MMAARRTTIINNRREEAA IINNTTEERRNNAATTIIOONNAALL IINNCC..
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2016
MESSAGE TO SHAREHOLDERS
Welcome to 2017, a year of promise and opportunity, a year in which we foresee continued advancement
in our quality, safety, employee satisfaction, level of customer delight with our product offerings,
operational excellence, and financial metrics.
Every day we focus on our vision for the future—to be the best, preferred and most valued supplier in the
world in the products and services we provide our customers. Every day we strive to deliver on our mission,
providing outstanding quality products and services to our customers; meaningful opportunity, job
satisfaction and job security for our people through competitiveness and prudent growth; superior long term
returns to our stakeholders; and positive contributions to our communities as good corporate citizens. Every
day we focus on our culture, driving it through the organization, as we apply our Ten Guiding Principles:
1.
2.
3.
4.
5.
6.
7.
8.
9.
We make great, high quality products
Every plant/division must be a centre of excellence
Be disciplined. Discipline is key
We attract, train and work with excellent people, and we motivate our people to perform
well
We are a team
Challenges make us better
Think different
Work hard, play hard
The golden rule – show dignity and respect
10.
Our leadership team has to drive these messages consistently and simply. Leadership
means having the will to ensure we get the right things done the right way.
Peter Drucker once stated that culture trumps strategy every time and, while we all understand the
importance of great strategy, we believe that is a great foundational statement for the long term health of a
firm. Martinrea is still a young company; it has grown very rapidly over the last decade and a half, and we
have grown by building greenfield facilities and acquiring a variety of assets, many of which required
restructuring and nurturing. We have done this all in order to build a long term stable footprint from which
we can compete with anyone in servicing our customers. But the real long term strength of the firm depends
also on creating a strong cultural foundation, so that the whole becomes more than the sum of its sometimes
very disparate parts. That is what we are doing. The results are becoming increasingly evident not just to
us, but to our customers, suppliers, stakeholders and of course our people.
1
In 2016 we rolled out our Martinrea 2.0 framework as the foundation to become a great company - diverse
people and groups working together to be One Company. Martinrea 2.0 is principle centered to promote
specific behaviours to create a strong culture. Martinrea 2.0 is working well, as a cultural basis for our four
pillar strategy:
A High Performance Culture, supported by engaging and developing our people
Operational Excellence, using lean thinking and tools, learning by doing to attack waste, lowering
cost and continually improving profitability
Financial Management, increasing financial capability and responsibly managing all business
aspects efficiently
Customer is King, assuring profitable growth by being the best of suppliers with our Casper the
Ghost approach (the supplier is invisible as being a problem free supplier that can be counted on to
deliver without issue) creating customer enthusiasm with our benchmark approach.
We are pleased with our progress and expect to continue to build on it in 2017 and beyond.
We produce structural parts and assemblies and, in so doing, are a lightweighting company. We believe
that our lightweighting initiatives, in both steel and aluminum products, are bearing fruit and will continue
to do so. We are continuously working on the development and evolution of core metallic products to
reduce vehicle weight and CO2 contribution, improving overall vehicle efficiency in terms of miles per
gallon or distance per electrical charge. Lightweighting is here to stay, being driven by regulation, but also
by market trends and consumer preference. Lightweighting means increasing the use of aluminum in a
vehicle. We make engine blocks and structural parts, hollow and solid, to satisfy this growing need.
Lightweighting means increasing the use of high strength steels, or of techniques that help to lighten the
vehicle while maintaining safety standards. That is one of our manufacturing strengths. Lightweighting
means working on structures and assemblies that can combine the use of different materials in various
combinations. Our assembly expertise positions us in the sweet spot of specializing in this area. So, whether
we are working on B Pillars, cross members, control arms, battery trays, engine cradles or steel and
aluminum hybrid components, we are positioned in the lightweighting sweet spot. Frankly, whether the
future vehicles are gasoline-powered, hybrid, plug in hybrid, electric, fuel cell, with driver or not, structures
will still matter and lightweighted structures, yet strong and durable, will matter more. We are a market
leader in this area.
We are also a fluid management systems company, and a very successful one. We have taken two
companies, acquired in 2002, and developed a business that is leading edge in its field, producing
environmentally friendly fluid systems, which reduce pollution and have environmentally friendly coatings.
We have grown to be one of the market leaders, not just in North America, but worldwide with our
expansions in Europe and China, with both greenfield operations now profitable. Our products will remain
in demand for a very long time, as we provide fluid systems to internal combustion engine, electric and
hybrid vehicles.
2
The year 2016 was a great year for us in many respects:
-
-
-
-
-
-
-
-
We recorded record revenues of just under $4.0 billion, up approximately 3% from 2015
We achieved record earnings performance, with adjusted net earnings of approximately
$130 million, up 9.5% from 2015, or fully diluted adjusted net earnings per share of $1.50,
the best performance in our history, and our eighth consecutive year of increased adjusted
earnings
Our adjusted operating income margins increased to 5% for the year, up from 4.6% last
year and 4.1% in 2014, as we move towards our publicly announced target of 6% by the
end of 2017
We achieved record adjusted EBITDA performance in 2016 of $350 million, up from $318
million in 2015, representing a 10.3% increase
Our net debt:adjusted EBITDA ratio ended the year at 1.89:1, compared to 2.17:1 at the
end of 2015 and 2.37:1 at the end of 2014, as we continue to trend to our targeted net
debt:adjusted EBITDA ratio of 1.5:1 by the end of 2017
We continued to advance our quality, and received multiple customer quality awards,
including top supplier awards from Ford, GM and FCA, our three largest customers. We
also have received supplier diversity awards as we work with a culturally diverse supply
base
We launched over 70 new programs in 2016, all successfully
Company wide safety performance continued to improve to better than industry averages,
as we strive towards our goal of being an industry leader in safety. This improvement is
notable as it comes at a time that we were opening many new plants and expansions.
