF MINORITY INTEREST
Divestiture of APPH Bolton
On May 4, 2021, the Corporation concluded an agreement for the sale of its Bolton, UK operations to Ontic Engineering & Manufacturing UK
Limited for a sale price of £2,700 ($4,614) excluding £900 ($1,478) which is subject to the achievement of certain commercial objectives. The
transaction did not result in a material gain or loss on disposal. A cash amount of $2,041 was received during the first quarter of fiscal 2022
and the £1,500 ($2,463) balance, included in other current assets as at March 31, 2022, was received in May 2022.
Purchase of minority interest
On October 5, 2021, the Corporation purchased the remaining 30% minority interest in Tekalia Aeronautik for $900.
NOTE 6. SALES
The amount of sales recognized in the following sectors was as follow for fiscal year:
Civil
Defence
Total sales
Geographic sales based on the customers’ location are detailed as follows, for fiscal year:
2022
2021
$ 149,368
$ 193,220
386,719
$ 536,087
377,465
$ 570,685
United States
Canada
United Kingdom
Spain
Rest of Europe
Other countries
2022
2021
$ 313,218 $ 300,691
56,343
47,877
47,730
73,532
44,512
$ 536,087 $ 570,685
32,970
39,320
36,424
73,282
40,873
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
$
2022
650
585
2021
$ 1,016
682
11,124
17,728
Government assistance includes research and development tax credits, other credits and grants.
During fiscal 2022, government assistance accounted for in cost of sales and selling and administrative expenses includes essentially the
Canadian Emergency Wage Subsidy (“CEWS”) and R&D tax credits, while for fiscal 2021, it was largely comprised of the CEWS.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 43
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 gain (loss) upon conversion of net monetary items
NOTE 9. NON-RECURRING ITEMS
Non-recurring items in operating income
Legal ruling
Restructuring charges
2022
2021
$ 199,421
$ 223,626
181,494
189,354
35,982
72,123
43,086
69,408
$ 489,020
$ 525,474
842
(1,456)
2022
2021
$ 2,309
$
—
—
11,115
$ 2,309
$ 11,115
Legal ruling
Following a court decision resulting from legal action intended by a non-product supplier related to a contractual dispute, the Corporation
incurred $2,309 of damages and legal fees.
Restructuring charges
In fiscal 2021, Héroux-Devtek announced restructuring initiatives in light of the effects of the COVID-19 pandemic. These initiatives affected
15% of the workforce, or approximately 315 employees, and included the closure of Alta Précision and APPH Wichita.
The total restructuring cost of $11,115, recorded in fiscal 2021, mainly comprised of employee-related charges and costs to dismantle and
relocate machinery. As at March 31 2022, all of the staff reductions have been completed and no restructuring provision remained on the
consolidated balance sheet ($3,607 as at March 31, 2021).
NOTE 10. 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)
Interest on defined benefit obligations (note 25)
Interest on leases (note 20)
Amortization of deferred financing costs
Other net non-cash financial income
Non-cash net financial expenses
Interest expense
Interest income on cash
44 – HÉROUX-DEVTEK INC. – Fiscal 2020 Consolidated Financial Statements
2022
2021
$ 3,162
$ 3,018
(3,062)
(1,649)
23
394
1,010
1,247
554
(548)
1,139
3,653
794
(984)
2,820
5,850
(522)
(761)
$ 4,270
$ 7,909
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
2022
2021
35,748,639
36,429,244
274,423
93,587
36,023,062
36,522,831
189,000
862,000
March 31, 2022 March 31, 2021
$ 83,396
115,172
1,774
$ 200,342
$ 106,528
107,075
2,838
$ 216,441
An amount of $342,525 of inventory was recognized as cost of sales during the fiscal year ($366,432 for fiscal 2021).
Reserves related to inventories are as follows, for fiscal year:
Reserves recognized as cost of sales
Reversal of prior-period reserves
2022
2021
$ 2,847
$ 11,469
1,081
855
The reversal of prior-period reserves is mainly 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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 45
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 agreement
Current Liabilities
Forward foreign exchange contracts
Long-term Liabilities
Forward foreign exchange contracts
Cross-currency interest-rate swap agreements
NOTE 14. OTHER ASSETS
As at
Investment and other tax credits receivable
Prepaid expenses
Sales tax receivable
Balance of sale receivable (note 5)
Others
Other current assets
Investment and other tax credits receivable
Long-term receivable
Net pension plan asset (note 25)
Other long-term assets
March 31, 2022 March 31, 2021
$ 4,338
$ 4,903
1,162
—
$ 5,500
$ 4,903
$ 4,790
$ 6,423
8,469
1,070
1,863
1,088
$ 14,329
$ 9,374
$ 1,852
$ 1,852
$
$
—
—
$
830
$
—
$
830
$
—
544
544
March 31, 2022 March 31, 2021
$ 5,635
3,931
3,243
2,463
1,147
$ 16,419
3,047
3,229
6,388
$ 12,664
$
7,247
5,055
3,010
—
1,211
$ 16,523
1,445
3,568
1,603
$ 6,616
46 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
NOTE 15. PROPERTY, PLANT AND EQUIPMENT
Cost:
As at March 31, 2021
Additions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Accumulated amortization:
As at March 31, 2021
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Total
$ 16,783
$ 134,454
$ 301,791 $ 24,183
$ 1,663 $ 478,874
—
—
(412)
(613)
2,546
12,366
(8)
(6,544)
(2,304)
(535)
(29,003)
(4,038)
1,448
(42)
(4,089)
(718)
990
—
(137)
(73)
17,350
(585)
(40,185)
(7,746)
$ 15,758
$ 128,144
$ 280,581 $ 20,782
$ 2,443 $ 447,708
$
$
—
—
—
—
—
$ 47,169
$ 187,536 $ 16,548
7,042
(5,430)
(1,163)
19,365
(27,838)
(2,681)
2,235
(3,205)
(708)
$ — $ 251,253
28,642
(36,473)
—
—
—
(4,552)
$ 47,618
$ 176,382 $ 14,870
$ — $ 238,870
Net book value as at March 31, 2022
$ 15,758
$ 80,526
$ 104,199 $
5,912
$ 2,443 $ 208,838
Cost:
As at March 31, 2020
Additions
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2021
Accumulated amortization:
As at March 31, 2020
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2021
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Land
Other
Construction
in progress
Total
$ 17,572
$ 144,801
$ 305,453 $ 22,800
$ 3,040 $ 493,666
—
—
—
(789)
7,354
14,686
2,608
(62)
(9,537)
(8,102)
(554)
(3,741)
(14,053)
(66)
(205)
(954)
(1,166)
—
—
(211)
23,482
(682)
(13,483)
(24,109)
$ 16,783
$ 134,454
$ 301,791 $ 24,183
$ 1,663 $ 478,874
$
$
—
—
—
—
—
$ 43,278
$ 176,571 $ 14,176
7,728
(925)
(2,912)
22,794
(4,841)
(6,988)
3,136
(72)
(692)
$ — $ 234,025
33,658
—
—
—
(5,838)
(10,592)
$ 47,169
$ 187,536 $ 16,548
$ — $ 251,253
Net book value as at March 31, 2021
$ 16,783
$ 87,285
$ 114,255 $
7,635
$ 1,663 $ 227,621
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 47
Right of use assets:
The following tables reconciles the right-of-use assets for the Corporation as at March 31, 2022 and 2021 that is included in Property, Plant
and Equipment:
Cost:
As at March 31, 2021
Additions
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Accumulated amortization:
As at March 31, 2021
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Net book value as at March 31, 2022
Cost:
As at March 31, 2020
Additions
Effect of changes in exchange rates
As at March 31, 2021
Accumulated amortization:
As at March 31, 2020
Amortization expense
Effect of changes in exchange rates
As at March 31, 2021
Net book value as at March 31, 2021
Building and
leasehold
improvements
Machinery,
equipment and
tooling
Other
Total
$ 18,301
$ 45,942
$ 1,982
$ 66,225
459
(754)
(885)
—
—
—
321
—
(26)
780
(754)
(911)
$ 17,121
$ 45,942
$ 2,277
$ 65,340
$ 4,450
$ 21,598
$
2,248
6,136
(239)
(247)
—
—
918
533
—
(19)
$ 26,966
8,917
(239)
(266)
$ 6,212
$ 27,734
$ 1,432
$ 35,378
$ 10,909
$ 18,208
$
845
$ 29,962
Building and
leasehold
improvements
Machinery,
equipment and
tooling
Other
Total
$ 26,729
$ 44,827
$ 1,526
$ 73,082
—
(717)
1,121
(6)
556
(100)
1,677
(823)
$ 18,301
$ 45,942
$ 1,982
$ 66,225
$ 2,250
$ 15,748
$
2,572
5,851
(166)
(1)
532
439
(53)
$ 18,530
8,862
(220)
$ 4,450
$ 21,598
$
918
$ 26,966
$ 13,851
$ 24,344
$ 1,064
$ 39,259
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
2022
2021
$ 17,350
$ 23,482
(585)
16,765
(780)
1,321
(682)
22,800
(1,677)
136
$ 17,306
$ 21,259
As at March 31, 2022, the cost of property, plant and equipment still in use and fully depreciated is $111,283 ($120,314 as at March 31,
2021).
48 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
NOTE 16. FINITE-LIFE INTANGIBLE ASSETS
Cost:
As at March 31, 2021
Additions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Accumulated amortization:
As at March 31, 2021
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2022
Net book value as at March 31, 2022
Cost:
As at March 31, 2020
Additions
Customers funding
Government assistance (note 7)
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2021
Accumulated amortization:
As at March 31, 2020
Amortization expense
Retirements and disposals
Effect of changes in exchange rates
As at March 31, 2021
Net book value as at March 31, 2021
Capitalized
development
costs
$ 24,658
7,849
(5,520)
(650)
—
—
Customer
relationships
and contracts
Total
$ 68,059
$ 117,397
—
—
—
—
(2,520)
10,157
(5,520)
(650)
(5,324)
(3,295)
Software
$ 24,680
2,308
—
—
(5,324)
(775)
$ 26,337
$ 20,889
$ 65,539
$ 112,765
$ 13,889
$ 20,285
$ 31,227
$ 65,401
575
—
—
$ 14,464
$ 11,873
Capitalized
development
costs
$ 25,955
9,391
(9,514)
(953)
(76)
(145)
2,178
(5,324)
(689)
$ 16,450
$ 4,439
Software
$ 24,344
1,782
—
(63)
(369)
(1,014)
4,587
—
(1,283)
$ 34,531
$ 31,008
Customer
relationships
and contracts
7,340
(5,324)
(1,972)
$ 65,445
$ 47,320
Total
$ 72,103
$ 122,402
—
—
—
(484)
(3,560)
11,173
(9,514)
(1,016)
(929)
(4,719)
$ 24,658
$ 24,680
$ 68,059
$ 117,397
$ 13,409
600
(76)
(44)
$ 18,554
2,574
(3)
(840)
$ 13,889
$ 10,769
$ 20,285
$ 4,395
$ 26,392
6,254
(119)
(1,300)
$ 31,227
$ 36,832
$ 58,355
9,428
(198)
(2,184)
$ 65,401
$ 51,996
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 49
NOTE 17. GOODWILL
Goodwill varied as follows, during fiscal year:
Balance at beginning of the year
Divestiture (note 5)
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
2022
$ 115,970
(2,467)
(5,303)
$ 108,200
2021
$ 120,773
—
(4,803)
$ 115,970
March 31, 2022 March 31, 2021
$ 22,594
64,738
28,638
$ 115,970
$ 22,485
58,835
26,880
$ 108,200
The following assumptions were used to measure recoverable amounts (value in use), as at:
North America
U.K.
