Héroux-Devtek Annual Report 2023

Plain-text annual report

ANNUAL REPORT 2023 TABLE OF CONTENTS 1 HÉROUX-DEVTEK AT A GLANCE 2 DIVERSIFIED AND BALANCED REVENUE MIX 3 FINANCIAL HIGHLIGHTS 4 EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS MESSAGE TO SHAREHOLDERS 6 PRESIDENT & CEO MESSAGE TO SHAREHOLDERS 8 SUPPLY CONTRACTS 11 ECONOMIC OUTLOOK 16 BOARD OF DIRECTORS 17 CORPORATE MANAGEMENT TEAM 17 OPERATIONS MANAGEMENT TEAM 18 GLOBAL CENTRES OF EXCELLENCE 21 FINANCIAL STATEMENTS 65 MANAGEMENT’S DISCUSSION AND ANALYSIS 99 SHAREHOLDER INFORMATION 2 Héroux-Devtek — Annual Report 2023HÉROUX-DEVTEK AT A GLANCE Héroux-Devtek Inc. (traded as “HRX” on the Toronto Stock Exchange) has evolved from its beginnings in 1942 as a parts manufacturer for aerospace products to become a leading landing gear manufacturer in the industry. The company specializes in designing, developing, manufacturing, repairing, and overhauling aircraft landing gears, hydraulic and electromechanical flight control actuators, custom ball screws, and fracture-critical components for both the civil and defence market segments. Aside from its ability to manufacture complete landing gear and actuation systems to specification, Héroux-Devtek has earned a strong reputation for its outstanding support and service of landing gear and actuation systems for a wide range of defence and civil aircraft, including some out-of-production models. The company’s comprehensive services encompass maintenance, repair, 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 currently employs approximately 1,800 dedicated individuals across its 15 centres of excellence, which are strategically located in Canada, the United States, the United Kingdom, and Spain. Recognized for its innovative approach, expertise in system integration, engineering prowess, world-class service, and exceptional execution, Héroux-Devtek continues to lead the industry as the third-largest landing gear manufacturer worldwide. DIVERSIFIED AND BALANCED REVENUE MIX (Based on fiscal 2023 sales) DEFENCE CIVIL PROPRIETARY BUILD-TO-PRINT 68.6% Defence 31.4% Civil 50.2% Proprietary 49.8% Build-to-print Helicopters Large Jets 15.1% Business Jets 10.6% 8.1% Proprietary and Life of Program Build-to-print Other Build-to-print Tier 1 4.6% 8.2% Other 6.1% 24.9% Fighters Regional Jets Helicopters 2.7% 2.7% 2.8% Other 50.2% 27.0% Transport 37.0% Build- to-print OEM OEM/AFTERMARKET SALES MIX BY END CUSTOMER LOCATION Aftermarket 25.4% Rest of Europe Spain 12.6% 5.4% 7.7% Other United Kindom 6.8% Canada 6.1% 74.6% OEM United States 61.4% 2 Héroux-Devtek — Annual Report 2023FINANCIAL HIGHLIGHTS FISCAL YEAR ENDED MARCH 31 2023 2022 2021 2020 2019 OPERATING RESULTS (in millions of dollars except per share data and ratios) Sales Operating income (loss) as percentage of sales Adjusted EBITDA (1) as percentage of sales Net income (loss) Adjusted net income (1) Cash flows related to operating activities Free cash flow (usage) (1) Funded backlog PER SHARE DATA EPS — basic (loss) Adjusted EPS (1) 543.6 536.1 570.7 613.0 483.9 26.2 4.8% 61.4 11.3% 13.8 12.6 30.1 (1.7) 44.8 8.4% 83.0 15.5% 32.1 33.8 63.2 45.9 34.1 6.0% 88.3 15.5% 19.8 29.0 89.2 67.7 (30.1) (4.9)% 96.2 15.7% (50.7) 35.7 52.6 30.3 37.2 7.7% 74.2 15.3% 26.2 30.4 70.0 58.6 864.0 682.0 717.0 810.0 624.0 0.40 0.37 0.91 0.95 0.55 0.80 (1.38) 1.00 0.73 0.84 Weighted-average number of common diluted shares outstanding (in 000’s) 34 485 36 023 36 523 36 363 36 437 FINANCIAL POSITION Cash Working capital Total assets Long-term debt (2) 15.0 86.7 95.5 45.8 35.1 205.6 235.6 241.4 205.4 173.1 821.3 813.4 854.8 898.8 872.8 180.0 238.8 253.0 292.7 263.3 Net debt to adjusted EBITDA ratio (1) 2.7 1.8 1.8 2.6 3.1 Shareholders’ equity 390.9 377.3 391.7 349.4 404.1 [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] Excluding net deferred financing costs. 3 Héroux-Devtek — Annual Report 2023GILLES LABBÉ Executive Chairman of the Board OUR CLIENTS RECOGNIZED OUR COMMITMENT TO EXCELLENCE “ ” EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS MESSAGE TO SHAREHOLDERS DEAR SHAREHOLDERS, The last twelve months saw a sustained recovery in demand for the aerospace sector. The commercial aircraft market, which was hit hard by the COVID-19 pandemic, has seen demand nearly double since travel restrictions were lifted around the world. Still, even better days lay ahead, as some large countries only recently removed travel restrictions. Global passenger traffic, as of February 2023, was still 15% below pre-COVID levels and is expected to fully recover in 2024, highlighting the resilience of the sector. Meanwhile, global spending on military aircraft remains robust, with increasing spending goals driven by the military conflict in Ukraine, ageing global fleets and technological advancements propelling the development of sixth-generation fighter jets. STRENGTH THROUGH CHALLENGES: HÉROUX-DEVTEK’S COMMITMENT TO EXCELLENCE In the past year, our business of supplying aircraft manufacturers with systems and components was faced with exceptional realities which impacted the pace of our throughput. Global supply chains encountered several headwinds, including the availability of raw materials, labor and parts, along with surging energy prices and transportation costs. These obstacles contributed to an exceptionally challenging year for aerospace production. Despite these challenges, the management team at Héroux-Devtek took swift action to address the pain points in production. They re-allocated resources as needed and worked closely with both suppliers and customers. I would like to extend my appreciation to the management team and employees for managing production in an exceptionally difficult environment. 4 Héroux-Devtek — Annual Report 2023Although our delivery capabilities and profitability were affected, our clients recognized our commitment to excellence. Looking ahead, we remain focused on strengthening our position as a trusted partner to aircraft manufacturers. As we enter FY2024 with a near-record backlog, I have full confidence in our management team’s ability to navigate the ongoing volatility in production and input costs, as we strive to return to historical levels of profitability. Armed with a strong balance sheet, Héroux-Devtek is also well-positioned to capitalize on any opportunities that come our way, whether through organic growth or strategic acquisitions. As we continue to execute our strategic initiatives and capitalize on the growth opportunities in the aerospace sector, we remain committed to enhancing shareholder value. We are actively engaging with investors and analysts to ensure they have a comprehensive understanding of our business, its underlying strengths, and the value we bring to the market. SHARING OUR ESG JOURNEY I want to extend my gratitude to our shareholders for their ongoing support during this volatile period in our industry and in equity markets. As the development of landing gears and actuation systems can take several years from conception to delivery, resource management from a long-term perspective is engrained in the way we operate. As such, in conjunction with this annual report, we are also publishing our inaugural ESG report, which provides insight into our sustainability initiatives and highlights the benchmarks and measurement guidelines we are adopting to adhere to ESG principles. As ESG considerations increasingly factor into investment decisions, we are committed to fulfilling our responsibilities to investors, clients, and stakeholders by sharing our approach to ESG and sustainability. As ESG reporting principles continue to evolve, we’re committed to adapting our reporting accordingly. ESG principles are regularly discussed at our Board meetings, and we are pleased to be able to provide investors with a first look at our values going forward. Furthermore, in line with our commitment to strengthening our Board, I am delighted to announce the appointment of Ted Di Giorgio as our new Board Member and Member of the Audit Committee earlier this calendar year. We warmly welcome Ted to the team and look forward to his valuable contributions. As we turned the page on our 80th year of operation last year, we look to the future with the benefit of experience and cautious optimism. The long-term outlook for the aerospace sector is bright and by focusing on our product’s quality and reliability and serving our customers, we are positioning ourselves to benefit from rising demand and continue to play an integral role providing essential systems and components for the world’s most advanced aircraft. GILLES LABBÉ Executive Chairman of the Board 5 Héroux-Devtek — Annual Report 2023MARTIN BRASSARD President and Chief Executive Officer AGILITY AND ADAPTABILITY — KEY TO SUCCEED IN A CHANGING WORLD “ PRESIDENT & CEO MESSAGE TO SHAREHOLDERS ” Third, we are reviewing our pricing and supply agreements to offset the effects of inflation. We are confident these actions will return our profitability to higher levels. To achieve these priorities, we are fortunate to be able to draw on Héroux-Devtek’s long-standing history as a successful company. Our strong balance sheet allows us to take steps to facilitate production, such as increasing inventories on hand to improve the linearity of our revenues and to contemplate larger- scale projects where warranted. Also, despite the industry-wide challenge of skilled labor availability, we have been successful in maintaining 99% of our positions filled by leveraging Héroux- Devtek’s strong reputation to attract and retain employees. NAVIGATING UNPREDICTABLE TIMES Last year, I mentioned that our responsibility was to continue to display agility and adaptability while creating value for our clients and shareholders in an unpredictable environment. With this objective in mind, we continued to work closely with our suppliers and clients to reinforce our reputation as a trusted partner of choice. Our revenues reached $544 million, bolstered by a strong second-half performance of $297 million, demonstrating a strong recovery after a slow start to the fiscal year. However, our profitability was hampered by the instability of the global production environment, and by the effect of inflation on general production supplies, transportation, and utility costs. Fiscal 2023 was a year of adjustment for the industry overall as demand for civil products rebounded after a severe two- year drop. Today, OEM order books are filled with orders for new aircraft and aftermarket parts and services. This increased demand is putting pressure on the entire industry that must deliver products steadily and efficiently. PRIORITIZING OPERATIONAL EFFICIENCY AND SUPPLY CHAIN RESILIENCE At Héroux-Devtek, we are embracing these challenges as we focus on three priorities: first, we are working on ways to restore health to our supply chain and stabilize our production system. We will achieve this by continuing to qualify new sources and by strengthening supplier relations, enabling us to better track and manage quality and delivery. Second, we are reexamining our production processes to identify efficiency gains, whether through streamlining processes or by optimizing automation in our machining centres of excellence. These measures can all be implemented with limited additional capital requirements. 6 Héroux-Devtek — Annual Report 2023STRENGTHENING CUSTOMER PARTNERSHIPS AND IMPROVING ENVIRONMENTAL STEWARDSHIP A STRONG TEAM AND NEAR-RECORD BACKLOG POSITION HÉROUX-DEVTEK FOR SUCCESS While we are improving our operations, we continue to better our relationships with our customers. During fiscal 2023, we achieved significant milestones, including a contract with Embraer to design, develop, and manufacture the main deck cargo door actuation system for the E190F and E195F freighter conversion program and a long-term contract with Boeing to repair and overhaul the main landing gear for the F/A-18 E/F Super Hornets and EA-18G Growlers. These contracts not only serve as a testament to our expertise in design but also emphasize the enduring nature of our client partnerships. These partnerships are key to making Héroux-Devtek the great company that is, and will continue to grow as we study new aircraft programs with industry leaders. Environmental stewardship was another area of progress for us this past year as we made great strides in minimizing our footprint. For instance, we launched an initiative to convert our fossil fuel energy sources to green or renewable energy sources. As a result, we were able to reduce the direct greenhouse gas emissions of our operations by one third. We are committed to pursuing this initiative and achieving further meaningful reductions in the upcoming year. With a near-record backlog, a strong team and opportunities for margin improvements, I am confident in our ability to materially improve our profitability in the next several quarters. Our end- markets are underpinned by strong fundamentals which will result in an attractive growth rate in demand for defence, large civil and business aircraft over the next decade. As a trusted supplier of systems and components for critical platforms, we are well-positioned to capitalize on this growth. I would like to express my deep appreciation and gratitude to our 1,800 employees worldwide who have put in countless hours of hard work and effort, allowing us to remain agile for the benefit of our clients. I would also like to extend my heartfelt thanks to the Board Members for their unwavering support during this exceptional year. MARTIN BRASSARD President and Chief Executive Officer 7 Héroux-Devtek — Annual Report 2023SUPPLY CONTRACTS The strategy of diversifying our customer base and program portfolio across the civil and defence market segment has proven to provide us with some degree of shelter from the challenges that the industry is currently facing. We believe that this approach not only helps us to mitigate risk, but also enables us to leverage our expertise across a wider range of applications and markets. As we continue to strengthen our partnerships with our customers, we remain committed to delivering high-quality products and services that meet their evolving needs and expectations. GROWTH PLATFORMS 1 Boeing F/A-18 E/F Super Hornet 3 Sikorsky CH-53K* and EA-18G Growler Supply, assemble, repair and overhaul the main landing gear and Design, develop and supply the landing gear system and tail bumpers for production and spares for the CH-53K King Stallion sIde brace production and spares for the F/A-18E/F Super Hornet heavy lift helicopter. and EA-18G Growler. 