2 Héroux-Devtek — 2024 Annual Report
TABLE OF CONTENTS
3
4
5
6
8
10
12
16
18
19
19
20
23
65
97
HÉROUX-DEVTEK AT A GLANCE
DIVERSIFIED AND BALANCED REVENUE MIX
FINANCIAL HIGHLIGHTS
EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS
MESSAGE TO SHAREHOLDERS
PRESIDENT & CEO MESSAGE TO SHAREHOLDERS
HÉROUX-DEVTEK’S ESG COMMITMENTS
AND ACHIEVEMENTS IN FISCAL 2024
ECONOMIC OUTLOOK
DEMONSTRATED CAPABILITIES OF WINNING CONTRACTS
AND SUPPORTING PROGRAMS ACROSS THE LIFECYCLE
OF BOTH CIVIL AND DEFENCE AIRCRAFT
BOARD OF DIRECTORS
CORPORATE MANAGEMENT TEAM
OPERATIONS MANAGEMENT TEAM
GLOBAL CENTRES OF EXCELLENCE
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS
SHAREHOLDER INFORMATION
Héroux-Devtek — 2024 Annual Report 3
HÉROUX-DEVTEK
AT A GLANCE
Established in 1942 and listed as HRX
on the Toronto Stock Exchange,
Héroux-Devtek has risen to become
the world’s third-largest landing
gear manufacturer.
The company excels in the design, development, manufacturing, repair,
and overhaul of aircraft landing gear systems, along with hydraulic and
electromechanical actuators, custom ball screws, and fracture-critical
components. Serving both civil and defence market segments,
Héroux-Devtek is renowned for its ability to deliver complete landing gear
and actuation systems tailored to specification, backed by a reputation for
exceptional support and service for a broad spectrum of aircraft, including
those no longer in production.
Operating from its headquarters in Longueuil, Québec, Canada,
Héroux-Devtek employs approximately 1,900 dedicated staff across 15
centres of excellence strategically located in Canada, the United States, the
United Kingdom, and Spain. The company is known for its innovative
solutions, system integration prowess, engineering excellence, and
commitment to world-class service and execution, continuously leading
the industry with its forward-thinking approach and expert capabilities.
4 Héroux-Devtek — 2024 Annual Report
DIVERSIFIED AND BALANCED
REVENUE MIX
FISCAL 2024 SALES MIX BY
END CUSTOMER LOCATION
Based on fiscal 2024 sales
OEM | AFTERMARKET
PROPRIETARY BUILD-TO-PRINT
DEFENCE CIVIL
61.4% Defence 38.6% Civil
51% Proprietary 49% Build-to-print
38.4%
56.9%
5.7%
35.4%
18.8%
10.3%
3.5%
4.3%
12.0%
24.7%
20.4%
3.0%
3.0%
8.8%
4.8%
51.0%
61.6%
7.9%
8.1%
10.8%
10.6%
United States
Aftermarket
Build-to-print
(OEM)
Build-to-print
(Tier 1)
Build-to-print
(Other)
Proprietary
and Life of
Program
Transport
Large Jets
Business
Jets
Regional
Jets
Other
Helicopters
Other
Fighters
Helicopters
Other Countries
OEM
Rest of Europe
Canada
United Kingdom
Spain
PER SHARE DATA
Héroux-Devtek — 2024 Annual Report 5
FINANCIAL
HIGHLIGHTS
FISCAL YEAR ENDED MARCH 31
2024
543.6
26.2
4.8%
61.4
11.3%
13.8
12.6
30.1
(1.7)
864.0
629.8
59.8
9.5%
92.2
14.6%
38.3
34.3
2.9
(31.5)
951.0
0.40
0.37
34,485
1.13
1.01
33,653
15.0
199.3
821.3
180.0
2.7
390.9
9.8
266.9
911.4
219.6
2.3
429.6
86.7
235.6
813.4
238.8
1.8
377.3
95.5
241.4
854.8
253.0
1.8
391.7
45.8
205.4
898.8
292.7
2.6
349.4
536.1
44.8
8.4%
83.0
15.5%
32.1
33.8
63.2
45.9
682.0
0.91
0.95
36,023
570.7
34.1
6.0%
88.3
15.5%
19.8
29.0
89.2
67.7
717.0
0.55
0.80
36,523
613.0
(30.1)
(4.9)%
96.2
15.7%
(50.7)
35.7
52.6
30.3
810.0
(1.38)
1.00
36,363
2023
2022
2021
2020
OPERATING RESULTS
FINANCIAL POSITION
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
EPS - basic (loss)
Adjusted EPS (1)
Weighted-average number of common
diluted shares outstanding (in 000’s)
Cash
Working capital
Total assets
Long-term debt (2)
Net debt to adjusted EBITDA ratio (1)
Shareholders’ equity
[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.
(in millions of dollars except per share data and ratios)
GILLES LABBÉ
Executive Chairman of the Board
Our achievements
over the past year are
a collective reflection
of the dedication, hard
work, and strategic
acumen of our team.
“
”
6 Héroux-Devtek — 2024 Annual Report
EXECUTIVE CHAIRMAN
OF THE BOARD OF DIRECTORS
MESSAGE TO SHAREHOLDERS
Dear Shareholders,
In the ever-evolving landscape of the aerospace
industry, 2024 has unfolded with a unique blend of
challenges and opportunities. The current geopolitical
tensions, while causing market disruptions, have also
opened doors in the defence sector, presenting unique
opportunities amidst the global economic shifts.
These dynamics, driven by escalating conflicts and
supply chain vulnerabilities, have called for a strategic
reassessment and robust response, particularly in the
aerospace sector where corporations worldwide are
finding new prospects for growth and innovation.
NAVIGATING COMPLEXITIES
WITH AGILITY AND RESILIENCE
Héroux-Devtek, in this complex environment, has
remained steadfast in its commitment to operational
excellence delivering on our strategic priorities:
stabilizing the supply chain, enhancing automation,
and revising pricing strategies. These priorities are
critical levers that have enabled us to realign our
operational efficiency and financial performance to
pre-pandemic standards, indicating a resilient and
adaptable business model.
Delving into the specifics, the stabilization of the
supply chain has been paramount. In an era where
logistical disruptions have become the norm, our
proactive measures in securing critical supplies and
diversifying our supplier base have shielded us from
the brunt of market volatility. Automation, on the
other hand, has emerged as a cornerstone of our
GILLES LABBÉ
Executive Chairman of the Board
operational strategy, driving efficiency, reducing costs,
and ensuring a sustainable production lifecycle. The
strategic revision of our pricing mechanism, in tandem
with these efforts, has bolstered our financial resilience,
empowering us to navigate the turbulent economic
environment with confidence.
The backdrop of these operational strategies is a broader
economic situation that plays to our strengths. Despite
the prevailing uncertainties, the aerospace sector’s
fundamentals remain robust, with Héroux-Devtek’s
diversified portfolio positioning us advantageously.
Our ability to adapt and thrive in these conditions is a
testament to our strategic planning and execution.
STRATEGIC CAPITAL ALLOCATION
FOR SUSTAINABLE GROWTH
Transitioning to capital allocation, our approach has
been one of prudent evaluation and strategic patience.
In an active market for mergers and acquisitions,
our focus has been on identifying and pursuing
opportunities that promise not just growth but strategic
synergies and long-term value creation. This approach
has led us to be selective, prioritizing ventures that align
with our core competencies and strategic objectives.
Consequently, we have adopted a cautious stance on
mergers and acquisitions, emphasizing the quality of
investments over mere expansion.
Investing in our core business remains our top priority.
Allocating capital to inventory not only helped us
navigate supply chain disruptions but also set the
stage for future success. The opportunities we have for
organic growth put us in a strong position to generate
operational efficiency, driving shareholder value and
bolstering corporate resilience.
In closing, I would like to thank all our stakeholders.
Your unwavering support has been a cornerstone of
our success, enabling us to navigate the complexities
of the current market landscape with confidence and
determination. Our achievements over the past year
are a collective reflection of the dedication, hard work,
and strategic acumen of our team. As we continue this
journey, our commitment to operational excellence,
strategic growth, and shareholder value remains
unwavering. Together, we are charting a course towards
a bright and prosperous future for Héroux-Devtek.
MARTIN BRASSARD
President and Chief Executive Officer
This new reality
is a testament of the
trust and recognition
our clients place
in the quality, safety,
and excellence
of our products.
“
”
8 Héroux-Devtek — 2024 Annual Report
PRESIDENT & CEO MESSAGE
TO SHAREHOLDERS
EXECUTING TO PLAN
As we close the books on fiscal 2024, I reflect on the
past year, a period marked by continued instability in
the aerospace supply chain and uncertain economic
environment. We entered the year with three priorities
to get Héroux-Devtek back on track towards its strong
historical performance. As I mentioned in my message
to shareholders the previous year, our plan was to
restore the health of our supply chain and stabilize our
production system, examine our production processes
to identify efficiency gains and review our pricing and
supply agreements to offset the effects of inflation.
I am pleased to announce that this three-pronged
strategy has paid off and produced both excellent
financial results and laid the groundwork for future
growth.
Through
diligent
management
and
the
collaborative efforts of our employees throughout
the organization, we achieved record sales of
$629.8 million and an EPS of $1.13, aligning with our
goal to restore Héroux-Devtek to its strong historical
profitability levels, which we believe we can surpass in
the coming years. By stabilizing our supply chain and
securing the availability of key components, we were able
to uphold production efficiency and quality, underscoring
our dedication to operational excellence and commitment
to meeting customer expectations. This approach has
transformed us into a more robust organization, with
improved integration with our suppliers, expanded
sources for materials and parts, and fortified supply
contracts. Consequently, we are well prepared for future
contract awards and poised for continued success.
With our commitment to innovation and operational
efficiency, especially through the adoption of automation,
we are able to scale our production platforms efficiently,
MARTIN BRASSARD
President and Chief Executive Officer
Héroux-Devtek — Annual Report 2024 9
without a significant increase in resources. This ability
to scale efficiently within existing resources forms a
robust foundation, empowering us to capitalize on
organic growth opportunities and expand our market
presence in the dynamic aerospace sector. This
optimism is shared by our workforce: I am pleased to
note that employee turnover has continued to decline
each quarter.
In fiscal 2024, Héroux-Devtek also achieved significant
milestones in its Environmental, Social, and Governance
(ESG) initiatives. We secured contracts for certified
renewable energy across our North American and
European facilities, achieving carbon neutrality at our
St-Hubert and Laval sites in Québec. Collaborations
with partners like IperionX and Endesa have integrated
upcycled titanium into our processes and sourced 100%
renewable wind-generated electricity, respectively.
SEIZING OPPORTUNITIES IN A
DYNAMIC LANDSCAPE
With a stronger supply chain and improved operational
efficiency, we are well positioned for active expansion,
supported by sustained demand for aircraft from our
end customers. In the civil aviation sector, Boeing and
Airbus boast record-high backlogs. In the near term,
the entry in service of the Falcon 6X, Falcon 10X, and
Boeing 777X will all drive higher sales volume for us,
as will the ramp-up of the Embraer Praetor and E-2
programs. Our execution on these platforms and
our customer relationships position us uniquely to
capitalize on new opportunities in this market as well,
further enhancing our market presence.
Amidst geopolitical uncertainties and technological
advancements,
defence
spending
has
surged
to record levels, driving significant demand for
Héroux-Devtek’s products. We are set to poised to
capitalize on opportunities like the Next Generation Air
Dominance (NGAD) and Future Combat Air System
(FCAS) programs, enhancing air combat capabilities in
collaboration with the US Air Force and Navy and more.
Indeed, the demand for our cutting-edge solutions has
never been higher, with demand from prime contractors
around the world. This new reality is a testament of the
trust and recognition our clients place in the quality,
safety, and excellence of our products.
POSITIONED TO REACH NEW HEIGHTS
Looking ahead at the opportunities before us, I have
never been more confident in Héroux-Devtek’s future
than I am today. We remain steadfast on continuing
to execute our plan and delivering value to our
stakeholders. With a clear vision and the support of
our dedicated employees, we are poised to reach new
heights in the aerospace industry.
I extend my sincere thanks to our teams for their
unwavering support and commitment, which have
been instrumental in achieving our goals and will
continue to be vital as we pursue future opportunities
and navigate the complexities of our industry. I would
also like to express my sincere gratitude to the Board
Members for their steadfast support throughout this
extraordinary year.
10 Héroux-Devtek — 2024 Annual Report
HÉROUX-DEVTEK’S ESG
COMMITMENTS AND
ACHIEVEMENTS IN FISCAL 2024
At
Héroux-Devtek,
Environmental,
Social,
and
Governance (ESG) principles help guide every decision
we make. In 2023 we were proud to release a dedicated
ESG report, underscoring our deep commitment to
sustainable practices across our North American and
European operations. We embed these values into
every aspect of our business, from environmental
stewardship to community engagement.
As well as securing contracts for high quality, certified,
locally produced renewable energy for several of
our facilities in Europe and North America, we also
completed an important water conservation project in
our Longueuil facility. By implementing a closed-loop
system, we not only significantly reduced overall water
consumption, but this project has also reduced the
load on the Municipal wastewater treatment network.
This is part of our efforts to save water particularly in
water scarce areas or where water conservation brings
desirable co-benefits. Additionally, the St-Hubert site
was recognized by the Québec government with
the “ICI on Recycle +” certification for their effective
sustainable waste management practices. These efforts
show our commitment to reducing our manufacturing
operations’ ecological footprint in line with global
sustainability objectives.
Internally, Héroux-Devtek celebrates this commitment
to environmental excellence through awards such
as this year’s “President’s Award for FY24,” given
to our Nottingham, UK site for its improvements in
environmental performance and compliance. We host
monthly forums with VPs, plant managers as well as
our Environmental, Health and Safety officers where
the discussion focuses entirely on environmental
sustainability and health & safety, recognizing the efforts
of employees and their commitment to advancing ESG.
Héroux-Devtek also collaborates with many partners to
advance its ESG objectives. A groundbreaking initiative
in partnership with a specialized recycling company has
already integrated several tons of upcycled titanium into
their processes, demonstrating the practical application
of titanium in additive manufacturing for the aerospace
industry. This project not only minimizes waste but also
enhances resource efficiency, embodying the principles
of the circular economy.
Another project includes several employees from
various plants creating a climate change mural in
collaboration with Aéro Montréal that allowed them
to explore the fundamental science behind climate
change. This is part of a larger initiative that involves
Héroux-Devtek — 2024 Annual Report 11
rallying our talented workforce to prepare detailed
decarbonization studies at two of our largest plants,
focusing on significant reductions in greenhouse gas
emissions and efficient use of energy.
Community engagement is another pillar of
Héroux-Devtek’s ESG efforts, highlighted by its
involvement in the “Bal en Bleu” organized by
École nationale d’aérotechnique (ÉNA). Héroux-Devtek
was proud to play a key role in this fundraiser, which
raised $485,000 to support the next generation of
aerospace professionals. Twenty of our employees
participated, reinforcing our commitment to fostering
industry growth. Additionally, Héroux-Devtek supports
the Youth in Mind Foundation in aid of preventing
psychological distress among young people in Québec.
We co-chaired their golf tournament and helped raise
over $600,000. The Héroux-Devtek United Way
fundraiser, driven by the generous contributions of our
employees, reached a record of $225,000 this year. We
extend our heartfelt thanks to all our employees for their
incredible support. Furthermore, Héroux-Devtek partners
with environmental protection organizations like Friends
of the Rouge, Nottinghamshire Wildlife Trust, and West
Creek, which focus on environmental conservation.
Héroux-Devtek continues to invest in future talent
through numerous multi-disciplinary internships,
providing practical experience and academic support.
We are also pioneering industrial symbiosis in our
Québec plants in collaboration with Comité 21 and
other local partners, promoting resource sharing and
waste reduction. In addition, our IT practices support
the circular economy by selling refurbished old
computers and donating the proceeds to Centraide
(United Way), demonstrating a dual commitment to
social and environmental sustainability.
Héroux-Devtek’s governance practices ensure that
all our programs adhere to the highest standards,
advancing our ESG agenda while setting a benchmark
for responsible and sustainable industry practices. We
not only strive to fulfill our own governance obligations,
but to lead by example, and elevate the aerospace
industry as a whole.