Spain
March 31, 2022
March 31, 2021
Pre-tax discount rate
Perpetual growth rate
Pre-tax discount rate
Perpetual growth rate
14.4 %
14.7 %
14.8 %
2.5 %
2.5 %
2.5 %
14.8 %
14.6 %
15.0 %
2.5 %
2.5 %
2.5 %
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 impairment tests performed as at March 31, 2022 did not indicate any impairment charges were warranted.
Sensitivity of recoverable amounts
The following table presents, for each CGU, the change in the discount rate or in the perpetual growth rate used in the most recently
performed tests that would have been required to recover the carrying amount of the CGU as at March 31, 2022:
North America
U.K.
Spain
Incremental increase
in pre-tax discount rate
2.2 %
1.4 %
Incremental decrease in
perpetual growth rate
3.5 %
2.1 %
4.3 %
7.6 %
50 – HÉROUX-DEVTEK INC. – Fiscal 2022 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 employee-related liabilities.
NOTE 19. PROVISIONS
$
March 31, 2022
71,637
39,442
3,429
$ 114,508
$
March 31, 2021
57,508
47,424
4,877
$ 109,809
Onerous
contracts
$ 9,348
406
—
(1,467)
(19)
—
(234)
$ 8,034
2,318
$ 5,716
Asset retirement
obligations
Product
warranty
Restructuring
(note 9)
Others
(notes 9, 26)
Total
$ 6,305
$ 12,187
$ 3,607
$ 11,372
$ 42,819
143
124
—
—
(517)
—
$ 6,055
—
$ 6,055
1,237
—
(2,263)
(501)
(247)
(633)
$ 9,780
7,454
$ 2,326
—
—
(3,607)
—
—
—
—
—
—
$
$
3,708
—
(1,132)
(850)
—
(214)
$ 12,884
12,153
731
$
5,494
124
(8,469)
(1,370)
(764)
(1,081)
$ 36,753
21,925
$ 14,828
As at March 31, 2021
Arising during the year
Accretion expense
Utilized
Reversed
Discount rate adjustment
Effect of changes in exchange rates
As at March 31, 2022
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
Deferred financing costs, net
Less: current portion
Long-term debt
March 31, 2022 March 31, 2021
$ 59,342
90,382
75,000
28,274
(2,299)
250,699
15,315
$ 235,384
$ 58,821
84,508
75,000
20,497
(2,300)
236,526
10,835
$ 225,691
Senior Secured Syndicated Revolving Credit Facility
The Revolving Facility has a limit of $250,000, of which $58,821 or US$47,000 is drawn, and bears interest at Libor + 1.0% representing an
effective rate of 1.3% ($59,342 or US$47,000 Libor + 1.2% representing 1.3% as at March 31, 2021). It includes an accordion feature to
increase the limit by an additional $200,000 ($100,000 as at March 31, 2021), subject to lenders’ approval, and is secured by essentially all
assets of the corporation and its subsidiaries.
In June 2021 and May 2022, the Corporation reached agreements to extend the Revolving Facility to a new maturity of June 2027 (as at
March 31, 2021 - December 2024). The accordion feature was increased from $100,000 to $200,000 as part of the June agreement, while
other terms and conditions remain relatively unchanged.
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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 51
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, 2022, the Corporation revised the estimated
repayment schedule of its government authorities loans, taking into account updated assumptions and data. This resulted in a non-cash gain
of $3,062 ($1,649 in fiscal 2021), which was included in Net financial expenses (see note 10).
The effective interest rates for these loans were in the range of 0.0% to 6.8% as at March 31, 2022 (0.0% to 6.8% as at March 31, 2021).
Unsecured Subordinated Term Loan Facility
The Corporation has a Term Loan Facility provided by the Fonds de solidarité FTQ for an amount of up to $75,000. As at March 31, 2022 and
2021, this facility was fully drawn.
In June 2021, the Corporation reached an agreement to extend the Term Loan Facility to a new maturity of September 2028, (September
2025 as at March 31, 2021). The Term Loan Facility bears interest at a rate of 5.0% (5.2% as at March 31, 2021) and the Corporation will
have the option to make early repayments as of September 2024, subject to certain fees.
Lease liabilities
The incremental borrowing rate applied to lease liabilities recognized as at March 31, 2022 ranged between 2.1% and 7.0% for leases (2.1%
and 7.0% as at March 31, 2021), maturing from April 2022 to May 2039.
The following table presents the reconciliation between the opening and the closing balances of the lease liabilities:
As at
Balance at the beginning of the year
Additions
Settlement
Lease payments
Interest expense on lease liabilities (note 10)
Effect of changes in exchange rates
March 31, 2022 March 31, 2021
$ 28,274
$ 44,665
780
(534)
(8,466)
1,010
(567)
1,677
(9,130)
(9,359)
1,247
(826)
$ 20,497
$ 28,274
The expense related to short-term leases and low-value assets leases during the years ended March 31, 2022 and 2021 was immaterial.
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, 2022.
The following table presents reconciliation between the opening and closing balances for the Long-term debt.
Long-term debt, at beginning of the fiscal year
Increase in long-term debt
Repayment of long-term debt
Settlement of lease liabilities
Amortization of deferred financing costs (note 10)
Increase in deferred financing cost
Interest accretion and adjustments on governmental authorities loans (note 10)
Interest accretion in lease liability (note 10)
Effects of fluctuations in exchange rates
Long-term debt, at end of the fiscal year
52 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
March 31, 2022
$ 250,699
March 31, 2021
$ 289,617
3,925
(16,310)
(534)
554
(555)
100
1,010
(2,363)
69,790
(89,616)
(9,130)
794
—
1,369
1,247
(13,372)
$ 236,526
$ 250,699
NOTE 21. OTHER LIABILITIES
As at
Progress billings
Deferred revenue
Net defined benefit obligations (note 25)
Other
Other Liabilities
NOTE 22. ISSUED CAPITAL
Authorized
Voting common shares, without par value
First preferred shares, issuable in series, without par value
Second preferred shares, issuable in series, without par value
No preferred shares are outstanding.
Variations in common shares issued and fully paid were as follows, for fiscal year:
March 31, 2022 March 31, 2021
$ 2,763
942
1,547
1,619
$ 6,871
$ 3,377
725
1,063
1,174
$ 6,339
Unlimited
Unlimited
Unlimited
Balance at the beginning of the year
Issued for cash on exercise of stock options
Repurchase and cancellation
Balance at the end of the year
2022
Issued
capital
Number
2021
Issued
capital
Number
36,764,710 $
86,222
36,367,210 $
79,757
134,345
2,031
397,500
(2,412,279)
(6,064)
—
6,465
—
34,486,776 $
82,189
36,764,710 $
86,222
On May 20, 2021, the Corporation announced a Normal Course Issuer Bid ("NCIB") for the purchase for cancellation of up to 2,412,279
common shares on the open market through the TSX or alternative trading facilities. The NCIB began on May 25, 2021, and was set to end
on May 24, 2022, or on such earlier date when the Corporation has either acquired the maximum number of common shares allowable under
the NCIB or decided not to make any further purchases under it.
As at March 31, 2022, the Corporation has purchased and cancelled the full amount of 2,412,279 common shares for a cash consideration of
$43,000 representing a weighted average price of $17.83 per share. The $36,936 excess of purchase price over the carrying value was
charged to retained earnings.
In May 2022, the Corporation filed a notice with the Toronto Stock Exchange of its intention to initiate a new NCIB for purchase and
cancellation of 1,905,385 of its issued and outstanding common shares.
Stock-based compensation
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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 53
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
2022
Weighted-
average
exercise price
Number of
stock options
2021
Weighted-
average
exercise price
Number of
stock options
1,449,095
$ 13.48
1,497,595
$ 13.86
197,000
(134,345)
(8,000)
1,503,750
17.45
11.16
17.45
$ 14.19
$ 1,173
349,000
(397,500)
—
1,449,095
9.83
11.71
—
$ 13.48
$ 1,145
The weighted-average share price at the date of exercise of stock options in fiscal 2022 was $17.86 ($15.13 in 2021).
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
2022
2021
197,000
$6.30
$1,241
349,000
$3.05
$1,064
5.4 years
5.7 years
36%
1.1%
None
1.0%
31%
1.1%
None
0.4%
As at March 31, 2022, 1,503,750 stock options were issued and outstanding and can be detailed as follows:
Exercisable price
$9.83 to 10.71
14.93 to 15.01
16.03 to 17.45
Outstanding options
Weighted-average
years to maturity
Weighted-average
exercise price
4.01
2.46
4.42
3.86
$10.03
14.95
16.45
$14.19
Number
452,750
332,000
719,000
1,503,750
Vested options
Number
191,000
332,000
313,625
836,625
Weighted-average
exercise price
$10.32
14.95
16.12
$14.33
As at March 31, 2022, 2,808,257 common shares are reserved for issuance upon exercise of stock options, of which 2,225,662 remained to
be issued, compared to 2,360,007 as at March 31, 2021.
54 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
B. Deferred Share Unit (“DSU”) and Performance Share Unit (“PSU”) plans
Movements in outstanding DSUs and related expense were as follows, for fiscal year:
In number of DSUs
Balance, beginning of year
Issued
Settled
Closing balance of DSUs outstanding
DSU expense
Fair value of outstanding DSUs, end of year
Movements in outstanding PSUs and related expense were as follows, for fiscal year:
In number of PSUs
Balance, beginning of year
Issued
Settled
Cancelled/forfeited
Closing balance of PSUs outstanding
PSU expense
Fair value of vested outstanding PSUs, end of year
2022
2021
192,108
154,950
31,676
37,158
(24,313)
—
199,471
192,108
$
$
540 $
3,332 $
1,644
3,243
2022
2021
300,150
278,450
88,150
(86,800)
119,100
(93,200)
(16,150)
(4,200)
285,350
300,150
$
$
1,420 $
3,999 $
3,004
4,089
Liabilities related to PSUs and DSUs plans are presented under the Accounts payable and accrued liabilities caption on the Consolidated
Balance Sheets.