2 Boeing F-15 4 Dassault Falcon 6X* Design, develop and supply the complete landing gear system Supply and assemble the nose and main landing gear for the for the Falcon 6X. F-15EX / Advanced F-15 programs for production and spares requirements. * Proprietary programs 1 3 8 2 4 a s n a m A l . V - n o i t a v A i t l u a s s a D © Héroux-Devtek — Annual Report 2023 DESIGN AND MANUFACTURING OF COMPLETE LANDING GEAR SYSTEMS AND COMPONENTS Designing and manufacturing complete landing gear systems is a complex and highly specialized process. The process typically starts with the initial design phase, in which engineers work closely with customers to identify the specific requirements for their aircraft. Once the design has been finalized, the manufacturing process begins. This typically involves a range of precision machining and fabrication techniques, such as forging and casting to create the various components of the landing gear system. These components may include struts, shock absorbers and hydraulic systems. Once the components have been manufactured, they are assembled and tested to ensure they meet the requirements for safe and reliable operation. This may involve rigorous testing and simulation under a range of operating conditions, as well as extensive quality control measures to ensure that each component and subsystem meets the required specifications. CIVIL PROGRAMS Dassault Falcon 6X 4 Dassault Falcon 10X 2 Embraer Praetor 500/600 Leonardo AW609 DEFENCE PROGRAMS Airbus A400M Airbus C295 3 Boeing MQ-25 Eurofighter Typhoon KAI KF-21 Northrop Grumman RQ4B / MQ4C 1 Saab Gripen E-series Sikorsky CH-53K 1 3 2 4 e m u B l i t t a M © n o i t a v A i t l u a s s a D © 9 Héroux-Devtek — Annual Report 2023 1 2 3 m o c . e b o d a . k c o t s - s e g a m I f l o W r e d n a V BUILD TO PRINT LANDING GEAR SYSTEMS AND COMPONENTS Build-to-print landing gear systems are manufactured to meet specific requirements developed by the customer. The process starts with the customer providing a detailed set of drawings and technical specifications. We then manufacture the landing gear system to those instructions provided by the customer. This typically involves sourcing materials, fabricating and machining components, and assembling them into the final product. CIVIL PROGRAMS Airbus A350 2 Boeing 777/777X Sikorsky S-92 DEFENCE PROGRAMS Boeing F/A-18 / EA-18G Boeing F-15 1 Boeing CH-47 3 Lockheed Martin C-130 10 Héroux-Devtek — Annual Report 2023 ECONOMIC OUTLOOK TRAVEL RECOVERY AND INCREASED DEFENCE SPENDING SUPPORT POSITIVE LONG-TERM AIRCRAFT OUTLOOK With several countries beginning to remove COVID-related travel restrictions early in 2022, global passenger traffic staged a strong recovery last year. Consumers returned in numbers after years of travel restrictions in spite of high-ticket prices and long queues caused by inherent lag times to readapt the global air travel infrastructure to meet surging demand. According to data from IATA, global passenger numbers in 2022 rose over 60% from 2021 levels and are expected to surpass the 2019 peak by 2024, as the last few major countries to maintain travel restrictions removed them at the end of 2022 and beginning of 2023. This rebound in demand for global passenger travel underscores the resilience of the airline sector and supports a favourable long-term outlook for commercial aircraft driven by factors such as population growth, increased use of aircraft for intra- city travel, an ageing global fleet and demand for more fuel- efficient aircraft. Boeing, in its latest Commercial Market Outlook (CMO), released in July 2022, forecasts that the order value of new airplane deliveries will amount to $7.2 trillion for the next two decades. In terms of number of aircraft, Boeing expects the global fleet to nearly double reaching 47,080 airplanes by 2041. On top of the fleet expansion, more than 75% of the existing fleet would need to be replaced, increasing the demand by approximately 20,000 aircraft. Over 2,100 deliveries will be needed in average per year to reach this level, compared to only 1,143 in 2022. Single aisle aircraft is expected to be the fastest-growing category with a fleet expected to reach 32,770 airplanes in 2041 compared to 16,530 airplanes in service in 2019 while widebody aircraft is supposed to go from 4,660 in 2019 to 8,360 in 2041. These long-term commercial passenger trends continue to have positive implications for Héroux-Devtek as a result of its long-standing association with Boeing and Airbus on a number of established programs. As a supplier of components for key platforms like the Boeing 777 and Airbus A350, Héroux-Devtek is particularly well positioned to benefit from the growth in deliveries of these widebody aircraft. For example, since its introduction in service, the widebody A350 has received a positive reception and deliveries for this aircraft are expected to almost triple in the next decade from current levels, according to estimates from Teal group. Similarly, Héroux-Devtek is poised to benefit from the entry into service of the highly anticipated Boeing 777X, for which it will supply the landing gear. GLOBAL PASSENGER NUMBERS COMMERCIAL AIRCRAFT OUTLOOK SINGLE-AISLES GROW TO 70% SHARE OF FLEET 120% 100% 80% 60% 40% 20% 0% A T A I : e c r u o S 2019 Baseline 2021 2022 2023 2024 2025 47,080 7% 18% 70% 5% 2041 O M C g n e o B i : e c r u o S 25,900 8% 18% 64% 10% 2019 Freighter Widebody Single-aisle Regional Jet 11 Héroux-Devtek — Annual Report 2023 l l e w y e n o H : e c r u o S p u o r G l a e T : e c r u o S The long-term demand outlook for business jets is similarly attractive. Honeywell, in its Global Business Aviation Outlook, forecasts up to 8,500 new business jet deliveries worth $274 billion from 2023 to 2032, which is up 15% in both deliveries and expenditures from the same 10-year forecast a year ago. Héroux-Devtek is well positioned to benefit from this growth in demand as it designed, developed and manufactures the landing gear system for the Embraer Praetor. In addition, the Corporation is the landing gear supplier for the Falcon 6X and Falcon 10X from Dassault Aviation. The Falcon 6X is expected to be certified and delivered in 2023, while the Falcon 10X is anticipated to enter service as soon as 2025. BUSINESS JET PRODUCTION 12,000 10,000 8,000 6,000 4,000 2,000 0 2012-2021 2022-2031 DEFENCE MARKET SEGMENT FIGHTER JET PRODUCTION 5,000 4,000 3,000 2,000 1,000 0 2011-2020 2022-2031 Héroux-Devtek is also a major supplier of aerospace components to defence aircraft. Total global military expenditure increased by 3.7% in real terms in 2022, to reach a new high of $2,240 billion, growing for the eighth consecutive year. Notably, military expenditure in Europe saw its steepest year-on-year increase in at least 30 years. The United Kingdom had the highest military spending in Central and Western Europe and was up 3.7% compared to 2021. In 2022, the United States accounted for 39% of the world’s total military expenditure, which is more than the next 10 countries combined, according to the new data on global spending published by the Stockholm International Peace Research Institute (SIPRI). With facilities in Spain, the UK, Canada and the US, Héroux-Devek is well positioned to serve these markets. The real-terms increase in world military spending in 2022 was slowed by the effects of inflation, which in many countries soared to levels not seen for decades. In nominal terms (i.e. in current prices without adjusting for inflation), the global total increased by 6.5 per cent. The invasion of Ukraine by Russia in February 2022 has brought potential for military conflicts to light and led many countries to significantly increase their military spending, while others announced plans to raise spending levels over periods of up to a decade. According to Teal Group, fighter jet production is expected to increase by 80% from 2,605 to 4,677 over the course of 10 years (2022-2031), with demand for the Lockheed Martin F-35, already the most produced aircraft, expected to grow further still; Héroux-Devtek supplies the landing gear door uplocks system for the F-35 which should be an important revenue contributor for the life of the program. Héroux-Devtek is also the sole-source supplier of landing gear systems for the Boeing F-15 and Saab Gripen E, as well as the main landing gear and side braces for the Boeing F-18 E/F and EA-18G. 12 Héroux-Devtek — Annual Report 2023 MILITARY TRANSPORT AIRCRAFT PRODUCTION MILITARY TRANSPORT AIRCRAFT PRODUCTION UNITS Military transport aircraft production is set to grow modestly by the end of this decade. That said, Héroux-Devtek supplies the three most produced military transport aircraft currently, representing over 80% of units produced last year: the Lockheed Martin C130J (Landing gear systems and spare parts) and Airbus C295 and A400M (Landing gear components, actuation systems and other components). 70 60 50 40 30 0 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 THE MILITARY HELICOPTER MARKET MILITARY HELICOPTER - BILLIONS The military helicopter market is expected to grow modestly in terms of units produced from 448 units in 2023 to 460 units by 2030 however from a dollar perspective, the value of units produced in the next decade to 2031 will be lower than 2012-2021 at $120b vs. $140b. Looking at specific programs however, production for the recently introduced Sikorsky CH-53K is expected to grow substantially over the next few years. Héroux-Devtek designed, developed and supplies the landing gear system and tail bumpers for production and spares for the CH-53K. Héroux-Devtek also supplies and assembles the landing gear for the Boeing CH-47 Chinook as well as provides spares requirements; this widely appreciated transport helicopter has been in operation since the early 1960s. 160.0 120.0 80.0 40.0 0 2012-2021 2022-2031 p u o r G l a e T : e c r u o S p u o r G l a e T : e c r u o S 13 Héroux-Devtek — Annual Report 2023 i m o c . s c m o n o c e g n d a r t i : e c r u o S NEAR-TERM PRODUCTION ENVIRONMENT CHALLENGES REMAIN Strong aircraft orders led Héroux-Devtek to close FY2023 with a near-record backlog of $864 million, up 27% from $682 million in FY2022. Global supply chain challenges that arose post-pandemic were exacerbated by the Russia-Ukraine conflict, especially in the aerospace sector, for which these two countries are major producers of rare metals, including titanium. As a result, lead times for the procurement of these metals increased significantly in 2022, limiting the supply. These delays have impacted the production process, resulting in increased transportation costs to expedite delivery times and higher overtime compensation to meet throughput delivery commitments. Energy costs rose sharply as a consequence of the Russia- Ukraine conflict as well, particularly in Europe, where many countries are striving to find alternative energy supplies to oil and gas from Russia. The lower supply and redistribution of demand to other sources drove up prices and contributed to the overall inflationary pressures affecting production costs. Héroux-Devtek’s manufacturing operations in the UK and Spain have not been immune and have seen their energy costs increase significantly, by 40% and 94% respectively. TITANIUM PRICE USD/KG EUROPEAN NATURAL GAS PRICE EUR/MWH 20 18 16 14 12 10 8 6 4 0 Jan 2020 2021 2022 2023 450 400 350 300 250 200 150 100 50 0 i i n o s s m m o c n a e p o r u E : e c r u o S Jan 2020 2021 2022 2023 Rising energy costs were one of the factors that contributed to the overall inflationary pressures affecting production costs. In 2021, the onset of inflationary pressures in North America, which reached 7% during the year, marked a significant departure from the relatively low inflationary environment of the previous decade, where annual US inflation mostly stayed below 2%. As can be seen from the different charts, the excess pricing levels seen in raw material prices, energy and freight rates have come down from their peak and presage a more manageable cost environment going forward. That said, two cost drivers remain obstinately high: labor costs and inflation. 14 Héroux-Devtek — Annual Report 2023 US INBOUND AIR FREIGHT PRICE INDEX 0 0 1 = 0 0 0 2 x e d n I 300 280 260 240 220 200 180 160 140 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Shaded areas indicate U.S. recessions. The tightness of North America’s labor markets, coupled with rapid demand recovery, presented operational challenges for Héroux-Devtek in FY2023. Despite being almost fully staffed, production inefficiencies have occurred due to the limited availability of skilled aerospace technicians and machinists. To address this shortage, the company increased spending on training and development to upskill new employees without prior aerospace experience. However, the higher turnover rate among these new employees has led to production inefficiencies, as recruiting and training new staff is time-consuming. Many central banks including in the Euro zone and in North America have responded to the inflationary and employment pressures by increasing interest rates. Héroux-Devtek, despite having little leverage by its own historical standards and compared to some of its peers, is not immune to the effects of these rate increases, as higher cost of capital may put some financially fragile suppliers at risk. FEDERAL FUNDS EFFECTIVE RATE t n e c r e P 5 4 3 2 1 0 Q1 2020 Q2 2020 Q3 2020 Q1 2021 Q2 2021 Q3 2021 Q1 2022 Q2 2022 Q3 2022 Q1 2023 Shaded areas indicate U.S. recessions. 15 s c i t s i t a t S r o b a L f o u a e r u B . . S U : e c r u o S k r o Y w e N f o k n a B e v r e s e R l a r e d e F : e c r u o S Héroux-Devtek — Annual Report 2023 BOARD OF DIRECTORS The Héroux-Devtek Board of Directors is comprised of 10 members coming from diverse sectors, including the aerospace industry and the business world. This diverse mix of professionals offers the management team valuable perspectives and expertise to draw from in making critical decisions. The Board’s extensive collective experience ensures that the company is guided by the best possible strategic vision and management practices. 1 2 3 4 5 6 7 8 9 10 1 Gilles Labbé 5 Louis Morin Executive Chairman of the board President, Busrel Inc. 8 Annie Thabet Partner, Celtis Capital Inc. Non-independent Director since 1985 Independent Director since 2008 Independent Director since 2021 Chair of the Audit Committee Member of the Human Resources and 2 Nathalie Bourque Corporate Director and Consultant 6 James J. Morris Independent Director since 2015 Member of the Audit Committee 3 Martin Brassard President and Chief Executive Officer Non-independent Director since 2019 4 Didier Evrard Corporate Director and Consultant Independent Director since 2021 Member of the Audit Committee Corporate Director and Consultant Independent Director since 2013 Chair of the Human Resources and Corporate Governance Committee 7 Brian A. Robbins Executive Chairman, Exco Technologies Limited Independent Director since 2000 Member of the Human Resources and Corporate Governance Committee 16 Corporate Governance Committee 9 Beverly Wyse Corporate Director and Consultant Lead Director Independent Director since 2019 Member of the Audit Committee 10 Ted Di Giorgio Corporate Director Independent Director since 2023 Member of the Audit Committee Héroux-Devtek — Annual Report 2023CORPORATE MANAGEMENT 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 & Environment Guy Delisle Vice-President, IT Alexandre Verdon Vice-President, Business Development, Mergers and Acquisitions Patrick Gagnon Vice-President, Corporate Controller Jean-Philippe Sanche Vice-President, Legal Affairs Olivier Perron Senior Director, Tax & Treasury Guillaume Lamy Director, Financial Reporting 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, Engineering & Product Support Hugo Lorrain Vice-President, Spain Daniel Normandin Vice-President, United Kindom 17 Héroux-Devtek — Annual Report 2023 13 12 14 15 10 3 4 2 1 5 6 7 11 9 8 GLOBAL CENTRES OF EXCELLENCE With a presence in 4 countries around the world, our 15 Centres of Excellence have proven their agility and resilience in the face of the ever-changing business environment. Our global locations have allowed us to work closely with our customers, providing them with tailored solutions that meet their specific needs. Our team of experts across the globe are dedicated to ensuring that our products and services meet the highest standards of quality, safety and performance. CANADA 1 Saint-Hubert, Québec 5 Kitchener, Ontario Design, engineering, and product support. Technical expertise and state-of-the-art testing facility 2 Longueuil, Québec Repair and overhaul activities, finishing and assembly of landing gear 3 Laval, Québec Manufacturing and assembly of small to medium landing gear components and systems 4 Montréal, Québec Surface treatment services Manufacturing of medium to large complex landing gear components 6 Cambridge, Ontario Manufacturing of ultra-large-scale complex landing gear components 7 Scarborough, Ontario Electronic enclosures, heat exchangers and cabinets 10 3 4 2 1 5 6 7 11 9 8 GLOBAL CENTRES OF EXCELLENCE 13 12 14 15 USA 8 Strongsville, Ohio Finishing and assembly of landing gear UNITED KINGDOM 12 Nottingham, Nottinghamshire Manufacturing of small to medium landing gear components SPAIN 14 Getafe Design, manufacturing, assembly and support for landing gear and actuation systems 9 Springfield, Ohio 13 Runcorn, Cheshire Repair and overhaul activities, finishing and assembly of landing gear, product support, testing and design engineering 15 Seville Assembly and installation of aircraft components at customer assembly lines Manufacturing of medium to large complex landing gear and titanium components 10 Everett, Washington Final assembly of Boeing 777/777X landing gear systems 11 Livonia, Michigan Design and manufacturing of ball screws and electro-mechanical linear actuation systems CONSOLIDATED FINANCIAL STATEMENTS For the fiscal year ended March 31, 2023 TABLE OF CONTENTS Note 1 Note 5 Note 2 Note 4 Note 7 Note 8 Note 3 Note 6 Management’s report ..................................................................................................................................................................... 23 Independent Auditor’s report ........................................................................................................................................................... 24 Consolidated financial statements ................................................................................................................................................... 27 Notes to the consolidated financial statements .................................................................................................................................. 