In sum, our Company continues to deliver improved operational and financial performance and put pucks
in the net, and we will be doing the same going forward.
We thank all our stakeholders for their continuing support. We thank our employees, who are driving the
success of Martinrea 2.0. We thank our customers, who continue to support us. We thank our communities,
which we serve, our lenders who have always been there for us, and our shareholders. If we keep putting
pucks in the net, share value will increase over time. As one industry observer stated recently, when
commenting on valuations in our industry, at some point, making money has got to count for something!
We agree.
We serve all our stakeholders with respect, and we will continue to do our very best for you in 2017 and
beyond. Our future is there for us to achieve great things.
(Signed) “Rob Wildeboer”
(Signed) “Pat D’Eramo”
Rob Wildeboer
Executive Chairman
Pat D’Eramo
President and Chief Executive Officer
3
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The following management discussion and analysis (“MD&A”) was prepared as of March 2, 2017 and should be read in conjunction
with the Company’s audited consolidated financial statements for the year ended December 31, 2016 together with the notes thereto.
All amounts in this MD&A are in Canadian dollars, unless otherwise stated; and all tabular amounts are in thousands of Canadian
dollars, except earnings per share and number of shares. Additional information about the Company, including the Company’s Annual
Information Form for the year ended December 31, 2016, can be found at www.sedar.com.
OVERVIEW
Martinrea International Inc. (TSX:MRE) (“Martinrea” or the “Company”) is a leader in the development and production of quality metal
parts, assemblies and modules, fluid management systems and complex aluminum products focused primarily on the automotive
sector. Martinrea currently employs approximately 15,000 skilled and motivated people in 44 operating divisions in Canada, the United
States, Mexico, Brazil, Germany, Slovakia, Spain and China.
Martinrea’s vision for the future is to be the best, preferred and most valued automotive parts supplier in the world in the products and
services we provide our customers. The Company’s mission is to deliver: outstanding quality products and services to our customers;
meaningful opportunity, job satisfaction and job security to our people through competitiveness and prudent growth; superior long-term
investment returns to our stakeholders; and positive contributions to our communities as good corporate citizens.
Results of operations may include certain unusual and other items which have been separately disclosed, where appropriate, in order
to provide a clear assessment of the underlying Company results. In addition to IFRS measures, management uses non-IFRS
measures in the Company’s disclosures that it believes provide the most appropriate basis on which to evaluate the Company’s results.
OVERALL RESULTS
The following table sets out certain highlights of the Company’s performance for the years ended December 31, 2016 and 2015. Refer
to the Company’s audited consolidated financial statements for the year ended December 31, 2016 for a detailed account of the
Company’s performance for the periods presented in the table below.
Year ended
December 31,
2016
3,968,407
432,050
159,444
91,961
92,380
1.07
1.07
197,707
5.0%
350,357
8.8%
130,085
$
$
$
$
$
Year ended
December 31,
2015
3,866,771
402,232
161,761
107,173
107,030
1.25
1.24
$ Change % Change
2.6%
101,636
29,818
7.4%
(1.4%)
(2,317)
(14.2%)
(15,212)
(13.7%)
(14,650)
(14.4%)
(0.18)
(13.7%)
(0.17)
178,870
4.6%
317,750
8.2%
18,837
10.5%
32,607
10.3%
118,788
11,297
1.51
1.50
$
$
1.38
1.38
0.13
0.12
9.5%
9.4%
8.7%
Sales
Gross Margin
Operating Income
Net Income for the period
Net Income Attributable to Equity Holders of the Company
Net Earnings per Share – Basic
Net Earnings per Share – Diluted
Non-IFRS Measures*
Adjusted Operating Income
% of sales
Adjusted EBITDA
% of sales
Adjusted Net Income Attributable to Equity Holders of the
Company
Adjusted Net Earnings per Share - Basic
Adjusted Net Earnings per Share - Diluted
$
$
$
$
$
$
$
Page 1 ▌Martinrea International Inc.
The following table sets out a detailed account of the Company’s performance for the fourth quarters of 2016 and 2015 (unaudited).
Three months
ended December
31, 2016
Three months
ended December
31, 2015
Sales
Cost of sales (excluding depreciation)
Depreciation of property, plant and equipment (production)
Gross Margin
Research and development costs
Selling, general and administrative expense
Depreciation of property, plant and equipment (non-production)
Amortization of customer contracts and relationships
Restructuring costs
Loss on disposal of property, plant and equipment
Operating Income
Finance costs
Other finance income
Income before income taxes
Income tax expense
Net Income for the period
Net Income Attributable to Equity Holders of the Company
Net Earnings per Share – Basic and Diluted
Non-IFRS Measures*
Adjusted Operating Income
% of sales
Adjusted EBITDA
% of sales
Adjusted Net Income Attributable to Equity Holders of the
Company
Adjusted Net Earnings per Share – Basic and Diluted
$
$
$
$
$
$
$
*Non-IFRS Measures
990,407 $
(852,732)
(33,363)
104,312
(7,239)
(47,971)
(2,258)
(597)
-
(271)
45,976 $
(6,084)
661
40,553 $
(9,923)
30,630
30,753 $
0.36 $
45,976 $
4.6%
86,072
8.7%
30,753
0.36 $
$ Change % Change
(4.3%)
(5.2%)
3.6%
0.5%
45.4%
(6.0%)
8.5%
14.1%
(100.0%)
(48.2%)
7.0%
4.2%
(23.7%)
6.7%
(2.5%)
10.1%
10.9%
12.5%
(44,907)
46,559
(1,169)
483
(2,259)
3,056
(176)
(74)
1,718
252
3,000
(247)
(205)
2,548
256
2,804
3,022
0.04
1,282
2.9%
2,811
3.4%
1,035,314
(899,291)
(32,194)
103,829
(4,980)
(51,027)
(2,082)
(523)
(1,718)
(523)
42,976
(5,837)
866
38,005
(10,179)
27,826
27,731
0.32
44,694
4.3%
83,261
8.0%
29,059
1,694
0.34
0.02
5.8%
5.9%
The Company prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”). However, the
Company considers certain non-IFRS financial measures as useful additional information in measuring the financial performance and
condition of the Company. These measures, which the Company believes are widely used by investors, securities analysts and other
interested parties in evaluating the Company’s performance, do not have a standardized meaning prescribed by IFRS and therefore
may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an
alternative to financial measures determined in accordance with IFRS. Non-IFRS measures include “Adjusted Net Income”, “Adjusted
Net Earnings per Share (on a basic and diluted basis)”, “Adjusted Operating Income” and "Adjusted EBITDA”.