NOTE 23. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
Balance as at March 31, 2021
Other comprehensive (loss) income
Balance as at March 31, 2022
Balance as at March 31, 2020
Other comprehensive income (loss)
Balance as at March 31, 2021
Exchange
differences on
conversion of
foreign operations
Hedge of net
investments in
foreign
operations
Cash flow
hedges
Total
$ 14,064
$
8,531
$
(6,316)
$ 16,279
(11,059)
(3,894)
5,539
(9,414)
$
3,005
$
4,637
$
(777)
$
6,865
Exchange
differences on
conversion of
foreign operations
Hedge of net
investments in
foreign
operations
Cash flow
hedges
Total
$ 34,845
$ (13,902)
$ (13,783)
$
7,160
(20,781)
22,433
7,467
9,119
$ 14,064
$
8,531
$
(6,316)
$ 16,279
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 55
NOTE 24. INCOME TAXES
Income tax expense is as follows, for fiscal year:
Consolidated statements of income
Current income tax expense
Deferred income tax expense
Income tax expense reported in the consolidated statements of income
Consolidated statements of changes in shareholders’ equity
Expense related to items charged or credited directly to retained earnings
Expense (recovery) related to items charged or credited directly to other comprehensive income
Income tax expense reported directly in shareholders’ equity
The computation of income tax expense is as follows, for fiscal year:
Income taxes at combined Federal and Provincial statutory rates of 26.4% (26.4% in 2021)
Income tax rate differential – foreign subsidiaries
Permanent differences
Write-down (recognition) of deferred tax asset
Other items
Income tax expense
Significant deferred income tax assets and liabilities arising from the effect of temporary differences are as follows:
2022
2021
$
$
8,277 $
71
8,348 $
$
1,455 $
(555)
6,149
225
6,374
2,709
8,189
$
900 $ 10,898
2022
$ 10,689 $
(2,010)
(475)
(301)
445
8,348 $
$
2021
6,933
(1,263)
1,399
544
(1,239)
6,374
As at
Deferred income tax assets
Non-deductible reserves
Inventories
Receivables
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
Derivative financial instruments
Total deferred income tax liabilities
Net deferred income tax (liabilities) assets
March 31, 2022 March 31, 2021
$ 7,752
5,729
(25)
2,090
284
19,261
$ 35,091
(547)
(24,945)
(9,002)
(2,607)
$ (37,101)
(2,010)
$
$ 9,403
5,011
53
1,225
477
18,918
$ 35,087
(533)
(22,365)
(9,946)
(3,141)
$ (35,985)
(898)
$
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 liabilities
March 31, 2022 March 31, 2021
$ 6,557
$ 8,485
(8,567)
(9,383)
$ (2,010)
$
(898)
56 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
As at March 31, 2022, net deferred income tax assets of $9,791 were recognized ($11,111 as at March 31, 2021) 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, 2022, non-capital 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 $32,962 ($34,095 as at March 31, 2021).
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, 2022
March 31, 2021
$ 23,397
$ 18,822
75,302
9,106
5,480
66,938
5,785
20,852
$ 113,285
$ 112,397
As at March 31, 2022, deferred income tax assets of $8,182 and deferred income tax liabilities of $4,888 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, 2022, the temporary differences
associated with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $22,100 ($21,347
in 2021).
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 2022, 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 $1,097 ($1,627
in 2021) while the cash contributed to its defined contribution plans amounted to $3,287 ($3,252 in 2021).
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.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 57
•
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 62% in equity funds, 35% in debt securities and 3% 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 – surplus
Present value of defined benefit obligations of unfunded plan
Net pension plan asset
Amount recognized in other long-term assets (note 14)
Amount recognized in other long-term liabilities (note 21)
March 31, 2022 March 31, 2021
$ 69,289
69,988
699
(643)
56
1,603
(1,547)
$ 64,443
70,241
5,798
(473)
$ 5,325
6,388
(1,063)
$
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 10)
Administrative cost
Defined benefit pension expense recognized in the consolidated statements of income
The total amount recognized in other comprehensive income is as follows, for fiscal year:
Remeasurements
Gains from changes in demographic assumptions
Gains (losses) from changes in financial assumptions
Experience gains
Return on plan assets, excluding interest income on plan assets
Other comprehensive income
The actual return on the fair value of plan assets is as follows, for fiscal year:
Actual return on the fair value of plan assets
The variation in present value of the defined benefit obligations were as follows, for fiscal year:
As at
Defined benefit obligations at the beginning of the year
Current service cost
Interest expense
Contributions by plans’ participants
Gains from changes in demographic assumptions
(Gains) losses from changes in financial assumptions
Experience gains
Benefits paid
Defined benefit obligations at the end of the year
58 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
2022
1,085 $
23
227
1,335 $
2021
1,053
394
307
1,754
$
$
2022
2021
$
1,203 $
—
5,524
5
(4,519)
1,801
12,980
(1,225)
5,507 $ 10,262
$
2022
2021
1,071 $ 15,070
$
March 31, 2022 March 31, 2021
$ 65,196
1,053
2,484
943
—
4,519
(1,801)
(2,462)
$ 69,932
$ 69,932
1,085
2,319
744
(1,203)
(5,524)
(5)
(2,432)
$ 64,916
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
Significant assumptions
The significant weighted-average assumptions used at the reporting date are as follows, for fiscal year:
Defined benefit obligations as at March 31:
Discount rate
Rate of compensation increase
Average life expectancies based on a pension at 65 years of age:
Male, 45 years of age at reporting date
Female, 45 years of age at reporting date
Male, 65 years of age at reporting date
Female, 65 years of age at reporting date
March 31, 2022 March 31, 2021
$ 55,117
2,090
$ 69,988
2,296
(1,225)
1,097
744
(2,432)
(227)
$ 70,241
12,980
1,627
943
(2,462)
(307)
$ 69,988
March 31, 2022 March 31, 2021
70 %
30 %
— %
100 %
62 %
35 %
3 %
100 %
2022
2021
3.98 %
3.50 %
3.28 %
3.50 %
87
89
86
88
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, 2022:
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
%
(5.9)
6.7
—
—
2.2
(2.2)
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 59
Corporation’s pension benefits future cash flows
The cash contributions expected to be made to these plans in fiscal year 2023 amount to $891.
The duration of the defined benefit obligations at March 31, 2022 is 13.4 years (14.6 years in 2021). 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
Between 5-10 years
Total
Defined contribution pension plans
The defined contribution pension plans’ costs are as follows, for fiscal year:
Defined contribution pension plan costs
NOTE 26. COMMITMENTS AND CONTINGENCIES
March 31, 2022 March 31, 2021
$ 2,095
2,174
7,643
16,410
$ 28,322
$ 2,233
2,357
8,290
16,857
$ 29,737
2022
3,287 $
2021
3,252
$
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:
2023
2024
2025
2026
2027 Thereafter
Total 2022
Building, machinery and equipment acquisition commitments
$ 2,616
—
—
—
—
— $
2,616
Guarantees
The Corporation executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business
dispositions 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 legislation), valuation
differences or as a result of litigation 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, 2022, the duration of these indemnification agreements could extend
up to fiscal year 2024. As at March 31, 2022, an amount of $4,795 ($4,588 in 2021) 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, 2022, the Corporation has outstanding letters of credit amounting to $18,824 ($22,772 in 2021).
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.
60 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
NOTE 27. NET CHANGE IN NON-CASH ITEMS
The net change in non-cash items is detailed as follows, for fiscal year:
Accounts receivable
Inventories
Other assets
Account payable and accrued liabilities
Provisions
Customer advances and progress billings
Other Liabilities
NOTE 28. 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
2022
2021
(8,515) $ 11,324
21,812
11,026
7,970
(7,248)
(12,297)
10,418
(3,661)
(5,333)
5,301
(9,823)
2,986
(8,842)
(6,489) $ 21,607
$
$
March 31, 2022
Canada
U.S.
U.K.
Spain
Total
$ 93,141 $ 63,367 $ 16,543 $ 35,787 $ 208,838
11,990
5,404
3,561
17,085
1,749
58,833
30,020
47,320
26,878
108,200
March 31, 2021
Canada
U.S.
U.K.
Spain
Total
$ 99,161 $ 69,998 $ 19,528 $ 38,934 $ 227,621
11,943
5,404
3,823
17,191
2,823
64,737
33,407
51,996
28,638
115,970
NOTE 29. 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 benefits and other benefits
Pension and other post-retirement benefits
Share-based compensation
2022
3,872 $
97
2,349
6,318 $
2021
3,820
196
1,848
5,864
$
$
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 61
NOTE 30. FINANCIAL INSTRUMENTS
Fair value hierarchy
Financial assets and financial liabilities measured at fair value in the consolidated balance sheets are grouped into three levels of a fair value
hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, and
Level 3: unobservable inputs for the asset or liability.
The classifications of financial instruments as well as their carrying amounts and fair values are summarized as follows:
As at
Financial assets
Cash
March 31, 2022
March 31, 2021
Fair value
hierarchy
Carrying
amount
Fair Value
Fair value
hierarchy
Carrying
amount
Fair Value
Level 1
$
86,692 $
86,692
Level 1
$
95,470 $
95,470
Derivative financial instruments
Level 2
19,829
19,829
Level 2
14,277
14,277
$
106,521 $
106,521
$
109,747 $
109,747
Financial liabilities
Derivative financial instruments
Long-term debt, including current portion
Level 2
$
2,682 $
2,682
Level 2
$
544 $
544
Level 2
238,826
243,081
Level 2
252,998
270,790
$
241,508 $
245,763
$
253,542 $
271,334
Derivative financial instruments – Thee 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.
Accounts receivable and Account payable and accrued liabilities – Given the short-term nature of these financial instruments, the Corporation
has determined that their carrying amount approximate the fair value.
NOTE 31. 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.
62 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
As at March 31, 2022, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $341,604 denominated
in USD, EUR and GBP ($268,737 in 2021). This amount includes mainly contracts with nominal value of US$219,500 convertible into
Canadian dollars at an average rate of 1.2888 and contracts with nominal value of US$35,540 convertible into EUR at an average rate of
0.8709. These contracts mature at various dates between April 2022 and March 2026, with the majority maturing in fiscal years 2023 and
2024.
As at March 31, 2022, a 1% strengthening of the Canadian dollar over foreign currencies, while all other variables would remain fixed, would
have impacted the consolidated net income and the other comprehensive income as follows:
Decrease in net income
Increase (decrease) in other comprehensive income (loss)
U.S. dollar
impact
(460)
1,527
$
British pound
impact
(38)
(1,571)
$
Euro
impact
(122)
(631)
$
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.
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 100% of
long-term debt, excluding lease liabilities and government loans.
Cross-currency interest rate swaps
The acquisition of CESA 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.
As at March 31, 2022, the Corporation had cross-currency interest rate swap agreements exchanging CAD and USD-denominated debt to
EUR for a total notional amount of € 90.5 million in order to mitigate foreign exchange and interest rate risks. These agreements mature
between May 2022 and September 2028, and bear interest at a weighted average fixed rate of 2.3%.
In order to mitigate these risks, as at March 31, 2022, 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
US$ 17,523
C$ 75,000
Fixed EUR equivalent
Interest rate
Inception
Maturity
€
€
€
25,000
15,000
50,468
1.75 %
September 2018
December 2024
Euribor 1 month + 1.74%
September 2018
May 2022
2.95 %
July 2021
September 2028
A 100 basis point variation in interest rates would have affected the Corporation’s financial results for fiscal 2022 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
$
1
100 bps decrease
$
(1)
3,257
(3,286)
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, 2022, 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 2023.
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 63
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 derivative financial instruments.
Credit concentration risks are related to the fact that approximately 44% of the Corporation’s fiscal 2022 sales are made to the top four
customers (47% in 2021). More specifically, in fiscal 2022, the Corporation had one customer representing 15% of its consolidated sales (one
customer representing 17% in 2021).
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 3.5% in fiscal 2022 (2.6% in 2021) of the Corporation’s consolidated sales.
The Corporation has historically not made any significant write-off of accounts receivable, and as at March 31, 2022, the number of days in
accounts receivable was at acceptable levels in the industry in which the Corporation operates.
Changes in the allowance for doubtful accounts were as follows for the fiscal year ended March 31, 2022:
Balance, beginning of year
Arising during the year
Reversed
Amounts written off
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
Allowance for doubtful accounts
Balance at the end of the year
2022
1,694 $
—
(1,092)
(97)
505 $
$
$
2021
1,188
506
—
—
1,694
March 31, 2022 March 31, 2021
$ 99,687
4,669
1,538
105,894
(505)
$ 95,609
5,243
566
101,418
(1,694)
$ 105,389
$ 99,724
Cash 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, 2022, the maximum exposure to credit and credit concentration risks for financial instruments represented the following (see
note 30):
Cash
Accounts receivable
Derivative financial instruments
(1) Represents the fair value of derivative financial instruments designated in a hedging relationship.