32 Nature of activities and corporate information ............................................................................................................... 32 Basis of preparation ................................................................................................................................................... 32 Significant accounting policies .................................................................................................................................... 33 Significant accounting estimates and assumptions ........................................................................................................ 40 Divestiture and purchase of minority interest ................................................................................................................ 42 Sales ........................................................................................................................................................................ 42 Government assistance .............................................................................................................................................. 42 Cost of sales, selling and administrative expenses ........................................................................................................ 43 Other expenses (gains) .............................................................................................................................................. 43 Note 9 Note 10 Net financial expenses ............................................................................................................................................... 43 Note 11 Earnings per share..................................................................................................................................................... 44 Inventories ................................................................................................................................................................ 44 Note 12 Note 13 Derivative financial instruments ................................................................................................................................... 45 Note 14 Other assets .............................................................................................................................................................. 45 Note 15 Property, plant and equipment .................................................................................................................................... 46 Finite-life intangible assets .......................................................................................................................................... 48 Note 16 Note 17 Goodwill .................................................................................................................................................................... 49 Note 18 Accounts payable and accrued liabilities ...................................................................................................................... 50 Note 19 Provisions ................................................................................................................................................................. 50 Long-term debt .......................................................................................................................................................... 50 Note 20 Note 21 Other liabilities ........................................................................................................................................................... 52 Issued capital ............................................................................................................................................................ 52 Note 22 Note 23 Accumulated other comprehensive income .................................................................................................................. 54 Income taxes ............................................................................................................................................................. 55 Note 24 Note 25 Pension and other retirement benefit plans .................................................................................................................. 56 Note 26 Commitments and contingencies ................................................................................................................................. 59 Note 27 Net change in non-cash items ..................................................................................................................................... 60 Note 28 Geographic information .............................................................................................................................................. 60 Note 29 Executive compensation ............................................................................................................................................. 60 Financial instruments ................................................................................................................................................. 61 Note 30 Financial risk management ......................................................................................................................................... 61 Note 31 Note 32 Capital risk management ............................................................................................................................................ 64 22 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements MANAGEMENT’S REPORT The accompanying consolidated financial statements and Management’s 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 disclosure controls and procedures (“DC&P”), or have caused them to be designed under their supervision, to provide reasonable assurance that material information related to the Corporation has been made known to them and has been properly disclosed or submitted by it under applicable securities legislation has been recorded, processed, summarized and reported within the time periods specified in securities legislation. The Corporation’s CEO and CFO have also designed internal controls over financial reporting (“ICFR”), or 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. 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 2023, or caused them to be evaluated under their supervision. As at March 31, 2023, management has concluded that the ICFR and DC&P were effective based on this evaluation, and had no material weaknesses. 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 17, 2023 Stéphane Arsenault, CPA Vice-President and Chief Financial Officer HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 23 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, 2023 and 2022, 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, 2023 and 2022, 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. 24 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements Impairment of goodwill and other non-financial assets How our audit addressed the key audit matter As at March 31, 2023, the Group had goodwill amounting to $112.4 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 of each CGU under a value in use approach using a discounted cash flow calculation, which requires significant estimation on the part of management. Recoverable amounts are based on management’s estimates of key variables including expected future cash flows, perpetual growth rate used and the discount rates. The risks surrounding the current business environment resulting from supply chain issues, inflation and workforce shortage have added complexity and subjectivity to the expected future cash flows determined by management. This combined with the significance and sensitivity of other assumptions such as the discount rates and annual/perpetual growth rates led us to conclude that the goodwill impairment test for the Group’s CGUs is a key audit matter. included, amongst others, Our audit procedures reviewing management’s assumptions relating to the expected future cash flows including overall sales projections and sales related to certain significant programs to publicly available data including analysts’ reports covering aerospace and airlines and existing customers’ contracts. We obtained information with respect to contract negotiations and management’s actions to face production and supply chain issues and compared these to supporting evidence. in comparison 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 of cash flow projections and growth rates by comparing management’s past projections to actual and historical performance. We compared management’s revenue and earnings projections per CGU for each of the next five years to market data and analysts’ expectations for the Group and industry, 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. Other information Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information; we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 25 Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 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 17, 2023 _____________________________________________ 1 CPA Auditor, public accountancy permit no. A121006 26 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS (In thousands of Canadian dollars) As at March 31, Assets Current assets Cash Accounts receivable Income tax receivable Inventories Derivative financial instruments Other current assets Property, plant and equipment, net Finite-life intangible assets, net Derivative financial instruments Deferred income tax assets Goodwill Other long-term assets Total assets Liabilities and shareholders’ equity Current liabilities Accounts payable and accrued liabilities Provisions Customer 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 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 Notes 20 2023 2022 12 13 14 15 16 13 24 17 14 18 19 13 20 20 19 13 24 21 22 23 $ 15,020 126,721 2,176 262,995 386 22,215 429,513 205,490 53,654 468 9,308 112,384 10,520 $ 821,337 $ 131,019 16,632 58,904 466 5,493 11,425 223,939 166,483 15,576 4,895 11,377 8,148 430,418 82,459 6,739 12,072 289,649 390,919 $ 821,337 $ 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 $ 813,358 Gilles Labbé Director HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 27 CONSOLIDATED STATEMENTS OF INCOME (In thousands of Canadian dollars, except per share data) For the fiscal years ended March 31, Notes 2023 2022 Sales Cost of sales Gross profit Selling and administrative expenses Other expenses (gains) 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 $ 543,622 $ 536,087 7, 8, 12 7, 8 9 10 24 11 470,087 73,535 48,556 (1,219) 444,992 91,095 44,028 2,309 26,198 44,758 7,575 4,270 18,623 40,488 4,798 8,348 $ 13,825 $ 32,140 13,825 32,525 — (385) $ 13,825 $ 32,140 $ 0.40 0.40 $ 0.91 0.90 28 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands of Canadian dollars) For the fiscal years ended March 31, Notes 2023 2022 Other comprehensive income (loss): Items that may be reclassified to net income Gains (losses) arising from conversion of the financial statements of foreign operations Cash flow hedges: Net losses on valuation of derivative financial instruments Net losses (gains) on derivative financial instruments transferred to net income Deferred income taxes (Losses) gains on hedges of net investments in foreign operations Deferred income taxes Items that are never reclassified to net income Defined benefit pension plans: (Losses) gains from remeasurement Deferred income taxes 23 23 23 25 $ 20,363 $ (11,059) (21,615) 7,193 3,808 (10,614) (5,229) 687 (4,542) (1,709) 451 (1,258) (817) (4,471) 1,394 (3,894) 6,378 (839) 5,539 5,507 (1,455) 4,052 Other comprehensive income (loss) $ 3,949 $ (5,362) 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. $ 13,825 $ 32,140 3,949 (5,362) $ 17,774 $ 26,778 17,774 — 27,163 (385) $ 17,774 $ 26,778 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 29 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands of Canadian dollars) Balance as at March 31, 2022 Common shares issued under the stock option plan Repurchase and cancellation of common shares Stock-based compensation expense Net income Other comprehensive income 22 22 22 23 Balance as at March 31, 2023 $ 82,459 Notes Issued capital Contributed surplus Accumulated other comprehensive income Retained earnings $ 82,189 1,437 $ 5,767 (334) $ 6,865 $ 282,461 — — Total equity attributable to the equity holders of the parent $ 377,282 1,103 Non- Controlling interests $ — — Total Shareholders’ equity $ 377,282 1,103 (1,167) — — — — 1,306 — — $ 6,739 — — (5,379) (6,546) — 1,306 — 13,825 13,825 5,207 (1,258) 3,949 — — — — (6,546) 1,306 13,825 3,949 $ 12,072 $ 289,649 $ 390,919 $ — $ 390,919 Notes 22 22 22 5 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) Balance as at March 31, 2022 — — — 1,173 — — — $ 5,767 23 — $ 82,189 Issued capital $ 86,222 2,031 Contributed surplus $ 5,126 (532) Accumulated other comprehensive income Retained earnings $ 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) — 32,525 32,525 (385) 32,140 4,052 (9,414) $ 6,865 $ 282,461 (5,362) $ 377,282 — $ — (5,362) $ 377,282 The accompanying notes are an integral part of these consolidated financial statements. 30 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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 on disposal of property, plant and equipment Net non-cash financial expenses Stock-based compensation expense Net change in non-cash items Cash flows related to operating activities Investing activities Net additions to property, plant and equipment Proceeds of 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 Proceeds from long-term debt Repayment of long-term debt Increase in deferred financing costs Repurchase and cancellation of shares Issuance of common shares under the stock option plan 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 Notes 2023 2022 15, 16 24 10 22 27 15 16 5 5 20 20 20 22 22 $ 13,825 $ 32,140 36,387 35,982 6,021 — 2,908 1,306 60,447 (30,387) 30,060 71 (850) 1,139 1,173 69,655 (6,489) 63,166 (18,641) (17,306) — (13,137) 3,486 — 2,881 (2,847) 2,041 (900) (28,292) (16,131) 7,046 3,145 (75,747) (16,310) (245) (6,546) 1,103 (555) (43,000) 1,499 (74,389) (55,221) 949 (592) (71,672) 86,692 (8,778) 95,470 $ 15,020 $ 86,692 $ $ $ 6,946 2,279 2,636 $ $ $ 7,460 522 4,895 The accompanying notes are an integral part of these consolidated financial statements. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the fiscal years ended March 31, 2023 and 2022 (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 17, 2023. 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. 32 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements NOTE 3. SIGNIFICANT ACCOUNTING POLICIES A. Foreign currency The consolidated financial statements are presented in Canadian dollars. Each entity in the Corporation accounts for transactions in its own functional currency and items included in the consolidated financial statements of each entity are measured using that functional currency. The functional currency of Héroux-Devtek and of the Canadian operations is the Canadian dollar. The functional currency of the U.S. operations is the U.S. dollar, the functional currency of the U.K operations is the British pound and the functional currency of 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 33 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. 34 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 35 The typical payment term is between 30 and 60 days and 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. 36 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements Hedges of net investments in foreign operations When 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 costs such as depreciation. 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 by the Corporation. 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 37 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 payment equal to the quoted price of the Corporation’s common share multiplied by the number of vested DSUs. 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. Intercompany sales are eliminated. 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. 38 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 39 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 Right-of-use assets and lease liabilities 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). 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. 