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 2023 HÉROUX-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 2023 FINANCIAL 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 2023 GILLES 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 2023 Although 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 2023 MARTIN 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 2023 STRENGTHENING 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 2023 SUPPLY 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
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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
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Héroux-Devtek — Annual Report 2023
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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%
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2019
Baseline
2021
2022
2023
2024
2025
47,080
7%
18%
70%
5%
2041
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25,900
8%
18%
64%
10%
2019
Freighter
Widebody
Single-aisle
Regional Jet
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Héroux-Devtek — Annual Report 2023
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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
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2012-2021
2022-2031
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Héroux-Devtek — Annual Report 2023
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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
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s
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t
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t
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b
a
L
f
o
u
a
e
r
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B
.
.
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k
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o
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e
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l
a
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e
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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 2023 CORPORATE
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: $15.9 VARIATIONS IN CASH
Cash at beginning of periods
Cash flows related to operating activities
Cash flows related to investing activities
Cash flows related to financing activities
Effect of changes in exchange rates on cash
Cash at end of periods
Operating Activities
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