12 Héroux-Devtek — 2024 Annual Report
ECONOMIC
OUTLOOK
IMPROVED SUPPLY CHAIN CONDITIONS, RECORD AIRCRAFT BACKLOGS,
AND INCREASED DEFENCE SPENDING SIGNAL POSITIVE OUTLOOK
FOR AIRCRAFT PARTS SUPPLIERS
GLOBAL AIRLINE PASSENGER
RECOVERY CONTINUES
The resurgence in passenger travel gained momentum
in 2023. Global airline passenger traffic, measured
in Revenue Passenger Kilometers (RPK), increased
by 36.9% compared to 2022, reaching 94.1% of
2019 levels, according to IATA. Domestic traffic
exceeded 2019 levels, while international traffic rose
by 41.6% compared to 2022 but remained at 88.6%
of 2019 levels, indicating further growth potential.
ACI forecasts that 2024 will surpass the pre-COVID
2019 baseline for air travel, with an even stronger year
projected for 2025.
Source: ACI
© Dassault Aviation
Global, Domestic and International
Airline Passenger Traffic
0
20
40
60
80
100
120
2025
(Forecast)
2024
(Forecast)
2023
2022
2019
2022
35 000
30 000
25 000
20 000
15 000
5 000
10 000
2042
Héroux-Devtek — 2024 Annual Report 13
STRONG GROWTH AND BRIGHT
PROSPECTS IN THE GLOBAL
COMMERCIAL AIRCRAFT MARKET
Strong demand for air travel and the need for new
aircraft led to higher order volumes for Airbus and
Boeing, resulting in record backlogs. Aircraft deliveries
continued to improve, with a highly promising long-
term outlook for commercial aircraft. According to
Boeing’s projections, the global aviation industry will
need the delivery of 42,595 new aircraft over the next
20 years to meet the growing demand, including the
need to replace existing fleets. Indeed, Boeing’s latest
Commercial Market Outlook, released in June 2023,
predicts a 3.5% annual growth in the global commercial
aircraft fleet, reaching 48,600 jets by 2042. The single-
aisle fleet is expected to grow by 110.8%, from 16,180
in 2022 to 34,110 in 2042, while the widebody fleet will
grow by 127.5%, from 3,780 to 8,600 aircraft.
This promising outlook for commercial aircraft,
particularly
in
the
single-aisle
market
where
Héroux-Devtek seeks to strengthen its position,
continues to have positive implications for the
Corporation. Among the top commercial aviation
programs globally, including the Airbus A320,
Boeing 737 MAX, Boeing 787, and Airbus A350,
Héroux-Devtek proudly supplies build to print landing
gear systems for the Boeing 777 and components
for the Airbus A350 and Boeing 787. Additionally,
the company is well positioned to capitalize on the
forthcoming introduction of the Boeing 777X, a highly
anticipated widebody expected to enter service in 2025,
for which Héroux-Devtek will provide the landing gear.
Beyond
the
commercial
aviation
sector,
our
other end markets also reflect a similarly positive
trajectory. Honeywell, in its Global Business Aviation
Outlook, has increased its 10-year delivery forecast
for business jets to 8,500 units from 2023 to 2032,
which is 15% higher than last year’s forecast and
valued at $274 billion. Once again, Héroux-Devtek
is primed to benefit from this growth in demand as
a landing gear supplier for the Falcon 6x and Falcon
10x from Dassault Aviation and the Embraer Praetor.
The Falcon 6x was certified and entered service in
2023, while the Falcon 10x is expected to enter
service as early as 2027.
Photo by Steve Lynes
Widebody Fleet
Single-Aisle Fleet
Projected Growth in Global
Commercial Aircraft Fleet
Number of Aircraft
14 Héroux-Devtek — 2024 Annual Report
GEOPOLITICAL DYNAMICS
AND INCREASED DEFENCE SPENDING
Geopolitical events have led to increased defence
spending for the ninth consecutive year, with a
significant portion directed towards military aircraft.
This demand is supported by programs to upgrade
to the latest technologies. Ongoing global programs
to develop 6th generation aircraft include the Global
Combat Air Programme (UK, Italy, Japan), Future
Combat Air System (France, Germany, Spain), and
Next Generation Air Dominance in the US. The NGAD
program, expected to enter production first among
these, includes replacements for the F-22 and F-18, as
well as several unmanned aircraft with various mission
profiles. This sets the stage for new opportunities for
the Corporation.
The recently released “Trends in World Military
Expenditure” report by the Stockholm International
Peace Research Institute (SIPRI), indicates that global
military expenditures grew by 6.8% in 2023, reaching
a record US$2,443 billion. The US accounted for 37%
of this spending, totalling $916 billion, a 2.3% increase
from 2022. NATO member states also increased
spending, with eleven countries meeting or exceeding
the 2% GDP target. Among the top ten spenders,
the UK, Germany, and France increased their military
expenditures by 7.9%, 9.0%, and 6.5%, respectively.
Military Expenditure of US,
UK, Germany and France in 2023
Photo by Matti Blume
United States
United Kingdom
Germany
France
Other Countries
Héroux-Devtek — 2024 Annual Report 15
Héroux-Devtek continues to be strategically positioned
to capitalize on current defence programs, leveraging
its extensive experience and capabilities in supplying
high-quality aerospace components.
The fighter and attack aircraft segment is experiencing
robust growth, driven by aging fleets, global tensions,
extensive aircraft utilization, and delayed ramp-ups of
programs like the F-35. Héroux-Devtek is well-placed
to benefit from this growth as it supplies components
for prominent fighter jet programs such as the
Lockheed Martin F-35, which is expected to dominate
the market with approximately 1,500 deliveries over the
next decade. Additionally, the company supports other
key fighter programs including the F-18 and Gripen,
contributing to a further 400 aircraft in the same period.
In the helicopter sector, Héroux-Devtek supplies systems
for vital programs such as the Boeing CH-47 and Sikorsky
CH-53K. Despite a projected decline in the market’s value
over the next decade, production is set to see a slight
increase in units, with peak production expected in 2027.
The continued demand for older, reliable models like the
CH-47 highlights the importance of Héroux-Devtek’s role
in this market.
The military transport aircraft market, while experiencing a
decline, still presents opportunities for sustained production
and aftermarket business. Héroux-Devtek supplies
systems for critical transport aircraft such as the Airbus
C295 and Lockheed Martin C-130, and components for
the Airbus A400M. These programs ensure the company’s
continued relevance and potential for growth in meeting
ongoing strategic air mobility needs.
CAPITALIZING ON CURRENT DEFENCE
PROGRAMS IN AEROSPACE
Photo by Ilka Cole
Defence Platforms
Civil Platforms
Entry in Service
Falcon 10X
777X
KF-21
T-625
CH-53K
787
Triton
MQ-25
AW159
Praetor
500 / 600
A400M
F-35
C-130J
S-92
Learjet 45
777
RQ-4B
Global Hawk
A330
Hawk
F-15
F-18
CH-47 H-60
C295
AW101
MQ- 4C /
E2
A350
C-27J
SAAB
340 / 2000
Eurofighter
Typhoon
H175
Falcon 6X
Gripen E
AW609
DHC -6
USAF
Spare Parts(1)
HAL Helicopters
HURKUS
CL-415
DHC-515
Classified
FCAS
20 – 50 + Years
Sales
1. Includes B-52, B-1B, C-5, KC-135R
EMERGING PROGRAMS
Civil
Defence
Large
Regional
Business
Helicopter
Fighter
Transport
Helicopter
UAV
• 777X
• n.a.
• Falcon 10X
• Falcon 6X
• AW609
• T-625
• KF-21
• Gripen E
• HURKUS
• FCAS
• n.a.
• CH-53K
• MQ-25
• MQ-4C /
Triton
ESTABLISHED PROGRAMS
Civil
Defence
Large
Regional
Business
Helicopter
Fighter
Transport
Helicopter
UAV
• A350
• 787
• A330
• 777
• E2
• DHC-6
• Saab 340
• Saab 2000
• CL-415 /
DHC-515
• Praetor
500 / 600
• Learjet 45
• H175
• S-92
• F-35
• Eurofighter
Typhoon
• F-15
• F-18
• Hawk
• C-130J
• C295
• A400M
• C-27J
• USAF
Spare
Parts(1)
• HAL
Helicopters
• CH-47
• H-60
• AW159
• AW101
• RQ-4B /
Global
Hawk
Héroux-Devtek — 2024 Annual Report
17
DEMONSTRATED CAPABILITIES
OF WINNING CONTRACTS AND
SUPPORTING PROGRAMS
Design & Engineering
Industrialization & LRIP
1
2
Proposal submission / contract award
and transition to production with
significant investment in development,
training and fixed assets
Entry in service with
accelerating operating leverage
3
Active Program
End of Production &
Continued Fleet Sustainment
4
Manage OE deliveries and engage
aftermarket customers
for sustainment solutions
Gradual decline in OE deliveries
with focus shifting to aftermarket
service support with higher margins
ACROSS THE LIFECYCLE
OF BOTH CIVIL AND
DEFENCE AIRCRAFT
18 Héroux-Devtek — 2024 Annual Report
BOARD OF
DIRECTORS
The Héroux-Devtek Board of Directors consists of ten members with expertise in aerospace and business sectors.
Their collective experience and diverse backgrounds provide the management team with strategic insights and
informed guidance. This ensures that Héroux-Devtek is well-positioned to navigate the complexities of the market
and maintain its leadership in the industry, adhering to high standards of strategic vision and management practices.
GILLES LABBÉ
Executive Chairman of the Board
Non-independent Director since 1985
LOUIS MORIN
President, Busrel Inc.
Independent Director since 2008
Chair of the Audit Committee
NATHALIE BOURQUE
Corporate Director and Consultant
Independent Director since 2015
Member of the Audit Committee
JAMES J. MORRIS
Corporate Director and Consultant
Independent Director since 2013
Chair of the Human Resources and
Corporate Governance Committee
MARTIN BRASSARD
President and Chief Executive Officer
Non-independent Director since 2019
BRIAN A. ROBBINS
Executive Chairman, Exco
Technologies Limited
Independent Director since 2000
Member of the Audit Committee
TED DI GIORGIO
Corporate Director
Independent Director since 2023
Member of the Audit Committee
ANNIE THABET
Corporate Director
Independent Director since 2021
Member of the Human Resources and
Corporate Governance Committee
DIDIER EVRARD
Corporate Director and Consultant
Independent Director since 2021
Member of the Human Resources and
Corporate Governance Committee
BEVERLY WYSE
Corporate Director and Consultant
Lead Director
Independent Director since 2019
Member of the Human Resources
and Corporate Governance Committee
Héroux-Devtek — 2024 Annual Report 19
CORPORATE
MANAGEMENT TEAM
OPERATIONS
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
PATRICK GAGNON
Vice-President, Corporate Controller
JEAN-PHILIPPE SANCHE
Vice-President, Legal Affairs
OLIVIER PERRON
Senior Director, Tax & Treasury
SYLVIE HÉBERT
Senior Director, Human Resources
DIEGO VELANDIA
Director, Strategic Supply chain
GUILLAUME LAMY
Director, Financial Reporting
ROBERT CADIEUX
Director, Environment and Health & Safety
DOMINIQUE DALLAIRE
Vice-President, Central Region
ANNE-MARIE BERTRAND
Vice-President, Eastern Region
MARC-OLIVIER GAGNON
Vice-President, Engineering
& Product Support
BRIAN DAPP
General Manager, Beaver Aerospace & Defense
DANIEL NORMANDIN
Vice-President, United Kingdom
HUGO LORRAIN
Vice-President, Spain
ISABELLE JEAUGEY (PAUWELS)
Vice-President, Quality Assurance
& Engineering Support (MRB, M&P)
20 Héroux-Devtek — 2024 Annual Report
GLOBAL CENTRES
OF EXCELLENCE
Héroux-Devtek
operates
15
Centres
of
Excellence across four countries, showcasing
its global reach and capacity to adapt to
market dynamics. Its international footprint
enables it to meet diverse customer demands,
offering customized solutions that align with
specific requirements. With a dedicated global
team, Héroux-Devtek ensures its products
and services uphold the highest standards of
quality, safety, and performance, positioning
itself as a responsive and reliable partner in the
aerospace sector.
EVERETT,
WASHINGTON
Final assembly of Boeing
777/777X landing gear systems
STRONGSVILLE,
OHIO
Finishing and assembly
of landing gear
SPRINGFIELD,
OHIO
Manufacturing of medium to
large complex landing gear and
titanium components
LIVONIA,
MICHIGAN
Design and manufacturing of ball
screws and electro-mechanical
linear actuation systems
LONGUEUIL,
QUÉBEC
Repair and overhaul activities,
finishing and assembly
of landing gear
LAVAL,
QUÉBEC
Manufacturing and assembly
of small to medium landing
gear components and systems
Héroux-Devtek — 2024 Annual Report 21
15
Centres of Excellence
4
Countries
MONTRÉAL,
QUÉBEC
Surface treatment services
ST-HUBERT,
QUÉBEC
Design, engineering, and product
support. Technical expertise and
state-of-the-art testing facility
KITCHENER,
ONTARIO
Manufacturing of medium
to large complex landing
gear components
CAMBRIDGE,
ONTARIO
Manufacturing of ultra-large-
scale complex landing
gear components
GETAFE
Design, engineering, assembly
and support for landing gear
and actuation systems
NOTTINGHAM,
NOTTINGHAMSHIRE
Manufacturing of small to medium
landing gear components
SEVILLE
Assembly and installation
of aircraft components at
customer assembly lines
RUNCORN,
CHESHIRE
Repair and overhaul activities,
finishing and assembly of landing
gear, product support, testing
and design engineering
SCARBOROUGH,
ONTARIO
Electronic enclosures, heat
exchangers and cabinets
TABLE OF CONTENTS
Management’s report ..................................................................................................................................................................... 25
Independent Auditor’s report ........................................................................................................................................................... 26
Consolidated financial statements ................................................................................................................................................... 29
Notes to the consolidated financial statements .................................................................................................................................. 34
Note 1
Nature of activities and corporate information ............................................................................................................... 34
Note 2
Basis of preparation ................................................................................................................................................... 34
Note 3
Material accounting policies ........................................................................................................................................ 35
Note 4
Significant accounting estimates and assumptions ........................................................................................................ 42
Note 5
Sales ........................................................................................................................................................................ 43
Note 6
Government assistance .............................................................................................................................................. 44
Note 7
Cost of sales, selling and administrative expenses ........................................................................................................ 44
Note 8
Gains on extinguishment of a liability and business divestiture ....................................................................................... 44
Note 9
Net financial expenses ............................................................................................................................................... 45
Note 10
Earnings per share..................................................................................................................................................... 45
Note 11
Inventories ................................................................................................................................................................ 45
Note 12
Derivative financial instruments ................................................................................................................................... 46
Note 13
Other assets .............................................................................................................................................................. 46
Note 14
Property, plant and equipment .................................................................................................................................... 47
Note 15
Finite-life intangible assets .......................................................................................................................................... 49
Note 16
Goodwill .................................................................................................................................................................... 50
Note 17
Accounts payable and accrued liabilities ...................................................................................................................... 50
Note 18
Provisions ................................................................................................................................................................. 51
Note 19
Long-term debt .......................................................................................................................................................... 51
Note 20
Other liabilities ........................................................................................................................................................... 52
Note 21
Issued capital ............................................................................................................................................................ 52
Note 22
Accumulated other comprehensive income .................................................................................................................. 54
Note 23
Income taxes ............................................................................................................................................................. 55
Note 24
Pension and other retirement benefit plans .................................................................................................................. 56
Note 25
Commitments and contingencies ................................................................................................................................. 59
Note 26
Net change in non-cash items ..................................................................................................................................... 59
Note 27
Geographic information .............................................................................................................................................. 60
Note 28
Executive compensation ............................................................................................................................................. 60
Note 29
Financial instruments ................................................................................................................................................. 60
Note 30
Financial risk management ......................................................................................................................................... 61
Note 31
Capital risk management ............................................................................................................................................ 63
24 – HÉROUX-DEVTEK INC. – Fiscal 2024 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 2024, or
caused them to be evaluated under their supervision. As at March 31, 2024, 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
Stéphane Arsenault, CPA
President and Chief Executive Officer
Vice-President and Chief Financial Officer
May 21, 2024
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 25
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, 2024 and 2023, 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 material accounting policy information.
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, 2024 and 2023, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are
independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in
Canada, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial
statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For the matter below, our description
of how our audit addresses the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of
our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the
procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying consolidated financial
statements.
Impairment of goodwill and other non-financial assets
As at March 31, 2024, the Group had goodwill amounting to
$113.7 million on the consolidated balance sheet. As disclosed in
Note 3 – Material Accounting Policies and Note 16 – 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 fair value
less costs of disposal approach using a market approach, which
requires significant estimation on the part of management.