The following tables provide a reconciliation of IFRS “Net Income Attributable to Equity Holders of the Company” to Non-IFRS “Adjusted
Net Income Attributable to Equity Holders of the Company”, “Adjusted Operating Income” and “Adjusted EBITDA”:
Net Income Attributable to Equity
Holders of the Company
Unusual and Other Items (after-tax)*
Adjusted Net Income Attributable to
Equity Holders of the Company
$
$
Three months ended
December 31,
2016
Three months ended
December 31,
2015
Year ended
December 31,
2016
Year ended
December 31,
2015
30,753 $
-
30,753 $
27,731 $
1,328
29,059 $
92,380 $
107,030
37,705
11,758
130,085 $
118,788
*Unusual and other items are explained in the "Adjustments to Net Income" section of this MD&A
Page 2 ▌Martinrea International Inc.
Three months ended
December 31,
2016
Three months ended
December 31,
2015
Year ended
December 31,
2016
Year ended
December 31,
2015
Net Income Attributable to Equity
Holders of the Company
Non-controlling interest
Income tax expense
Other finance expense (income)
Finance costs
Unusual and Other Items (before-tax)*
Adjusted Operating Income
Depreciation of property, plant and
equipment
Amortization of intangible assets
Loss/(gain) on disposal of property,
plant and equipment
Adjusted EBITDA
$
$
$
30,753 $
(123)
9,923
(661)
6,084
-
45,976 $
35,621
4,204
271
86,072 $
27,731 $
95
10,179
(866)
5,837
1,718
44,694 $
34,276
3,768
523
83,261 $
92,380 $
(419)
41,378
1,909
24,196
38,263
197,707 $
136,344
15,959
347
350,357 $
107,030
143
34,247
(4,925)
25,266
17,109
178,870
124,872
14,238
(230)
317,750
Unusual and other items are explained in the "Adjustments to Net Income" section of this MD&A
The year-over-year changes in significant accounts and financial highlights are discussed in detail in the sections below.
SALES
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
North America
Europe
Rest of the World
Total Sales
Three months ended
December 31, 2016
$
$
803,265 $
148,977
38,165
990,407 $
Three months ended
December 31, 2015
837,607
166,870
30,837
1,035,314
$ Change
(34,342)
(17,893)
7,328
(44,907)
% Change
(4.1%)
(10.7%)
23.8%
(4.3%)
The Company’s consolidated sales for the fourth quarter of 2016 decreased by $44.9 million or 4.3% to $990.4 million as compared to
$1,035.3 million for the fourth quarter of 2015. The total decrease in sales was driven by decreases in the North America and Europe
operating segments partially offset by an increase in sales in the Rest of the World.
Sales for the fourth quarter of 2016 in the Company’s North America operating segment decreased by $34.3 million or 4.1% to $803.3
million from $837.6 million for the fourth quarter of 2015. The decrease was due to lower year-over-year OEM production volumes on
certain light-vehicle platforms including the Chrysler 200, Ford Escape/Focus, Ford Fusion and other platforms late in their product life
cycle such as the GM Equinox, and programs that ended production during or subsequent to the fourth quarter of 2015. These
negative factors were partially offset by the impact of foreign exchange on the translation of U.S. denominated production sales, which
had a positive impact on overall sales for the fourth quarter of 2016 of approximately $2.5 million as compared to the fourth quarter of
2015; a $52.9 million increase in tooling sales, which are typically dependent on the timing of tooling construction and final acceptance
by the customer; and the launch of new programs during or subsequent to the fourth quarter of 2015, including the Chevrolet Malibu,
Cadillac CT6, and Chrysler Pacifica.
Sales for the fourth quarter of 2016 in the Company’s Europe operating segment decreased by $17.9 million or 10.7% to $149.0 million
from $166.9 million for the fourth quarter of 2015. The decrease can be attributed to lower overall production volumes in the
Company’s Martinrea Honsel German operations, a $0.4 million negative foreign exchange impact from the translation of Euro
denominated production sales as compared to the fourth quarter of 2015, and a $7.4 million decrease in tooling sales; partially offset by
increased production sales in the Company’s new operating facility in Spain, which continues to ramp up and execute its backlog of
new business.
Sales for the fourth quarter of 2016 in the Company’s Rest of the World operating segment increased by $7.3 million or 23.8% to $38.2
million from $30.8 million for the fourth quarter of 2015. The increase was predominantly due to a year-over-year increase in production
sales in the Company’s two new operating facilities in China, which continue to ramp up and execute on their backlogs of new
business; partially offset by a $0.3 million negative foreign exchange impact from the translation of foreign denominated production
Page 3 ▌Martinrea International Inc.
sales as compared to the fourth quarter of 2015, and a $0.9 million decrease in tooling sales. Production volumes and sales for the
fourth quarter in the Company’s operating facility in Brazil increased slightly year-over-year however still continue to trend at low levels.