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 40 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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 the highest of the fair value less costs of disposal and the value in use, 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; and, 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 41 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 was subject to the achievement of certain commercial objectives. The transaction did not result in a material gain or loss on disposal at the time. The commercial objectives related to the transaction were met during fiscal 2023, resulting in a $1,219 net gain included in Other expenses (gains) (note 9). 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: 2023 2022 $ 170,680 $ 149,368 372,942 386,719 $ 543,622 $ 536,087 United States Canada United Kingdom Spain Rest of Europe Other countries 2023 2022 $ 333,914 $ 313,218 32,970 39,320 36,424 73,282 40,873 $ 543,622 $ 536,087 33,257 36,875 29,599 68,463 41,514 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 2023 $ 1,010 $ 78 2022 650 585 5,656 11,124 Government assistance mainly includes research and development tax credits, other credits and grants, including in fiscal 2022 the Canadian Emergency Wage Subsidy and other pandemic relief measures (none in fiscal 2023). 42 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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) Supplies and small tools Maintenance and machinery repair Others Included in cost of sales, selling and administrative expenses: Foreign exchange gain (loss) upon conversion of net monetary items NOTE 9. OTHER EXPENSES (GAINS) 2023 2022 $ 203,379 $ 199,421 191,723 181,494 36,387 22,737 16,104 48,313 35,982 19,577 14,708 37,838 $ 518,643 $ 489,020 (105) 842 Other expenses (gains) are comprised of items whose separate disclosure may be useful to users of the financial statements in interpreting the Corporation’s financial performance. These items do not share the same function as those included in other financial statement captions and generally are not as indicative of the Corporation’s past or future operating performance. Other items in operating income Legal ruling Gain on a business divestiture (note 5) 2023 2022 $ — $ 2,309 (1,219) — $ (1,219) $ 2,309 Gain on a business divestiture The commercial objectives included in the agreement for the fiscal 2022 sale of Bolton operations to Ontic Engineering & Manufacturing UK Limited were achieved in September 2022, resulting in a net gain of $1,219 in fiscal 2023. 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 during the fourth quarter of fiscal 2022. 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 Net non-cash financial expenses Interest expense on long-term debt Interest income on cash 2023 2022 $ 3,140 $ 3,162 (1,207) (3,062) (194) 840 475 (146) 2,908 6,946 (2,279) 23 1,010 554 (548) 1,139 3,653 (522) $ 7,575 $ 4,270 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 43 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 2023 2022 34,384,106 35,748,639 100,857 274,423 34,484,963 36,023,062 1,288,000 189,000 March 31, 2023 March 31, 2022 $ 130,618 129,625 2,752 $ 83,396 115,172 1,774 $ 262,995 $ 200,342 An amount of $357,105 of inventory was recognized as cost of sales during the fiscal year 2023 ($342,525 for fiscal 2022). Reserves related to inventories are as follows, for fiscal year: Reserves recognized as cost of sales Reversal of prior-period reserves 2023 2022 $ 3,599 $ 2,847 2,317 1,081 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. 44 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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 Equity swap agreement 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, 2023 March 31, 2022 $ 386 $ 4,338 — 1,162 $ 386 $ 5,500 $ 468 $ 4,790 — — 8,469 1,070 $ 468 $ 14,329 $ 5,493 $ 5,493 $ 1,852 $ 1,852 $ 4,771 $ 830 124 — $ 4,895 $ 830 March 31, 2023 March 31, 2022 $ 9,907 5,917 4,504 376 1,511 $ 22,215 2,514 3,299 4,707 $ 5,635 3,931 3,243 2,463 1,147 $ 16,419 3,047 3,229 6,388 $ 10,520 $ 12,664 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 45 NOTE 15. PROPERTY, PLANT AND EQUIPMENT Cost: As at March 31, 2022 Additions Government assistance (note 7) Retirements and disposals Effect of changes in exchange rates As at March 31, 2023 Accumulated amortization: As at March 31, 2022 Amortization expense Retirements and disposals Effect of changes in exchange rates As at March 31, 2023 Buildings and leasehold improvements Machinery, equipment and tooling Land Other Construction in progress Total $ 15,758 $ 128,144 $ 280,581 $ 20,782 $ 2,443 $ 447,708 — — — 645 3,280 11,749 3,868 — (103) — — 5,452 4,016 (78) (982) 698 1,101 — — 26 19,998 (78) (1,085) 10,837 $ 16,403 $ 136,773 $ 296,346 $ 24,288 $ 3,570 $ 477,380 $ $ — — — — — $ 47,618 $ 176,382 $ 14,870 6,416 (101) 2,227 19,301 — 3,477 2,117 (984) 567 $ — $ 238,870 27,834 (1,085) — — — 6,271 $ 56,160 $ 199,160 $ 16,570 $ — $ 271,890 Net book value as at March 31, 2023 $ 16,403 $ 80,613 $ 97,186 $ 7,718 $ 3,570 $ 205,490 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 46 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements Right of use assets: The following tables reconciles the right-of-use assets for the Corporation as at March 31, 2023 and 2022 that are included in Property, Plant and Equipment: Cost: As at March 31, 2022 Additions Effect of changes in exchange rates As at March 31, 2023 Accumulated amortization: As at March 31, 2022 Amortization expense Effect of changes in exchange rates As at March 31, 2023 Net book value as at March 31, 2023 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 Building and leasehold improvements Machinery, equipment and tooling Other Total $ 17,121 $ 45,942 $ 2,277 $ 65,340 606 (914) 73 7 470 136 1,149 (771) $ 16,813 $ 46,022 $ 2,883 $ 65,718 $ 6,212 $ 27,734 $ 1,432 $ 35,378 1,179 150 4,037 (597) 682 (767) 5,898 (1,214) $ 7,541 $ 31,174 $ 1,347 $ 40,062 $ 9,272 $ 14,848 $ 1,536 $ 25,656 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 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 2023 2022 $ 19,998 $ 17,350 (78) 19,920 (1,149) (585) 16,765 (780) (130) 1,321 $ 18,641 $ 17,306 As at March 31, 2023, the cost of property, plant and equipment still in use and fully depreciated is $131,388 ($111,283 as at March 31, 2022). HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 47 NOTE 16. FINITE-LIFE INTANGIBLE ASSETS Cost: As at March 31, 2022 Additions Customers funding Government assistance (note 7) Retirements and disposals Effect of changes in exchange rates As at March 31, 2023 Accumulated amortization: As at March 31, 2022 Amortization expense Retirements and disposals Effect of changes in exchange rates As at March 31, 2023 Net book value as at March 31, 2023 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 Capitalized development costs $ 26,337 15,056 (2,858) (1,010) — Software $ 20,889 1,750 — — (349) 902 $ 37,525 $ 23,192 Customer relationships and contracts Total $ 65,539 $ 112,765 — — — — 3,616 $ 69,155 16,806 (2,858) (1,010) (349) 4,518 $ 129,872 $ 14,464 $ 16,450 $ 34,531 $ 65,445 2,190 — — $ 16,654 $ 20,871 Capitalized development costs $ 24,658 7,849 (5,520) (650) — — 1,298 (349) 810 $ 18,209 $ 4,983 Software $ 24,680 2,308 — — (5,324) (775) 5,065 — 1,759 $ 41,355 $ 27,800 Customer relationships and contracts 8,553 (349) 2,569 $ 76,218 $ 53,654 Total $ 68,059 $ 117,397 — — — (2,520) 10,157 (5,520) (650) (5,324) (3,295) $ 26,337 $ 20,889 $ 65,539 $ 112,765 $ 13,889 $ 20,285 $ 31,227 $ 65,401 575 — — $ 14,464 $ 11,873 2,178 (5,324) (689) $ 16,450 $ 4,439 4,587 — (1,283) $ 34,531 $ 31,008 7,340 (5,324) (1,972) $ 65,445 $ 47,320 48 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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 2023 $ 108,200 — 4,184 $ 112,384 2022 $ 115,970 (2,467) (5,303) $ 108,200 March 31, 2023 March 31, 2022 $ 22,485 58,835 26,880 $ 108,200 $ 23,902 59,943 28,539 $ 112,384 The following assumptions were used to measure recoverable amounts (value in use), as at: North America U.K. Spain March 31, 2023 March 31, 2022 Pre-tax discount rate Perpetual growth rate Pre-tax discount rate Perpetual growth rate 14.7 % 15.2 % 14.9 % 2.5 % 2.5 % 2.5 % 14.4 % 14.7 % 14.8 % 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, 2023 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, 2023: North America U.K. Spain Incremental increase in pre-tax discount rate 2.1 % 0.7 % 3.6 % Incremental decrease in perpetual growth rate 4.9 % 3.3 % 5.9 % HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 49 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, 2023 89,521 38,155 3,343 $ 131,019 $ March 31, 2022 71,637 39,442 3,429 $ 114,508 Onerous contracts $ 8,034 170 — (2,023) (2) — 522 $ 6,701 1,498 $ 5,203 Asset retirement obligations Product warranty Others (note 26) Total $ 6,055 $ 9,780 $ 12,884 $ 36,753 228 179 (72) — (390) — $ 6,000 — $ 6,000 1,096 2,172 3,666 — (1,259) (529) (53) 288 $ 9,323 6,886 $ 2,437 — (1,965) (3,054) (4) 151 $ 10,184 8,248 $ 1,936 179 (5,319) (3,585) (447) 961 $ 32,208 16,632 $ 15,576 As at March 31, 2022 Arising during the year Accretion expense Utilized Reversed Discount rate adjustment Effect of changes in exchange rates As at March 31, 2023 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, 2023 March 31, 2022 $ 58,821 84,508 75,000 20,497 (2,300) 236,526 10,835 $ 225,691 — 89,032 75,000 15,946 (2,070) 177,908 11,425 $ 166,483 Senior Secured Syndicated Revolving Credit Facility The Revolving Facility has a limit of $250,000, no amount outstanding as at March 31, 2023, and bears interest at SOFR + 1.1% representing an effective rate of 5.9% ($58,821 or US$47,000 Libor + 1.0% representing 1.3% as at March 31, 2022). It includes an accordion feature to increase the limit by an additional $200,000, subject to lenders’ approval, and is secured by essentially all assets of the Corporation and its subsidiaries. In May 2022, the Corporation reached an agreement to extend the Revolving Facility to a new maturity of June 2027 (as at March 31, 2022 - June 2026), 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. 50 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 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, 2023, 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 $1,207 ($3,062 in fiscal 2022), 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 6.6% as at March 31, 2023 (0.0% to 6.8% as at March 31, 2022). 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, 2023 and 2022, this facility was fully drawn. The Term Loan Facility matures in September 2028, bears interest at a rate of 5.0%, 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, 2023 ranged between 2.1% and 11.0% for leases (2.1% and 7.0% as at March 31, 2022), maturing from April 2023 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, 2023 March 31, 2022 $ 20,497 $ 28,274 1,149 — (6,703) 840 163 780 (534) (8,466) 1,010 (567) $ 15,946 $ 20,497 The expense related to short-term leases and low-value assets leases during the years ended March 31, 2023 and 2022 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 its covenants as at March 31, 2023. 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 March 31, 2023 $ 236,526 March 31, 2022 $ 250,699 8,195 (75,747) — 475 (245) 1,933 840 5,931 $ 177,908 3,925 (16,310) (534) 554 (555) 100 1,010 (2,363) $ 236,526 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 51 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, 2023 March 31, 2022 $ 3,377 725 1,063 1,174 $ 6,339 $ 5,617 — 953 1,578 $ 8,148 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 2023 Issued capital Number 2022 Issued capital Number 34,486,776 $ 82,189 36,764,710 $ 86,222 103,000 1,437 134,345 (482,703) (1,167) (2,412,279) 2,031 (6,064) 34,107,073 $ 82,459 34,486,776 $ 82,189 On May 19, 2022, the Corporation announced a Normal Course Issuer Bid ("NCIB") for the purchase for cancellation of up to 1,896,079 common shares on the open market through the TSX or alternative trading facilities. The NCIB began on May 25, 2022, and was set to end on May 24, 2023, 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, 2023, the Corporation has purchased and cancelled 482,703 common shares for a cash consideration of $6,546 representing a weighted average price of $13.56 per share (2,412,279 common shares for a cash consideration of $43,000 representing a weighted average price of $17.83 per share as at March 31, 2022). The $5,379 excess of purchase price over the carrying value was charged to retained earnings. 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. 52 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements Variations in stock options outstanding and related compensation expense were as follows, for fiscal year: Balance at the beginning of the year Granted Exercised Expired Cancelled / forfeited Balance at the end of the year 2023 Weighted- average exercise price Number of stock options 2022 Weighted- average exercise price Number of stock options 1,503,750 $ 14.19 1,449,095 $ 13.48 247,000 (103,000) (2,250) (10,000) 15.42 10.71 10.71 15.42 197,000 (134,345) — 17.45 11.16 — (8,000) 17.45 1,635,500 $ 14.59 1,503,750 $ 14.19 Stock option expense for fiscal 2023 was $1,306 ( $1,173 in 2022 ). The weighted-average share price at the date of exercise of stock options in fiscal 2023 was $15.85 ($17.86 in 2022). 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 As at March 31, 2023, 1,635,500 stock options were issued and outstanding, detailed as follows: Exercise price $9.83 $14.93 to $15.42 $16.03 to $17.45 Outstanding options Weighted-average years to maturity Weighted-average exercise price 4.16 3.42 3.42 3.58 $9.83 15.15 16.45 $14.59 Number 347,500 569,000 719,000 1,635,500 2023 247,000 $ 6.12 $ 1,512 2022 197,000 $ 6.30 $ 1,241 5.5 years 5.4 years 36 % 1.3 % None 2.8 % 36 % 1.1 % None 1.0 % Vested options Number 173,000 332,000 493,375 998,375 Weighted-average exercise price $9.83 14.95 16.24 $14.70 As at March 31, 2023, 2,808,257 common shares are reserved for issuance upon exercise of stock options, of which 2,122,662 remained to be issued, compared to 2,225,662 as at March 31, 2022. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 53 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 2023 2022 199,471 56,935 — 256,406 $ (95) $ 3,242 192,108 31,676 (24,313) 199,471 $ 540 $ 3,332 2023 2022 285,350 129,300 (98,200) (11,600) 304,850 300,150 88,150 (86,800) (16,150) 285,350 $ 388 $ 3,185 $ 1,420 $ 3,999 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, 2022 Other comprehensive (loss) income Balance as at March 31, 2023 Balance as at March 31, 2021 Other comprehensive income (loss) Balance as at March 31, 2022 Exchange differences on conversion of foreign operations Hedge of net investments in foreign operations Cash flow hedges Total $ 3,005 $ 4,637 $ (777) $ 6,865 20,363 (10,614) (4,542) 5,207 $ 23,368 $ (5,977) $ (5,319) $ 12,072 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 54 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements NOTE 24. INCOME TAXES Income tax expense is as follows, for fiscal year: Consolidated statements of income Current income tax expense (recovery) Deferred income tax expense Income tax expense reported in the consolidated statements of income Consolidated statements of changes in shareholders’ equity Expense (recovery) related to items charged or credited directly to retained earnings 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 2022) Income tax rate differential – foreign subsidiaries Permanent differences Write-down (recognition) of deferred tax asset Other items Income tax expense 2023 2022 $ (1,223) 6,021 $ 4,798 $ 8,277 71 $ 8,348 $ (451) $ 1,455 (4,495) (555) $ (4,946) $ 900 2023 $ 4,935 (152) 183 656 (824) $ 4,798 2022 $ 10,689 (2,010) (475) (301) 445 $ 8,348 Significant deferred income tax assets and liabilities arising from the effect of temporary differences are as follows: As at Deferred income tax assets Non-deductible reserves Inventories Receivables Derivative financial instruments Lease liabilities Governmental authorities loans Deferred tax benefits from tax losses and deductible expenses carried forward Total deferred income tax assets Deferred income tax liabilities Investment and other tax credits Property, plant and equipment Customer relationships and contracts Derivative financial instruments Total deferred income tax liabilities Net deferred income tax liabilities March 31, 2023 March 31, 2022 $ 6,605 5,984 150 2,323 1,908 665 14,854 $ 32,489 (830) (25,030) (8,698) — $ (34,558) $ (2,069) $ 7,752 5,729 (25) — 2,090 284 19,261 $ 35,091 (547) (24,945) (9,002) (2,607) $ (37,101) $ (2,010) 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, 2023 March 31, 2022 $ 9,308 $ 6,557 (11,377) (8,567) $ (2,069) $ (2,010) HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 55 As at March 31, 2023, net deferred income tax assets of $12,015 were recognized ($9,791 as at March 31, 2022) 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, 2023, 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 $36,919 ($32,962 as at March 31, 2022). 