Recoverable amounts are based on management’s estimates of
key variables including Earnings Before Interest, Taxes,
Depreciation and Amortization (“EBITDA”, a non-IFRS measure)
forecasts and multiples of recent sector notable transactions. This
combined with the significance and sensitivity of other
assumptions led us to conclude that the goodwill impairment test
for the Group’s CGUs is a key audit matter.
How our audit addressed the key audit matter
Our audit procedures included, amongst others, reviewing
management’s assumptions relating to EBITDA including overall
sales projections and sales related to certain significant programs
in comparison to publicly available data including analysts’
reports covering aerospace and airlines and existing customers’
contracts.
With the assistance of our internal valuation specialists, we
evaluated the Group’s valuation methodology and mathematical
accuracy of the calculation. We assessed the reasonableness of
the selection and application of the valuation multiples in
comparison to externally available information.
We assessed the historical accuracy of management’s estimates
of EBITDA margin and growth rates by comparing management’s
past projections to actual and historical performance. We
performed sensitivity analyses on the key assumptions such as
EBITDA projections, and market multiples to assess their effects
on the determination of the recoverable amount.
We also assessed the adequacy of the Group’s disclosures
included in Note 16 of the accompanying consolidated financial
statements in relation to this matter.
26 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
Other information
Management is responsible for the other information. The other information comprises:
•
Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so,
consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information; we are required to report that fact in this auditor’s report. We have
nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this
other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with
governance.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and
for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial
statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
•
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
•
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or
conditions may cause the Group to cease to continue as a going concern.
•
Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
•
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group
to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 27
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 Yannick Ouimet.
Ernst & Young LLP
Montréal, Québec
May 21, 2024
_____________________________________________
1 CPA Auditor, public accountancy permit no. A127424
28 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)
As at March 31,
Notes
2024
2023
Assets
19
Current assets
Cash
$
9,765
$
15,020
Accounts receivable
146,787
120,409
Income tax receivable
579
2,176
Inventories
11
323,350
262,995
Derivative financial instruments
12
2,778
386
Other current assets
13
24,586
22,215
507,845
423,201
Property, plant and equipment, net
14
200,505
205,490
Finite-life intangible assets, net
15
60,558
53,654
Derivative financial instruments
12
1,840
468
Deferred income tax assets
23
10,337
9,308
Goodwill
16
113,651
112,384
Other long-term assets
13
16,687
16,832
Total assets
$ 911,423
$ 821,337
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities
17
$ 142,718
$ 131,019
Provisions
18
12,165
16,632
Customer advances and progress billings
64,479
58,904
Income tax payable
2,174
466
Derivative financial instruments
12
3,147
5,493
Current portion of long-term debt
19
16,263
11,425
240,946
223,939
Long-term debt
19
201,764
166,483
Provisions
18
14,218
15,576
Derivative financial instruments
12
2,692
4,895
Deferred income tax liabilities
23
14,178
11,377
Other liabilities
20
7,987
8,148
481,785
430,418
Shareholders’ equity
Issued capital
21
81,363
82,459
Contributed surplus
8,185
6,739
Accumulated other comprehensive income
22
17,044
12,072
Retained earnings
323,046
289,649
429,638
390,919
Total liability and shareholders’ equity
$ 911,423
$ 821,337
Commitments and contingencies (note 25)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors
Louis Morin
Gilles Labbé
Director
Director
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 29
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars, except per share data)
For the fiscal years ended March 31,
Notes
2024
2023
Sales
5
$ 629,767
$ 543,622
Cost of sales
6, 7, 11
518,695
470,087
Gross profit
111,072
73,535
Selling and administrative expenses
6, 7
55,270
48,556
Gains on extinguishment of a liability and business divestiture
8
(3,961)
(1,219)
Operating income
59,763
26,198
Net financial expenses
9
14,275
7,575
Income before income tax expense
45,488
18,623
Income tax expense
23
7,217
4,798
Net income
$
38,271
$
13,825
Earnings per share – basic and diluted
10
1.13
0.40
The accompanying notes are an integral part of these consolidated financial statements.
30 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2024
2023
Items that may be reclassified to net income
Gains arising from translation of the financial statements of foreign operations
22
$
1,129
$ 20,363
Cash flow hedges:
22
Net gains (losses) on valuation of derivative financial instruments
1,760
(21,615)
Net losses on derivative financial instruments transferred to net income
3,386
7,193
Deferred income taxes
(1,359)
3,808
3,787
(10,614)
Gains (losses) on hedges of net investments in foreign operations
22
65
(5,229)
Deferred income taxes
(9)
687
56
(4,542)
Items that are never reclassified to net income
Defined benefit pension plans:
24
Gains (losses) from remeasurement
1,126
(1,709)
Deferred income taxes
(297)
451
829
(1,258)
Other comprehensive income
$
5,801
$
3,949
Net income
$ 38,271
$ 13,825
Other comprehensive income
5,801
3,949
Comprehensive income
$ 44,072
$ 17,774
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 31
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In thousands of Canadian dollars)
Notes
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
Total
Shareholders’
equity
Balance as at March 31, 2023
$ 82,459
$ 6,739
$ 12,072 $ 289,649 $ 390,919
Repurchase and cancellation of common shares
21
(1,096)
—
—
(5,703)
(6,799)
Stock-based compensation expense
21
—
1,446
—
—
1,446
Net income
—
—
— 38,271
38,271
Other comprehensive income
22
—
—
4,972
829
5,801
Balance as at March 31, 2024
$ 81,363
$ 8,185
$ 17,044 $ 323,046 $ 429,638
Notes
Issued
capital
Contributed
surplus
Accumulated
other
comprehensive
income
Retained
earnings
Total
Shareholders’
equity
Balance as at March 31, 2022
$ 82,189
$ 5,767
$ 6,865 $ 282,461 $ 377,282
Common shares issued under the stock option plan
21
1,437
(334)
—
—
1,103
Repurchase and cancellation of common shares
21
(1,167)
—
—
(5,379)
(6,546)
Stock-based compensation expense
21
—
1,306
—
—
1,306
Net income
—
—
— 13,825
13,825
Other comprehensive income
22
—
—
5,207
(1,258)
3,949
Balance as at March 31, 2023
$ 82,459
$ 6,739
$ 12,072 $ 289,649 $ 390,919
The accompanying notes are an integral part of these consolidated financial statements.
32 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
For the fiscal years ended March 31,
Notes
2024
2023
Cash provided by (used for):
Operating activities
Net income
$
38,271
$
13,825
Items not requiring an outlay of cash or not providing cash inflows:
Amortization expense
14, 15
36,382
36,387
Deferred income taxes
23
83
6,021
Extinguishment of liability
8
(3,961)
—
Net non-cash financial expenses
9
5,222
2,908
Stock-based compensation expense
21
1,446
1,306
77,443
60,447
Net change in non-cash items
26
(74,510)
(30,387)
Cash flows related to operating activities
2,933
30,060
Investing activities
Net additions to property, plant and equipment
14
(20,519)
(18,641)
Net increase in finite-life intangible assets
15
(13,915)
(13,137)
Proceeds from a business divestiture
—
3,486
Cash flows related to investing activities
(34,434)
(28,292)
Financing activities
Proceeds from long-term debt
20
51,894
7,046
Repayment of long-term debt
20
(18,998)
(75,747)
Increase in deferred financing costs
20
—
(245)
Repurchase and cancellation of shares
21
(6,799)
(6,546)
Issuance of common shares under the stock option plan
21
—
1,103
Cash flows related to financing activities
26,097
(74,389)
Effect of changes in exchange rates on cash
149
949
Change in cash during the year
(5,255)
(71,672)
Cash at beginning of year
15,020
86,692
Cash at end of year
$
9,765
$
15,020
Interest and income taxes reflected in operating activities:
Interest paid
$
9,483
$
6,946
Interest received
$
430
$
2,279
Income taxes paid
$
2,310
$
2,636
The accompanying notes are an integral part of these consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 33
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
For the fiscal years ended March 31, 2024 and 2023
(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 21, 2024.
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
Location
Devtek Aerospace Inc.
Canada
HDI Landing Gear USA Inc.
United States
APPH Limited
United Kingdom
Beaver Aerospace & Defense Inc.
United States
Compañia Española de Sistemas Aeronauticos S.A.
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.
34 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 3. MATERIAL 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 consumed in the manufacturing process, 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,
•
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 2024 Consolidated Financial Statements – 35
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
Customer relationships are amortized on a straight-line basis over the estimated useful life of the related customer relationship, 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.
36 – HÉROUX-DEVTEK INC. – Fiscal 2024 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. 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 (“FVLCD”) and its value in use.
Non-financial assets other than goodwill are tested for impairment should events or circumstances indicate that their carrying amount may not
be recoverable, as measured by comparing their carrying amount to their recoverable amount, which corresponds to the higher of the FVLCD
and the value in use of the non-financial asset or CGU. 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.
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
Forward foreign exchange contracts are carried at fair value and 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.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 37
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.
AC
All debts, accounts payable, accrued liabilities, 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 and equity swap agreements to hedge its
risks associated with foreign currency and other price fluctuations. Such derivative financial instruments are initially recognized and
subsequently measured at fair value. Derivative financial instruments are carried as financial assets when the fair value is favorable and as
financial liabilities when the fair value is unfavorable.
Cash flow hedges
For the purpose of hedge accounting, all hedges are classified as cash flow hedges except for hedges of net investments in foreign
operations (see below). Hedging exposure to variability in cash flows is attributable to a risk associated with a recognized liability or a highly
probable forecast transaction in foreign currency.
At the inception of a hedge relationship, the Corporation formally designates and documents the hedge relationship to which the Corporation
wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes
identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the
hedging instrument’s effectiveness. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are
assessed quarterly to determine that they actually have been highly effective throughout the designated periods.
The change in the fair value of the effective portion of hedges is recognized in other comprehensive income, while the ineffective portion is
recognized in the consolidated statements of income. Amounts recognized in other comprehensive income are transferred to the
consolidated statements of income when the hedged transaction affects income, such as when the hedged financial income or financial
expense is recognized or when a forecast sale occurs. In the event that the forecast transaction or firm commitment is no longer expected to
occur, amounts previously recognized in accumulated other comprehensive income are transferred to the consolidated statements of income.
Hedges of net investments in foreign operations
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.
38 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
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 restructuring and other provisions
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. Pensions and other retirement benefits
The Corporation has defined contribution pension plans as well as funded and unfunded defined benefit pension plans that provide pension
benefits to its employees. The current and past service costs of these pension plans are recorded within the cost of sales and selling and
administrative expenses under “Employee costs” in the consolidated statements of income while the administrative costs related to these
pension plans are included in selling and administrative expenses. The net interest income or expense on the net surplus or deficit is
recorded in financial expenses.
The actuarial determination of the defined benefit obligations for pensions uses the projected unit credit method which incorporates
management’s best estimate of future salary levels, when applicable, other cost escalations, retirement ages of employees, discount rates
and other actuarial factors.
The pension and other retirement benefit plans liabilities included in other liabilities in the consolidated balance sheets represent the present
value of the defined benefit obligations reduced by the fair value of plan assets.
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.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 39
M. 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 the consolidated
statement of income 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 the consolidated statement of income 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 the consolidated statement of income 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.
Restricted share unit (“RSU”) plan
The Corporation has a RSU plan as part of the incentive plan for management and key employees. RSUs vest on the third anniversary of the
grant and are payable to employees who are still employed by the Corporation on the payment date. RSUs enable 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 RSU vested.
RSUs 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 the consolidated statement of income and its counterpart is accounted for in accounts payable
and accrued liabilities until the RSUs are paid or canceled at the expiry or termination date.
N. 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.
40 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
O. 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, as a result
of changes in sales growth forecasts, 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.
P. 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 2024 Consolidated Financial Statements – 41
Q. 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.
R. 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:
A. 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 of disposal (“FVLCD”) and its value in use. The FVLCD calculation is based on a market approach, which is based
on multiples of recent sector notable transactions applied to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”, a
non-IFRS measure), less incremental costs of disposal. The recoverable amount is most sensitive to the multiple selected and revenue and
EBITDA margin forecasts in determining future forecasted cash flows as further explained in note 16.
B. Deferred income tax assets
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
42 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
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 24.
D. 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.
E. 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 Corporation’s sales growth. 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 sales growth over the expected duration of the
loan. These forecasts are used to determine the expected repayment schedules. In determining these amounts, management must rely on
market rates of interest and assumptions such as, but not limited to, current and future order intake, industry order backlogs, Original
Equipment Manufacturer (“OEM”) production rates, expected economic conditions, the stability of foreign exchange rates and the
Corporation’s ability to deliver on key contract initiatives.
NOTE 5. SALES
The amount of sales recognized in the following sectors was as follow for fiscal year:
2024
2023
Defence
$ 386,400 $ 372,942
Civil
243,367
170,680
Total sales
$ 629,767 $ 543,622
Geographic sales based on the customers’ location are detailed as follows, for fiscal year:
2024
2023
United States
$ 358,522 $ 333,914
Canada
36,156
24,308
United Kingdom
49,615
33,863
Spain
50,917
41,560
Rest of Europe
68,064
68,463
Other countries
66,493
41,514
$ 629,767 $ 543,622
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 43
NOTE 6. GOVERNMENT ASSISTANCE
Government assistance deducted from the cost of the related assets or recognized as a reduction of expenses, was as follows, for fiscal
year:
2024
2023
Finite-life intangible assets (note 15)
$
1,450
$
1,010
Property, plant and equipment (note 14)
69
78
Cost of sales and, selling and administrative expenses
8,496
5,656
NOTE 7. COST OF SALES, SELLING AND ADMINISTRATIVE EXPENSES
The main components of these expenses were as follows, for fiscal year:
2024
2023
Raw materials and purchased parts
$ 230,775
$ 203,379
Employee costs
215,872
191,723
Amortization of property, plant and equipment and finite-life intangible assets (notes 14, 15)
36,382
36,387
Supplies and small tools
24,979
22,737
Maintenance and machinery repair
17,892
16,104
Others
48,065
48,313
$ 573,965
$ 518,643
Included in cost of sales, selling and administrative expenses:
Foreign exchange losses upon conversion of net monetary items
61
105
NOTE 8. GAINS ON EXTINGUISHMENT OF A LIABILITY AND BUSINESS DIVESTITURE
Gains on extinguishment of a liability and business divestiture are 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.
2024
2023
Extinguishment of liability
$ (3,961)
$
—
Business divestiture
—
(1,219)
$ (3,961)
$ (1,219)
Extinguishment of liability
During the financial year, a provision of $3,961 related to a previous business acquisition was extinguished due to the expiration of the
indemnification agreement.
Business divestiture
The commercial objectives included in the agreement for the fiscal 2022 sale of the Corporation’s Bolton operations to Ontic Engineering &
Manufacturing UK Limited were achieved in September 2022, resulting in a net gain of $1,219 in fiscal 2023.
44 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 9. NET FINANCIAL EXPENSES
Net financial expenses comprise the following, for fiscal year:
2024
2023
Interest accretion on governmental authorities loans
$ 3,125
$ 3,140
Revision of governmental authorities loans repayment estimates (note 19)
602
(1,207)
Interest on defined benefit obligations (note 24)
(164)
(194)
Interest on leases (note 19)
891
840
Amortization of deferred financing costs
469
475
Other net non-cash financial expense (income)
299
(146)
Net non-cash financial expenses
5,222
2,908
Interest expense on long-term debt
9,483
6,946
Interest income on cash
(430)
(2,279)
$ 14,275
$ 7,575
NOTE 10. EARNINGS PER SHARE
The following table sets forth the elements used to compute basic and diluted earnings per share, for fiscal year:
2024
2023
Weighted-average number of common shares outstanding
33,834,158
34,384,106
Effect of dilutive stock options of the Corporation
155,633
100,857
Weighted-average number of common diluted shares outstanding
33,989,791
34,484,963
Options excluded from diluted earnings per share calculation(1)
952,000
1,288,000
(1) Excluded from diluted earnings per share calculation due to anti-dilutive impact.
NOTE 11. INVENTORIES
As at
March 31, 2024
March 31, 2023
Raw materials and purchased parts
$ 159,634
$ 130,618
Work in progress
159,726
129,625
Finished goods
3,990
2,752
$ 323,350
$ 262,995
An amount of $395,187 of inventory was recognized as cost of sales during the fiscal year 2024 ($357,105 for fiscal 2023).