Overall tooling sales increased by $44.6 million to $107.2 million for the fourth quarter of 2016 from $62.6 million for the fourth quarter
of 2015.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
North America
Europe
Rest of the World
Total Sales
Year ended
December 31, 2016
Year ended
December 31, 2015
$
$
3,212,128 $
633,290
122,989
3,968,407 $
3,094,463
684,215
88,093
3,866,771
$ Change
117,665
(50,925)
34,896
101,636
% Change
3.8%
(7.4%)
39.6%
2.6%
The Company’s consolidated sales for the year ended December 31, 2016 increased by $101.6 million or 2.6% to $3,968.4 million as
compared to $3,866.8 million for the year ended December 31, 2015. The total increase in sales was driven by increases in the
Company’s North America and Rest of the World operating segments, partially offset by a year-over-year decrease in sales in Europe.
Sales for the year ended December 31, 2016 in the Company’s North America operating segment increased by $117.7 million or 3.8%
to $3,212.1 million from $3,094.5 million for the year ended December 31, 2015. The increase was due to the impact of foreign
exchange on the translation of U.S. denominated production sales, which had a positive impact on overall sales for the year ended
December 31, 2016 of approximately $132.6 million as compared to the comparative period of 2015; the launch of new programs
during or subsequent to the year ended December 31, 2015, including the Chevrolet Malibu, Ford Edge, Cadillac CT6 and higher
overall volumes on the Chrysler mini-van platform; and a year-over-year increase in tooling sales of $100.2 million. These positive
variances were partially offset by lower year-over-year OEM production volumes on certain light-vehicle platforms including the Chrysler
200, Ford Escape/Focus and other platforms late in their product life cycle such as the GM Equinox, and programs that ended
production during or subsequent to the year ended December 31, 2015; some previously unplanned shutdowns from GM of four
assembly plants for two weeks because of an earthquake in Japan disrupting the supply chain; and the planned shutdown of Chrysler’s
V6 Pentastar engine block for re-tooling. The planned shutdown of Chrysler’s V6 Pentastar engine block program for re-tooling
commenced during the fourth quarter of 2015 and was completed near the end of the first quarter of 2016. Volumes on the program
ramped up during the second quarter but did not return to historical levels until the end of June 2016.
Sales for the year ended December 31, 2016 in the Company’s Europe operating segment decreased by $50.9 million or 7.4% to
$633.3 million from $684.2 million for the year ended December 31, 2015. The decrease can be attributed to a $13.7 million decrease
in tooling sales and lower overall production volumes in the Company’s Martinrea Honsel German operations including the impact from
the sale of the Company’s operating facility in Soest, Germany on August 31, 2015; partially offset by increased production sales in the
Company’s operating facilities in Spain and Slovakia, which continue to ramp up and execute their backlogs of new business, and the
impact of foreign exchange on the translation of Euro denominated production sales, which had a positive impact on overall sales for
the year ended December 31, 2016 of approximately $24.2 million as compared to the comparable period of 2015.
Sales for the year ended December 31, 2016 in the Company’s Rest of the World operating segment increased by $34.9 million or
39.6% to $123.0 million from $88.1 million for the year ended December 31, 2015. The increase can be attributed to an increase in
production sales in the Company’s two new operating facilities in China, which continue to ramp up and execute on their backlogs of
new business, and a $4.3 million increase in tooling sales; partially offset by the translation of foreign denominated production sales,
which had a negative impact on overall sales for the year ended December 31, 2016 of $1.4 million as compared to the comparative
period of 2015, and lower year-over-year production sales in the Company’s operating facility in Brazil where OEM light vehicle
production volumes continue to trend at low levels. The year-over-year increase in sales in the Company’s operations in China was
tempered by an unplanned OEM shutdown of one of its key light vehicle platforms during the second quarter. The program was down
for seven weeks during the second quarter and came back online in July, 2016.
Overall tooling sales increased by $90.8 million to $252.9 million for the year ended December 31, 2016 from $162.1 million for the year
ended December 31, 2015.
Page 4 ▌Martinrea International Inc.
GROSS MARGIN
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
Gross margin
% of sales
Three months ended
December 31, 2016
$
104,312 $
10.5%
Three months ended
December 31, 2015
103,829
10.0%
$ Change
483
% Change
0.5%
The gross margin percentage for the fourth quarter of 2016 of 10.5% increased as a percentage of sales by 0.5% as compared to the
gross margin percentage for the fourth quarter of 2015 of 10.0%. The increase in gross margin as a percentage of sales was generally
due to:
•
•
productivity and efficiency improvements at certain operating facilities; and
recently added new greenfield operating facilities which continue to ramp up and execute their backlogs of business.
These factors were partially offset by the following:
•
•
•
an increase in tooling sales which typically earn low or no margins for the Company;
operational inefficiencies and other costs at certain other facilities; and
general sales mix including lower production volumes on certain programs.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
Gross margin
% of sales
Year ended
December 31, 2016
Year ended
December 31, 2015
$
432,050 $
10.9%
402,232
10.4%
$ Change
29,818
% Change
7.4%
The gross margin percentage for the year ended December 31, 2016 of 10.9% increased as a percentage of sales by 0.5% as
compared to the gross margin percentage for the year ended December 31, 2015 of 10.4%. Similar to the year-over-year fourth quarter
increase explained above, the annual increase in gross margin as a percentage of sales was generally due to:
•
•
productivity and efficiency improvements at certain operating facilities; and
recently added new greenfield operating facilities which continue to ramp up and execute their backlogs of business.