$
FVTPL
FVTOCI (1)
— $
—
1,070
— $
—
18,759
A.C.
86,692
105,389
—
64 – HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements
Liquidity risk
The Corporation is exposed to the risk of being unable to honour its financial commitments by the deadlines set, under the terms of such
commitments and at a reasonable price. The Corporation manages its liquidity risk by forecasting cash flows from operations and anticipated
investing and financing activities. Senior management is also actively involved in the review and approval of long-term sales contracts and
planned capital expenditures.
As at March 31, 2022, the maturity analysis of financial liabilities represented the following:
Accounts payable and accrued liabilities
$
Customer advances
Long-term debt including interest payments(1)
Derivative financial instruments
9,923
16,190
1,852
(1) The carrying amount of the long-term debt is $238,826 (note 20) .
NOTE 32. CAPITAL RISK MANAGEMENT
< 1 year
114,508 $
1 to 3 years
4 to 5 years
> 5 years
— $
—
— $
—
— $
—
34,752
409
90,943
421
145,170
—
Total
114,508
9,923
287,055
2,682
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, 2022, 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
Net debt
Shareholders’ equity
Net debt-to-equity ratio
The Corporation is not subject to any regulatory capital requirements.
March 31, 2022
March 31, 2021
$ 10,835
$ 15,315
225,691
2,300
86,692
$ 152,134
377,282
0.40:1
235,384
2,299
95,470
$ 157,528
391,732
0.40:1
HÉROUX-DEVTEK INC. – Fiscal 2022 Consolidated Financial Statements – 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the fiscal year ended March 31, 2022
TABLE OF CONTENTS
OVERVIEW .................................................................................................................................................................................
Forward-looking Statements .......................................................................................................................................................
Highlights of the Year ................................................................................................................................................................
Overview of the Business ...........................................................................................................................................................
Economic Outlook .....................................................................................................................................................................
OPERATING RESULTS ...............................................................................................................................................................
Non-IFRS Financial Measures ....................................................................................................................................................
LIQUIDITY AND CAPITAL RESOURCES ......................................................................................................................................
Credit Facilities and Net Debt Position .........................................................................................................................................
Government Authorities Loans ....................................................................................................................................................
Variations in Cash .....................................................................................................................................................................
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 .....................................................................................................................................................
Selected Financial Information ....................................................................................................................................................
68
68
69
70
70
73
76
78
78
79
80
82
83
84
84
85
86
86
88
88
88
89
95
95
96
96
99
Shareholder Information ............................................................................................................................................................. 100
Additional Information and Continuous Disclosure ........................................................................................................................ 100
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 67
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, 2021 and
March 31, 2022. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2022 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, 2022, 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, 2022 and 2021 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
Economic Outlook section 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. 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.
68 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
HIGHLIGHTS OF THE YEAR
Fiscal year
Sales
Operating income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net income
Adjusted net income (1)
Cash flows related to operating activities
Free cash flow (1)
In dollars per share
Earnings share - diluted
Adjusted EPS (1)
As at
Funded backlog (2)
2022
2021
$ 536,087 $ 570,685
34,096
45,211
88,297
19,813
29,034
89,188
67,665
44,758
47,067
83,049
32,140
33,839
63,166
45,894
$
0.90 $
0.95
March 31,
2022
0.55
0.80
March 31,
2021
$ 682,000 $ 717,000
(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 $536.1 million compared to sales of $570.7 million last fiscal year. This decrease mainly relates to
delayed deliveries resulting from supply chain and production system disruptions related to the current operating environment.
These sales resulted in operating income and adjusted EBITDA of $44.8 million and $83.0 million, respectively, compared to $34.1
million and $88.3 million, last fiscal year.
The fiscal year closed with diluted earnings per share at $0.90 and adjusted EPS of $0.95, compared to $0.55 and $0.80 last fiscal year.
Héroux-Devtek generated cash flows related to operating activities of $63.2 million and free cash flow of $45.9 million during fiscal 2022,
compared to $89.2 million and $67.7 million in fiscal 2021.
During the fiscal year, Héroux-Devtek announced and completed a Normal Course Issuer Bid (“NCIB”), resulting in the repurchase and
cancellation of 2.4 million shares for a total consideration of $43 million, or $17.83 per share, while maintaining a net debt to Adjusted
EBITDA ratio of 1.8:1. Refer to Capital Structure under Financial Position for further details.
In May 2022 and June 2021, the Corporation reached agreements with its lenders to extend its Revolving and Term Loan facilities. As
part of the agreements, the accordion feature of the Revolving Facility has been increased from $100 to $200 million. Together with
available liquidity totaling $271.4 million, the revised accordion feature would allow the Corporation to deploy nearly $500 million with no
major principal repayments until June 2027. Refer to Credit Facilities and Net Debt Position under Liquidity and Capital Resources for
further details.
In October 2021, the Corporation announced that it had been awarded a contract by Lockheed Martin for the development of landing
gears for its next generation of defense aircraft.
In November 2021, the Corporation announced a six-year extension of its contract with The Boeing Company to supply complete
landing gear systems for the 777 and 777X aircraft programs. The contract, which includes all OEM and aftermarket requirements, has
been extended until December 31, 2030.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 69
OVERVIEW OF THE BUSINESS
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 defence sector, the Corporation supplies landing gear systems, parts and repair and overhaul services for a diversified portfolio of
transport aircraft, fighter jets and helicopters in the United States and Europe. For the civil sector, the Corporation is active in the large
commercial, business jet, regional aircraft and helicopter markets. 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, Canada while operating facilities are located in Canada, the United States,
Spain and the United Kingdom.
Héroux-Devtek sells to Original Equipment Manufacturers (“OEMs”) such as Boeing, Airbus, Lockheed Martin, Leonardo, Embraer, Saab and
Dassault Aviation; to Tier 1 suppliers such as Safran Landing Systems and Collins Aerospace; and to end users in the aftermarket where its
largest customer is the U.S. Air Force. In fiscal 2022, the Corporation’s four largest customers represented approximately 44% of total
consolidated sales, with one customer accounting for 15%.
The following charts describe Héroux-Devtek’s revenue segmentation in terms of intellectual property and destination:
* BTP: Build to Print
ECONOMIC OUTLOOK
Impacts of the COVID-19 pandemic and rising geopolitical tensions
The COVID-19 pandemic continued to exert a major toll on passenger travel activity throughout 2021, which greatly affected civil market
demand and the corresponding production rates, particularly for twin-aisle aircraft. On the other hand, defence spending remained relatively
immune to the pandemic this past year and will most likely continue to increase over the next quarters in response to escalating geopolitical
tensions and a strengthening of the NATO alliance, likely leading to an increase in orders for certain defence aircraft programs.
70 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
Fiscal 2022 sales, BTP* vs proprietary51.8%48.2%Proprietary productsBuild-to-printFiscal 2022 sales mix by end customerlocationCanada:6.2%United States: 58.4%UnitedKingdom:7.3%Rest of Europe: 13.7%Spain: 6.8%Other:7.6% In late 2021, the Omicron variant and its various sub-variants brought about additional challenges, namely to the stability and reliability of the
entire production system, leading to delays in the delivery of key components and materials. In early 2022, the Russia-Ukraine conflict has
exacerbated supply chain challenges1. Russia and Ukraine are both major producers of metals used for critical components. Ukraine's
production was indeed hampered, and Russia's export opportunities are limited as a result of sanctions2. Commodity prices are expected to
rise even further as global demand for metals increases while production remains stagnant.
In accordance with the forecasts presented in this section, drawn from recent reports published by key industry associations and analysts,
such as reports from the International Air Transport Association (IATA), a full recovery of air traffic to pre-pandemic levels is expected in
20243. Recently, travel restrictions were lifted in many countries, therefore encouraging passengers to re-engage in both local and
international travel. The trend is forecasted to continue unless the epidemiological situation worsens unexpectedly.
Civil Market
Passenger activity
As a result of the evolution of government-imposed travel restrictions in some countries, expectations for full recovery are now higher than in
previous months. Nevertheless, the threat of new COVID-19 variants remains and could lead to further disruptions, as experienced with
Omicron. Indeed, overall passenger numbers in 2021 were 47% lower than in 2019, pre-pandemic. Passenger activity is expected to rise to
83% of 2019 levels in 2022, 94% in 2023, 103% in 2024, and 111% in 20254. The revenue passenger kilometres (RPKs) increased by 115.9
% year-over-year (YoY) in February 2022 but stood at 54.5% of the levels of February 20195.
The pandemic has led to some changes in passenger behaviour which continued to endure throughout this past year, with a shift to short-
haul and domestic flights. As evidence, in 2021, domestic traveller numbers were 61% of 2019 levels, ending at nearly 76% in December,
while international traveller numbers represented 27% of 2019 levels, and closed the year at close to 42%. These changes in traveller habits
are already translating in a higher demand for narrow-body aircraft. Indeed, according to Air Lease Corporation (ALC), global demand for
narrow-body aircraft has recovered6.
Global production backlog and long-term perspectives
Globally, the civil aircraft backlog stood at 12,218 at the end of December 20217, which represents a 9.0% decline from the same time last
year. Deliveries totaled 951 aircraft for 2021, almost identical to last year deliveries8. Airbus and Boeing both went through a COVID-19
recovery phase in 2021, which is reflected in the results. Over the long term, Boeing recently revised its 20-year forecasted demand to
43,500 new commercial aircraft9, a figure only slightly below the pre-pandemic forecast of 44,000.
Business jets
Compared to the large commercial aircraft segment, business jet deliveries have been relatively resilient to the market effects of COVID-19,
and have in fact recovered from it faster, with 2021 deliveries nearly reaching pre-pandemic levels10. Part of this recovery has been due to
changing passenger habits. Over the next ten years, Teal Group forecasts a total output of 10,813 business aircraft worth $244.5 billion. In
comparison, the previous decade (2011-2020) saw 10,180 business aircraft produced for a total value of $238.4 billion11.
Air cargo
The cargo market was strong throughout calendar 2021, with cargo tonne kilometers (CTK) exceeding pre-pandemic levels all year-long. In
March 2022, however, CTKs suffered a notable decrease, falling slightly below pre-pandemic levels. The rapid spread of Omicron across
Asia, particularly in China, is prompting additional lockdowns and labour shortages. These have had a significant impact on manufacturing
hubs in China and Asia, which has affected air freight traffic12. In the long term, driven by persistent demand associated with rising
e-commerce and air freight's speed and dependability, the global freighter fleet is estimated to be 70% larger in 2040 than it was
pre-pandemic9.
1 Source: Supply of Critical Minerals Amid the Russia-Ukraine War and Possible Sanctions, Columbia | SIPA Center on Global Energy Policy,
April 19, 2022
2 Source: Invasion halts Ukraine steel shipments; appetite wanes for Russian steel, S&P Global Commodity Insights, February 24, 2022
3 Source: Air Passenger Numbers to Recover in 2024, IATA, March 1, 2022
4 Source: Air Passenger Numbers to Recover in 2024, IATA, March 1, 2022
5 Source: Air Passenger Market Analysis, IATA, February 2022
6 Source: ALC Sees Strong Recovery In Narrowbody Aircraft Demand, Simple Flying, November 06, 2021
7 Source: Airbus and Boeing Report Q4 and Full-Year 2021 Commercial Aircraft Orders and Deliveries, Forecast International, January 18,
2022
8 Source: Airbus, Boeing Report 2021 Commercial Aircraft Deliveries, Aviation Today, January 12, 2022
9 Source: Commercial Market Outlook 2021–2040, Boeing, September 2021
10 Source: Business Aviation: GAMA Year End 2021 Results, GAMA, February 23, 2022
11 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, November 2021
12 Source: Air cargo volumes fall to late-2020 levels, IATA, March 2022
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 71
Defence Market
Military expenditures
Global military spending surged in 2021, hitting new records as Russia prepared its invasion of Ukraine, forecasting that the trend would
continue in Europe in particular. Despite the financial consequences of the worldwide COVID-19 pandemic, governments all around the globe
upgraded their arsenals, with global military spending increasing. Indeed, expenses totalled 2.1 trillion, a 5% increase compared to the
previous year. 2021 marks the 7th year of consecutive increase in defence spending13.