Reserves related to inventories are as follows, for fiscal year:
2024
2023
Reserves recognized as cost of sales
$ 7,117
$ 3,599
Reversal of prior-period reserves
3,980
2,317
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 and also reductions in production costs resulting from improvements in manufacturing processes.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 45
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS
As at
March 31, 2024 March 31, 2023
Current Assets
Forward foreign exchange contracts
$
638
$
386
Equity swap agreement
2,140
—
$ 2,778
$
386
Long-term Assets
Forward foreign exchange contracts
$ 1,840
$
468
$ 1,840
$
468
Current Liabilities
Forward foreign exchange contracts
$ 3,147
$ 5,493
$ 3,147
$ 5,493
Long-term Liabilities
Forward foreign exchange contracts
$ 2,692
$ 4,771
Equity swap agreement
—
124
$ 2,692
$ 4,895
NOTE 13. OTHER ASSETS
As at
March 31, 2024
March 31, 2023
Investment and other tax credits receivable
$ 11,996
$
9,907
Prepaid expenses
6,138
5,917
Sales tax receivable
4,127
4,504
Others
2,325
1,887
Other current assets
$ 24,586
$ 22,215
Investment and other tax credits receivable
2,272
2,514
Long-term receivable
8,920
9,611
Net pension plan asset (note 24)
5,495
4,707
Other long-term assets
$ 16,687
$ 16,832
46 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 14. PROPERTY, PLANT AND EQUIPMENT
Land
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Other
Construction
in progress
Total
Cost:
As at March 31, 2023
$ 16,403
$ 136,773
$ 296,346 $ 24,288
$ 3,570 $ 477,380
Additions
—
5,793
13,213
2,859
2,135
24,000
Government assistance (note 6)
—
(42)
(27)
—
—
(69)
Retirements and disposals
—
(277)
(945)
(1,018)
—
(2,240)
Effect of changes in exchange rates
(33)
118
1,086
51
15
1,237
As at March 31, 2024
$ 16,370
$ 142,365
$ 309,673 $ 26,180
$ 5,720 $ 500,308
Accumulated amortization:
As at March 31, 2023
$
—
$ 56,160
$ 199,160 $ 16,570
$
— $ 271,890
Amortization expense
—
6,576
20,604
2,282
—
29,462
Retirements and disposals
—
(277)
(906)
(1,017)
—
(2,200)
Effect of changes in exchange rates
—
19
523
109
—
651
As at March 31, 2024
$
—
$ 62,478
$ 219,381 $ 17,944
$
— $ 299,803
Net book value as at March 31, 2024
$ 16,370
$ 79,887
$ 90,292 $
8,236
$ 5,720 $ 200,505
Land
Buildings and
leasehold
improvements
Machinery,
equipment
and tooling
Other
Construction
in progress
Total
Cost:
As at March 31, 2022
$ 15,758
$ 128,144
$ 280,581 $ 20,782
$ 2,443 $ 447,708
Additions
—
3,280
11,749
3,868
1,101
19,998
Government assistance (note 6)
—
—
—
(78)
—
(78)
Retirements and disposals
—
(103)
—
(982)
—
(1,085)
Effect of changes in exchange rates
645
5,452
4,016
698
26
10,837
As at March 31, 2023
$ 16,403
$ 136,773
$ 296,346 $ 24,288
$ 3,570 $ 477,380
Accumulated amortization:
As at March 31, 2022
$
—
$ 47,618
$ 176,382 $ 14,870
$
— $ 238,870
Amortization expense
—
6,416
19,301
2,117
—
27,834
Retirements and disposals
—
(101)
—
(984)
—
(1,085)
Effect of changes in exchange rates
—
2,227
3,477
567
—
6,271
As at March 31, 2023
$
—
$ 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
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 47
Right of use assets:
The following tables reconciles the right-of-use assets for the Corporation as at March 31, 2024 and 2023 that are included in Property, Plant
and Equipment:
Building and
leasehold
improvements
Machinery,
equipment and
tooling
Other
Total
Cost:
As at March 31, 2023
$ 16,813
$ 46,022
$ 2,883
$ 65,718
Additions
1,718
565
477
2,760
Effect of changes in exchange rates
70
(127)
12
(45)
As at March 31, 2024
$ 18,601
$ 46,460
$ 3,372
$ 68,433
Accumulated amortization:
As at March 31, 2023
$ 7,541
$ 31,174
$ 1,347
$ 40,062
Amortization expense
1,308
3,647
713
5,668
Effect of changes in exchange rates
(33)
55
(7)
15
As at March 31, 2024
$ 8,816
$ 34,876
$ 2,053
$ 45,745
Net book value as at March 31, 2024
$ 9,785
$ 11,584
$ 1,319
$ 22,688
Building and
leasehold
improvements
Machinery,
equipment and
tooling
Other
Total
Cost:
As at March 31, 2022
$ 17,121
$ 45,942
$ 2,277
$ 65,340
Additions
606
73
470
1,149
Effect of changes in exchange rates
(914)
7
136
(771)
As at March 31, 2023
$ 16,813
$ 46,022
$ 2,883
$ 65,718
Accumulated amortization:
As at March 31, 2022
$ 6,212
$ 27,734
$ 1,432
$ 35,378
Amortization expense
1,179
4,037
682
5,898
Effect of changes in exchange rates
150
(597)
(767)
(1,214)
As at March 31, 2023
$ 7,541
$ 31,174
$ 1,347
$ 40,062
Net book value as at March 31, 2023
$ 9,272
$ 14,848
$ 1,536
$ 25,656
Additions to property, plant and equipment shown above can be reconciled as follows, for fiscal year:
2024
2023
Gross additions
$ 24,000
$ 19,998
Government assistance (note 6)
(69)
(78)
Additions to property, plant and equipment
23,931
19,920
Non-cash additions to right-of-use assets
(2,760)
(1,149)
Variation in unpaid additions included in Accounts payable and accrued liabilities at year-end
(652)
(130)
Additions, as per statements of cash flows
$ 20,519
$ 18,641
As at March 31, 2024, the cost of property, plant and equipment still in use and fully depreciated is $162,562 ($131,388 as at March 31,
2023).
48 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 15. FINITE-LIFE INTANGIBLE ASSETS
Capitalized
development
costs
Software
Customer
relationships
and contracts
Total
Cost:
As at March 31, 2023
$ 37,525
$ 23,192
$ 69,155
$ 129,872
Additions
13,130
5,670
—
18,800
Customers funding
(3,435)
—
—
(3,435)
Government assistance (note 6)
(1,254)
(196)
—
(1,450)
Retirements and disposals
—
(498)
—
(498)
Effect of changes in exchange rates
1
55
285
341
As at March 31, 2024
$ 45,967
$ 28,223
$ 69,440
$ 143,630
Accumulated amortization:
As at March 31, 2023
$ 16,654
$ 18,209
$ 41,355
$ 76,218
Amortization expense
1,845
1,550
3,525
6,920
Retirements and disposals
—
(498)
—
(498)
Effect of changes in exchange rates
—
58
374
432
As at March 31, 2024
$ 18,499
$ 19,319
$ 45,254
$ 83,072
Net book value as at March 31, 2024
$ 27,468
$ 8,904
$ 24,186
$ 60,558
Capitalized
development
costs
Software
Customer
relationships
and contracts
Total
Cost:
As at March 31, 2022
$ 26,337
$ 20,889
$ 65,539
$ 112,765
Additions
15,056
1,750
—
16,806
Customers funding
(2,858)
—
—
(2,858)
Government assistance (note 6)
(1,010)
—
—
(1,010)
Retirements and disposals
—
(349)
—
(349)
Effect of changes in exchange rates
—
902
3,616
4,518
As at March 31, 2023
$ 37,525
$ 23,192
$ 69,155
$ 129,872
Accumulated amortization:
As at March 31, 2022
$ 14,464
$ 16,450
$ 34,531
$ 65,445
Amortization expense
2,190
1,298
5,065
8,553
Retirements and disposals
—
(349)
—
(349)
Effect of changes in exchange rates
—
810
1,759
2,569
As at March 31, 2023
$ 16,654
$ 18,209
$ 41,355
$ 76,218
Net book value as at March 31, 2023
$ 20,871
$ 4,983
$ 27,800
$ 53,654
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 49
NOTE 16. GOODWILL
Goodwill varied as follows, during fiscal year:
2024
2023
Balance at beginning of the year
$ 112,384
$ 108,200
Effect of changes in exchange rates
1,267
4,184
Balance, end of year
$ 113,651
$ 112,384
As at March 31, 2024, the Corporation revised its assessment of CGUs for impairment testing purposes. Where as at March 31, 2023 CGUs
were identified as North America, U.K. and Spain, the increasing integration of the Corporation’s business have led these to be combined into
a single CGU, Aerospace components.
Goodwill allocated to the CGUs is as follows, for the fiscal year ended:
March 31, 2024
March 31, 2023
North America
$
—
$ 23,902
U.K.
—
59,943
Spain
—
28,539
Aerospace Components
113,651
—
$ 113,651
$ 112,384
For the annual impairment test and at the date of the change in CGUs, the Corporation used FVLCD with a market approach, which is a
change in approach compared to the test as at March 31, 2023 (value in use approach). This transition reflects the conviction that the latter
method more accurately captures the true value of the Corporation. The approach is based on the Earnings Before Interest, Taxes,
Depreciation and Amortization (“EBITDA”, a non-IFRS measure) using a valuation multiple derived from recent sector notable transactions
ranging from 11.3x to 17x, (Level 3), to determine the fair value. Management established a budget for the year ending March 31, 2025,
which was approved by the Board of Directors. The projections were prepared based on both historical data, existing backlog, expected
booking of new orders and future trends anticipated by the Corporation. A valuation multiple was then applied to the projected EBITDA to
determine the recoverable amount. The Corporation concluded that the recoverable amount of the CGUs subject to the annual test was
greater than their carrying amount. As such, no impairment charge was recorded for the year ended March 31, 2024.
The key assumptions for the FVLCD method include estimated revenue and EBITDA margin forecasts and the valuation multiple. No
reasonably possible change in the key assumptions used in determining the recoverable amount would result in any impairment of goodwill.
NOTE 17. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at
March 31, 2024
March 31, 2023
Trade payables (1)
$
87,042
$
89,521
Accrued liabilities (2)
51,669
38,155
Other
4,007
3,343
Accounts payable and accrued liabilities
$ 142,718
$ 131,019
(1) Trade payables are normally settled on 30 to 60 day terms.
(2) Accrued liabilities mainly include employee-related liabilities.
50 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 18. PROVISIONS
Onerous
contracts
Asset
retirement
obligations
Product
warranty
Others
(note 25)
Total
As at March 31, 2023
$ 6,701
$ 6,000
$ 9,323
$ 10,184
$ 32,208
Arising during the year
428
—
2,069
2,742
5,239
Accretion expense
—
220
—
—
220
Utilized
(1,101)
(29)
(1,589)
(244)
(2,963)
Reversed (note 8)
(170)
—
(1,862)
(6,342)
(8,374)
Discount rate adjustment
—
82
(39)
(25)
18
Effect of changes in exchange rates
(3)
—
17
21
35
As at March 31, 2024
$ 5,855
$ 6,273
$ 7,919
$ 6,336
$ 26,383
Less: current portion
1,670
—
5,491
5,004
12,165
Long-term portion
$ 4,185
$ 6,273
$ 2,428
$ 1,332
$ 14,218
NOTE 19. LONG-TERM DEBT
As at
March 31, 2024
March 31, 2023
Senior Secured Syndicated Revolving Credit Facility (“Revolving Facility“)
$ 40,999
$
—
Governmental authorities loans
88,642
89,032
Unsecured Subordinated Term Loan Facility ("Term Loan")
75,000
75,000
Lease liabilities
14,987
15,946
Deferred financing costs, net
(1,601)
(2,070)
218,027
177,908
Less: current portion
16,263
11,425
Long-term debt
$ 201,764
$ 166,483
Senior Secured Syndicated Revolving Credit Facility
The Revolving Facility has a limit of $250,000, of which $40,999 is drawn as at March 31, 2024, and bears interest at SOFR + 1.1%
representing an effective rate of 6.4% (SOFR + 1.1% representing 5.9% as at March 31, 2023). 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. The Revolving Facility will mature in June 2027.
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 research and development costs. They were granted as incentives under Canadian federal and
provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be refund. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest
rates.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in net financial expenses.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2024, 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 loss
of $602 (gain of $1,207 in fiscal 2023), which was included in net financial expenses (see note 9).
The effective interest rates for these loans were in the range of 0.0% to 6.6% as at March 31, 2024 (0.0% to 6.6% as at March 31, 2023).
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, 2024 and
2023, this facility was fully drawn.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 51
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, 2024 ranged between 2.1% and 13.9% for leases
(2.1% and 11.0% as at March 31, 2023), maturing from April 2024 to May 2039.
The following table presents the reconciliation between the opening and the closing balances of the lease liabilities:
As at
March 31, 2024
March 31, 2023
Balance at the beginning of the year
$ 15,946
$ 20,497
Additions
2,760
1,149
Lease payments
(4,654)
(6,703)
Interest expense on lease liabilities (note 9)
891
840
Effect of changes in exchange rates
44
163
$ 14,987
$ 15,946
The expense related to short-term leases and low-value assets leases during the years ended March 31, 2024 and 2023 was immaterial.
The following table presents reconciliation between the opening and closing balances for the Long-term debt.
March 31, 2024
March 31, 2023
Long-term debt, at beginning of the fiscal year
$ 177,908
$ 236,526
Increase in long-term debt
54,654
8,195
Repayment of long-term debt
(18,998)
(75,747)
Amortization of deferred financing costs (note 9)
469
475
Increase in deferred financing cost
—
(245)
Interest accretion and adjustments on governmental authorities loans (note 9)
3,727
1,933
Interest accretion in lease liability (note 9)
891
840
Effects of fluctuations in exchange rates
(624)
5,931
Long-term debt, at end of the fiscal year
$ 218,027
$ 177,908
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, 2024.
NOTE 20. OTHER LIABILITIES
As at
March 31, 2024
March 31, 2023
Progress billings
$ 6,804
$ 5,617
Net defined benefit obligations (note 24)
566
953
Other
617
1,578
Other Liabilities
$ 7,987
$ 8,148
NOTE 21. ISSUED CAPITAL
Authorized
Voting common shares, without par value
Unlimited
First preferred shares, issuable in series, without par value
Unlimited
Second preferred shares, issuable in series, without par value
Unlimited
No preferred shares are outstanding.
52 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
Variations in common shares issued and fully paid were as follows, for fiscal year:
2024
2023
Number
Issued
capital
Number
Issued
capital
Balance at the beginning of the year
34,107,073 $
82,459 34,486,776 $
82,189
Issued for cash on exercise of stock options
—
—
103,000
1,437
Repurchase and cancellation
(453,503)
(1,096)
(482,703)
(1,167)
Balance at the end of the year
33,653,570 $
81,363 34,107,073 $
82,459
On August 8, 2023, the Corporation announced a Normal Course Issuer Bid ("NCIB") for the purchase for cancellation of up to 1,791,984
common shares on the open market through the TSX or alternative trading facilities. The NCIB began on August 10, 2023, and will end on
August 9, 2024, 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.
As at March 31, 2024, the Corporation has purchased and cancelled 453,503 common shares for a cash consideration of $6,799
representing a weighted average price of $14.99 per share (482,703 common shares for a cash consideration of $6,546 representing a
weighted average price of $13.56 per share as at March 31, 2023). The $5,703 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.
Variations in stock options outstanding and related compensation expense were as follows, for fiscal year:
2024
2023
Number of
stock options
Weighted-
average
exercise price
Number of
stock options
Weighted-
average
exercise price
Balance at the beginning of the year
1,635,500
$ 14.59
1,503,750
$ 14.19
Granted
370,000
14.07
247,000
15.42
Exercised
—
—
(103,000)
10.71
Expired
(96,000)
15.01
(2,250)
10.71
Cancelled / forfeited
(14,000)
14.46
(10,000)
15.42
Balance at the end of the year
1,895,500
$ 14.47
1,635,500
$ 14.59
Stock option expense for fiscal 2024 was $1,446 ( $1,306 in 2023 ). The weighted-average share price at the date of exercise of stock
options in fiscal 2023 was $15.85.