These factors were partially offset by the following:
•
•
•
an increase in tooling sales which typically earn low or no margins for the Company;
operational inefficiencies and other costs at certain other facilities; and
general sales mix including lower production volumes on certain programs.
SELLING, GENERAL & ADMINISTRATIVE ("SG&A")
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
Selling, general & administrative
% of sales
Three months ended
December 31, 2016
$
47,971 $
4.8%
Three months ended
December 31, 2015
51,027
4.9%
$ Change
(3,056)
% Change
(6.0%)
SG&A expense for the fourth quarter of 2016 decreased by $3.0 million to $48.0 million as compared to $51.0 million for the fourth
quarter of 2015. As a result, SG&A expense as a percentage of sales decreased slightly year-over-year to 4.8% for the fourth quarter of
2016 from 4.9% for the fourth quarter of 2015. SG&A expenses are being monitored and managed on a continuous basis in order to
optimize costs.
Page 5 ▌Martinrea International Inc.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
Selling, general & administrative
% of sales
Year ended
December 31, 2016
Year ended
December 31, 2015
$
198,109 $
5.0%
193,610
5.0%
$ Change
4,499
% Change
2.3%
SG&A expense, before adjustments, for the year ended December 31, 2016 increased by $4.5 million to $198.1 million as compared to
$193.6 million for the year ended December 31, 2015. Excluding the unusual and other item recorded in SG&A expense incurred
during the year ended December 31, 2015 as explained in Table B under “Adjustments to Net Income”, SG&A expense for the year
ended December 31, 2016 increased by $5.9 million to $198.1 million from $192.2 million for the comparative period of 2015. The
increase is predominantly due to costs incurred at new and/or expanded facilities, including incremental employment levels to support
the business.
Excluding the unusual and other item recorded in SG&A expense incurred during the year ended December 31, 2015 as explained in
Table B under “Adjustments to Net Income”, SG&A expense as a percentage of sales remained consistent year-over-year at 5.0%.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT ("PP&E") AND AMORTIZATION OF INTANGIBLE ASSETS
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
Three months ended
December 31, 2016
Depreciation of PP&E (production)
Depreciation of PP&E (non-production)
Amortization of customer contracts and
relationships
Amortization of development costs
Total depreciation and amortization
$
$
33,363 $
2,258
597
3,607
39,825 $
Three months ended
December 31, 2015
32,194
2,082
$ Change
1,169
176
% Change
3.6%
8.5%
523
3,245
38,044
74
362
1,781
14.1%
11.2%
4.7%
Total depreciation and amortization expense for the fourth quarter of 2016 increased by $1.8 million to $39.8 million as compared to
$38.0 million for the fourth quarter of 2015. The increase in total depreciation and amortization expense was primarily due to an
increase in depreciation expense on a larger PP&E base resulting from equipment purchases to support new and replacement
business. The year-over-year increase in total depreciation and amortization expense was partially offset by lower depreciation
expense recognized at an operating facility in Detroit, Michigan due to certain assets having been impaired during the second quarter of
2016 as explained in Table B under “Adjustments to Net Income”.
A significant portion of the Company’s recent investments relates to various new and replacement programs that commenced during or
subsequent to the fourth quarter of 2015. The Company continues to make significant investments in the business in light of its backlog
of business and growing global footprint.
Depreciation of PP&E (production) expense as a percentage of sales increased slightly year-over-over to 3.4% for the fourth quarter of
2016 from 3.1% for the fourth quarter of 2015 due to lower year-over-year sales as previously discussed.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
Year ended
December 31, 2016
Year ended
December 31, 2015
Depreciation of PP&E (production)
Depreciation of PP&E (non-production)
Amortization of customer contracts and
relationships
Amortization of development costs
Total depreciation and amortization
$
$
127,617 $
8,727
2,307
13,652
152,303 $
117,387
7,485
2,134
12,104
139,110
$ Change
10,230
1,242
% Change
8.7%
16.6%
173
1,548
13,193
8.1%
12.8%
9.5%
Total depreciation and amortization expense for the year ended December 31, 2016 increased by $13.2 million to $152.3 million as
compared to $139.1 million for the year ended December 31, 2015. The increase was due to foreign currency translation and, similar
to the year-over-year quarterly trend, an increase in depreciation expense on a larger PP&E base resulting from equipment purchases
Page 6 ▌Martinrea International Inc.
to support new and replacement business, and increased amortization of development costs as new and replacement programs, for
which development costs were incurred, started production and reached peak volumes. The year-over-year increase in total
depreciation and amortization expense was partially offset by lower depreciation expense recognized at an operating facility in Detroit,
Michigan due to certain assets having been impaired during the second quarter of 2016 as explained in Table B under “Adjustments to
Net Income”.
Depreciation of PP&E (production) expense as a percentage of sales increased slightly year-over-year to 3.2% for the year ended
December 31, 2016 compared to 3.0% for the year ended December 31, 2015 as recent investments in equipment were put to use,
partially offset by higher year-over-year sales as previously discussed.
ADJUSTMENTS TO NET INCOME
(ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY)
Adjusted Net Income excludes certain unusual and other items, as set out in the following tables and described in the notes thereto.
Management uses Adjusted Net Income as a measurement of operating performance of the Company and believes that, in conjunction
with IFRS measures, it provides useful information about the financial performance and condition of the Company.