However, as a percentage of GDP, world military expenditures stood at 2.2%, compared to 2.3% in 2020. This small decrease is due to the
strong economic recovery in 2021. In reaction to Russia's invasion of Ukraine in February 2022, numerous European NATO member nations
declared intentions to increase military expenditures to meet or surpass the NATO spending objective of 2% of GDP or more in the coming
months.
Military spending in the United States fell marginally to 3.5% of GDP in 2021 from 3.7% of GDP in 2020. The US Department of Defense
reported that military spending in 2021 was $801 billion, down 1.4% from 2020. In 2022, the budget is anticipated to grow due to a $29 billion
spending increase requested by President Joe Biden in April 202214,15.
Amongst other commitments, on March 16, 2022, Germany's coalition cabinet was presented with a draft law creating a special defence fund
totalling $112 billion16. This money will be used to increase German defence spending from roughly 1.5% of GDP to at least 2%.
China raised expenditures by 4.7%, marking the 27th consecutive year of increases. As a result of the country's military expansion, its
neighbouring countries have increased their own military spending, with Japan contributing $7 billion for a total budget of $47.2 billion17.
Fighter jets
The fighter jet market continues to represent the second-largest segment of the world aircraft production market over the next decade,
accounting for over US$319 billion over the next decade. Deliveries have averaged $19 billion each year (in 2021 USD) during the last five
years (2016-2020). Calendar 2022 figures are expected to approximate 290 deliveries valued at $23 billion18.
Between 2021 and 2030, specialists forecasted the production of 4,305 fighter jets valued at $325.2 billion (in 2021 USD). In comparison,
between 2011 and 2020, a total of 2,605 aircraft were manufactured19. The high projections reflect aging fleets, high levels of global tension
and high levels of utilization. According to Teal Group forecasts, the F-35 will account for 47.2% of the market in terms of value over the next
ten years. Other programs, such as the F-18, F-15, Gripen and Eurofighter are expected to make up over 15% of the balance.
Refer to Forward-Looking Statements for further information regarding forward-looking statements and related risks.
13 Source: World military expenditure passes $2 trillion for first time, Stockholm International Peace Research Institute, April 25, 2022
14 Source: Biden Approves $29 Billion Increase in Defense Budget, Arms Control Association, April 2022
15 Source: 2022 aerospace and defense industry outlook, Deloitte, January 2022
16 Source: Explainer: The proposed hike in German military spending, Stockholm International Peace Research Institute, March 25, 2022
17 Source: Japan Approves Record Defense Budget for Fiscal Year 2022, The Diplomat, December 27, 2022
18 Source : World Military & Civil Aircraft Briefing, Teal Group Corporation, February 2022
19 Source : World Military & Civil Aircraft Briefing, Teal Group Corporation, November 2021
72 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
OPERATING RESULTS
Quarters ended March 31,
Fiscal years ended March 31,
2022
2021
$ 147,459 $ 154,989 $
Variance
2022
(7,530) $ 536,087 $ 570,685 $
2021
Variance
(34,598)
25,891
12,119
13,772
2,309
11,463
(1,643)
1,647
$
$
$
11,459 $
13,158 $
22,149 $
25,170
11,322
13,848
1,619
12,229
(158)
3,585
8,802 $
10,169 $
24,975 $
721
797
(76)
690
(766)
(1,485)
(1,938)
2,657 $
2,989 $
(2,826) $
91,095
44,028
47,067
2,309
44,758
4,270
8,348
32,140 $
33,839 $
83,049 $
94,917
49,706
45,211
11,115
34,096
7,909
6,374
19,813 $
29,034 $
88,297 $
(3,822)
(5,678)
1,856
(8,806)
10,662
(3,639)
1,974
12,327
4,805
(5,248)
17.6%
8.2%
7.8%
9.3%
16.2%
7.3%
7.9%
8.9%
140 bps
90 bps
-10 bps
40 bps
17.0%
8.2%
8.3%
8.8%
16.6%
8.7%
6.0%
7.9%
40 bps
-50 bps
230 bps
90 bps
Sales
Gross profit
Selling and administrative expenses
Adjusted operating income(1)
Non-recurring items
Operating income
Net financial (income) expenses
Income tax expense
Net income
Adjusted net income(1)
Adjusted EBITDA(1)
As a percentage of sales
Gross profit
Selling and administrative expenses
Operating income
Adjusted operating income(1)
In dollars per share
Earnings per share
Diluted earnings per share
Adjusted EPS(1)
0.15
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
0.95 $
0.38 $
$
$
$
0.33 $
0.33 $
0.24 $
0.24 $
0.28 $
0.09 $
0.09 $
0.10 $
0.91 $
0.90 $
0.55 $
0.55 $
0.80 $
0.36
0.35
Sales
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 73
Historical Sales (millions), by fiscal year$386.6$483.9$613.0$570.7$536.1201820192020202120222022 Sales by SectorCvil28%Defence72%
Sales can be broken down by sector as follows:
Defence
Civil
Total
Defence
Civil
Total
Fiscal years ended March 31,
2022
2021
FX Impact
Net variance
$ 386,719 $ 377,465 $
(15,826) $ 25,080
149,368
$ 536,087 $ 570,685 $
193,220
(6,113)
(37,739)
(21,939) $ (12,659)
6.6 %
(19.5) %
(2.2) %
Quarters ended March 31,
2022
2021
FX Impact
Net variance
$ 109,518 $ 107,312 $
(1,854) $
4,060
37,941
47,677
$ 147,459 $ 154,989 $
(497)
(2,351) $
(9,239)
(5,179)
3.8 %
(19.4) %
(3.3) %
The following analysis excludes the impact of foreign exchange fluctuations which are itemized in the table above.
Defence
The $25.1 million and $4.1 million net increases for the fiscal year and the fourth quarter, respectively, were mainly driven by:
▪
▪
The ramp-up of deliveries under the Boeing F-18, Sikorsky CH-53K and Boeing MQ-25 contracts; and,
High deliveries of spares for the U.S. Government.
These positive factors were partly offset by lower aftermarket demand from AAR, as the contract is ending.
Civil
The respective 19.5% and 19.4% net reductions for the fiscal year and fourth quarter, respectively, were mainly driven by:
•
•
Large commercial sales were lower than the comparative periods in last fiscal year as the pandemic’s effect was not yet fully
realized then; and,
The repatriation by customers of certain Tier-2 contracts in the large commercial sector.
These factors were partly offset by higher deliveries for proprietary business jet programs.
Gross Profit
Gross profit increased from 16.6% of sales last year to 17.0% for the fiscal year, and from 16.2% to 17.6% for the quarter, due to the positive
effect of the Corporation’s restructuring initiatives, including lower depreciation, as well as a positive sales mix. These positive elements were
partly offset by the effect of lower throughput and higher quality-related costs resulting from the disruptions caused by the current
environment, as described in the Overview section.
Foreign exchange fluctuations had a negligible impact on gross profit for both the fiscal year and fourth quarter.
Selling and Administrative Expenses
Selling and Administrative Expenses
Less: Net gains (losses) on conversion of net monetary items
2022
Quarters ended
March 31,
2021
Fiscal years ended
March 31,
2021
$ 12,119 $ 11,322 $ 44,028 $ 49,706
(1,456)
$ 11,884 $ 12,136 $ 44,870 $ 48,250
(235)
2022
842
814
As a percentage of sales
8.1 %
7.8 %
8.4 %
8.5 %
Excluding the effect of the conversion of net monetary items, sales and administrative expenses remained relatively stable as a percentage of
sales for the fiscal year and fourth quarter, as the effect of the Corporation’s restructuring initiatives and lower stock-based compensation
expense offset the effect of lower sales.
74 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
Non-Recurring Items
Non-recurring items comprise the following:
Non-recurring items in operating income
Legal ruling
Restructuring charges
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$
$
2,309 $
—
2,309 $
— $
1,619
1,619 $
2,309 $
—
2,309 $
—
11,115
11,115
Legal ruling
Following a court decision resulting from legal action intended by a non-product supplier related to a contractual dispute, the Corporation
incurred $2.3 million of damages and legal fees.
Restructuring charges
In Fiscal 2021, Héroux-Devtek announced restructuring initiatives in light of the ongoing COVID-19 pandemic. These initiatives were
expected to affect 15% of the workforce, or approximately 315 employees, and include the closure of Alta Précision and APPH Wichita.
During fiscal 2021, $11.1 million of related charges were incurred. Of this amount $1.6 million were incurred in the three months ended
March 31, 2021. These restructuring initiatives were completed during the current fiscal year and no additional related charges were incurred.
Operating Income
Operating income
Non-recurring items
Adjusted operating income
As a percentage of sales
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
$ 11,463
2,309
$ 13,772
2021
$ 12,229
1,619
$ 13,848
2022
$ 44,758
2,309
$ 47,067
2021
$ 34,096
11,115
$ 45,211
Operating income
Adjusted operating income(1)
6.0 %
7.9 %
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
8.3 %
8.8 %
7.8 %
9.3 %
7.9 %
8.9 %
Excluding non-recurring items, adjusted operating income stood at 8.8% this fiscal year compared to 7.9% last year. Aside from the factors
described above, this improvement also reflects a $0.9 million positive year-over-year impact of foreign exchange, representing 0.2% of
sales.
For the quarter ended March 31, 2022, adjusted operating income stood at 9.3% of sales, compared to 8.9% last year, reflecting the factors
described above as well as $1.1 million negative year-over-year impact of foreign exchange, representing 0.7% of sales.
Net financial Expenses
Interest on long-term debt
2021
2022
814 $ 1,182 $
$
Net interest expense (income) related to government loans
(2,246)
(1,000)
Interest income
Other interest expense
(99)
(113)
$ (1,644) $
(169)
(171)
(158) $
(368) $ 3,653 $ 5,850 $
(2,197)
(1,246)
70
100
(522)
58
1,039
1,369
(761)
1,451
(1,269)
239
(412)
(1,486) $ 4,270 $ 7,909 $
(3,639)
Quarters ended March 31,
Variance
Fiscal years ended March 31,
2021 Variance
2022
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 75
This fiscal year, net financial expenses decreased from $7.9 million to $4.3 million due to a lower level of outstanding debt throughout the
year, as well as a higher gain on revision of government loan repayment estimates (see Government Authorities Loans under Liquidity and
Capital Resources for further details).
For the quarter, the increase in net financial income mainly relates to a higher gain on revision of government loan repayment estimates as
well as a lower level of outstanding debt.