Details of stock options granted were as follows, for fiscal year:
2024
2023
Number of stock options granted
370,000
247,000
Weighted average fair value per stock option
$ 5.70
$ 6.12
Total fair value
$ 2,109
$ 1,512
Exercise price
$ 14.07
$ 15.42
Expected life
5.5 years
5.5 years
Expected volatility
37 %
36 %
Expected forfeiture
1.4 %
1.3 %
Expected dividend distribution
None
None
Compounded risk-free interest rate
2.9 %
2.8 %
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 53
As at March 31, 2024, 1,895,500 stock options were issued and outstanding, detailed as follows:
Outstanding options
Vested options
Exercise price
Number
Weighted-average
years to maturity
Weighted-average
exercise price
Number
Weighted-average
exercise price
$9.83
347,500
3.16
$9.83
260,250
$9.83
$14.07 to $15.42
829,000
4.40
14.69
294,250
15.03
$16.03 to $17.45
719,000
2.42
16.45
624,500
16.30
1,895,500
3.42
$14.47
1,179,000
$14.55
As at March 31, 2024, 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 2,122,662 as at March 31, 2023.
B.
Deferred Share Unit ("DSU"), Performance Share Unit ("PSU") and Restricted Share Unit ("RSU") plans
For the fiscal year ended March 31, movements in outstanding PSUs, DSUs and RSUs were as follows:
2024
2023
PSUs
DSUs
RSUs
PSUs
DSUs
RSUs
In number units
Opening balance
304,850
256,406
—
285,350 199,471
—
Issued
162,431
52,566
88,350
129,300
56,935
—
Settled
(101,100)
—
—
(98,200)
—
—
Cancelled/Forfeited
(12,000)
—
(2,950)
(11,600)
—
—
Closing balance
354,181 308,972
85,400
304,850 256,406
—
Fair value of vested outstanding units, end of periods
$
4,648 $
5,481 $
431
$
3,185 $
3,242 $
—
The compensation expense with respect to the PSU, DSU and RSU plans amounted to $5,669 during the fiscal year ended March 31, 2024
(expense of $293 during the fiscal year ended March 31, 2023).
NOTE 22. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income were as follows:
Exchange
differences on
conversion of
foreign operations
Cash flow
hedges
Hedge of net
investments in
foreign
operations
Total
Balance as at March 31, 2023
$ 23,368
$
(5,977)
$
(5,319)
$ 12,072
Other comprehensive income
1,129
3,787
56
4,972
Balance as at March 31, 2024
$ 24,497
$
(2,190)
$
(5,263)
$ 17,044
Exchange
differences on
conversion of
foreign operations
Cash flow
hedges
Hedge of net
investments in
foreign
operations
Total
Balance as at March 31, 2022
$
3,005
$
4,637
$
(777)
$
6,865
Other comprehensive income (loss)
20,363
(10,614)
(4,542)
5,207
Balance as at March 31, 2023
$ 23,368
$
(5,977)
$
(5,319)
$ 12,072
54 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
NOTE 23. INCOME TAXES
Income tax expense is as follows, for fiscal year:
2024
2023
Consolidated statements of income
Current income tax expense (recovery)
$ 7,134
$ (1,223)
Deferred income tax expense
83
6,021
Income tax expense reported in the consolidated statements of income
$ 7,217
$ 4,798
Consolidated statements of changes in shareholders’ equity
Expense (recovery) related to items charged or credited directly to retained earnings
$
297
$
(451)
Expense (recovery) related to items charged or credited directly to other comprehensive income
1,368
(4,495)
Income tax expense reported directly in shareholders’ equity
$ 1,665
$ (4,946)
The computation of income tax expense is as follows, for fiscal year:
2024
2023
Income taxes at combined Federal and Provincial statutory rates of 26.5% (26.4% in 2023)
$ 12,054
$ 4,935
Income tax rate differential – foreign subsidiaries
(588)
(152)
Permanent differences
(803)
183
(Recognition) write-down of deferred tax asset
(2,798)
656
Other items
(648)
(824)
Income tax expense
$ 7,217
$ 4,798
Significant deferred income tax assets and liabilities arising from the effect of temporary differences are as follows:
As at
March 31, 2024
March 31, 2023
Deferred income tax assets
Non-deductible reserves
$ 8,772
$ 6,605
Inventories
6,409
5,984
Receivables
157
150
Derivative financial instruments
807
2,323
Lease liabilities
2,272
1,908
Governmental authorities loans
1,572
665
Deferred tax benefits from tax losses and deductible expenses carried forward
11,023
14,854
Total deferred income tax assets
$ 31,012
$ 32,489
Deferred income tax liabilities
Investment and other tax credits
(2,096)
(830)
Property, plant and equipment
(24,843)
(25,030)
Customer relationships and contracts
(7,914)
(8,698)
Total deferred income tax liabilities
$ (34,853)
$ (34,558)
Net deferred income tax liabilities
$ (3,841)
$ (2,069)
The net deferred income tax assets are included under the following captions on the consolidated balance sheets:
As at
March 31, 2024
March 31, 2023
Deferred income tax assets
$ 10,337
$ 9,308
Deferred income tax liabilities
(14,178)
(11,377)
Net deferred income tax liabilities
$ (3,841)
$ (2,069)
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 55
As at March 31, 2024, net deferred income tax assets of $10,680 were recognized ($12,015 as at March 31, 2023) in jurisdictions that
incurred losses in 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, 2024, 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 $20,270 ($36,919 as at March 31, 2023).
The Corporation had the following non-capital losses and undeducted interest expenses available for carry-forward:
As at
March 31, 2024
March 31, 2023
Canada
$
9,217
$ 14,364
United States
68,916
83,017
United Kingdom
13,606
12,431
Spain
—
3,765
$ 91,739
$ 113,577
As at March 31, 2024, deferred income tax assets of $11,037 and deferred income tax liabilities of $4,654 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, 2024, the temporary differences
associated with investments in subsidiaries for which a deferred income tax liability has not been recognized aggregate to $29,595 ($23,840
in 2023).
NOTE 24. 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 2024, 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 $804 ($1,028 in
2023) while the cash contributed to its defined contribution plans amounted to $3,948 ($3,746 in 2023).
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 one plan, and the valuation is made as at March 31
for others.
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 2024 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 44% in equity funds, 31% in debt securities, 13%
annuity buy-in insurance contracts, 8% in real estate & infrastructure 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
March 31, 2024
March 31, 2023
Present value of defined benefit obligations of funded plans
$ 59,895
$ 58,966
Fair value of plan assets
73,203
68,980
Irrecoverable surplus (effect of asset ceiling)
(8,039)
(5,876)
Funded status of the plans – surplus
5,269
4,138
Present value of defined benefit obligations of unfunded plan
(340)
(384)
Net pension plan asset
$ 4,929
$ 3,754
Amount recognized in other long-term assets (note 13)
5,495
4,707
Amount recognized in other long-term liabilities (note 20)
(566)
(953)
Defined benefit pension expense recognized in the consolidated statements of income is as follows, for fiscal year:
2024
2023
Current service cost
$
555
$
791
Interest on net defined benefit obligations (note 9)
(164)
(194)
Administrative cost
439
293
Defined benefit pension expense recognized in the consolidated statements of income
$
830
$
890
The total amount recognized in other comprehensive income is as follows, for fiscal year:
2024
2023
Remeasurements
Gains from changes in financial assumptions
$
181
$ 6,565
Experience (losses) gains
211
(166)
Return on plan assets, excluding interest income on plan assets
2,613
(2,232)
Change in irrecoverable surplus other than interest
(1,879)
(5,876)
Other comprehensive income
$ 1,126
$ (1,709)
The actual return on the fair value of plan assets is as follows, for fiscal year:
2024
2023
Actual return on the fair value of plan assets
$ 5,898
$
422
The variation in present value of the defined benefit obligations were as follows, for fiscal year:
As at
March 31, 2024
March 31, 2023
Defined benefit obligations at the beginning of the year
$ 59,350
$ 64,916
Current service cost
555
791
Interest expense
2,850
2,460
Contributions by plans’ participants
755
699
Gains from changes in financial assumptions
(181)
(6,565)
Experience gains
(211)
166
Benefits paid
(2,883)
(3,117)
Defined benefit obligations at the end of the year
$ 60,235
$ 59,350
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 57
The fair value of plan assets is as follows:
As at
March 31, 2024
March 31, 2023
Fair value of plans’ assets at the beginning of the year
$ 68,980
$ 70,241
Interest income on plans’ assets
3,285
2,654
Return on plans’ assets, excluding interest income on plans’ assets
2,613
(2,232)
Contributions by the employer
804
1,028
Contributions by plans’ participants
755
699
Benefits paid
(2,795)
(3,117)
Administrative costs
(439)
(293)
Fair value of plans’ assets at the end of the year
$ 73,203
$ 68,980
The plans’ assets consist of:
As at
March 31, 2024
March 31, 2023
Equity securities
44 %
52 %
Debt securities
31 %
30 %
Annuity buy-in insurance contracts
13 %
14 %
Real estate & infrastructure
8 %
— %
Other
4 %
4 %
Total
100 %
100 %
Significant assumptions
The significant weighted-average assumptions used at the reporting date are as follows, for fiscal year:
2024
2023
Defined benefit obligations as at March 31:
Discount rate
4.88 %
4.85 %
Rate of compensation increase
N/A
3.50 %
Average life expectancies based on a pension at 65 years of age:
Male, 45 years of age at reporting date
87
87
Female, 45 years of age at reporting date
89
89
Male, 65 years of age at reporting date
86
86
Female, 65 years of age at reporting date
88
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, 2024:
Increase (Decrease)
Defined
benefit
obligations
%
Discount rate
Increase of 0.5%
(4.6)
Decrease of 0.5%
5.2
Average life expectancies
Increase of 1 year
2.1
Decrease of 1 year
(2.1)
Corporation’s pension benefits future cash flows
The cash contributions expected to be made to these plans in fiscal year 2025 amount to $858.
The duration of the defined benefit obligations at March 31, 2024 is 10.6 years (10.5 years in 2023). The expected maturity of undiscounted
pension benefits for the Unionized Pension Plan is presented as follows:
58 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
As at
March 31, 2024
March 31, 2023
Less than a year
$ 2,637
$ 2,399
Between 1-2 years
2,653
2,563
Between 2-5 years
9,114
8,616
Between 5-10 years
17,464
16,962
Total
$ 31,868
$ 30,540
Defined contribution pension plans
The defined contribution pension plans’ costs are as follows, for fiscal year:
2024
2023
Defined contribution pension plan costs
$ 3,948
$ 3,746
NOTE 25. COMMITMENTS AND CONTINGENCIES
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:
2025
2025 and
thereafter
Building, machinery and equipment acquisition commitments
$
4,930 $
—
Guarantees
The Corporation executes agreements that provide for indemnification and guarantees to counterparties in transactions such as business
dispositions and the sale of assets.
These indemnification undertakings and guarantees may require the Corporation to compensate the counterparties for costs or losses
incurred as a result of various events including breaches of representations and warranties, intellectual property right infringement, loss of or
damage to property, environmental liabilities, changes in or in the interpretation of laws and regulations (including tax legislation), valuation
differences or as a result of litigation that may be suffered by the counterparties.
In the sale of all or a part of a business or assets, in addition to possible indemnification relating to failure to perform covenants and breach of
representations and warranties, the Corporation may have to indemnify against claims related to past conduct of the business. The nature of
these indemnification agreements prevents the Corporation from estimating the maximum potential liability that could be required under
guarantees, since these events have not occurred yet.
Letters of credit
As at March 31, 2024, the Corporation has outstanding letters of credit amounting to $18,818 ($19,024 in 2023).
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 26. NET CHANGE IN NON-CASH ITEMS
The net change in non-cash items is detailed as follows, for fiscal year:
2024
2023
Accounts receivable
$ (26,053) $ (18,003)
Inventories
(59,296)
(55,323)
Other assets
219
3,955
Accounts payable and accrued liabilities
5,948
19,558
Provisions
(2,198)
(5,394)
Customer advances and progress billings
5,565
27,658
Other liabilities
1,305
(2,838)
$ (74,510) $ (30,387)
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 59
NOTE 27. GEOGRAPHIC INFORMATION
The geographic segmentation of the Corporation’s assets is as follows:
As at
March 31, 2024
Canada
U.S.
U.K.
Spain
Total
Property, plant and equipment, net
$ 88,826 $ 61,766 $ 16,893 $ 33,020 $ 200,505
Finite-life intangible assets, net
28,758
2,038
814
28,948
60,558
Goodwill
5,404
18,525
61,331
28,391 113,651
As at
March 31, 2023
Canada
U.S.
U.K.
Spain
Total
Property, plant and equipment, net
$ 89,479 $ 64,161 $ 16,449 $ 35,401 $ 205,490
Finite-life intangible assets, net
18,236
4,544
925
29,949
53,654
Goodwill
5,404
18,502
59,941
28,537 112,384
NOTE 28. 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:
2024
2023
Short-term benefits and other benefits
$
5,642 $
3,438
Pension and other post-retirement benefits
77
74
Share-based compensation
2,418
1,958
$
8,137 $
5,470
NOTE 29. 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
March 31, 2024
March 31, 2023
Fair value
hierarchy
Carrying
amount
Fair Value
Fair value
hierarchy
Carrying
amount
Fair Value
Financial assets
Cash
Level 1
$
9,765 $
9,765
Level 1
$
15,020 $
15,020
Derivative financial instruments
Level 2
4,618
4,618
Level 2
854
854
$
14,383 $
14,383
$
15,874 $
15,874
Financial liabilities
Derivative financial instruments
Level 2
$
5,839 $
5,839
Level 2
$
10,388 $
10,388
Long-term debt, including current portion
Level 2
219,628
215,183
Level 2
179,978
178,367
$ 225,467 $ 221,022
$ 190,366 $ 188,755
60 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
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 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 30. 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.
The forward foreign currency contracts outstanding are as follows:
As at
March 31, 2024
March 31, 2023
Currencies (sold/bought)
Notional
amount (1)
Average
rate
Notional
amount (1)
Average
rate
$ 161,188
1.33 $ 162,867
1.32
113,330
1.32
125,196
1.30
34,850
1.33
29,408
1.33
11,762
0.81
15,055
0.78
24,839
0.81
23,627
0.81
14,258
0.81
26,081
0.81
13,498
0.92
10,885
0.87
13,254
0.91
13,517
0.92
—
—
6,616
0.90
6,707
0.97
—
—
10,158
0.96
—
—
—
—
25,079
0.72
$ 403,844
$ 438,331
(1) Exchange rates as at the end of respective periods were used to translate amounts in foreign currencies.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 61
USD/CAD
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
USD/GBP
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
USD/EUR
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
EUR/USD
Less than 1 year
Between 1 and 3 years
EUR/CAD
Less than 1 year
Total
As at March 31, 2024, 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:
U.S. dollar
impact
British pound
impact
Euro
impact
Decrease in net income
$ (373)
$ (120)
$
(97)
Increase (decrease) in other comprehensive income (loss)
1,072
(1,818)
(709)
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 19). 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.
Other price risk
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs, PSUs and RSUs (see note 21). 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, PSUs and RSUs included in the Corporation’s selling and administrative expenses.
As at March 31, 2024, the equity swap agreement covered 500,000 common shares of the Corporation at a price of $13.91 per share and
matures in June 2024 (400,000 common shares at a price of $13.39 per share, and maturity of June 2024 as at March 31,2023).
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 53% of the Corporation’s fiscal 2024 sales are made to the top five
customers (52% in 2023). More specifically, in fiscal 2024, the Corporation had one customer representing 16% of its consolidated sales (one
customer representing 15% in 2023).
Accounts receivable
The credit and credit concentration risks related to these financial instruments are limited due to the fact that the Corporation deals generally
with large corporations and Government agencies, with the exception of sales made to private small businesses which represent together
approximately 3.7% in fiscal 2024 (3.5% in 2023) of the Corporation’s consolidated sales.
The Corporation has historically not made any significant write-off of accounts receivable, and as at March 31, 2024, 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, 2024:
2024
2023
Balance, beginning of year
$
429
$
505
Arising during the year
218
90
Reversed
(102)
(165)
Effect of changes in foreign exchange rates
—
(1)
Balance at the end of the year
$
545
$
429
62 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
The details of the Corporation’s trade receivables are the following:
As at
March 31, 2024
March 31, 2023
Not past due
$ 134,770
$ 111,037
Past due less than 90 days
10,830
6,609
Past due more than 90 days
1,732
3,192
147,332
120,838
Allowance for doubtful accounts
(545)
(429)
Balance at the end of the year
$ 146,787
$ 120,409
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, 2024, the maximum exposure to credit and credit concentration risks for financial instruments represented the following (see
note 29):
FVTOCI (1)
A.C.
Cash
$
—
$
9,765
Accounts receivable
—
146,787
Derivative financial instruments
4,618
—
(1) Represents the fair value of derivative financial instruments designated in a hedging relationship.