TABLE A
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
NET INCOME (A)
$30,753
$27,731
$3,022
For the three months ended For the three months ended
December 31, 2016
(a)
December 31, 2015
(b)
(a)-(b)
Change
Add back - Unusual and Other Items:
Restructuring costs (2)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
Tax impact of above items
TOTAL UNUSUAL AND OTHER ITEMS AFTER TAX (B)
-
-
-
-
1,718
(1,718)
$1,718
($1,718)
(390)
390
$1,328
($1,328)
ADJUSTED NET INCOME (A + B)
$30,753
$29,059
$1,694
Number of Shares Outstanding – Basic (‘000)
Adjusted Basic Net Earnings Per Share
Number of Shares Outstanding – Diluted (‘000)
Adjusted Diluted Net Earnings Per Share
86,404
$0.36
86,466
$0.36
86,345
$0.34
86,730
$0.34
Page 7 ▌Martinrea International Inc.
TABLE B
Year ended December 31, 2016 to year ended December 31, 2015 comparison
NET INCOME (A)
$92,380
$107,030 ($14,650)
For the year ended
December 31, 2016
(a)
For the year ended
December 31, 2015
(b)
(a)-(b)
Change
Add back - Unusual and Other Items:
Impairment of assets (1)
Restructuring costs (2)
Executive separation agreement (3)
Loss on sale of assets and liabilities held for sale (4)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
Tax impact of above items (5)
TOTAL UNUSUAL AND OTHER ITEMS AFTER TAX (B)
34,579
3,684
-
-
$38,263
(558)
$37,705
- 34,579
(11,653)
(1,402)
(370)
15,337
1,402
370
$17,109
$21,154
(5,351)
4,793
$11,758
$25,947
ADJUSTED NET INCOME (A + B)
$130,085
$118,788
$11,297
Number of Shares Outstanding – Basic (‘000)
Adjusted Basic Net Earnings Per Share
Number of Shares Outstanding – Diluted (‘000)
Adjusted Diluted Net Earnings Per Share
(1) Impairment of assets
86,389
$1.51
86,527
$1.50
85,863
$1.38
86,369
$1.38
During the second quarter of 2016, the Company recorded impairment charges on PP&E, intangible assets and inventories
totaling $34.6 million (US $26.6 million) related to an operating facility in Detroit, Michigan included in the North America
operating segment. The impairment charges resulted from the cancellation of the main OEM light vehicle platform being
serviced by the facility, representing the majority of the business, well before the end of its expected life cycle. This led to a
decision to close the facility. The impairment charges were recorded where the carrying amount of the assets exceeded their
estimated recoverable amounts.
(2) Restructuring costs
As part of the acquisition of Honsel in 2011, a certain level of restructuring activity was contemplated, in particular, at the
Company’s German operating facility in Meschede, Germany. In connection with these restructuring activities, $1.8 million
(€1.2 million) of employee related severance was recognized during the second quarter of 2016 and $15.3 million (€10.9
million) was recognized during 2015 of which $13.6 million (€9.7 million) was recognized during the third quarter of 2015 and
$1.7 million (€1.2 million) was recognized during the fourth quarter of 2015 (including $0.3 million relating to the right sizing of
the Company’s facility in Brazil). No further costs related to this restructuring are expected to be incurred.
Other additions to the restructuring accrual during the second quarter of 2016 totaled $1.9 million (US$1.4 million) and
represent employee related payouts resulting from the closure of the operating facility in Detroit, Michigan as described above.
(3) Executive separation agreement
On July 14, 2015, Danny Infusino stepped down as the Company’s Executive Vice President of Business Development and
Engineering and Vice President of Operations. The costs added back for Adjusted Net Income purposes represents Mr.
Infusino’s termination benefits (included in SG&A expense) as set out in his employment contract payable over an eighteen
month period.
Page 8 ▌Martinrea International Inc.
(4) Loss on sale of assets and liabilities held for sale
During the second quarter of 2015, certain assets and liabilities of the Company’s operating facility in Soest, Germany were
transferred to assets held for sale. The Soest facility specialized in aluminum extrusions which the Company determined was
not core to the strategy of the overall business going forward. The agreement to sell the Soest facility was closed on August
31, 2015. The net assets were sold for proceeds of $20.6 million (€14.6 million) resulting in a pre-tax loss on sale of $0.4
million (€0.3 million).
(5) Tax impact of above items (For the year ended December 31, 2016)
The tax impact of the adjustments recorded to income during the second quarter of 2016 (and reflected in the unusual and
other items recognized during the year ended December 31, 2016) of $0.6 million represents solely the corresponding tax
effect on the $1.8 million in restructuring costs incurred in Meschede, Germany. The $34.6 million in impairment charges and
$1.9 million in restructuring costs related to the closure of the operating facility in Detroit, Michigan, as described above,
resulted in tax losses that were not benefitted and, as a result, not recognized as a deferred tax asset. In assessing the
realization of deferred tax assets, the Company considers whether it is more likely than not that some portion of its deferred
tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income and the reversal of taxable temporary differences; however, forming a conclusion on the realization of deferred
tax assets requires judgment when there are recent tax losses.
NET INCOME
(ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY)
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
Net Income
Adjusted Net Income
Net Earnings per Share
Basic
Diluted
Adjusted Net Earnings per Share
Basic
Diluted
Three months ended
December 31, 2016
$
$
$
$
$
$
30,753 $
30,753 $
0.36 $
0.36 $
0.36 $
0.36 $
Three months ended
December 31, 2015
27,731
29,059
$ Change
3,022
1,694
% Change
10.9%
5.8%
0.32
0.32
0.34
0.34
Net Income, before adjustments, for the fourth quarter of 2016 increased by $3.1 million to $30.8 million from $27.7 million for the fourth
quarter of 2015. Excluding the unusual and other items incurred during the fourth quarter of 2015 as explained in Table A under
“Adjustments to Net Income”, net income for the fourth quarter of 2016 increased to $30.8 million or $0.36 per share, on a basic and
diluted basis, from $29.1 million or $0.34 per share, on a basic and diluted basis, for the fourth quarter of 2015.