Income Tax Expense
Income before income tax expense
Income tax expense
Effective tax rate
Canadian blended statutory income tax rate
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$ 13,106
$ 12,387
$ 40,488
$ 26,187
1,647
12.6 %
26.4 %
3,585
28.9 %
26.5 %
8,348
20.6 %
26.4 %
6,374
24.3 %
26.5 %
For fiscal 2022, the Corporation’s effective income tax rate is 5.8% lower than the Canadian blended statutory rate (2.2% in fiscal 2021)
primarily due to the favourable impact of earnings in lower tax rate jurisdictions totaling $2.1 million ($1.3 million in fiscal 2021) and non-
taxable income of $0.7 million, partially offset by permanent differences of $0.4 million ($0.7 million in fiscal 2021).
The effective income tax rate for the quarter ended March 31, 2022 mainly reflects the favourable impact of earnings in lower tax rate
jurisdictions of $0.5 million ($0.2 million in fiscal 2021), as well as the recognition of a $0.9 million deferred tax asset (none in fiscal 2021) and
non-taxable income of $0.6 million (none in fiscal 2021), partially offset by permanent differences totaling $0.1 million ($0.4 million in fiscal
2021).
Net Income
Earnings increased from $19.8 million to $32.1 million this fiscal year compared to last and increased from $8.8 million to $11.5 million during
the quarter compared to the same quarter last fiscal year mainly as a result of the factors described above. Excluding non-recurring items net
of taxes, adjusted net income increased from $29.0 million to $33.8 million over the fiscal year, and from $10.2 million to $13.2 million during
the quarter.
During the fiscal year, earnings per share increased from $0.55 to $0.91 per share (or increased from $0.80 to $0.95 per share excluding
non-recurring items net of taxes), while they increased from $0.24 to $0.33 per share (or increased from $0.28 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:
Adjusted EBITDA:
Adjusted net income:
Adjusted earnings per share:
Free cash flow:
Operating income excluding non-recurring items.
Operating income excluding amortization expense and non-recurring items
Net income excluding non-recurring items net of taxes.
Diluted earnings per share calculated on the basis of adjusted net income.
Cash flows related to operating activities less net additions to property, plant and equipment and net
increase or decrease in finite-life intangible assets, plus proceeds of disposal of property, plant and
equipment.
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.
76 – HÉROUX-DEVTEK INC. – Fiscal 2022 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 income
Non-recurring items
Adjusted operating income
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
$ 11,463
2,309
$ 13,772
2021
$ 12,229
1,619
$ 13,848
2022
$ 44,758
2,309
$ 47,067
2021
$ 34,096
11,115
$ 45,211
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
Adjusted EBITDA
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
$ 11,463
8,377
2,309
2021
$ 12,229
11,127
1,619
2022
$ 44,758
35,982
2,309
2021
$ 34,096
43,086
11,115
$ 22,149
$ 24,975
$ 83,049
$ 88,297
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 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
Earnings per share - diluted
Non-recurring items net of taxes
Adjusted earnings per share
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
$ 11,459
1,699
$ 13,158
—
$ 13,158
2021
$ 8,802
1,367
$ 10,169
(145)
$ 10,314
2022
$ 32,140
1,699
$ 33,839
(385)
$ 34,224
2021
$ 19,813
9,221
$ 29,034
(244)
$ 29,278
$
$
0.33
0.05
0.38
$
0.24
0.04
$
$
0.28
$
0.90
0.05
0.95
$
0.55
0.25
$
0.80
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 2022 MD&A – 77
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITIES AND NET DEBT POSITION
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 $200.0 million during the
term of this agreement, subject to the approval of the lenders ($100.0 million as at March 31, 2021).
In June 2021 and May 2022, the Corporation reached agreements to extend the Revolving Facility to a new maturity of June 2027 (as at
March 31, 2021 - December 2024). The accordion feature was increased from $100.0 million to $200.0 million as part of the June agreement,
while other terms and conditions remain relatively unchanged.
As at March 31, 2022, the Corporation had $58.8 million (US$ 47.0 million) drawn against this facility, compared to $59.3 million
(US$ 47.0 million) as at March 31, 2021.
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 $75.0 million. This facility is fully drawn
and bears interest at a rate of 5.0%, compared to 5.2% as at March 31, 2021. The decrease resulted from an agreement reached in June
2021 which also extended the Term Loan Facility to a new maturity of September 2028 (previously September 2025). The Term Loan Facility
is repayable at maturity, and the Corporation has the option to make early repayments as of September 2024 (previously September 2021),
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
Net debt position
Adjusted EBITDA(2)
Net debt to adjusted EBITDA ratio
March 31, 2022 March 31, 2021
$ 238,826
$ 252,998
86,692
95,470
$ 152,134
$ 157,528
$
83,049
$
88,297
1.8 :1
1.8 :1
(1) Excluding net deferred financing costs of $2.3 million and $2.3 million as at March 31, 2022 and March 31, 2021, respectively.
(2) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
The Corporation’s net debt position remained relatively stable throughout the fiscal year, as free cash flow generation offset the $43.0 million
allocated to the NCIB.
78 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
*Excluding net deferred financing costs of $2.3 million as at March 31, 2022 and $2.3 million as at March 31, 2021.
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, 2022 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.
As shown in this graphic, the Corporation has no obligatory
capital repayments required on its credit facilities until June of
2027.
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, 2022, the Corporation updated the estimated
repayment schedule of its government authorities’ loans, taking into account updates assumptions and data. As these assumptions resulted
in a more favourable repayment profile, non-cash gains of $3.1 million and $1.6 million in fiscal 2022 and 2021, respectively, which were
included in net financial expenses.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 79
Fiscal YearNet Debt Position (millions)$38.8$243.0$246.9$157.5$152.10.73.12.61.81.8Net debt positionNet debt to Adjusted EBITDA20182019202020212022Long-term debt* composition$239 million as at March 31, 2022Revolving Facility: $58.8Term Loan Facility: $75.0GovernmentLoans:$84.5Leases: $20.5Fiscal YearCapital Repayments($M)Credit Facilities - Maturity Profile$58.8$75.0Credit FacilityTerm Loan Facility2023202420252026202720282029 As at March 31, 2022, the Corporation had a present value of $84.5 million outstanding under these agreements ($90.4 million as at
March 31, 2021), bearing effective interest rates between 0.0% to 6.8% as at March 31, 2022 (0.0% to 6.8% as at March 31, 2021). These
loans have repayment terms extending to fiscal 2035 at the latest.
VARIATIONS IN CASH
Cash at beginning of periods
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
Cash at end of periods
Operating Activities
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$ 86,836 $ 95,500 $ 95,470 $ 45,841
10,016
31,565
63,166
89,188
(3,173)
(7,874)
(16,131)
(21,523)
(6,555)
(23,016)
(55,221)
(16,849)
(432)
(705)
(592)
(1,187)
$ 86,692 $ 95,470 $ 86,692 $ 95,470
The Corporation generated cash flows from operations and used cash 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,
Fiscal years ended
March 31,
2022
2021
2022
2021
$ 16,051 $ 20,224 $ 69,655 $ 67,581
(6,035)
11,341
(6,489)
21,607
$ 10,016 $ 31,565 $ 63,166 $ 89,188
While cash flows from operations were relatively stable year over year, during the quarter, the lower cash flows from operations is mainly
explained by lower adjusted EBITDA.
The net change in non-cash items can be summarized as follows:
Accounts receivable
Inventories
Other assets
AP and accrued liabilities
Provisions
Customer advances and progress billings
Other liabilities
Net change in non-cash items
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$ (20,700) $ (18,325) $
(8,515) $ 11,324
8,966
21,988
11,026
21,812
(7,660)
4,779
(7,248)
7,970
13,376
14,440
10,418
(12,297)
1,561
(6,982)
5,404
(5,492)
1,110
(7,159)
(5,333)
(9,823)
2,986
(3,661)
5,301
(8,842)
$
(6,035) $ 11,341 $
(6,489) $ 21,607
For the quarter and fiscal year ended March 31, 2022, the negative net change in non-cash items mainly reflected:
▪
▪
A decrease in customer advances and progress billings related to the profile of ongoing production and deliveries over the fiscal
year;
An increase in accounts receivable mainly related to the non-linear profile of fourth quarter deliveries, and;
These negative items were partly offset by a decrease in inventory related to ongoing optimization in line with expected sales as well as an
increase in trade accounts payable due to the timing of supplier receipts and payments.
80 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
For the fiscal year ended March 31, 2021, the positive net change in non-cash items mainly reflected:
•
•
•
A decrease in inventory due to lower civil sales; and
A decrease in accounts receivable due to a lower sales volume and optimization of our collection initiatives; partially offset by,
A decrease of accounts payable as a result of the reduction in inventory.
For the quarter ended March 31, 2021, the positive net change in non-cash items mainly reflected a decrease in civil inventory for the same
reasons as described above, slightly offset by an increase in accounts receivable due to a less linear sale profile compared to the third
quarter.
Investing Activities
The Corporation’s investing activities were as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
Net additions to property, plant and equipment
$ (4,399)
$ (6,764)
$ (17,306)
$ (21,259)
Proceeds on disposal of property, plant and equipment
Net increase in finite-life intangible assets
Proceeds from a business divestiture
Purchase of minority interest
Cash flows related to investing activities
2,562
(1,336)
—
—
379
(1,489)
—
—
2,881
(2,847)
2,041
(900)
379
(643)
—
—
$ (3,173)
$ (7,874)
$ (16,131)
$ (21,523)
Proceeds from disposal of property, plant and equipment essentially relate to the sale of the building upon closure of APPH Wichita, while the
proceeds from a business divestiture relate to the sale of the Corporation’s Bolton operations.
Additions to property, plant and equipment shown above can be reconciled as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
Gross additions to property, plant and equipment
$ 6,598
$ 8,054
$ 17,350
$ 23,482
Government assistance
Additions to property, plant and equipment
Variation in unpaid additions included in Accounts Payable
Non-cash additions of right-of-use assets
Additions, as per statements of cash flows
(585)
(682)
(585)
(682)
$ 6,013
$ 7,372
$ 16,765
$ 22,800
(1,539)
(75)
(360)
(248)
1,321
136
(780)
(1,677)
$ 4,399
$ 6,764
$ 17,306
$ 21,259
Financing Activities
The Corporation’s financing activities were as follows:
Increase in long-term debt
Repayment of long-term debt
Issuance of common shares
Repurchase and cancellation of shares
Increase in deferred financing cost
Cash flows related to financing activities
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$
86
$ 3,524
$ 3,145
$ 68,113
(2,315)
53
(4,379)
—
(31,019)
4,479
—
—
(16,310)
1,499
(43,000)
(555)
(89,616)
4,654
—
—
$ (6,555)
$ (23,016)
$ (55,221)
$ (16,849)
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 81
Repayment of long-term debt during the fourth quarter and fiscal 2022 is comprised of lease payments and scheduled reimbursements of
governmental loans.
During fiscal 2021, the increase in long-term debt mainly related to $60.0 million of drawings on credit facilities made as a precaution in case
of liquidity needs resulting from the impact of COVID-19. $45 million of these drawings were repaid during the second quarter of last fiscal
year, and the remainder in the fourth quarter of last fiscal year.
The $4.4 million and $43.0 million were spent on the repurchase and cancellation of 256,645 and 2,412,279 shares under a NCIB further
detailed in Capital Structure under Financial Position.
FREE CASH FLOW (1)
Cash flows related to operating activities
Additions to property, plant and equipment
Quarters ended
March 31,
Fiscal years ended
March 31,
2022
2021
2022
2021
$ 10,016 $ 31,565 $ 63,166 $ 89,188
(4,399)
(6,764)
(17,306)
(21,259)
Net increase in finite-life intangible assets
Proceeds of disposal of property, plant and equipment
Free cash flow(1)
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for the definition of this metric.