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, 2023 March 31, 2022 $ 14,364 $ 23,397 83,017 12,431 3,765 75,302 9,106 5,480 $ 113,577 $ 113,285 As at March 31, 2023, deferred income tax assets of $8,217 and deferred income tax liabilities of $4,679 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, 2023, the temporary differences associated with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $23,840 ($22,100 in 2022). 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 2023, 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 $1,028 ($1,097 in 2022) while the cash contributed to its defined contribution plans amounted to $3,746 ($3,287 in 2022). 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 each plan actuarial valuation date 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. 56 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements • 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 52% in equity funds, 30% in debt securities, 14% annuity buy-in insurance contracts and 4% 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 Irrecoverable surplus (Effect of asset ceiling) 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, 2023 March 31, 2022 $ 64,443 70,241 — 5,798 (473) $ 5,325 6,388 (1,063) $ 58,966 68,980 (5,876) 4,138 (384) $ 3,754 4,707 (953) 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 from changes in financial assumptions Experience (losses) gains Return on plan assets, excluding interest income on plan assets Change in irrecoverable surplus other than interest 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 2023 791 (194) 293 890 $ $ 2022 $ 1,085 23 227 $ 1,335 2023 2022 $ — 6,565 (166) (2,232) (5,876) $ (1,709) $ 1,203 5,524 5 (1,225) — $ 5,507 2023 422 $ 2022 $ 1,071 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 57 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 from changes in financial assumptions Experience gains Benefits paid Defined benefit obligations at the end of the year The fair value of plan assets is as follows: As at Fair value of plans’ assets at the beginning of the year Interest income on plans’ assets Return on plans’ assets, excluding interest income on plans’ assets Contributions by the employer Contributions by plans’ participants Benefits paid Administrative costs Fair value of plans’ assets at the end of the year The plans’ assets consist of: As at Equity securities Debt securities Annuity buy-in insurance contracts 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 58 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements March 31, 2023 March 31, 2022 $ 69,932 1,085 2,319 744 (1,203) (5,524) (5) (2,432) $ 64,916 $ 64,916 791 2,460 699 — (6,565) 166 (3,117) $ 59,350 March 31, 2023 March 31, 2022 $ 69,988 2,296 (1,225) 1,097 744 (2,432) (227) $ 70,241 $ 70,241 2,654 (2,232) 1,028 699 (3,117) (293) $ 68,980 March 31, 2023 March 31, 2022 62 % 20 % 15 % 3 % 100 % 52 % 30 % 14 % 4 % 100 % 2023 4.85 % 3.50 % 87 89 86 88 2022 3.98 % 3.50 % 87 89 86 88 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, 2023: 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 % (4.6) 5.1 — — 2.0 (2.1) Corporation’s pension benefits future cash flows The cash contributions expected to be made to these plans in fiscal year 2024 amount to $844. The duration of the defined benefit obligations at March 31, 2023 is 10.5 years (13.4 years in 2022). 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, 2023 March 31, 2022 $ 2,233 2,357 8,290 16,857 $ 29,737 $ 2,399 2,563 8,616 16,962 $ 30,540 2023 $ 3,746 2022 $ 3,287 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: 2024 2025 and thereafter Building, machinery and equipment acquisition commitments $ 1,984 $ — 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. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 59 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, 2023, the duration of these indemnification agreements could extend up to fiscal year 2024. As at March 31, 2023, an amount of $4,795 ($4,795 in 2022) 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, 2023, the Corporation has outstanding letters of credit amounting to $19,024 ($18,824 in 2022). Contingencies The Corporation is involved in litigations and claims in the normal course of business. Management is of the opinion that any resulting settlements would not materially affect the Corporation’s consolidated financial position and operating results. NOTE 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 Accounts 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 2023 $ (18,003) $ (55,323) 3,955 19,558 (5,394) 27,658 (2,838) $ (30,387) $ 2022 (8,515) 11,026 (7,248) 10,418 (5,333) (9,823) 2,986 (6,489) March 31, 2023 Canada U.S. U.K. Spain Total $ 89,479 $ 64,161 $ 16,449 $ 35,401 $ 205,490 18,236 5,404 4,544 18,502 925 29,949 53,654 59,941 28,537 112,384 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 26,878 47,320 108,200 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 60 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements 2023 3,438 $ 74 1,958 5,470 $ 2022 3,872 97 2,349 6,318 $ $ 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, 2023 March 31, 2022 Fair value hierarchy Carrying amount Fair Value Fair value hierarchy Carrying amount Fair Value Level 1 $ 15,020 $ 15,020 Level 1 $ 86,692 $ 86,692 Derivative financial instruments Level 2 854 854 Level 2 19,829 19,829 $ 15,874 $ 15,874 $ 106,521 $ 106,521 Financial liabilities Derivative financial instruments Long-term debt, including current portion Level 2 $ 10,388 $ 10,388 Level 2 $ 2,682 $ 2,682 Level 2 179,978 178,367 Level 2 238,826 243,081 $ 190,366 $ 188,755 $ 241,508 $ 245,763 Derivative financial instruments – The fair value of derivative financial instruments recognized in the consolidated balance sheets has been determined using the Corporation’s valuation models and compared to the fair value information provided by the financial institutions using exchange rates or interest rates quoted in the active market and adjusted for the credit risk added by the financial institution. These models project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative financial instruments and factors observable in external markets data, such as period-end interest-rate swap and foreign exchange rates. Long-term debt – The fair value of long-term debt has been determined by calculating the present value of long-term debt using the rate that would be negotiated under the economic conditions at year-end. 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 approximates 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 when transacting in a currency other than the functional currency of a business unit. This primarily occurs in the case of transactions denominated in U.S. Dollars carried out in the Corporation’s operations in Canada, Spain and the United Kingdom. In an effort to mitigate these exposures, the Corporation makes use of derivative contracts. The Corporation’s foreign exchange policy requires the hedging of 50% to 100% of the identified foreign currency exposure, after accounting for any natural hedge arising from opposing cash flows of the same foreign currency. HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 61 As at March 31, 2023, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $438,331 denominated in USD, EUR and GBP ($341,604 in 2022). This amount includes mainly contracts with nominal value of US$241,550 convertible into Canadian dollars at an average rate of 1.3143 and contracts with nominal value of US$48,000 convertible into GBP at an average rate of 0.8067. These contracts mature at various dates between April 2023 and March 2028, with the majority maturing in fiscal years 2024 and 2025. As at March 31, 2023, 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 (353) 1,185 $ British pound impact (60) (1,612) $ Euro impact (78) (703) $ 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 the variable interest rate on its Revolving Facility (see note 20). In addition, interest rate fluctuations could also have an impact on the interest income earned on Héroux-Devtek’s cash deposits. 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 As at March 31,2022, the Corporation had three 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 matured between May 2022 and September 2028, and mainly bore interest at a weighted average fixed rate of 2.4%. During the fiscal year ended March 31, 2023, one of these swaps expired and the other two were unwound for cash proceeds totaling $11,260. 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, 2023, the equity swap agreement covered 400,000 common shares of the Corporation at a price of $13.39 per share and matures in June 2024 (300,000 common shares at a price of $13.52 per share, and maturity of June 2023 as at March 31,2022). 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 46% of the Corporation’s fiscal 2023 sales are made to the top four customers (44% in 2022). More specifically, in fiscal 2023, the Corporation had one customer representing 15% of its consolidated sales (one customer representing 15% in 2022). 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 2023 (3.5% in 2022) of the Corporation’s consolidated sales. 62 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements The Corporation has historically not made any significant write-off of accounts receivable, and as at March 31, 2023, 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, 2023: Balance, beginning of year Arising during the year Reversed Amounts written off Effect of changes in foreign exchange rates 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 2023 505 90 (165) — (1) 429 $ $ 2022 $ 1,694 — (1,092) (97) — 505 $ March 31, 2023 March 31, 2022 $ 117,349 $ 99,687 6,609 3,192 127,150 (429) 4,669 1,538 105,894 (505) $ 126,721 $ 105,389 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, 2023, 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. FVTOCI (1) $ — $ — 854 A.C. 15,020 126,721 — 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, 2023, 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 29,725 15,964 5,493 (1) The carrying amount of the long-term debt is $179,978 (note 20) . < 1 year 131,019 $ 1 to 3 years 4 to 5 years > 5 years — $ — — $ — — $ — 36,984 4,820 31,816 75 139,611 — Total 131,019 29,725 224,375 10,388 HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements – 63 NOTE 32. CAPITAL RISK MANAGEMENT The general objectives of the Corporation, in terms of capital management, reside in the preservation of Héroux-Devtek’s capacity to continue operating and provide an adequate return on investment to its stakeholders while 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, 2023, 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, 2023 March 31, 2022 $ 11,425 $ 10,835 166,483 2,070 15,020 $ 164,958 390,919 0.4:1 225,691 2,300 86,692 $ 152,134 377,282 0.4:1 64 – HÉROUX-DEVTEK INC. – Fiscal 2023 Consolidated Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS For the fiscal year ended March 31, 2023 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 ..................................................................................................................................................................... Derivative Financial Instruments ................................................................................................................................................. Internal Controls and Procedures ................................................................................................................................................ Critical Accounting Estimates ..................................................................................................................................................... Selected Financial Information .................................................................................................................................................... Shareholder Information ............................................................................................................................................................. Additional Information and Continuous Disclosure ........................................................................................................................ 67 67 68 69 70 73 76 78 78 79 80 82 83 84 84 85 86 86 88 88 88 89 94 94 95 97 98 98 66 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A OVERVIEW The purpose of this management discussion and analysis (‘’MD&A’’) is to provide the reader with an overview of how the financial position of Héroux-Devtek Inc. and its subsidiaries (‘’Héroux-Devtek’’, the ‘’Corporation’’ or “Management”) evolved between March 31, 2022 and March 31, 2023. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2023 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, 2023, 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, 2023 and 2022 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 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. HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 67 HIGHLIGHTS OF THE YEAR Fiscal year Sales Operating income 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) 2023 2022 $ 543,622 $ 536,087 44,758 83,049 32,140 33,839 63,166 45,894 26,198 61,366 13,825 12,606 30,060 (1,718) $ 0.40 $ 0.37 March 31, 2023 0.90 0.95 March 31, 2022 $ 864,000 $ 682,000 (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. Operating Environment After a difficult first quarter with $114.0 million of sales, Héroux-Devtek’s throughput improved throughout the year, reaching a high of $156.0 million in Q4 for a total of $543.6 million for the year compared to $536.1 million last year. The positive impact of this improvement in sales on profitability however was more than offset by the continued effect of supply chain disruptions and inflation on production costs. These factors resulted in a decrease in operating income and net income compared to the last fiscal year. The operating environment remains volatile and several factors are still rendering the consistent generation of throughput challenging: • • • Lead times for the procurement of raw material continue to increase and Russia’s invasion of Ukraine limits the supply of certain material; Although the inflation peak is behind us, the impact of higher costs, rising interest rates and raw material lead times continue putting pressure on the aerospace supply chain; and, Skilled workforce availability remains a challenge as the tight labour market continues to impact both Héroux-Devtek and its supply chain. The Corporation’s order book stood at $864 million, compared to $682 million last year, bolstered by both civil and defence orders. This amount is nearly a record high and speaks to the health of Héroux-Devtek’s customer relationships; the challenge remains delivering on these orders in a timely and efficient manner given the difficult environment. Key Events ▪ ▪ ▪ ▪ The Corporation generated sales of $543.6 million compared to sales of $536.1 million last fiscal year, or a 1.6% improvement, due mainly to the positive impact of foreign exchange rates on sales denominated in foreign currencies. These sales resulted in operating income and adjusted EBITDA of $26.2 million and $61.4 million, respectively, compared to $44.8 million and $83.0 million, last fiscal year. The decrease in profitability is mainly the result of inflation and production system inefficiencies driven by the challenging environment described above and a less favourable product mix. Last year’s COVID-19 disruptions were partly compensated for by government relief measures bearing a positive impact of 1.4% of sales (none this year). The fiscal year closed with diluted earnings per share at $0.40 and adjusted EPS of $0.37, compared to $0.90 and $0.95 last fiscal year. Héroux-Devtek generated cash flows related to operating activities of $30.1 million and free cash flow usage of $1.7 million during fiscal 2023, compared to $63.2 million and free cash flow of $45.9 million in fiscal 2022. The decreases are mainly related to the investment in inventory levels made to stabilize the production system and mitigate the effect of supply chain delays. 