Adjusted Net Income for the fourth quarter of 2016, as compared to the fourth quarter of 2015, was positively impacted by the following:
•
•
•
•
•
slightly higher gross profit despite an overall decrease in year-over-year sales as previously explained;
productivity and efficiency improvements at certain operating facilities;
recently added new greenfield operating facilities which continue to ramp up and execute their backlogs of business;
a year-over-year decrease in SG&A expense as previously discussed; and
a lower effective tax rate on adjusted pre-tax 2016 income due generally to the mix of earnings (24.5% for the fourth quarter of
2016 compared to 26.6% for the fourth quarter of 2015).
Page 9 ▌Martinrea International Inc.
These factors were partially offset by the following:
•
•
•
operational inefficiencies and other costs at certain other facilities;
general sales mix including lower production volumes on certain programs; and
an increase in product and process research and development activity and, to a lesser extent, an increase in the amortization
of program specific development costs as previously discussed.
Three months ended December 31, 2016 actual to guidance comparison:
On November 3, 2016, the Company provided the following guidance for the fourth quarter of 2016:
Production sales (in millions)
Adjusted Net Earnings per Share
Basic & Diluted
Guidance
860 - 900
0.33 - 0.37
$
$
$
$
Actual
883
0.36
For the fourth quarter of 2016, production sales and Adjusted Net Earnings per share were within the range of published guidance.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
Net Income
Adjusted Net Income
Net Earnings per share
Basic
Diluted
Adjusted Net Earnings per share
Basic
Diluted
$
$
$
$
$
$
Year ended
December 31, 2016
Year ended
December 31, 2015
92,380 $
130,085 $
107,030
118,788
$ Change
(14,650)
11,297
% Change
(13.7%)
9.5%
1.07 $
1.07 $
1.51 $
1.50 $
1.25
1.24
1.38
1.38
Net Income, before adjustments, for the year ended December 31, 2016 decreased by $14.6 million to $92.4 million from $107.0 million
for the year ended December 31, 2015 largely as a result of the impact of the unusual and other items incurred during the years ended
December 31, 2016 and 2015 as explained in Table B under “Adjustments to Net Income”. Excluding these unusual and other items,
net income for the year ended December 31, 2016 increased to $130.1 million or $1.51 per share, on a basic basis, and $1.50 per
share, on a diluted basis, from $118.8 million or $1.38 per share, on a basic and diluted basis, for the year ended December 31, 2015.
Adjusted Net Income for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was positively
impacted by the following:
•
•
•
higher gross profit on an overall increase in year-over-year sales as previously explained;
productivity and efficiency improvements at certain operating facilities; and
recently added new greenfield operating facilities which continue to ramp up and execute their backlogs of business.
These factors were partially offset by the following:
•
•
•
•
•
operational inefficiencies and other costs at certain other facilities;
general sales mix including lower production volumes on certain programs;
a year-over-year increase in SG&A as previously discussed;
an increase in research and development costs due to increased product and process research and development activity and
an increase in the amortization of program specific development costs as previously discussed; and
a net foreign exchange loss of $2.2 million for the year ended December 31, 2016 compared to a net foreign exchange gain of
$4.8 million for the comparative period of 2015.
Page 10 ▌Martinrea International Inc.
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
Additions to PP&E
Three months ended
December 31, 2016
$
112,721 $
Three months ended
December 31, 2015
85,683
$ Change
27,038
% Change
31.6%
Additions to PP&E increased by $27.0 million to $112.7 million in the fourth quarter of 2016 from $85.7 million in the fourth quarter of
2015 due generally to the timing of expenditures. Additions as a percentage of sales increased year-over-year to 11.4% for the fourth
quarter of 2016 from 8.3% for the fourth quarter of 2015. While capital expenditures are made to refurbish or replace assets consumed
in the normal course of business and for productivity improvements, a large portion of the investment in the fourth quarter of 2016
continued to be for manufacturing equipment and multiple expansions/new operating facilities for programs that recently launched or
will be launching over the next 24 months.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
Additions to PP&E
Year ended
December 31, 2016
Year ended
December 31, 2015
$
249,454 $
215,219
$ Change
34,235
% Change
15.9%
Additions to PP&E increased by $34.2 million year-over-year to $249.5 million for the year ended December 31, 2016 compared to
$215.2 million for the year ended December 31, 2015 due generally to the timing of expenditures and the impact of foreign exchange
on the translation of foreign denominated purchases. Additions as a percentage of sales increased year-over-year to 6.3% for the year
ended December 31, 2016 from 5.6% for the year ended December 31, 2015. The Company continues to make investments in the
business in particular at new greenfield operating facilities as these new plants execute on their backlogs of new business.
SEGMENT ANALYSIS
The Company defines its operating segments as components of its business where separate financial information is available and
routinely evaluated by the Company’s chief operating decision maker which is the Chief Executive Officer. Given the differences
between the regions in which the Company operates, Martinrea’s operations are segmented and aggregated on a geographic basis
between North America, Europe and the Rest of the World. The Company measures segment operating performance based on
operating income.