(1,489)
379
(1,336)
2,562
$
(2,847)
2,881
6,843 $ 23,691 $ 45,894 $ 67,665
(643)
379
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 decrease in free cash flow over the fourth quarter and fiscal
year compared to the same periods last fiscal year are mainly
explained by last year’s strong inventory decrease related to an
alignment with the revised civil aerospace market resulting from the
impact of COVID-19, as well as the implementation of stronger
working capital management practices that were upheld during
fiscal 2022.
82 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
Fiscal YearFree Cash Flow (millions)$5.3$11.3$22.2$21.9$20.2$50.8$58.1$30.3$67.7$45.9Net additions to PP&E and intangiblesFree cash flow20182019202020212022
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, 2022:
Contractual obligations
Governmental authorities’ loans
Lease liabilities
Revolving Facility
Term Loan Facility
Payments due by period
Total
1 year
2-3 years
4-5 years
> 5 years
$ 104,997 $
5,255 $ 19,558 $ 20,556 $ 59,628
24,989
6,444
6,212
3,647
8,686
61,739
778
1,556
59,405
—
95,420
3,713
7,426
7,425
76,856
Repayments of long term debt, including interest
287,145
16,190
34,752
91,033 145,170
Purchase obligations
Accounts payable
Building, machinery and equipment acquisition commitments
Total contractual obligations(1)
(1) Excluding defined benefit pension plan obligations presented in the Pension Plans section.
264,998 198,703
63,339
2,934
71,637
71,637
2,616
2,616
—
—
—
—
22
—
—
$ 626,396 $ 289,146 $ 98,091 $ 93,967 $ 145,192
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 83
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:
•
•
•
•
Contract or repay long-term debt facilities;
Issue new common shares;
Repurchase common shares; and/or,
Return capital to shareholders.
The net debt-to-equity ratio, calculated as net debt divided by shareholders’ equity, is a key metric that is considered in the Corporation’s
capital management and monitoring practices.
During fiscal year ended March 31, 2022, 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
Net debt
Shareholders’ equity
Net debt-to-equity ratio
Normal Course Issuer Bid
March 31, 2022
March 31, 2021
$ 236,526
$ 250,699
2,300
86,692
$ 152,134
377,282
0.40:1
2,299
95,470
$ 157,528
391,732
0.40:1
On May 20, 2021, the Corporation announced a Normal Course Issuer Bid (NCIB) for the purchase for cancellation of up to 2,412,279
common shares on the open market through the TSX or alternative trading facilities. The NCIB began on May 25, 2021, and was set to end
on May 24, 2022, or on such earlier date when the Company has either acquired the maximum number of common shares allowable under
the NCIB or decided not to make any further purchases under it.
Quarter ended June 30, 2021
Quarter ended September 30, 2021
Quarter ended December 31, 2021
Quarter ended March 31, 2022
Total
Number of
shares
During the period
Average cost
per share
Total cost
370,427
389,017
1,396,190
256,645
$ 17.96
$ 6,654
17.56
18.00
17.06
6,831
25,136
4,379
2,412,279
$ 17.83
$ 43,000
During the quarter, the Corporation completed the amount of repurchases and cancellation allowed under the NCIB. The total program cost
$43.0 million, representing an average cost of $17.83 per share.
84 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
When evaluating the Corporation’s capital structure following the fiscal year end, management determined that further reducing net debt was
not the optimal means of capital deployment to generate shareholder return given the low cost of existing debt and share price performance.
Therefore, again in May 2022, the Company filed a second notice with the Toronto Stock Exchange of its intention to initiate a NCIB for
cancellation of up to 1,905,385 (May 2021 - 2,412,279) of its issued and outstanding common shares.
Management views the NCIB as a flexible means to allocate capital to drive shareholder value without compromising the Corporation’s
position for future growth initiatives, whether they are new contract opportunities or business acquisitions.
ISSUED CAPITAL
Capital stock varied as follows:
Opening balance
Issued for cash on exercise of stock options
Repurchase and cancellation
Ending balance
As at May 18, 2022, the number of common shares outstanding stood at 34,486,776.
Stock options varied as follows:
Opening balance
Granted
Exercised
Cancelled / forfeited
Ending balance
Fiscal year ended
March 31, 2022
Issued
capital
Number of
shares
36,764,710
$86,222
134,345
(2,412,279)
2,031
(6,064)
34,486,776
$82,189
Fiscal year ended
March 31, 2022
Number of
stock
options
Weighted-
average
exercise price
1,449,095
197,000
(134,345)
(8,000)
$ 13.48
17.45
11.16
17.45
1,503,750
$ 14.19
As at March 31, 2022, 2,225,662 common shares remained reserved for issuance upon exercise of stock options compared to 2,360,007 at
March 31, 2021. As a result, the Corporation may issue a further 721,912 stock options within the current reserve.
As at May 18, 2022, the number of stock options outstanding stood at 1,503,750.
For further information regarding the Corporation’s outstanding issued capital and related compensation plans, refer to Note 22, Issued
Capital, to the consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 85
CONSOLIDATED BALANCE SHEETS
Working Capital
The Corporation’s working capital was as follows, as at:
Current assets
Current liabilities
Net working capital
Working capital ratio
March 31, 2022 March 31, 2021
Variance
$ 415,450
179,821
$ 235,629
$ 434,769 $ (19,319)
(13,548)
$ 241,400 $ (5,771)
193,369
(4.4) %
(7.0) %
(2.4) %
2.31
2.25
The $19.3 million decrease in current assets is mainly due to a $16.1 million decrease in inventories due to the ongoing alignment with civil
sales and the closure of Wichita.
The $13.5 million decrease in current liabilities is mainly due to an $11.0 million decrease in customers advances and progress billing, mainly
attributed to the profile of ongoing production and deliveries over the fiscal year.
Long-term assets, Long-term liabilities and Shareholders’ equity
The Corporation’s long-term assets and liabilities and shareholders’ equity were as follows, as at:
Long-term assets
Long-term liabilities
Shareholder’s equity
March 31, 2022
March 31, 2021
Variance
$ 397,908
256,255
$ 377,282
$ 420,062
$ (22,154)
(5.3) %
269,730
(13,475)
(5.0) %
$ 391,732
(14,450)
(3.7) %
The $22.2 million decrease in long-term assets over the fiscal year is mainly related to the excess of amortization expense over additions to
fixed assets and the negative impact of foreign exchange on the Corporation’s assets denominated in foreign currencies.
The $13.5 million decrease in long-term liabilities mainly results from a $9.7 million decrease in long term debt due to scheduled repayments
and lease terminations, and the positive impact of foreign exchange on the Corporation’s liabilities denominated in foreign currencies.
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 pension plan assets (defined benefit obligations), beginning of year
Net gains from remeasurement
Employer contributions
Current service cost
Interest on net defined benefit obligations
Other
Net pension plan assets, end of year
Amount recognized in other long-term assets
Amount recognized in other long-term liabilities
86 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
2022
2021
$
56 $ (10,079)
5,507
1,097
10,262
1,627
(1,085)
(1,053)
(23)
(227)
$
5,325 $
6,388
(1,063)
(394)
(307)
56
1,603
(1,547)
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
March 31, 2022
$ 64,443
70,241
109.0 %
March 31, 2021
$ 69,289
69,988
101.0 %
The Corporation made contributions of $1.1 million and $3.3 million to its defined benefit and defined contribution benefit plans, respectively,
during fiscal 2022, and expects to make respective contributions of $0.9 million and $2.8 million during fiscal 2023. The decrease in the
present value of the defined benefit obligations is mainly due from the change in the discount rate and demographic assumptions.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 87
ADDITIONAL INFORMATION
BUSINESS DIVESTITURE AND PURCHASE OF MINORITY INTEREST
Divestiture of APPH Bolton
On May 4, 2021, the Corporation concluded an agreement for the sale of its Bolton, UK operations to Ontic Engineering & Manufacturing UK
Limited for a sale price of £2.7 million ($4.6 million) excluding £0.9 million ($1.5 million) which is subject to the achievement of certain
commercial objectives. The transaction did not result in a material gain or loss on disposal. $2.0 million was received during the first quarter
of fiscal 2022 and the £1.5 million ($2.5 million) balance, included in other current assets as at March 31, 2022, was received in May 2022.
Purchase of minority interest
On October 5, 2021, the Corporation purchased the remaining 30% minority interest in Tekalia Aeronautik for $0.9 million.
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, 2022 March 31, 2021
1.2496
1.3853
1.6417
1.2575
1.4759
1.7337
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,
2021
2022
Fiscal years ended March 31,
2021
2022
1.2663
1.4218
1.6995
1.2666
1.5267
1.7461
1.2536
1.4570
1.7130
1.3292
1.5405
1.7269
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 2022 featured a decrease in the value of the EUR and GBP
compared to CAD and USD. Approximately 77% of the Corporation’s sales are denominated in USD, compared to approximately 54% 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.
88 – HÉROUX-DEVTEK INC. – Fiscal 2022 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.
A key component of the Corporation’s risk management practices is the Enterprise Risk Management (“ERM”) process. The ERM process is
a multi-level risk and control assessment procedure under which appraisals, insights and practices are solicited from management teams
across all divisions, the senior management team, the Board of Directors, and internal leaders in specific fields of expertise. The information
gathered is consolidated, assessed and synthesized to arrive at a comprehensive list of key risks, controls, responses and residual risks. The
resulting information is incorporated into the internal audit program and communicated to the Audit Committee and Board of Directors, who
also review key risks on a periodic basis.
The most significant risk management methods used by management have entity-wide impacts. Such entity-wide efforts include, but are not
limited to:
•
the establishment of a corporate culture which fosters responsible management and integrity by adhering to strict hiring policies
and emitting strong tone from the top;
the application of a code of ethical conduct and a whistleblower policy in order to assure the quality of the Corporation's corporate
governance, and the integrity of the Corporation's functioning;
the establishment and ongoing alignment of company-wide quality organizations and systems, including supply chain, quality
assurance and continuous improvement; and,
the company-wide establishment of a strong internal control environment in order to manage risks associated with financial
reporting, fraud, treasury and operations.
•
•
•
The tables below include a selection of key risks identified by management as well as the related risk management approach. This list is not,
nor is it intended to be, exhaustive. Other risks which may not yet have been identified by management could have an adverse effect on the
Corporation’s business, financial condition or results.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 89
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 4 of Héroux-Devtek’s customers represent
approximately 44% of consolidated sales, including one
customer representing 15% 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.
90 – HÉROUX-DEVTEK INC. – Fiscal 2022 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
Foreign currency
fluctuations
Liquidity, capital
resources and
related covenants
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.
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.
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.
Changing interest
rates
Fluctuations in interest rates may also negatively impact
the balance sheet by their impact on rates used by
Héroux- Devtek to discount provisions and pension
obligations, among other balances.
Outstanding derivatives are detailed in the Derivative
Financial Instruments section under Additional
Information.
Tax matters and
changes in tax laws
As a multinational company conducting operations
through subsidiaries in multiple jurisdictions, the
Corporation is subject to income and other tax laws and
fiscal policies in numerous jurisdictions. The effective
income tax rate in the future could be adversely affected
as a result of a number of factors, including changes in
the mix of earnings in countries with differing statutory
tax rates, changes in tax laws, treaties or regulations or
their interpretation, and the outcome of income tax audits
(including transfer pricing) in various jurisdictions around
the world. The assessment of additional taxes, interest
and penalties could be materially adverse to the
Corporation’s current and future results of operations
and financial condition.