68 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A ▪ ▪ ▪ In August 2022, the Corporation announced a major contract with Boeing for the repair and overhaul of the main landing gear and side braces for the F/A-18 E/F super Hornet and the EA-18G Growler. The first phase of the contract covers 40 aircraft and is expected to be followed by options for the sustainment of the complete U.S. Navy fleet of over 600 aircraft. In November 2022, the Corporation announced a contract with Embraer to design, develop and manufacture the main deck cargo door actuation system for the E190F and E195F Freighter conversion program. The agreement will be fulfilled by Héroux-Devtek’s team in Spain and includes the delivery of spare parts and aftermarket services for the life of the program. Subsequent to year end, in April 2023, the unionized employees of the Corporation’s Longueuil, Québec, facility voted in favour of the renewal of a three-year collective agreement which extends through April 30, 2026. The renewal concerns approximately 200 employees. OVERVIEW OF THE BUSINESS Héroux-Devtek Inc. (TSX: HRX) is an international company specializing in the design, development, manufacture and repair and overhaul 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 market segments. In the defence market segment, 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 market segment, 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 2023, the Corporation’s four largest customers represented approximately 46% 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 HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 69 Fiscal 2023 sales, BTP* vs proprietary50.2%49.8%Proprietary productsBuild-to-printFiscal 2023 sales mix by end customer locationCanada: 6.1%United States: 61.4%United Kingdom:6.8%Rest of Europe: 12.6%Spain: 5.4%Other: 7.7%ECONOMIC OUTLOOK Travel recovers and defence spending increases amid rising geopolitical tensions With several countries removing COVID-related travel restrictions early in 2022, global passenger traffic staged a strong recovery last year. International air travelers returned in numbers, more than doubling from prior year levels, even though travel conditions were more difficult1. Consumer demand highlighted the resilience of the airline sector, despite higher ticket prices and prolonged airport queues as a result of the capacity constraints and delays restoring global air travel infrastructure to pre-COVID levels. Meanwhile, defence spending maintained its momentum in 2022, growing for the eighth consecutive year. Russia’s invasion of Ukraine has brought attention to the potential for military conflicts and prompted numerous countries to substantially increase their military expenditures, with some announcing long-term plans to increase their spending levels over periods spanning up to a decade. Production environment impacted by supply challenges and inflation These positive advances in commercial air travel and global defence spending boosted the backlog of aircraft manufacturers and suppliers to near record levels, setting the industry up nicely for years to come. The aerospace production environment on the other hand had a challenging year in 2022. Russia and Ukraine are major producers of rare metals essential for critical aerospace components, including titanium. As a result of their conflict, lead times for the procurement of these rare metals increased significantly in 2022, limiting their supply and causing the aerospace supply chain to incur costs and inefficiencies due to shortages and efforts to find and qualify new sources. Energy costs rose sharply as a consequence of the Russia-Ukraine conflict as well, particularly in Europe, where many countries are striving to find alternative energy supplies to oil and gas from Russia. The lower supply and redistribution of demand to other sources drove up prices and contributed to the overall inflationary pressures affecting production costs. In North America, government stimulus combined with supply chain disruptions and high demand from consumers drove inflation over 6%, a significant departure from the relatively low inflationary environment of the previous decade. Lastly, central banks worldwide increased benchmark interest rates in an effort to curb inflationary pressures, increasing the cost of capital for leveraged firms and putting some financially fragile suppliers at risk. It is anticipated that supply chain obstacles will persist throughout the year. Civil Market Passenger activity According to data from IATA, global passenger traffic in 2022 (measured in revenue passenger kilometers or RPKs) rose 64.4% compared to 20212. Full-year 2022 traffic was at 68.5% of pre-pandemic (2019) levels. Within this, international traffic in 2022 climbed 152.7% versus 2021 and reached 62.2% of 2019 levels. Global production backlog and long-term perspectives Globally, the civil aircraft backlog stood at 11,8173 at the end of December 2022, a 3.2% decline from the same time last year, but still representing many years of production at current rates. Deliveries totaled 1,185, a 24.6% increase from 2021, as production capabilities improved following the lifting of pandemic restrictions. According to Boeing's projections, the global aviation industry is expected to require a total of 41,170 new airplanes over the next 20 years in order to meet growing demand and improve the global fleet’s fuel efficiency. Single- aisle aircraft are estimated to account for approximately 75% of this total, while widebody aircraft are projected to represent around 18%4. Business jets In contrast to the impact of COVID-19 on the market for large commercial aircraft, the delivery of business jets has shown notable resilience. Business jet manufacturers managed to deliver a total of 712 units in 2022, representing a marginal increase of only two units compared to 2021. However, it is worth noting that their collective billings experienced a significant growth of 5.8%, amounting to US$22.9 billion in 20225. 1 Source : Passenger Demand Recovery Continued in December 2022 & for the Full Year, IATA, February 6, 2023 2 Source : Passenger Demand Recovery Continued in December 2022 & for the Full Year, IATA, February 6, 2023 3 Source: Airbus and Boeing Report December and Full-Year 2022 Commercial Aircraft Orders and Deliveries, January 16, 2023 4 Source: Commercial Market Outlook 2022–2041, Boeing, July 16, 2022 5 Source: GAMA Releases 2022 Aircraft Shipment and Billing Report , GAMA, February 22, 2023 70 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A Honeywell's Global Business Aviation Outlook projects an increase in the demand for new business jets. The forecast indicates that between 2023 and 2032, up to 8,500 new business jet deliveries are anticipated, with an estimated value of US$274 billion. These figures reflect a significant 15% rise in both deliveries and expenditures compared to the corresponding 10-year forecast made one year prior.6 Air cargo Global demand for air cargo took a step back in 2022 from 2021 levels which were unusually elevated due to the onset of COVID-19, but overall the levels were close to the 2019 performance. Throughout the entire year, the global demand, measured in cargo tonne-kilometers (CTKs*), decreased by 8.0% compared to 2021, with a slightly larger decline of 8.2% for international operations. When compared to 2019, there was a decrease of 1.6% in both global and international air cargo demand7. Boeing forecasts that air cargo will grow more than 60% through 2041, implying an average compound rate of 4.1% per year, an upward revision of 0.1% compared their 2021 forecast. They estimate that robust market growth in East Asia, acceleration of global e-commerce and evolution of supply chains will be key drivers over the forecast period8. Defence Market Military expenditures Total global military expenditure rose 3.7% in 2022 to reach a new high of US$2,240 billion, with the three largest spenders — the United States, China and Russia—accounted for 56% of the total9. Global spending grew by 19% from 2013 to 2022 and has risen every year since 2015. Russia’s invasion of Ukraine was a major driver of the growth in spending in 2022, with military expenditure in Europe rose by 13% during the year, which was the largest annual increase in the post-cold war era10. The exceptional growth was largely driven by substantial increases in Russian and Ukrainian spending, but many other European countries, such as France, Germany and the UK boosted their military budgets as well. This trend is expected to continue, as a number of countries made pledges to boost their military spending, in some cases for several years11. Between 2021 and 2022, US military expenditure grew by 8.8% in nominal terms, but the 8.1% inflation rate in the same period, the highest annual level since 1981, meant that real-terms expenditure went up by only 0.7%12. In spite of the marginal real-terms increase, spending still totaled US$877 billion, representing 3.5% of GDP. Early indications suggest additional budget increases, as on March 9, 2023, the Biden-Harris Administration submitted a proposed Fiscal 2024 Budget request of US$842 billion for the Department of Defense, an increase of US$26 billion over 2023 levels and US$100 billion more than 2022. Of this amount, US$61.1 billion is earmarked for air power, including fighter jets13. Fighter jets According to Teal Group, the fighter and attack aircraft segment is currently experiencing its strongest performance in nearly three decades. This growth is primarily attributed to factors such as aging fleets, heightened global tensions, extensive aircraft utilization, and the ramp-up of the F-35 program. As a result, the demand for fighters is expected to continue expanding in the foreseeable future. They forecast the production of 4,677 fighters worth US$349.8 billion in 2022 dollars between 2022 and 2031. For comparison, a total of 2,605 fighter jets worth US$207.3 billion, in 2021 dollars, were built between 2011 and 202014. The Lockheed Martin F-35 has come to dominate this market and, according to Teal Group, will capture 46% of the market by value over the next ten years. Other programs, such as the F-18, F-15, Gripen and Eurofighter are expected to make up 10% of the balance15. 6 Source: Honeywell Forecast Shows Strong Growth For Business Aviation As Purchase Plans Increase Sharply, Honeywell, October 16, 2022 7 Source: Air Cargo Closes 2022 Near Pre-Pandemic Levels, IATA, February 6, 2023 8 Source: World Air Cargo Freighter Industry Forecast (WACF) 2022-2041, Boeing, November 1, 2022 9 Source: World military expenditure reaches new record high as European spending surges, SIPRI, April 24, 2023 10 Source: Trends in world military expenditure, 2022, SIPRI, April 2023 11 Source: World military expenditure passes $2 trillion for first time, Stockholm International Peace Research Institute, April 25, 2022 12 Source: Trends in world military expenditure, 2022, SIPRI, April 2023 13 Source: Department of Defense Releases the President's Fiscal Year 2024 Defense Budget, US Department of Defense, March 2023 14 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, December 2022 15 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, December 2022 HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 71 Military transport aircraft Production of military transport aircraft is set to remain stable over the next decade. Smaller transport aircraft such as the Airbus CN-235/ C295, which is projected to reach its production peak in 2027, will represent nearly 44% of total production. This growth will drive the small transport aircraft segment to surpass the production of medium-sized aircraft like the Lockheed C-130J, which is anticipated to decline by half over the next decade. Limited aircraft production represents an opportunity for the MRO (Maintenance, Repair, and Overhaul) and spare parts businesses16. Military helicopter The military rotorcraft market is projected to experience a marginal increase over the next 10 years, with the number of rotorcraft produced rising from 409 in 2022 to 427 by 2031. The peak production is expected to occur in 2027, reaching a total of 525 units. Similar to the military transport aircraft segment, the market is still dominated by older helicopter models such as the Boeing AH-64, which was first introduced in 1965, and the Sikorsky UH60L/M, with its initial model introduced in 1974. In 2009, to address the need for modernization, the US Army undertook the Future Vertical Lift program. This initiative aims to develop a new family of military helicopters for various purposes, including attack, reconnaissance, and long-range assault, with the intention of replacing the majority of existing Army helicopters17. On the other hand, the United States Navy declared Full Rate Production for the CH-53K program in December 2022, a decision that is expected to increase the production to more than 20 helicopters annually in the coming years18. 16 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, July 2022 17 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, December 2022 18 Source: US Marines’ CH-53K King Stallion cleared for full-rate production, The Defense Post, Dec 27, 2022 72 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A OPERATING RESULTS Quarters ended March 31, Fiscal years ended March 31, 2023 2022 Variance 2023 2022 Variance Sales Gross profit Selling and administrative expenses Other expenses (gains) 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 In dollars per share Earnings per share Diluted earnings per share Adjusted EPS(1) $ 155,978 $ 147,459 $ 8,519 $ 543,622 $ 536,087 $ (3,150) 73,535 91,095 22,741 12,862 — 9,879 1,175 2,416 $ $ $ 6,288 $ 6,288 $ 19,595 $ 25,891 12,119 2,309 11,463 (1,643) 743 (2,309) (1,584) 2,818 1,647 11,459 $ 13,158 $ 22,149 $ 769 (5,171) $ (6,870) $ (2,554) $ 48,556 (1,219) 26,198 7,575 4,798 13,825 $ 12,606 $ 61,366 $ 44,028 2,309 44,758 4,270 8,348 32,140 $ 33,839 $ 83,049 $ 7,535 (17,560) 4,528 (3,528) (18,560) 3,305 (3,550) (18,315) (21,233) (21,683) 14.6% 8.2% 6.3% 17.6% 8.2% 7.8% -300 bps — bps -150 bps 13.5% 8.9% 4.8% 17.0% 8.2% 8.3% -350 bps 70 bps -350 bps (0.58) (1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures. 0.37 $ 0.18 $ $ $ $ 0.18 $ 0.18 $ 0.33 $ 0.33 $ 0.38 $ (0.15) $ (0.15) $ (0.20) $ 0.40 $ 0.40 $ 0.91 $ 0.90 $ 0.95 $ (0.51) (0.50) Sales HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 73 Fiscal YearSales (millions)$483.9$613.0$570.7$536.1$543.6201920202021202220232023 Sales by SectorCivil31%Defence69% Sales can be broken down by market segment as follows: Defence Civil Total Defence Civil Total Fiscal years ended March 31, 2023 2022 FX Impact Net variance $ 372,942 $ 386,719 $ 6,301 $ (20,078) 170,680 $ 543,622 $ 536,087 $ 149,368 2,883 9,184 $ 18,429 (1,649) (5.2) % 12.3 % (0.3) % Quarters ended March 31, 2023 2022 FX Impact Net variance $ 107,078 $ 109,518 $ 4,126 $ (6,566) 48,900 37,941 $ 155,978 $ 147,459 $ 1,888 6,014 $ 9,071 2,505 (6.0) % 23.9 % 1.7 % The following analysis excludes the impact of foreign exchange fluctuations which are itemized in the tables above. Defence The $20.1 million and $6.6 million net decreases for the fiscal year and the fourth quarter, respectively, were mainly driven by the current operating environment as described in the highlight section partly offset by the ramp up of the deliveries for the F-18 program with Boeing for the fiscal year and the CH-53k program with Sikorsky during the fourth quarter. Civil The respective $18.4 million and $9.1 million net increases, compared to last year, for the fiscal year and fourth quarter, respectively, were mainly driven by the increase in deliveries for the Boeing 777, Embraer Praetor and Falcon 6x programs. Gross Profit Gross profit decreased from 17.0% of sales last year to 13.5% this year, and from 17.6% to 14.6% for the quarter, mainly due to: • • • Inefficiencies resulting from the production system disruptions mentioned above; The effect of inflation, more specifically on general production supplies and utilities; and, A less favourable product mix. During the fiscal year and quarter ended March 31, 2022, Covid-related disruptions were also partly compensated for by government relief measures bearing respective 1.4% and 0.7% favourable impacts on gross profit (none this year). Selling and Administrative Expenses Selling and Administrative Expenses Less: Net gains (losses) on conversion of net monetary items 2023 Quarters ended March 31, 2022 Fiscal years ended March 31, 2022 $ 12,862 $ 12,119 $ 48,556 $ 44,028 842 $ 13,542 $ 11,884 $ 48,451 $ 44,870 (235) (105) 2023 680 As a percentage of sales 8.7 % 8.1 % 8.9 % 8.4 % When excluding net gains (losses) on conversion of net monetary items, the increases in Selling and Administrative Expenses as a percentage of sales fiscal year and fourth quarter when compared to last year mainly relate to higher employee-related costs, including the effect of share price fluctuations on stock-based compensation expense, and higher professional fees. 74 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A Other Expenses (gains) Other expenses (gains) are comprised of items whose separate disclosure may be useful to users of the financial statements and MD&A in interpreting the Corporation’s financial performance. These items do not share the same function as those included in other financial statement captions and generally are not as indicative of the Corporation’s past or future operating performance. Other expenses (gains) comprise the following: Other expenses (gains) in operating income Gain on business divestiture Legal ruling Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ $ — $ — — $ — $ 2,309 2,309 $ (1,219) $ — (1,219) $ — 2,309 2,309 Gain on a business divestiture The commercial objectives included in the agreement for the fiscal 2022 sale of Bolton operations to Ontic Engineering & Manufacturing UK Limited were achieved in September 2022, resulting in a net gain of $1.2 million in fiscal 2023. See Business Divestiture and Purchase of Minority Interest under Additional Information for further details. 