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, 2024, the maturity analysis of financial liabilities represented the following:
< 1 year
1 to 3 years
4 to 5 years
> 5 years
Total
Accounts payable and accrued liabilities
$
142,718 $
— $
— $
— $
142,718
Customer advances
35,494
—
—
—
35,494
Long-term debt including interest payments(1)
23,586
45,549
151,922
43,296
264,353
Derivative financial instruments
3,147
2,675
17
—
5,839
(1)The carrying amount of the long-term debt is $219,628 (note 19) .
NOTE 31. 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.
HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements – 63
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, 2024, 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
March 31, 2024
March 31, 2023
Current portion of long-term debt
$ 16,263
$ 11,425
Long-term debt
201,764
166,483
Deferred financing costs, net
1,601
2,070
Less: Cash
9,765
15,020
Net debt
$ 209,863
$ 164,958
Shareholders’ equity
429,638
390,919
Net debt-to-equity ratio
0.49:1
0.42:1
The Corporation is not subject to any regulatory capital requirements.
64 – HÉROUX-DEVTEK INC. – Fiscal 2024 Consolidated Financial Statements
TABLE OF CONTENTS
OVERVIEW .................................................................................................................................................................................
67
Forward-looking Statements .......................................................................................................................................................
67
Highlights of the Year ................................................................................................................................................................
68
Overview of the Business ...........................................................................................................................................................
69
Economic Outlook .....................................................................................................................................................................
69
OPERATING RESULTS ...............................................................................................................................................................
72
Non-IFRS Financial Measures ....................................................................................................................................................
75
LIQUIDITY AND CAPITAL RESOURCES ......................................................................................................................................
77
Credit Facilities and Net Debt Position .........................................................................................................................................
77
Government Authorities Loans ....................................................................................................................................................
78
Variations in Cash .....................................................................................................................................................................
78
Free Cash Flow .........................................................................................................................................................................
81
Liquidity Requirements ..............................................................................................................................................................
81
FINANCIAL POSITION ................................................................................................................................................................
82
Capital Structure .......................................................................................................................................................................
82
Issued Capital ...........................................................................................................................................................................
83
Consolidated Balance Sheets .....................................................................................................................................................
84
Pension Plans ...........................................................................................................................................................................
84
ADDITIONAL INFORMATION ......................................................................................................................................................
86
Foreign Exchange .....................................................................................................................................................................
86
Risk Management .....................................................................................................................................................................
86
Derivative Financial Instruments .................................................................................................................................................
92
Internal Controls and Procedures ................................................................................................................................................
93
Critical Accounting Estimates .....................................................................................................................................................
93
Selected Financial Information ....................................................................................................................................................
95
Shareholder Information .............................................................................................................................................................
96
Additional Information and Continuous Disclosure ........................................................................................................................
96
66 – HÉROUX-DEVTEK INC. – Fiscal 2024 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, 2023 and
March 31, 2024. It also compares the operating results and cash flows for the quarter and fiscal year ended March 31, 2024 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, 2024, 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, 2024 and 2023 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 2024 MD&A – 67
HIGHLIGHTS OF THE YEAR
Fiscal year
2024
2023
Sales
$ 629,767 $ 543,622
Operating income
59,763
26,198
Adjusted EBITDA (1)
92,184
61,366
Net income
38,271
13,825
Adjusted net income (1)
34,310
12,606
Cash flows related to operating activities
2,933
30,060
Free cash flow (1)
(31,501)
(1,718)
In dollars per share
Earnings share - diluted
$
1.13 $
0.40
Adjusted EPS (1)
1.01
0.37
As at
March 31,
2024
March 31,
2023
Funded backlog (2)
$ 951,000 $ 864,000
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most
comparable IFRS measures.
(2) Represents firm orders.
Key Events
Héroux-Devtek’s throughput this fiscal year improved 15.8% to a record $629.8 million from $543.6 million last year exceeding pre-pandemic
levels. This performance is largely the result of the actions taken to better navigate the challenges of the current environment.
The higher volume as well as the Corporation’s pricing initiatives drove better profitability, which was partially offset by the year-over-year
effects of inflation on costs. As a result, operating income increased to $59.8 million from $26.2 million last year, and Adjusted EBITDA
increased 50.2% to $92.2 million or 14.6% of sales, compared to $61.4 million or 11.3% of sales last year.
Although the operating environment improved compared to last year, it remains volatile and several factors are still hampering the consistent
generation of throughput:
•
Lead times for the procurement of raw material remain long and Russia’s invasion of Ukraine limits the supply of certain material;
and,
•
Although the peak of inflation has passed, higher costs, higher interest rates and longer raw material lead times continue to hamper
the aerospace supply chain’s ability to manufacture and deliver products in a timely and efficient manner.
In order to mitigate this, the Corporation has invested in inventory levels to stabilize its production system and to sustain upcoming sales
growth. These measures resulted in cash flows related to operating activities decreasing to $2.9 million from $30.1 million in spite of higher
throughput and profitability, as the increase in inventory consumed $59.3 million during the year.
The positive result of these investments as well as the measures mentioned earlier accelerated throughout the fiscal year, resulting in record
fourth quarter performance, including $184.1 million of sales, $27.6 million of operating income and $33.1 million of adjusted EBITDA,
representing 18.0% of sales.
Strong demand in the aerospace industry, and in the defence sector in particular, are very favourable for the Corporation. This is reflected in
a record firm order book of $951.0 million at March 31, 2024, up 10% from March 31, 2023 and 39.4% compared to March 31, 2022. This
level of business demonstrates the health of Héroux-Devtek’s customer relationships and in the quality and safety of its products. The
challenge remains delivering on these orders in a timely and efficient manner given the current environment.
68 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
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 volume, supplying both the civil 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. 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 worldwide, though mainly in 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, Northrop Grumman,
Leonardo, Embraer, Saab, Bell 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 2024, the Corporation’s five largest customers
represented approximately 53% of total consolidated sales, with one customer accounting for 16%.
The following charts describe Héroux-Devtek’s revenue segmentation in terms of intellectual property and destination:
Fiscal 2024 sales, BTP* vs proprietary
51.0%
35.4%
8.8%
4.8%
Proprietary products
Build to Print - OEM
Build to Print - Tier 1
Other
Fiscal 2024 sales mix by end customer location
Canada: 5.7%
United States:
56.9%
United
Kingdom:7.9%
Rest of Europe:
10.8%
Spain: 8.1%
Other: 10.6%
* BTP: Build to Print
ECONOMIC OUTLOOK
Record commercial aircraft manufacturer backlogs and higher defence spending drive positive outlook
According to data from IATA, Global passenger traffic as measured in revenue passenger kilometer (RPKs) continued its post-COVID
recovery in 2023. Industry-wide RPKs rose 36.9% as traffic reached 94.1% of 2019 levels. International traffic, while 41.6% stronger year on
year, is still 88.6% of pre-COVID levels, suggesting further room for improvement in the near term1.
Order intake for aircraft marked a substantial increase from previous years at Airbus2 and Boeing3 while deliveries for passenger aircraft were
significantly below the pre-COVID peak, reaching levels last seen in 2012 and 2013. The Centre for Aviation (CAPA) reports that the global
aircraft order backlog has increased to 13 years, up from 9 years before the COVID era. This indicates strong and sustained throughput for
the aircraft supplier industry for years to come4.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 69
1 Source: Global Air Travel Demand Continued Its Bounce Back in 2023, IATA, January 31, 2024
2 Source: Airbus Annual Report 2023, Airbus, February 15, 2024
3 Source: Boeing Reports Fourth Quarter Results, Boeing, January 31, 2024
4 Source: Global aircraft order backlog hits 13 years. Airbus beats Boeing on key metrics, CAPA, January 11, 2024
Spending on defence meanwhile maintained its momentum in 2023, growing for the ninth consecutive year on increasing concerns of global
military conflicts. The Russian invasion of Ukraine, in its third year, has brought attention to the potential for military conflicts and prompted
numerous countries to substantially increase their military expenditures. Additionally, several nations have announced long-term plans to
increase their spending levels over periods spanning up to a decade
Civil Market
Global production backlog and long-term perspectives
According to the Centre for Aviation Fleet Database (CAPA), globally, the civil aircraft backlog stood at a record of 15,933 aircraft at the end
of December 2023, equivalent to 12.6 years of production based on 2023 delivery rates5.
Aircraft orders totalled 3,850 in 2023, a record and a 91% increase compared to 2022. Deliveries meanwhile continued to improve at 1,265
aircraft, an 11% improvement over 2022 but were still 26% below 2018's record high of 1,698.
According to Boeing's projections, the global aviation industry is expected to require deliveries of 42,595 new airplanes over the next 20 years
in order to meet the growing demand. Of this total, single-aisle aircraft are estimated to account for approximately 76%, widebody aircraft are
projected to represent around 17%, regional jet 4% and freighter 3%6. The increase in the global fleet over the next 20 years is expected
therefore to be in the order of 3.5% per annum, a significant acceleration as Boeing’s prior year forecast anticipated growth in the global
aircraft fleet of 2.8% per annum for the same period.
This substantial demand will require the aerospace supply chain to significantly increase output, well beyond what was required to meet the
level of deliveries achieved in calendar 2018. While this bodes well for suppliers, it is also represents a difficult challenge to meet, particularly
given recent supply chain disruptions.
Business jets
The General Aviation Manufacturers Association (GAMA) reported global sales of 730 new private business jets in 2023, an increase from
the 712 new jets sold in 2022.
Over the next ten years, Teal Group forecasts a total production of 10,905 aircraft worth US$262 billion, over the next ten years (2023-2032).
For comparison, the last ten years from 2013 to 2022, saw production of 9,702 business aircraft worth US$246 billion (also in 2023 dollars)7.
Growth in deliveries in dollar terms is expected to outpace the number of units in calendar 2024 compared to 2023, driven by higher
deliveries of very large aircraft such as the Dassault Falcon 6X8.
Air cargo
Global full-year demand in 2023, measured in cargo tonne-kilometers, was down 1.9% year on year in 2023 (-2.2% for international
operations). Compared to 2019, it was down 3.6% (-3.8% for international operations). This is an impressive performance coming from a high
base.
Capacity in 2023, measured in Available Cargo Tonne Kilometres, was 11.3% above 2022 (+9.6% for international operations). Compared to
2019 (pre-COVID) levels, capacity was up 2.5% (0.0% for international operations).
Boeing forecasts demand for freighters of 2,795 aircraft over the next 20 years which will grow the freighter fleet from 2,270 in 2022 to 3,745
in 2042 (net of retirements), a 65% increase driven by developing supply chains and demand for express deliveries9. 1,070 of these aircraft
are forecast to be new production (515 widebody), while the balance are conversions.
Defence Market
Military expenditures
Total global military expenditure increased by 6.8% in real terms in 2023, to reach a new high of US$2,443 billion, a marked increase from
the already brisk 3.7% increase from the prior year, marking a ninth consecutive year of military spending increases10. Significant increases in
recent years are essentially driven by Russia’s invasion of Ukraine and the ensuing need for countries to respond to the geopolitical tension.
70 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
5 Source: Global aircraft order backlog hits 13 years. Airbus beats Boeing on key metrics, CAPA, January 11, 2024
6 Source: Boeing Forecasts Demand for 42,600 New Commercial Jets Over Next 20 Years, Boeing, June 17, 2023
7 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, February 2023
8 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, January 2024
9 Source: World Air Cargo Freighter Industry Forecast (WACF) 2022-2041, Boeing, November 1, 2022
10 Source: Trend in World Military Expenditure, 2023, SIPRI, April 2024
The United States continued to dominate world military expenditures, increasing 2.3% compared to 2022 to reach $916 billion in 2023. The
next eleven countries with the most significant military spending totaled $930 billion of combined expenditures. The Biden government’s fiscal
2025 budget proposal proposed further increases, up 3% from the previous budget11. The proposed budget intends to allow the Department
of Defense to “invest in capabilities to maintain a ready, lethal, and combat-credible joint force”, and includes $61.2 billion earmarked for
airpower to “continue developing, modernizing, and procuring lethal air forces”.
Outside of the United States, other NATO member states continued their generally upward trend in spending, with eleven countries meeting
or exceeding the stated target of 2% of GDP spent on military, up four countries from 2022. Among the top ten countries in terms of military
expenditures, the United Kingdom, Germany and France increased their spending by 7.9%, 9.0% and 6.5% respectively12.
Fighter jets
According to Teal Group, the fighter and attack aircraft segment is 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, the delayed ramp-up of
the F-35 program, and the presence of high resource prices. As a result, the demand for fighters is expected to continue expanding in the
foreseeable future13.
Despite its delays and cost overruns, the Lockheed Martin F-35 has come to dominate this market and according to Teal Group it will
represent approximately 1500 deliveries over the next ten years. Other programs, such as the F-18, F-15, Gripen and Eurofighter are
expected to make up a further 400 aircraft14.
While already experiencing strong growth, there is anticipation surrounding new developments in the fighter market. There are several
ongoing programs to develop 6th generation aircraft, including the Global Combat Air Programme (United Kingdom, Italy and Japan), Future
Combat Air System (France, Germany and Spain), and Next Generation Air Dominance in the United States. The latter program, which is
expected to enter production first among these, includes replacements for the F-22 and F-18, as well as several unmanned aircraft with
various mission profiles.
Military transport aircraft
Despite the strategic needs for air mobility, such as global tensions and the necessity for remote deployments, the market for military
transports has been in decline, falling 39% by value from its peak in 2011 to 2021, with an anticipated further drop projected by 2027. This
decline is seen across various segments, however smaller military transport aircraft such as the Airbus C295 should see a sustained level of
production to meet ongoing demands.The limited aircraft production presents a favourable opportunity for aftermarket business15.
Military helicopter
Teal Group forecasts production of 4,575 military machines worth $120.6 billion between 2022 and 2031, representing a decline relative to
the last ten years (2012-2021) when production amounted to $140.6 billion. On a unit basis, however, production is set to experience a
marginal increase over the next 10 years, with the number of rotorcrafts produced rising from 409 in 2022 to 427 by 2031. The peak
production is expected to occur in 2027, reaching 525 units. Like 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.
While in recent years the future of the market prominently featured the U.S. Armed Forces’ Future Vertical Lift initiative, the outlook has
changed noticeably with the cancellation of the Future Attack Reconnaissance Aircraft (FARA) program. The U.S. Army cited ongoing
lessons learned in the battlefield, especially in Ukraine, and ordered the most recent versions of Boeing’s CH-47 and Sikorsky’s UH-60
instead16.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 71
11 Source: Department of Defense Releases the President's Fiscal Year 2025 Defense Budget, U.S. Department of Defense, March 11, 2024
12 Source: Trend in World Military Expenditure, 2023, SIPRI, April 2024
13 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, November 2023
14 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, November 2023
15 Source: World Military & Civil Aircraft Briefing, Teal Group Corporation, October 2023
16 Source: Army Future Attack Reconnaissance Aircraft (FARA) Program Proposed Cancellation: Background and Issues for Congress,
Congressional Resarch Services, February 16, 2024
OPERATING RESULTS
Quarters ended March 31,
Fiscal years ended March 31,
2024
2023
Variance
2024
2023
Variance
Sales
$ 184,053 $ 155,978 $ 28,075 $ 629,767 $ 543,622 $ 86,145
Gross profit
39,389
22,741
16,648 111,072
73,535
37,537
Selling and administrative expenses
15,738
12,862
2,876
55,270
48,556
6,714
Other gains
(3,961)
—
(3,961)
(3,961)
(1,219)
(2,742)
Operating income
27,612
9,879
17,733
59,763
26,198
33,565
Net financial expenses
4,726
1,175
3,551
14,275
7,575
6,700
Income tax expense
2,193
2,416
(223)
7,217
4,798
2,419
Net income
$ 20,693 $
6,288 $ 14,405 $ 38,271 $ 13,825 $ 24,446
Adjusted net income(1)
$ 16,732 $
6,288 $ 10,444 $ 34,310 $ 12,606 $ 21,704
Adjusted EBITDA(1)
$ 33,069 $ 19,595 $ 13,474 $ 92,184 $ 61,366 $ 30,818
As a percentage of sales
Gross profit
21.4%
14.6%
680 bps
17.6%
13.5%
410 bps
Selling and administrative expenses
8.6%
8.2%
40 bps
8.8%
8.9%
-10 bps
Operating income
15.0%
6.3%
870 bps
9.5%
4.8%
470 bps
In dollars per share
Earnings per share -basic and diluted
$
0.61 $
0.18 $
0.43 $
1.13 $
0.40 $
0.73
Adjusted EPS(1)
$
0.49 $
0.18 $
0.31 $
1.01 $
0.37 $
0.64
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section for definitions and reconciliations to the most comparable IFRS measures.