Risks associated with pensions are managed through
investment policies put in place by the Corporation and
pension committees.
Management regularly assess all tax matters to
determine the adequacy of the tax compliance.
Management is also supported by legal and accounting
tax specialists to insure compliance in all respective
jurisdictions that we operate in.
Developments in tax regulations are closely monitored
by management to ensure continuous compliance.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 91
Operational Risks
Operational risks are more specific to or result from Héroux-Devtek’s operations than strategic risks.
RISK
DESCRIPTION
The Corporation is exposed to having a viral outbreak in
a facility which could not only impact employees’ health
but also disrupt operations putting at risk customer
deliveries and causing financial losses.
Virus outbreak at a
facility
Litigation
Collective
bargaining
agreements
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.
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.
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, program management, procurement
and finance.
Availability of
skilled labour
Competition is fierce when it comes to hiring and
retaining such skilled employees.
Retention or replacement may cause increased labour
cost, while the Corporation may be unable to hire or
retain key employees and suffer delays or lose cost
efficiency in certain initiatives or deliveries.
RISK MANAGEMENT APPROACH
Héroux-Devtek has put in place several measures in
order to minimize the impact on its workforce and its
operations:
- The creation of a steering committee to coordinate
response;
- Travel limitations;
- Deployment of information technology tools;
- 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 program.
The Corporation employs internal and external legal
professionals who advise senior management on the
subject of ongoing legal, regulatory, export 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.
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.
It also includes succession planning, for key employees
up to senior management, discussed annually at the HR
and governance committee.
92 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
Information
technology
Warranty casualty
claim losses
Supply chain
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 pressure on the supply chain resulting from the
Covid-19 pandemic, geopolitical tensions or other
causes could lead to supply disruptions for the
Corporation.
Prolonged disruption in the supply chain could have a
material adverse effect on the Corporation’s operations,
significantly increase the cost of operating its business
and significantly reduce its margins and profitability.
Also, reductions in quality and reliability of supply could
result in material adverse effects on the Corporation’s
business and results.
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 tracks and monitors supplier
performance and mitigates potential losses by ensuring
poor quality, if any, is detected through internal quality
management.
Héroux-Devtek also has the ability to in-source
manufacturing or finishing of many key parts in the event
of critical issues in the supply chain.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 93
External Risks
External risks are generally outside of management’s control and mostly result from external factors.
RISK
General economic
conditions
DESCRIPTION
The ongoing COVID-19 pandemic, including the
emergence of variants, continues to negatively impact
the global economy, disrupt global supply chains and
create significant economic uncertainty and disruption of
financial markets. 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 downturns. Such market conditions may also
be caused by any number of factors, including but not
limited to political instability, terrorist activity, or natural
disasters. Such unfavourable conditions could negatively
impact the Corporation through decreased sales and
increased costs affecting the Corporation’s profitability.
RISK MANAGEMENT APPROACH
While such economic conditions are outside of the direct
sphere of control of management, this risk is 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.
Also, 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.
Inflation can directly affect the price the Corporation pays
for the goods and services it acquires or contracts and
also usually has a trailing effect on labour costs. Inflation
can be restricted to certain jurisdictions or, in rare cases,
be broadly generalized and occur at a high velocity.
Inflation
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.
The Corporation’s main customer contracts generally
feature escalation clauses based on indices of consumer
spending or material costs as appropriate. In other
cases, key materials may be supplied by customers, or
prices may be established by the cost on an order-to-
order basis. Supplier contracts also normally include
flow-down of terms and conditions included in long-term
contracts with customers.
As described in operational risks above, the Corporation
also monitors the supply chain and workforce diligently.
Héroux-Devtek manages risk from competition by
maximizing customer satisfaction, on-time delivery,
bidding competitively and maintaining high quality
products.
Competition and
innovation
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.
Defence spending
Environmental
matters
Defence spending is approved by governments on a
yearly basis and is subject to political climates and
changing priorities. Austerity measures or shifts away
from defence spending on the part of a government,
particularly that of the United States, could lead to a
significant downward trend in demand for the
Corporation’s defence products.
The Corporation’s activities are subject to environmental
laws and regulations associated with risks to human
health and the environment. These laws and regulations
and potential related charges could have a significant
adverse effect on the Corporation’s operations and
financial condition.
The Corporation’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.
94 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
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
Financial position
Net debt to Adjusted EBITDA ratio
Net debt to equity ratio
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
(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 adjusted EBITDA, adjusted net income and free cash flow. 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, 2022, these derivative financial instruments are as follows:
Forward foreign exchange contracts
As at March 31, 2022, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $341.6 million
denominated in USD, EUR and GBP. This amount includes contracts with nominal value of US$219.5 million convertible into Canadian
dollars at an average rate of 1.2888. These contracts mature at various dates between April 2022 and March 2026, with the majority
maturing in fiscal years 2022 and 2023.
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, 2022, a 1% strengthening of the CAD versus the USD would result in a $0.5 million decrease in
the Corporation’s fiscal 2022 net income.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 95
Cross-currency interest rate swaps
As at March 31, 2022, the Corporation had cross-currency interest rate swap agreements exchanging CAD and USD-denominated debt to
EUR for a total notional amount of €90.5 million in order to mitigate foreign exchange and interest rate risks. These agreements mature
between May 2022 and September 2028, and bear interest at a weighted average fixed rate of 2.3%.
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, 2022, the equity swap agreement covered 300,000 common shares of the Corporation at a price of $13.52, In February
2022, the agreement was amended and now matures in June 2023. All other conditions of the agreement stayed unchanged compared to
March 31, 2021. This agreement is a derivative that is not part of a designated hedging relationship.
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, 2022, 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, 2022, an evaluation of the design and effectiveness of the Corporation’s internal controls over financial reporting was carried out
under the supervision of the CEO and CFO, as defined in Regulation 52-109. Based on this evaluation, the CEO and CFO concluded that the
design and effectiveness of these internal controls over financial reporting were effective to provide reasonable assurance that the Corporation’s
financial reporting is reliable and that the Corporation’s consolidated financial statements were prepared in accordance with IFRS. However, a
control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
Changes in internal controls over financial reporting
No changes were made to the Corporation’s internal controls over financial reporting during the fiscal year ended March 31, 2022 that have
materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
96 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date.
Uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the Corporation’s financial
results or the carrying amount of assets or liabilities.
Key estimates and assumptions are as follows:
Impairment of goodwill and other non-financial assets
Impairment exists when the carrying amount of an asset or cash generating unit (“CGU”) exceeds its recoverable amount, which is the higher
of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales
transactions in an arm’s length transaction of similar assets and observable market prices less incremental costs for disposing of the asset.
The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the Corporation’s five-year budget
and strategic plan and do not include restructuring activities that the Corporation is not yet committed to or significant future investments that
may enhance the performance of the CGU being tested. The recoverable amount is most sensitive to the discount rate used in the
discounted cash flow model, the expected future cash flows and the perpetual growth rate used for extrapolation. The key assumptions used
to determine the recoverable amount of the CGUs, including sensitivity analysis, are further explained in note 17 to the Consolidated financial
statements.
Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that
taxable income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is
required to determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future
taxable income together with future tax planning strategies.
Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions
about discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the
interest rates of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant
uncertainty. The significant assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity
analysis, are further explained in note 25 to the Consolidated financial statements.
Capitalized development costs
Development costs are capitalized in accordance with the accounting policy described in note 3 to the Consolidated financial statements. In
determining the amounts to be capitalized, management makes assumptions regarding the expected future cash generation of the assets,
discount rates to be applied, the expected period of benefits and contract quantities. For purpose of impairment testing, the Corporation exercises
judgment to identify the cash inflows and outflows. The recoverable amount is based on fair value less costs of disposal, generally determined
using a discounted cash flow model. Other assumptions used to determine the recoverable amount include the applicable discount rate and the
expected future cash flows which include costs to complete the development activities.
Provisions
The Corporation has recorded provisions to cover cost exposures that could materialize in future periods. In determining the amount of the
provisions, assumptions and estimates are made in relation to discount rates and the expected cost to settle such liabilities.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 97
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.
98 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
SELECTED FINANCIAL INFORMATION
Selected financial information is as follows, for the quarters ended:
Fiscal year
Sales
Operating income
Adjusted operating income (1)
Adjusted EBITDA (1)
Net Income
Adjusted Net Income (1)
In dollars per share
Earnings (loss) per share diluted
Adjusted Earnings per share (1)
In millions of shares
Fourth
quarter
Fourth
quarter
Third
quarter
Second
quarter
2022
First
quarter
2021
First
quarter
$ 147,459 $ 131,147 $ 131,293 $ 126,188 $ 154,989 $ 150,298 $ 137,063 $ 128,335
1,385
11,463 10,545 11,953 10,797 12,229 13,362
13,772 10,545 11,953 10,797 13,848 14,145
7,430
22,149 19,694 21,157 20,049 24,975 23,731 21,233 18,358
(1,313)
11,459
3,382
13,158
6,703
8,802
6,703 10,169
3,838
6,118
6,468
6,468
7,510
7,510
8,486
9,365
7,120
9,788
Second
quarter
Third
quarter
$
0.33 $
0.38
0.18 $
0.18
0.21 $
0.21
0.19 $
0.19
0.24 $
0.28
0.24 $
0.26
0.11 $
0.17
(0.04)
0.09
Weighted average number of common diluted
shares outstanding
34.9
35.7
36.6
37.0
36.5
36.5
36.4
36.4
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
Seasonal trends
Héroux-Devtek’s first semester is usually slower than the last one due to seasonality such as plant shutdowns and summer vacations.
Selected financial information is as follows, for fiscal years:
Sales
Operating income (loss)
Adjusted operating income(1)
Adjusted EBITDA(1)
Net income (loss)
Adjusted net income(1)
Earnings (loss) per share ($) - basic
Earnings (loss) per share ($) - diluted
Adjusted earnings per share(1) ($)
Cash
Total assets
Long-term financial liabilities(2)
2022
2021
2020
$ 536,087 $ 570,685 $ 612,996
44,758
47,067
83,049
32,140
33,839
0.91
0.90
0.95
86,692
34,096
45,211
88,297
19,813
29,034
0.55
0.55
0.80
95,470
813,358
238,419
854,831
251,243
(30,070)
52,548
96,191
(50,658)
35,666
(1.38)
(1.38)
1.00
45,841
898,848
314,363
(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.
HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A – 99
SHAREHOLDER INFORMATION
ISSUED CAPITAL
Common shares issued and outstanding
Stock options issued and outstanding
May 18, 2022
34,486,776
1,503,750
Héroux-Devtek’s shares are traded on the Toronto Stock Exchange under the ticker “HRX” and Computershare Trust acts as registrar and
transfer agent.
Expected issuance date of financial results
Fiscal 2023
First quarter
Second quarter
Third quarter
Fourth quarter
August 5, 2022
November 11, 2022
February 8, 2023
May 17, 2023
100 – HÉROUX-DEVTEK INC. – Fiscal 2022 MD&A
Value of $100 invested in April 2017HRX return on investment - 5 years$147$141Value of $100 - HRXValue of $100 - TSXMar-17Mar-226080100120140160180
ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE
This MD&A was approved by the Audit Committee and by the Board of Directors on May 18, 2022. 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 2022 MD&A – 101
HEROUXDEVTEK.COM
CONTACT INFORMATION
1111 Saint-Charles street West, suite 600
West Tower, Saint-Charles Complex
Longueuil (Québec) Canada J4K 5G4
450 679-3330