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 during the fourth quarter of fiscal 2022. Operating Income Operating income decreased from 8.3% to 4.8% of sales this fiscal year and from 7.8% to 6.3% of sales for the quarter compared to the same periods last fiscal year mainly as a result of the factors described above. Year-over-year, foreign exchange fluctuations had a favourable net impact on operating income totaling $1.7 million, or 0.3% of sales, for the fiscal year and $1.6 million, or 1.0% of sales, for the fourth quarter. Net Financial Expenses Interest accretion on governmental authorities loans Adjustments to estimates related to governmental authorities loans Interest on defined benefit obligations Interest on leases Amortization of deferred financing costs Other accretion and adjustments Net non-cash financial expenses Interest on long-term debt Interest income on cash $ $ Quarters ended March 31, 2022 816 (3,062) (49) 237 124 (425) $ (2,359) 815 $ (99) $ (1,643) 2023 822 (1,207) (250) 231 117 185 $ (102) $ 2,111 (834) $ 1,175 Fiscal years ended March 31, 2022 $ 3,162 (3,062) 23 1,010 554 (548) $ 1,139 $ 3,653 (522) $ 4,270 2023 $ 3,140 (1,207) (194) 840 475 (146) $ 2,908 $ 6,946 (2,279) $ 7,575 HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 75 The increase in prevailing interest rates had the effects of increasing the effective interest rate payable on the Corporation’s Revolving Facility from 1.1% to 5.9% over the course of the fiscal year, while increasing the interest rate received on average cash balances outstanding from 0.8% to 5.1%. These factors largely offset each other during the fiscal year and fourth quarter. Net financial expenses increased, otherwise, due to the following two main factors: • • A lower gain on revision of government loan repayment estimates (see Government Authorities Loans under Liquidity and Capital Resources for further details); and, The effect of the unwinding of the Corporation’s cross-currency interest rate swaps on interest on long-term debt ($0.4 million per quarter) (see Derivative Financial Instruments under Additional Information for further details). Income Tax Expense Income before income tax expense Income tax expense at Canadian blended statutory tax Results coming from foreign jurisdictions Non-deductible expenses Non-taxable income Prior year adjustments Net non-recognition of tax benefits Income tax expense Net Income Quarters ended ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ 8,705 2,307 (198) 168 (72) (445) 656 $ 2,416 $ 13,106 26.5 % 3,460 (537) 50 $ 18,623 26.4 % 4,935 (152) 501 $ 40,488 26.5 % 10,689 (2,010) 283 26.4 % (563) 131 (894) 27.8 % $ 1,647 (318) (824) 656 12.6 % $ 4,798 (758) 445 (301) 25.8 % $ 8,348 20.6 % Net income decreased from $32.1 million to $13.8 million this fiscal year compared to last and decreased from $11.5 million to $6.3 million during the quarter compared to the same quarter last fiscal year mainly as a result of the factors described above. Excluding Other expenses (gains) net of taxes, adjusted net income decreased from $33.8 million to $12.6 million over the fiscal year, and from $13.2 million to $6.3 million during the quarter. NON-IFRS FINANCIAL MEASURES This MD&A is based on earnings in accordance with IFRS and the following non-IFRS financial measures: Adjusted EBITDA: Adjusted net income: Adjusted earnings per share: Free cash flow: Operating income excluding amortization expense and Other expenses (gains) Net income excluding Other expenses (gains) 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. 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. 76 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A The Corporation’s Adjusted EBITDA is calculated as follows: Operating income Amortization expense Other expenses (gains) Adjusted EBITDA Quarters ended March 31, Fiscal years ended March 31, 2023 $ 9,879 9,716 — 2022 $ 11,463 8,377 2,309 2023 $ 26,198 36,387 (1,219) 2022 $ 44,758 35,982 2,309 $ 19,595 $ 22,149 $ 61,366 $ 83,049 Management believes adjusted EBITDA provides 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 items that do not share the same function as those included in other financial statement captions and generally are not as indicative of the Corporation’s past or future operating performance. 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 Other expenses (gains), 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 Other expenses (gains) net of taxes Adjusted earnings per share Quarters ended March 31, Fiscal years ended March 31, 2023 $ 6,288 — $ 6,288 — $ 6,288 $ $ 0.18 — 0.18 2022 $ 11,459 1,699 $ 13,158 — $ 13,158 2023 $ 13,825 (1,219) $ 12,606 — $ 12,606 2022 $ 32,140 1,699 $ 33,839 (385) $ 34,224 $ 0.33 0.05 $ 0.40 (0.03) $ 0.90 0.05 $ 0.38 $ 0.37 $ 0.95 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 items that do not share the same function as those included in other financial statement captions and generally are not as indicative of the Corporation’s past or future operating performance. They are also a component of certain performance-based employee remuneration. HÉROUX-DEVTEK INC. – Fiscal 2023 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 subject to the approval of the lenders. In May 2022, the Corporation reached an agreement to extend the Revolving Facility to a new maturity of June 2027 (previously June 2026). The other terms and conditions remained relatively unchanged. As at March 31, 2023, the facility had no amount outstanding, compared to $58.8 million (US$47.0 million) as at March 31, 2022. During the fourth quarter of this fiscal year, Héroux-Devtek repaid the US$47.0 million outstanding balance to reduce interest expense. 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% and matures in September 2028. The Term Loan Facility is repayable at maturity, and the Corporation has the option to make early repayments as of September 2024, 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, 2023 March 31, 2022 $ 179,978 $ 238,826 15,020 86,692 $ 164,958 $ 152,134 $ 61,366 $ 83,049 2.7 :1 1.8 :1 (1) Excluding net deferred financing costs of $2.1 million and $2.3 million as at March 31, 2023 and March 31, 2022, 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 increased throughout the fiscal year mainly due to the allocation of $6.5 million to share repurchases under a Normal Course Issuer Bid (“NCIB”) and negative free cash flow. See Normal Course Issuer Bid under Financial Position for further details. 78 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A *Excluding net deferred financing costs of $2.1 million as at March 31, 2023 and $2.3 million as at March 31, 2022. 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 its covenants during the fiscal year ended March 31, 2023 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 meet its financial needs. The Corporation has no obligatory capital repayments required on its term loan facilities until September 2028. 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 repay. When not on a fixed schedule, repayments 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, 2023 and 2022 the Corporation updated the estimated repayment schedule of its government authorities’ loans, taking into account updated assumptions and data. As these assumptions resulted in a more favourable repayment profile than previously accounted for, respective non-cash gains of $1.2 million and $3.1 million were included in net financial expenses this and last fiscal year. As at March 31, 2023, the Corporation had a present value of $89.0 million outstanding under these agreements ($84.5 million as at March 31, 2022), bearing effective interest rates between 0.0% to 6.6% as at March 31, 2023 (0.0% to 6.8% as at March 31, 2022). These loans have repayment terms extending to fiscal 2035 at the latest. HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 79 Fiscal YearNet Debt Position (millions)$243.0$246.9$157.5$152.1$165.03.12.61.81.82.7Net debt positionNet debt to Adjusted EBITDA20192020202120222023Long-term debt* composition$180 million as at March 31, 2023Term Loan Facility: $75.0Government Loans: $89.0Leases: $15.9VARIATIONS 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 The Corporation generated cash flows from its operating activities as follows: 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 Net change in non-cash items Cash flows related to operating activities The net change in non-cash items can be summarized as follows: Accounts receivable Inventories Other assets Accounts payable 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, 2023 2022 2023 2022 $ 90,837 $ 86,836 $ 86,692 $ 95,470 4,518 10,016 30,060 63,166 (12,888) (67,446) (3,173) (28,292) (16,131) (6,555) (74,389) (55,221) (1) (432) 949 (592) $ 15,020 $ 86,692 $ 15,020 $ 86,692 Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ 6,288 $ 11,459 $ 13,825 $ 32,140 9,716 2,780 — (102) 329 8,377 36,387 35,982 (1,781) 6,021 60 (2,359) 295 — 2,908 1,306 71 (850) 1,139 1,173 19,011 16,051 60,447 69,655 (14,493) (6,035) (30,387) (6,489) $ 4,518 $ 10,016 $ 30,060 $ 63,166 Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ (22,180) $ (20,700) $ (18,003) $ 8,966 (14,408) (55,323) (8,515) 11,026 (3,052) (7,660) 3,955 (7,248) 20,685 13,376 19,558 10,418 (770) 1,561 (5,394) 2,510 2,722 (6,982) 5,404 27,658 (2,838) (5,333) (9,823) 2,986 $ (14,493) $ (6,035) $ (30,387) $ (6,489) For the quarter and fiscal year ended March 31, 2023, the negative net change in non-cash items mainly reflects: ▪ ▪ An investment in inventory levels to stabilize the production system and mitigate the effect of supply chain delays; and, An increase in accounts receivable mainly related to the non-linear profile of fourth quarter deliveries. These negative items were partly offset by an increase in accounts payable and accrued liabilities and customer advances. 80 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A 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; and, An increase in accounts receivable mainly related to the non-linear profile of fourth quarter deliveries. 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. Investing Activities The Corporation’s investing activities were as follows: Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 Net additions to property, plant and equipment $ (6,976) $ (4,399) $ (18,641) $ (17,306) Proceeds of 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 — (6,282) 370 — 2,562 (1,336) — — — (13,137) 3,486 — 2,881 (2,847) 2,041 (900) $ (12,888) $ (3,173) $ (28,292) $ (16,131) Proceeds from a business divestiture relate to the sale of the Corporation’s Bolton operations (Refer to Business Divesture and Purchase of Minority Interest under Additional Information for further details), while last year’s proceeds from disposal of property, plant and equipment essentially relate to the sale of the building upon closure of APPH Wichita. The increase in investments in finite-life intangible assets mainly relates to the ongoing development of civil aircraft programs. Additions to property, plant and equipment shown above can be reconciled as follows: Gross additions to property, plant and equipment $ 9,469 $ 6,598 $ 19,998 $ 17,350 Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 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 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 (21) (585) (78) (585) $ 9,448 $ 6,013 $ 19,920 $ 16,765 (1,548) (924) (1,539) (75) (130) (1,149) 1,321 (780) $ 6,976 $ 4,399 $ 18,641 $ 17,306 Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ 807 $ 86 $ 7,046 $ 3,145 (66,113) (2,315) — 53 (2,140) (4,379) — — (75,747) 1,103 (6,546) (245) (16,310) 1,499 (43,000) (555) $ (67,446) $ (6,555) $ (74,389) $ (55,221) HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 81 Repayment of long-term debt during the fourth quarter and fiscal 2023 is comprised of the full reimbursement of the revolving facility, lease payments and scheduled reimbursements of governmental loans. Refer to the Normal Course Issuer Bid section under Financial Position for further details regarding the repurchase and cancellation of shares. Proceeds of disposal of property, plant and equipment Free cash flow (usage)(1) (1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for the definition of this metric. (8,740) $ 6,843 $ 2,562 — $ Quarters ended March 31, Fiscal years ended March 31, 2023 2022 2023 2022 $ 4,518 $ 10,016 $ 30,060 $ 63,166 (6,976) (6,282) (4,399) (1,336) (18,641) (17,306) (13,137) — (2,847) 2,881 (1,718) $ 45,894 FREE CASH FLOW (1) Cash flows related to operating activities Net additions to property, plant and equipment Net increase in finite-life intangible assets 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 the strategic investment in inventory in order to stabilize the production system and mitigate the effect of supply chain delays as well as high investment in finite-life intangible assets related the ongoing development of civil aircraft programs.. to 82 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A Fiscal YearFree Cash Flow (millions)$11.3$22.2$21.9$20.2$31.8$58.1$30.3$67.7$45.9$(1.7)Net additions to PP&E and intangiblesFree cash flow20192020202120222023 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, 2023: Contractual obligations Governmental authorities’ loans Lease liabilities Term Loan Facility Payments due by period Total 1 year 2-3 years 4-5 years > 5 years $ 108,281 $ 7,928 $ 24,292 $ 21,046 $ 55,015 20,674 4,323 5,266 3,345 7,740 95,420 3,713 7,426 7,425 76,856 Repayments of long term debt, including interest 224,375 15,964 36,984 31,816 139,611 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. 365,053 280,825 80,860 2,416 952 89,521 89,521 1,984 1,984 — — — — — — $ 680,933 $ 388,294 $ 117,844 $ 34,232 $ 140,563 HÉROUX-DEVTEK INC. – Fiscal 2023 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, 2023, 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, 2023 March 31, 2022 $ 177,908 $ 236,526 2,070 15,020 $ 164,958 390,919 0.4:1 2,300 86,692 $ 152,134 377,282 0.4:1 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. Fiscal 2023 NCIB On May 19, 2022, the Corporation announced a Normal Course Issuer Bid (NCIB) for the purchase for cancellation of up to 1,896,079 common shares on the open market through the TSX or alternative trading facilities. The NCIB began on May 25, 2022, and will end on May 24, 2023, 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, 2022 Quarter ended September 30, 2022 Quarter ended December 31, 2022 Quarter ended March 31, 2023 Through May 17, 2023 Total 84 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A Number of shares During the period Average cost per share Total cost 107,835 90,825 120,800 163,243 101,200 583,903 $ 15.40 12.96 12.98 13.11 12.87 $ 13.44 $ 1,661 1,177 1,568 2,140 1,302 $ 7,848 Fiscal 2022 NCIB During Fiscal 2022, the Corporation announced and completed the amount of repurchases and cancellation of 2,412,279 shares at a cost of t $43.0 million, representing an average cost of $17.83 per share. Of this amount, 804,000 shares were repurchased at a price of $18.12 per share, or a total of $14.6 million, from 2945-0228 Québec inc., a company controlled by Mr. Gilles Labbé, Executive Chairman of the Board of Directors of Héroux-Devtek Inc.. 