Sales
Fiscal Year
Sales (millions)
$613.0
$570.7
$536.1
$543.6
$629.8
2020
2021
2022
2023
2024
2024 Sales by Sector
Civil
39%
Defence
61%
72 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
Sales by market segment are detailed as follows:
Fiscal years ended March 31,
2024
2023
FX Impact
Net variance
Defence
$ 386,400 $ 372,942 $
9,403 $
4,055
1.1 %
Civil
243,367 170,680
5,922
66,765
39.1 %
Total
$ 629,767 $ 543,622 $
15,325 $ 70,820
13.0 %
Quarters ended March 31,
2024
2023
FX Impact
Net variance
Defence
$ 108,235 $ 107,078 $
414 $
743
0.7 %
Civil
75,818
48,900
507
26,411
54.0 %
Total
$ 184,053 $ 155,978 $
921 $ 27,154
17.4 %
The following analysis excludes the impact of foreign exchange fluctuations which are itemized in the tables above.
On a general basis, the increase in sales compared to the comparable periods results from the actions taken to stabilize the Corporation’s
production system to better deliver in the current supply chain environment.
Defence
The $4.1 million net increase compared to last fiscal year and steady sales for the quarter were mainly driven by higher aftermarket business
for legacy programs and higher deliveries for the Sikorsky CH-53K and Lockheed Martin F-35 programs, partly offset by lower demand for
Boeing F-18 production.
Civil
The respective $66.8 million and $26.4 million net increases compared to last fiscal year and fourth quarter, were mainly driven by the
increase in deliveries for the Boeing 777, Embraer Praetor and E2 programs.
Gross Profit
Gross profit increased from 13.5% of sales last year to 17.6% this year, and from 14.6% to 21.4% for the quarter due to the positive impact of
higher volume and pricing initiatives, partly offset by the effects of inflation on costs. Foreign exchange had a negligible impact on both
periods when compared to last year.
Selling and Administrative Expenses
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Selling and Administrative Expenses
$ 15,738 $ 12,862 $ 55,270 $ 48,556
Less: Net (gains) losses on conversion of net monetary items
(560)
(680)
61
105
$ 16,298 $ 13,542 $ 55,209 $ 48,451
As a percentage of sales
8.9 %
8.7 %
8.8 %
8.9 %
When excluding net (gains) losses on conversion of net monetary items, the increases in Selling and Administrative Expenses when
compared to last year mainly relate to higher employee-related costs, including the effect of share price fluctuations and performance factors
on stock-based compensation expense, while as a percentage of sales it remains relatively stable for both the year and the quarter ended
March 31, 2024
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 73
Other Gains
Other gains are 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.
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Extinguishment of liability
$
(3,961) $
— $
(3,961) $
—
Business divestiture
—
—
—
(1,219)
$
(3,961) $
— $
(3,961) $
(1,219)
Extinguishment of liability
During the fiscal year and quarter ended March 31, 2024, a provision of $4.0 million related to a previous business acquisition was
extinguished due to the expiration of the indemnification agreement.
Business divestiture
The commercial objectives included in the agreement for the fiscal 2022 sale of the Corporation’s 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.
Operating Income
Operating income increased from 4.8% to 9.5% of sales this fiscal year and from 6.3% to 15.0% of sales for the quarter compared to the
same periods last fiscal year mainly as a result of the factors described above, including Other gains representing 2.1% of sales during the
quarter and 0.6% for the fiscal year.
Year-over-year, foreign exchange fluctuations had a negligible impact on both the quarter and fiscal year (< 0.1% of sales).
Net Financial Expenses
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Interest accretion on governmental authorities loans
$
895
$
822
$ 3,125
$ 3,140
Revision of governmental authorities loans repayment estimates
602
(1,207)
602
(1,207)
Interest on defined benefit obligations
(224)
(250)
(164)
(194)
Interest on leases
232
231
891
840
Amortization of deferred financing costs
117
117
469
475
Other net non-cash financial expense (income)
144
185
299
(146)
Net non-cash financial expenses
$ 1,766
$
(102)
$ 5,222
$ 2,908
Interest on long-term debt
$ 3,034
$ 2,111
$ 9,483
$ 6,946
Interest income on cash
(74)
(834)
(430)
(2,279)
$ 4,726
$ 1,175
$ 14,275
$ 7,575
The increase in net non-cash financial expenses for the quarter and fiscal year essentially relate to an expense resulting from the update of
government authority loan repayment estimates compared to a gain last year.
The increase in interest on long-term debt compared to last year for the quarter and fiscal year mainly relates to increases in underlying
benchmark rates and the balance drawn on the credit facility due to the Corporation’s investment in inventory.
The decrease in interest income on cash compared to last year relates to a lower outstanding cash balance as a result of investment in
inventory, partly offset by higher underlying benchmark rates.
74 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
Income Tax Expense
Quarters ended ended March 31,
Fiscal years ended March 31,
2024
2023
2024
2023
Income before income tax expense
$ 22,886
$ 8,705
$ 45,488
$ 18,623
Income tax expense at Canadian blended statutory tax
6,064 26.5 % 2,307 26.5 % 12,054 26.5 % 4,935 26.5 %
Results coming from foreign jurisdictions
(273)
(198)
(588)
(152)
Non-deductible expenses
88
168
549
501
Non-taxable income
(1,290)
(72)
(1,352)
(318)
Prior year adjustments
2
(445)
(648)
(824)
Non-recognition (recognition) of tax benefits
(2,398)
656
(2,798)
656
Income tax expense
$ 2,193
9.6 %
$ 2,416
27.8 % $ 7,217
15.9 % $ 4,798
25.8 %
Net Income
Net income increased from $13.8 million to $38.3 million this fiscal year compared to last and increased from $6.3 million to $20.7 million
during the quarter compared to the same quarter last fiscal year mainly as a result of the factors described above. Excluding other gains net
of taxes, adjusted net income increased from $12.6 million to $34.3 million over the fiscal year, and from $6.3 million to $16.7 million during
the quarter.
During the fiscal year, earnings per share increased from $0.40 to $1.13 per share (or increased from $0.37 to $1.01 per share excluding
other gains net of taxes), while they increased from $0.18 to $0.61 per share (or increased from $0.18 to $0.49 excluding other gains net of
taxes) 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:
Operating income excluding amortization expense and other gains.
Adjusted net income:
Net income excluding other gains net of taxes.
Adjusted earnings per share:
Diluted earnings per share calculated on the basis of adjusted net income.
Free cash flow:
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.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 75
The Corporation’s Adjusted EBITDA is calculated as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Operating income
$ 27,612
$ 9,879
$ 59,763
$ 26,198
Amortization expense
9,418
9,716
36,382
36,387
Other gains
(3,961)
—
(3,961)
(1,219)
Adjusted EBITDA
$ 33,069
$ 19,595
$ 92,184
$ 61,366
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:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Net income
$ 20,693
$ 6,288
$ 38,271
$ 13,825
Other gains, net of taxes
(3,961)
—
(3,961)
(1,219)
Adjusted net income
$ 16,732
$ 6,288
$ 34,310
$ 12,606
In dollars per share
Earnings per share - diluted
$
0.61
$
0.18
$
1.13
$
0.40
Other gains, net of taxes
(0.12)
—
(0.12)
(0.03)
Adjusted earnings per share
$
0.49
$
0.18
$
1.01
$
0.37
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.
76 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
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.
As at March 31, 2024, the facility had a balance of $41.0 million, compared to none as at March 31, 2023. Drawings on the facility were made
due to the Corporation’s investment in inventory made to stabilize the production system and to sustain upcoming sales growth.
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:
March 31, 2024
March 31, 2023
Long-term debt, including current portion(1)
$ 219,628
$ 179,978
Less: Cash
9,765
15,020
Net debt position
$ 209,863
$ 164,958
Adjusted EBITDA(2)
$
92,184
$
61,366
Net debt to adjusted EBITDA ratio
2.3 :1
2.7 :1
(1) Excluding net deferred financing costs of $1.6 million and $2.1 million as at March 31, 2024 and March 31, 2023, 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 $59.3 million investment in inventory to stabilize
the production system and to sustain upcoming sales growth.
Fiscal Year
Net Debt Position (millions)
$246.9
$157.5
$152.1
$165.0
$209.9
2.6
1.8
1.8
2.7
2.3
Net debt position
Net debt to Adjusted EBITDA
2020
2021
2022
2023
2024
Long-term debt* composition
$220 million as at March 31, 2024
Revolving
Facility: $41.0
Term Loan
Facility: $75.0
Government
Loans: $88.6
Leases: $15.0
*Excluding net deferred financing costs of $1.6 million as at March 31, 2024 and $2.1 million as at March 31, 2023.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 77
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, 2024 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 while the revolving facility
matures in June 2027.
GOVERNMENT AUTHORITIES LOANS
Governmental authorities’ loans represent government assistance for the purchase of certain equipment or tooling, for the modernization or
additions to the Corporation’s facilities or for development costs capitalized or expensed for aerospace programs. They were granted as
incentives under Canadian federal and provincial or Spanish industrial programs to promote industry development.
These loans have varying terms governing the timing and amount to be repaid. Repayments, when not on a fixed schedule, are either based
on sales of specific programs or the growth in sales of all or certain of Héroux-Devtek’s product lines and bear no or below-market interest
rates.
They are measured at a discounted value using a corresponding market rate of interest each time they are received, and the related discount
is accreted to income using the effective interest rate method and included in net financial expenses.
Assumptions underlying loan repayments are reviewed at least annually. As at March 31, 2024, 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 loss
of $0.6 million (gain of $1.2 million in fiscal 2023), which was included in net financial expenses.
As at March 31, 2024, the Corporation had a present value of $88.6 million outstanding under these agreements ($89.0 million as at
March 31, 2023), bearing effective interest rates between 0.0% to 6.6% as at March 31, 2024 (0.0% to 6.6% as at March 31, 2023). These
loans have repayment terms extending to fiscal 2035 at the latest.
VARIATIONS IN CASH
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Cash at beginning of periods
$
6,411 $ 90,837 $ 15,020 $ 86,692
Cash flows related to operating activities
19,743
4,518
2,933
30,060
Cash flows related to investing activities
(9,476) (12,888) (34,434) (28,292)
Cash flows related to financing activities
(7,250) (67,446)
26,097 (74,389)
Effect of changes in exchange rates on cash
337
(1)
149
949
Cash at end of periods
$
9,765 $ 15,020 $
9,765 $ 15,020
78 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
Operating Activities
The Corporation generated cash flows from its operating activities as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Net income
$ 20,693 $
6,288 $ 38,271 $ 13,825
Items not requiring an outlay of cash:
Amortization expense
9,418
9,716
36,382
36,387
Deferred income taxes
(1,785)
2,780
83
6,021
Extinguishment of liability
(3,961)
—
(3,961)
—
Net non-cash financial expenses
1,766
(102)
5,222
2,908
Stock-based compensation expense
368
329
1,446
1,306
26,499
19,011
77,443
60,447
Net change in non-cash items
(6,756) (14,493) (74,510) (30,387)
Cash flows related to operating activities
$ 19,743 $
4,518 $
2,933 $ 30,060
The net change in non-cash items can be summarized as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Accounts receivable
$ (16,995) $ (22,180) $ (26,053) $ (18,003)
Inventories
(7,737) (14,408) (59,296) (55,323)
Other assets
(73)
(3,052)
219
3,955
Accounts payable and accrued liabilities
12,568
20,685
5,948
19,558
Provisions
(982)
(770)
(2,198)
(5,394)
Customer advances and progress billings
2,908
2,510
5,565
27,658
Other liabilities
3,555
2,722
1,305
(2,838)
Net change in non-cash items
$ (6,756) $ (14,493) $ (74,510) $ (30,387)
For the quarter and fiscal year ended March 31, 2024, the negative net change in non-cash items mainly reflects:
▪
An investment in inventory levels to stabilize the production system and sustain future sales growth; and,
▪
An increase in accounts receivable mainly related to higher sales volume.
These negative items were partly offset by increases in customer advances and progress billings and in accounts payable and accrued
liabilities resulting from the higher level of activity.
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.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 79
Investing Activities
The Corporation’s investing activities were as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Net additions to property, plant and equipment
$ (5,574)
$
(6,976)
$ (20,519)
$ (18,641)
Net increase in finite-life intangible assets
(3,902)
(6,282)
(13,915)
(13,137)
Proceeds from a business divestiture
—
370
—
3,486
Cash flows related to investing activities
$ (9,476)
$
(12,888)
$ (34,434)
$ (28,292)
The net increase in finite-life intangible assets over the quarter and fiscal year was primarily explained by a lower investment in capitalized
development costs than during Fiscal 2023 partly offset by investments in an ERP system implementation.
Proceeds from a business divestiture related to the Fiscal 2022 sale of the Corporation’s Bolton operations.
Additions to property, plant and equipment shown above can be reconciled as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Gross additions to property, plant and equipment
$ 7,436
$ 9,469
$ 24,000
$ 19,998
Government assistance
(96)
(21)
(69)
(78)
Additions to property, plant and equipment
$ 7,340
$ 9,448
$ 23,931
$ 19,920
Variation in unpaid additions included in Accounts Payable
(1,625)
(1,548)
(652)
(130)
Non-cash additions of right-of-use assets
(141)
(924)
(2,760)
(1,149)
Additions, as per statements of cash flows
$ 5,574
$ 6,976
$ 20,519
$ 18,641
Financing Activities
The Corporation’s financing activities were as follows:
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Increase in long-term debt
$
761
$
807
$ 51,894
$
7,046
Repayment of long-term debt
(8,011)
(66,113)
(18,998)
(75,747)
Issuance of common shares
—
—
—
1,103
Repurchase and cancellation of shares
—
(2,140)
(6,799)
(6,546)
Increase in deferred financing cost
—
—
—
(245)
Cash flows related to financing activities
$ (7,250)
$ (67,446)
$ 26,097
$ (74,389)
The increase in long-term debt during the fiscal year mainly relate to drawings on the Revolving Facility due to the Corporation’s investment
in inventory made to stabilize the production system and prepare for future sales growth, while repayments of long-term debt are comprised
of partial repayment of the revolving facility, lease payments and scheduled reimbursements of governmental loans.
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.
80 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
FREE CASH FLOW (1)
Quarters ended
March 31,
Fiscal years ended
March 31,
2024
2023
2024
2023
Cash flows related to operating activities
$ 19,743 $
4,518 $
2,933 $ 30,060
Net additions to property, plant and equipment
(5,574)
(6,976)
(20,519)
(18,641)
Net increase in finite-life intangible assets
(3,902)
(6,282)
(13,915)
(13,137)
Free cash flow (usage)(1)
$ 10,267 $
(8,740) $ (31,501) $
(1,718)
(1) Non-IFRS financial measure. Refer to the Non-IFRS financial measures section under Operating Results for the definition of this metric.
Management considers free cash flow to be a good indicator of
financial strength and profitability because it shows how much cash
generated by operations is available for distribution, to repay debt
and fund investments.
The decrease in free cash flow over the fiscal year compared to last
fiscal year is mainly explained by a lower increase in customer
advances and progress billing. The increase in free cash flow for the
fourth quarter compared to the same period last year was mainly
driven by higher cash flows from operations resulting from higher
volume and profitability and lower investment in inventory.