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 17, 2023, the number of common shares outstanding stood at 34,005,873. Stock options varied as follows: Opening balance Granted Exercised Expired Cancelled / forfeited Ending balance Fiscal year ended March 31, 2023 Issued capital Number of shares 34,486,776 103,000 (482,703) 34,107,073 $82,189 1,437 (1,167) $82,459 Fiscal year ended March 31, 2023 Number of stock options Weighted- average exercise price 1,503,750 247,000 (103,000) (2,250) (10,000) $ 14.19 15.42 10.71 10.71 15.42 1,635,500 $ 14.59 As at March 31, 2023, 2,122,662 common shares remained reserved for issuance upon exercise of stock options compared to 2,225,662 at March 31, 2022. As a result, the Corporation may issue a further 487,162 stock options within the current reserve. As at May 17, 2023, the number of stock options outstanding stood at 1,635,500. 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 2023 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, 2023 March 31, 2022 Variance $ 429,513 223,939 $ 205,574 $ 415,450 $ 14,063 44,118 $ 235,629 $ (30,055) 179,821 3.4 % 24.5 % (12.8) % 1.92 2.31 The $14.1 million increase in current assets is mainly due to a $62.7 million investment in inventories and a $21.3 million increase in accounts receivable partly offset by $71.7 million decrease in cash as described under Liquidity and Capital Resources. The $44.1 million increase in current liabilities is mainly due to a $29.0 million increase in customer advances and progress billing and a $16.5 million increase in accounts payable and accrued liabilities. 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, 2023 March 31, 2022 Variance $ 391,824 206,479 $ 390,919 $ 397,908 $ (6,084) (1.5) % 256,255 (49,776) (19.4) % $ 377,282 13,637 3.6 % The $6.1 million decrease in long-term assets over the fiscal year mainly relates to the expiry and unwinding of the Corporation’s cross- currency interest swaps, partly offset by net investment in finite-life intangible assets. The $49.7 million decrease in long-term liabilities mainly results from the $64.4 million repayment of the Revolving Facility, partly offset by increases in government authorities loans and long-term progress billings. 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 2023 MD&A 2023 $ 5,325 $ (1,709) 1,028 (791) 194 (293) $ 3,754 $ 4,707 (953) 2022 56 5,507 1,097 (1,085) (23) (227) 5,325 6,388 (1,063) 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, 2023 $ 58,966 68,980 117.0 % March 31, 2022 $ 64,443 70,241 109.0 % The Corporation made contributions of $1.0 million and $3.7 million to its defined benefit and defined contribution benefit plans, respectively, during fiscal 2023, and expects to make respective contributions of $0.8 million and $3.1 million during fiscal 2024. The decrease in the present value of the defined benefit obligations is mainly due from the change in the discount rate and demographic assumptions. Refer to Note 25 - Pension and Other Retirement Benefit Plans to the Consolidated Financial Statements for further details regarding these assumptions. HÉROUX-DEVTEK INC. – Fiscal 2023 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 was subject to the achievement of certain commercial objectives. The transaction did not result in a material gain or loss on disposal at the time The commercial objectives related to the transaction were met during fiscal 2023, resulting in a $1.2 million net gain included in Other expenses (gains). 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, 2023 March 31, 2022 1.3533 1.4708 1.6726 1.2496 1.3853 1.6417 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, 2022 2023 Fiscal years ended March 31, 2022 2023 1.3518 1.4507 1.6429 1.2663 1.4218 1.6995 1.3231 1.3775 1.5941 1.2536 1.4570 1.7130 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 2023 featured an increase during the year in the value of the EUR and GBP compared to CAD and USD. Approximately 85% of the Corporation’s sales are denominated in USD, compared to approximately 60% of the related costs, which creates significant net inflows of USD. 88 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A 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. 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 2023 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 46% of consolidated sales, including one customer representing 15%. 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 Financial Risks 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 rigorously negotiated with the goal in mind to mitigate key acquisition risks via mutually agreeable conditions, warranties and contingent pricing agreements. The Corporation also 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. 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 continuously. 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 leasing facilities. These agreements subject the Corporation to financial covenants as described in the Liquidity and Capital Resources section. They also restrict the Corporation's ability to sell all or substantially all of its assets, incur certain forms of indebtedness, engage in mergers or consolidations or engage in transactions with affiliates without lender consent These restrictions and covenants could impede access to capital or prevent the Corporation from engaging in business activities that may be in its interest. 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. 90 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A The Corporation is exposed to fluctuations in interest rates through the floating rate of its Revolving facility as well as the impact on the cost of future capital requirements. 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. 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. Changing interest rates Tax matters and changes in tax laws Operational 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. Outstanding derivatives are detailed in the Derivative Financial Instruments section under Additional Information. Risks associated with pensions are managed through investment policies put in place by the Corporation and pension committees. 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. Operational risks are more specific to or result from Héroux-Devtek’s operations than strategic risks. RISK DESCRIPTION The pressure on the supply chain resulting from the Covid-19 pandemic, geopolitical tensions or other events could lead to supply disruptions for the Corporation. RISK MANAGEMENT APPROACH Héroux-Devtek manages supplier-related risks through frequent supplier audits and maintaining high standards, such as requiring AS9100 and Nadcap certification. Supply chain 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. The Corporation tracks and monitors supplier performance and mitigates potential losses by ensuring poor quality, if any, is detected through internal quality management. Also, reductions in quality, increased lead times and reliability of supply, including raw materials could result in material adverse effects on the Corporation’s business and results. Héroux-Devtek also has the ability to in-source or re-source manufacturing or finishing of many key parts in the event of critical issues in the supply chain. 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. The Corporation also manages inventory levels with the objective of having safety stock of key components where more supply chain risk is perceived. 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. HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 91 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. 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. Héroux-Devtek is subject to possible litigation in the ordinary course of its business by, among others, customers, suppliers, competitors, shareholders or government agencies. 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 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. Collective bargaining agreements Information technology Warranty casualty claim losses Litigation Virus outbreak at a facility 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. 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. 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. Héroux-Devtek has put in place several measures in order to minimize the impact on its workforce and its operations in the event of such an outbreak: - 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. 92 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A External Risks External risks are generally outside of management’s control and mostly result from external factors. RISK General economic conditions Inflation DESCRIPTION The aftereffects of the COVID-19 pandemic, and the fallout of Russia’s invasion of Ukraine have combined disrupt global supply chains and create significant economic uncertainty and disruption of financial and commodity 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. 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. Héroux-Devtek operates in an industry that has faced ongoing consolidation, resulting in a smaller overall number of larger competitors, as well as constant innovation in technology and products. RISK MANAGEMENT APPROACH 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 market segments on the Corporation as a whole. 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. HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 93 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. Forward foreign exchange contracts As at March 31, 2023, the Corporation had forward foreign exchange contracts outstanding for a notional amount of $438.3 million denominated in USD, EUR and GBP. This amount includes contracts with nominal value of US$241.6 million convertible into Canadian dollars at an average rate of 1.3143. These contracts mature at various dates between April 2023 and March 2028, with the majority maturing in fiscal years 2024 and 2025. 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 related gain or loss on conversion of the hedged items. As at March 31, 2023, a 1% strengthening of the CAD versus the USD would result in a $0.4 million decrease in the Corporation’s fiscal 2023 net income. Cross-currency interest rate swaps As at March 31, 2022, the Corporation had three 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 matured between May 2022 and September 2028, and mainly bore interest at a weighted average fixed rate of 2.4%. During the fiscal year ended March 31, 2023, one of these swaps expired, and the other two were unwound for cash proceeds of $11.3 million. 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, 2023, the equity swap agreement covered 400,000 common shares of the Corporation at a price of $13.39 (300,000 common share at a price of $13.52 as at March 31, 2022). In February 2023, the agreement was amended and now matures in June 2024. All other conditions of the agreement stayed unchanged compared to March 31, 2022. 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, 2023, 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. 94 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A 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, 2023, 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, 2023 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. CRITICAL ACCOUNTING ESTIMATES The preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. Uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the Corporation’s financial results or the carrying amount of assets or liabilities. Key estimates and assumptions are as follows: 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. HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A – 95 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 the highest of the fair value less costs of disposal and the value in use, generally determined using a discounted cash flow model. Other assumptions used to determine the recoverable amount include the applicable discount rate and the expected future cash flows which include costs to complete the development activities. Provisions The Corporation has recorded provisions to cover cost exposures that could materialize in future periods. In determining the amount of the provisions, assumptions and estimates are made in relation to discount rates and the expected cost to settle such liabilities. Government Authorities Loans The Corporation has outstanding loans with government authorities with variable repayment schedules. Annual repayments of these loans generally vary based on the sales of certain of the Corporation’s programs or segments. In order to account for the present value of these loans under the effective interest method, or for government assistance upon initial recognition, management must estimate the future sales growth of these programs or segments over the expected duration of the loan. These forecasts are used to determine effective interest rates and expected repayment schedules. In determining these amounts, management must rely on market rates of interest and assumptions such as, but not limited to, current and future order intake, industry order backlogs, Original Equipment Manufacturer (“OEM”) production rates, expected economic conditions, the stability of foreign exchange rates and the Corporation’s ability to deliver on key contract initiatives. Customer Relationships Customer relationships acquired in business acquisitions are considered intangible assets with finite lives. Their value was estimated upon acquisition using valuation methodologies which rely on many underlying assumptions, including: • • • • • Expected future order intake; Operational execution and cost management; Stability of economic conditions, including foreign exchange rates; Production rates; and, 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. 96 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A SELECTED FINANCIAL INFORMATION Selected financial information is as follows, for the quarters ended: Fiscal year Sales Operating income Adjusted EBITDA (1) Net Income Adjusted Net Income (1) In dollars per share Fourth quarter Third quarter Second quarter 2023 First quarter 2022 First quarter $ 155,978 $ 140,875 $ 132,680 $ 114,089 $ 147,459 $ 131,147 $ 131,293 $ 126,188 2,646 11,463 10,545 11,953 10,797 19,595 14,129 16,216 11,426 22,149 19,694 21,157 20,049 6,703 6,703 965 11,459 965 13,158 7,510 7,510 4,799 3,580 6,468 6,468 1,773 1,773 6,288 6,288 Second quarter Third quarter Fourth quarter 9,879 5,111 8,562 Earnings per share diluted Adjusted Earnings per share (1) In millions of shares Weighted average number of common diluted shares outstanding $ 0.18 $ 0.18 0.05 $ 0.05 0.14 $ 0.10 0.03 $ 0.03 0.33 $ 0.38 0.18 $ 0.18 0.21 $ 0.21 0.19 0.19 34.3 34.5 34.6 34.6 34.9 35.7 36.6 37.0 (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 seasonal factors such as plant shutdowns and summer vacations. Selected financial information is as follows, for fiscal years: Sales Operating income Adjusted EBITDA(1) Net income Adjusted net income(1) Earnings per share ($) - basic Earnings per share ($) - diluted Adjusted earnings per share(1) ($) Cash Total assets Long-term financial liabilities(2) 2023 2022 2021 $ 543,622 $ 536,087 $ 570,685 26,198 61,366 13,825 12,606 0.40 0.40 0.37 15,020 821,337 183,756 44,758 83,049 32,140 33,839 0.91 0.90 0.95 86,692 813,358 238,419 34,096 88,297 19,813 29,034 0.55 0.55 0.80 95,470 854,831 251,243 (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 2023 MD&A – 97 SHAREHOLDER INFORMATION ISSUED CAPITAL Common shares issued and outstanding Stock options issued and outstanding May 17, 2023 34,005,873 1,635,500 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 2024 First quarter Second quarter Third quarter Fourth quarter August 8, 2023 November 10, 2023 February 7, 2024 May 22, 2024 ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE This MD&A was approved by the Audit Committee and by the Board of Directors on May 17, 2023. 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. 98 – HÉROUX-DEVTEK INC. – Fiscal 2023 MD&A Value of $100 invested in April 2017HRX return on investment - 5 years$87$131Value of $100 - HRXValue of $100 - TSXMar-18Mar-23406080100120140160 SHAREHOLDER INFORMATION ANNUAL MEETING OF SHAREHOLDERS REGISTRAR AND TRANSFER AGENT Tuesday, August 8, 2023, at 10:00 A.M. Held virtually via webcast. The webcast can be accessed through the Events section of our website. Computershare Trust 1500 Robert-Bourassa Blvd, 7th Floor Montréal (Québec) Canada H3A 3S8 514-982-7555 /1-800-564-6253 AUDITORS Ernst & Young LLP 900 de Maisonneuve Blvd 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, ext. 555 hdelorme@mercureconseil.ca Héroux-Devtek — Annual Report 2023 99 1111 Saint-Charles street West, suite 600 West Tower, Saint-Charles Complex Longueuil, Québec, Canada J4K 5G4 450-679-3330 . HEROUXDEVTEK.COM

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