Fiscal Year
Free Cash Flow (millions)
$22.2
$21.9
$20.2
$31.8
$34.4
$30.3
$67.7
$45.9
$(1.7)
$(31.5)
Net additions to PP&E and intangibles
Free cash flow
2020
2021
2022
2023
2024
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, 2024:
Payments due by period
Contractual obligations
Total
1 year
2-3 years
4-5 years
> 5 years
Governmental authorities’ loans
$ 103,644 $ 13,931 $ 27,425 $ 26,508 $ 35,780
Lease liabilities
19,693
3,318
5,450
3,409
7,516
Term Loan Facility
91,708
3,713
7,426
80,569
—
Repayments of long term debt, including interest
264,353
23,586
45,549 151,922
43,296
Purchase obligations
439,226 325,377 112,203
1,646
—
Accounts payable
87,042
87,042
—
—
—
Building, machinery and equipment acquisition commitments
4,930
4,930
—
—
—
Total contractual obligations(1)
$ 795,551 $ 440,935 $ 157,752 $ 153,568 $ 43,296
(1) Excluding defined benefit pension plan obligations presented in the Pension Plans section.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 81
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, 2024, 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:
March 31, 2024
March 31, 2023
Long-term debt
$ 218,027
$ 177,908
Deferred financing costs, net
1,601
2,070
Less: Cash
9,765
15,020
Net debt
$ 209,863
$ 164,958
Shareholders’ equity
429,638
390,919
Net debt-to-equity ratio
0.49:1
0.42:1
Normal Course Issuer Bid
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 2024 NCIB
On August 8, 2023, the Corporation announced a Normal Course Issuer Bid ("NCIB") for the purchase for cancellation of up to 1,791,984
common shares on the open market through the TSX or alternative trading facilities. The NCIB began on August 10, 2023, and will end on
August 9, 2024, 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. The following table describes shares repurchased during the fiscal year:
Number of
shares
Average cost
per share
Total cost
Quarter ended June 30, 2023 (Fiscal 2023 NCIB)
101,200
$ 14.62
$ 1,302
Quarter ended September 30, 2023 (Fiscal 2024 NCIB)
158,003
15.74
2,487
Quarter ended December 31, 2023 (Fiscal 2024 NCIB)
194,300
15.49
3,010
Quarter ended March 31, 2024 (Fiscal 2024 NCIB)
—
—
—
Total
453,503
$ 14.99
$ 6,799
82 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
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 ended on
May 24, 2023. In fiscal year 2023, the Corporation repurchased and cancelled 482,703 common shares for a cash consideration of
$6.5 million representing a weighted average price of $13.56 per share.
ISSUED CAPITAL
Capital stock varied as follows:
Fiscal year ended
March 31, 2024
Number of
shares
Issued
capital
Opening balance
34,107,073
$82,459
Repurchase and cancellation
(453,503)
(1,096)
Ending balance
33,653,570
$81,363
As at May 21, 2024, the number of common shares outstanding stood at 33,653,570.
Stock options varied as follows:
Fiscal year ended
March 31, 2024
Number of
stock
options
Weighted-
average
exercise price
Opening balance
1,635,500
$ 14.59
Granted
370,000
14.07
Expired
(96,000)
15.01
Cancelled / forfeited
(14,000)
14.46
Ending balance
1,895,500
$ 14.47
As at March 31, 2024, 2,122,662 common shares remained reserved for issuance upon exercise of stock options (2,122,662 at March 31,
2023). As a result, the Corporation may issue a further 227,162 stock options within the current reserve.
As at May 21, 2024, the number of stock options outstanding stood at 1,895,500.
For further information regarding the Corporation’s outstanding issued capital and related compensation plans, refer to Note 21, Issued
Capital, to the consolidated financial statements.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 83
CONSOLIDATED BALANCE SHEETS
Working Capital
The Corporation’s working capital was as follows, as at:
March 31, 2024
March 31, 2023
Variance
Current assets
$ 507,845
$ 423,201 $ 84,644
20.0 %
Current liabilities
240,946
223,939 17,007
7.6 %
Net working capital
$ 266,899
$ 199,262 $ 67,637
33.9 %
Working capital ratio
2.11
1.89
The $84.6 million increase in current assets is mainly due to a $60.4 million increase in inventories and a $26.4 million increase in accounts
receivable.
The $17.0 million increase in current liabilities is mainly due to a $11.7 million increase in accounts payable and accrued liabilities and a $5.6
million increase in customer advances and progress billings.
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:
March 31, 2024
March 31, 2023
Variance
Long-term assets
$ 403,578
$ 398,136
$ 5,442
1.4 %
Long-term liabilities
240,839
206,479
34,360
16.6 %
Shareholders’ equity
429,638
390,919
38,719
9.9 %
The $5.4 million increase in long-term assets over the fiscal year mainly relates to the $6.9 million increase in finite-life intangible asset.
The $34.4 million increase in long-term liabilities mainly results from the $41.0 million drawdown on the Revolving Facility, partly offset by a
higher portion of long-term debt attributed to the current portion.
The $38.7 million increase in Shareholders’ equity is essentially driven by $38.3 million of net income.
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:
84 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
2024
2023
Net pension plan assets, beginning of year
$
3,754 $
5,325
Net gains (losses) from remeasurement
1,126
(1,709)
Employer contributions
804
1,028
Current service cost
(555)
(791)
Interest on net defined benefit obligations
164
194
Other
(364)
(293)
Net pension plan assets, end of year
$
4,929 $
3,754
Amount recognized in other long-term assets
5,495
4,707
Amount recognized in other long-term liabilities
(566)
(953)
The funding status of the Corporation’s pension plans was as follows, as at:
March 31, 2024
March 31, 2023
Present value of defined benefit obligations of funded plans
$ 59,895
$ 58,966
Fair value of plan assets
73,203
68,980
Funding ratio
122.2 %
117.0 %
The Corporation made contributions of $0.8 million and $3.9 million to its defined benefit and defined contribution benefit plans, respectively,
during fiscal 2024, and expects to make respective contributions of $0.9 million and $4.0 million during fiscal 2025. The increase in the net
pension plan assets is mainly due to the return on plan assets that exceeded the interest expense on defined benefit obligations during the
fiscal year. Refer to Note 24 - Pension and Other Retirement Benefit Plans to the Consolidated Financial Statements for further details
regarding these assumptions.
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 85
ADDITIONAL INFORMATION
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:
March 31, 2024 March 31, 2023
USD (Canadian equivalent of US$1.0)
1.3550
1.3533
EUR (Canadian equivalent of €1.0)
1.4632
1.4708
GBP (Canadian equivalent of £1.0)
1.7114
1.6726
The foreign exchange rates used to translate revenues and expenses into Canadian dollars were as follows:
Quarters ended March 31,
Fiscal years ended March 31,
2024
2023
2024
2023
USD (Canadian equivalent of US$1.0)
1.3488
1.3518
1.3488
1.3231
EUR (Canadian equivalent of €1.0)
1.4642
1.4507
1.4629
1.3775
GBP (Canadian equivalent of £1.0)
1.7103
1.6429
1.6951
1.5941
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 2024 featured an increase during the year in the value of the EUR
and GBP compared to CAD and USD. Approximately 81% of the Corporation’s sales are denominated in USD, compared to approximately
62% of the related costs, which creates significant net inflows of USD.
In order to manage this risk, the Corporation has put in place a foreign currency hedging policy whereby Héroux-Devtek contracts FFEC to
sell USD in amounts equivalent to expected net inflows. This policy requires that the Corporation hedge between 50% and 100% of the
identified net exposure, mainly over the next two fiscal years. See the Derivative Financial Instruments section for further details.
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.
86 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
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 2024 MD&A – 87
Strategic Risks
Strategic risks have company-wide impacts and are typically related to the Corporation’s overall direction.
RISK
DESCRIPTION
RISK MANAGEMENT APPROACH
Reliance on large
customers
The top five of Héroux-Devtek’s customers represent
approximately 53% of consolidated sales, including one
customer representing 16%. The loss of one of these
customers would have a material adverse impact on
current and forecasted financial results.
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.
Acquisitions and
integrations
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.
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
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
DESCRIPTION
RISK MANAGEMENT APPROACH
Foreign currency
fluctuations
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.
Liquidity, capital
resources and
related covenants
The Corporation requires continued access to capital
markets to finance its activities. The long-term nature
and up-front cost structure of certain programs can
require significant amounts of start-up costs. Inability to
access such capital could impede the Corporation’s
ability to bid on significant contracts, or negatively impact
ongoing operations.
Héroux-Devtek has access to such financing from its
banking syndicate, 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 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.
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.
88 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
Changing interest
rates
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.
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.
Tax matters and
changes in tax laws
As a multinational company conducting operations
through subsidiaries in multiple jurisdictions, the
Corporation is subject to income and other tax laws and
fiscal policies in numerous jurisdictions. The effective
income tax rate in the future could be adversely affected
as a result of a number of factors, including changes in
the mix of earnings in countries with differing statutory
tax rates, changes in tax laws, treaties or regulations or
their interpretation, and the outcome of income tax audits
(including transfer pricing) in various jurisdictions around
the world. The assessment of additional taxes, interest
and penalties could be materially adverse to the
Corporation’s current and future results of operations
and financial condition.
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
Operational risks are more specific to or result from Héroux-Devtek’s operations than strategic risks.
RISK
DESCRIPTION
RISK MANAGEMENT APPROACH
Supply chain
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.
Prolonged disruption in the supply chain could have a
material adverse effect on the Corporation’s operations,
significantly increase the cost of operating its business
and significantly reduce its margins and profitability.
Also, reductions in quality, 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 manages supplier-related risks through
frequent supplier audits and maintaining high standards,
such as requiring AS9100 and Nadcap certification.
The Corporation tracks and monitors supplier
performance and mitigates potential losses by ensuring
poor quality, if any, is detected through internal quality
management.
Héroux-Devtek also has the ability to in-source or
re-source manufacturing or finishing of many key parts in
the event of critical issues in the supply chain.
The Corporation also manages inventory levels with the
objective of having safety stock of key components
where more supply chain risk is perceived.
Availability of
skilled labour
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.
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.
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
and restricted 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 2024 MD&A – 89
Collective
bargaining
agreements
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.
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.
Information
technology
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.
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 governance
processes and policies regarding information technology;
- A cybersecurity awareness program and phishing
campaigns; and,
- Disaster recovery planning.
Warranty casualty
claim losses
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’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.
Litigation
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 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.
90 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
External Risks
External risks are generally outside of management’s control and mostly result from external factors.
RISK
DESCRIPTION
RISK MANAGEMENT APPROACH
General economic
conditions
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.
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.
Inflation
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.
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.
Competition and
innovation
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.
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.
Héroux-Devtek manages risk from competition by
maximizing customer satisfaction, on-time delivery,
bidding competitively and maintaining high quality
products.
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
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 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.
Environmental
matters
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.
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 2024 MD&A – 91
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 for further details of Héroux-Devtek’s risk management
practices.
Forward foreign exchange contracts
The forward foreign currency contracts outstanding are as follows:
As at
March 31, 2024
March 31, 2023
Currencies (sold/bought)
Notional
amount (1)
Average
rate
Notional
amount (1)
Average
rate
USD/CDN
Less than 1 year
$ 161,188
1.33 $ 162,867
1.32
Between 1 and 3 years
113,330
1.32
125,196
1.30
Between 3 and 5 years
34,850
1.33
29,408
1.33
USD/GBP
Less than 1 year
11,762
0.81
15,055
0.78
Between 1 and 3 years
24,839
0.81
23,627
0.81
Between 3 and 5 years
14,258
0.81
26,081
0.81
USD/EUR
Less than 1 year
13,498
0.92
10,885
0.87
Between 1 and 3 years
13,254
0.91
13,517
0.92
Between 3 and 5 years
—
—
6,616
0.90
EUR/USD
Less than 1 year
6,707
0.97
—
—
Between 1 and 3 years
10,158
0.96
—
—
EUR/CAD
Less than 1 year
—
—
25,079
0.72
Total
$ 403,844
$ 438,331
(1) Exchange rates as at the end of respective periods were used to translate amounts in foreign currencies.
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, 2024, a 1% strengthening of the CAD versus the USD would result in a $0.4 million decrease in the
Corporation’s fiscal 2024 net income.
Equity swap agreement
The Corporation’s net income is exposed to fluctuations of its share price through its DSUs PSUs and RSUs (see note 21 to the consolidated
financial statements). In order to mitigate this exposure, the Corporation has entered into equity swap agreements.
Pursuant to these agreements, 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, PSUs and RSUs included in the Corporation’s consolidated net income.
As at March 31, 2024, the equity swap agreements covered 500,000 common shares of the Corporation at a price of $13.91 (400,000
common share at a price of $13.39 as at March 31, 2023). All other conditions of the agreements stayed unchanged compared to March 31,
2023.
92 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
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, 2024, an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures was also carried
out under the supervision of the CEO and CFO, as defined in Regulation 52-109. Based on this evaluation, the CEO and CFO concluded that
the design and operation of these disclosure controls and procedures were effective. This evaluation took into account the Corporation’s
disclosure policy and its disclosure committee.
Internal controls over financial reporting
The CEO and CFO have also designed internal controls over financial reporting, or have caused them to be designed under their supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS.
As at March 31, 2024, 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, 2024 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 of disposal (“FVLCD”) and its value in use. The FVLCD calculation is based on a market approach, which is based
on multiples of recent sector notable transactions applied to Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”, a
non-IFRS measure), less incremental costs of disposal. The recoverable amount is most sensitive to the multiple selected and revenue and
EBITDA margin forecasts in determining future forecasted cash flows as further explained in note 16 to the Consolidated financial
statements.
Deferred income tax assets
HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A – 93
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. The
Corporation establishes provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of
such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the
taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that
taxable income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is
required to determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future
taxable income together with future tax planning strategies.
Pensions and other retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuation involves making assumptions
about discount rates, future salary increases and mortality rates. In determining appropriate discount rates, management considers the
interest rates of high-quality corporate bonds. Due to the long-term nature of these plans, such estimates are subject to significant
uncertainty. The significant assumptions used to determine the defined benefit obligations and the pension expense, including a sensitivity
analysis, are further explained in note 24 to the Consolidated financial statements.
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 Corporation’s sales growth. 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 sales growth over the expected duration of the
loan. These forecasts are used to determine the 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.
94 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
SELECTED FINANCIAL INFORMATION
Selected financial information is as follows, for the quarters ended:
Fiscal year
2024
2023
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
Fourth
quarter
Third
quarter
Second
quarter
First
quarter
Sales
$ 184,053 $ 163,518 $ 141,499 $ 140,697 $ 155,978 $ 140,875 $ 132,680 $ 114,089
Operating income
27,612 15,554
9,101
7,496
9,879
5,111
8,562
2,646
Adjusted EBITDA (1)
33,069 24,537 18,221 16,357 19,595 14,129 16,216 11,426
Net Income
20,693
8,980
4,628
3,970
6,288
1,773
4,799
965
Adjusted Net Income (1)
16,732
8,980
4,628
3,970
6,288
1,773
3,580
965
In dollars per share
Earnings per share diluted
$
0.61 $
0.27 $
0.14 $
0.12 $
0.18 $
0.05 $
0.14 $
0.03
Adjusted Earnings per share (1)
0.49
0.27
0.14
0.12
0.18
0.05
0.10
0.03
In millions of shares
Weighted average number of common diluted
shares outstanding
33.9
33.9
34.1
34.2
34.3
34.5
34.6
34.6
(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:
2024
2023
2022
Sales
$ 629,767 $ 543,622 $ 536,087
Operating income
59,763
26,198
44,758
Adjusted EBITDA(1)
92,184
61,366
83,049
Net income
38,271
13,825
32,140
Adjusted net income(1)
34,310
12,606
33,839
Earnings per share ($) - basic
1.13
0.40
0.91
Earnings per share ($) - diluted
1.13
0.40
0.90
Adjusted earnings per share(1) ($)
1.01
0.37
0.95
Cash
9,765
15,020
86,692
Total assets
911,423
821,337
813,358
Long-term financial liabilities(2)
221,285
183,756
238,419
(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 2024 MD&A – 95
SHAREHOLDER INFORMATION
ISSUED CAPITAL
May 21, 2024
Common shares issued and outstanding
33,653,570
Stock options issued and outstanding
1,895,500
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 2025
First quarter
August 6, 2024
Second quarter
November 12, 2024
Third quarter
February 7, 2025
Fourth quarter
May 20, 2025
Value of $100 invested in April 2019
HRX return on investment - 5 years
$115
$138
Value of $100 - HRX
Value of $100 - TSX
Mar-19
Mar-24
40
60
80
100
120
140
160
ADDITIONAL INFORMATION AND CONTINUOUS DISCLOSURE
This MD&A was approved by the Audit Committee and by the Board of Directors on May 21, 2024. 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.
96 – HÉROUX-DEVTEK INC. – Fiscal 2024 MD&A
Héroux-Devtek — 2024 Annual Report 97
SHAREHOLDER
INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, August 6, 2024, at 10:00 A.M.
Held virtually via webcast. The webcast can be
accessed through the Events section of our website.
REGISTRAR AND TRANSFER AGENT
Computershare Trust
650 de Maisonneuve Ouest boulevard, 7th floor,
Montréal, (Québec) H3A 3T2
514 982-7555 / 1 800 564-6253
AUDITORS
Ernst & Young LLP
900 de Maisonneuve Boulevard West, Suite 2300
Montreal (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
CONTACT INFORMATION
1111 Saint-Charles street West, suite 600
West Tower, St-Charles Complex
Longueuil (Québec) Canada J4K 5G4
450 679-3330
1111 Saint-Charles street West, suite 600
West Tower, St-Charles Complex
Longueuil (Québec) Canada J4K 5G4
450 679-3330