Three months ended December 31, 2016 to three months ended December 31, 2015 comparison
SALES
OPERATING INCOME (LOSS)*
Three months ended
December 31, 2016
Three months ended
December 31, 2015
Three months ended
December 31, 2016
Three months ended
December 31, 2015
$
North America
Europe
Rest of the World
Adjusted Operating Income
Unusual and Other Items*
803,265 $
148,977
38,165
837,607 $
166,870
30,837
$
35,759 $
9,642
575
45,976 $
-
45,976 $
34,202
11,975
(1,483)
44,694
(1,718)
Total
* Operating income for the operating segments has been adjusted for unusual and other items. Of the $1.7 million of unusual and other items incurred
during the fourth quarter of 2015, $1.4 million was incurred in Europe and $0.3 million in the Rest of the World. The unusual and other items noted are
all fully explained under “Adjustments to Net Income” in this MD&A.
1,035,314 $
990,407 $
42,976
$
North America
Adjusted Operating Income in North America increased by $1.6 million to $35.8 million for the fourth quarter of 2016 from $34.2 million
for the fourth quarter of 2015 despite lower year-over-year sales. Adjusted Operating Income in North America was positively impacted
by productivity and efficiency improvements at certain operating facilities; partially offset by operational inefficiencies and other costs at
certain other facilities and general sales mix including lower production volumes on certain programs.
Page 11 ▌Martinrea International Inc.
Europe
Adjusted Operating Income in Europe decreased by $2.4 million to $9.6 million for the fourth quarter of 2016 from $12.0 million for the
fourth quarter of 2015 due in large part to a $17.9 million year-over-year decrease in sales. As noted previously, the year-over-year
decrease in sales can be attributed to lower overall production volumes in the Company’s Martinrea Honsel German operations, a $0.4
million negative foreign exchange impact from the translation of Euro denominated production sales as compared to the fourth quarter
of 2015, and a $7.4 million decrease in tooling sales; partially offset by increased production sales in the Company’s new operating
facility in Spain, which continues to ramp up and execute its backlog of new business.
Rest of the World
The operating results for the Rest of the World operating segment improved year-over-year to an operating profit of $0.6 million for the
fourth quarter of 2016 from an operating loss of $1.5 million for the comparative period of 2015. The improved operating results were
due to increased production sales in the Company’s two new operating facilities in China, which continue to ramp up and execute on
their backlogs of business.
Year ended December 31, 2016 to year ended December 31, 2015 comparison
SALES
OPERATING INCOME (LOSS)*
Year ended
December 31, 2016
Year ended
December 31, 2015
Year ended
December 31, 2016
Year ended
December 31, 2015
$
North America
Europe
Rest of the World
Adjusted Operating Income
Unusual and Other Items*
3,212,128 $
633,290
122,989
3,094,463 $
684,215
88,093
$
165,236 $
36,813
(4,342)
197,707 $
(38,263)
154,603
33,425
(9,158)
178,870
(17,109)
Total
* Operating income for the operating segments has been adjusted for unusual and other items. Of the $38.3 million of unusual and other items
incurred during the year ended December 31, 2016, $36.5 million was incurred in North America and $1.8 million in Europe. Of the $17.1 million of
unusual and other items incurred during the year ended December 31, 2015, $15.4 million was incurred in Europe, $1.4 million in North America and
$0.3 million in the Rest of the World. The unusual and other items noted are all fully explained under “Adjustments to Net Income” in this MD&A.
3,866,771 $
3,968,407 $
159,444 $
$
161,761
North America
Adjusted Operating Income in North America increased by $10.6 million to $165.2 million for the year ended December 31, 2016 from
$154.6 million for the year ended December 31, 2015. Adjusted Operating Income in North America was positively impacted by higher
gross margin from an overall increase in year-over-year sales as previously explained and productivity and efficiency improvements at
certain operating facilities. These factors were partially offset by operational inefficiencies and other costs at certain other facilities, and
general sales mix including lower production volumes on certain programs.
Europe
Adjusted Operating Income in Europe increased by $3.4 million to $36.8 million for the year ended December 31, 2016 from $33.4
million for the year ended December 31, 2015. The operating results in Europe were positively impacted by recently added new
greenfield operating facilities in Spain and Slovakia, which continue to ramp up and execute their backlogs of new business. These
positive factors were partially offset by lower operating income in the Company’s Martinrea Honsel Germany operations due to lower
year-over-year production volumes as previously noted. The book of business in the Martinrea Honsel Germany operations is expected
to increase over the next three years as it begins to launch new programs it has won over the past 24 months.
Page 12 ▌Martinrea International Inc.
Rest of the World
The operating results for the Rest of the World operating segment improved year-over-year. The improved operating results were due
to increased production sales in the Company’s two new operating facilities in China, which continue to ramp up and execute on their
backlogs of business, partially offset by the operating results of the Company’s operating facility in Brazil which decreased year-over-
year due to a decline in production sales as OEM light vehicle production volumes in Brazil continue to trend at low levels. The year-
over-year increase in sales in the Company’s operations in China was tempered by an unplanned OEM shutdown of one of its key light
vehicle platforms during the second quarter. The program was down for seven weeks during the second quarter and came back online
in July 2016.
SUMMARY OF QUARTERLY RESULTS
(unaudited)
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Sales
Gross Margin
990,407 914,725 1,023,825 1,039,450 1,035,314 929,880 984,046 917,531
104,312 99,698
116,222 111,818
103,829 96,385 106,379 95,639
Net Income (loss) for the period
30,630 28,827
(27)
32,531
27,826 15,232
33,607 30,508
Net Income (loss) attributable to equity
holders of the Company
Adjusted Net Income attributable to
equity holders of the Company
Basic and Diluted Net Earnings
per Share
Adjusted Basic and Diluted Net
Earnings per Share
*Non-IFRS Measures
30,753 29,098
(42)
32,571
27,731 15,469
33,411 30,419
30,753 29,098
37,663
32,571
29,059 25,899
33,411 30,419
0.36
0.34
-
0.38
0.32
0.18
0.39
0.36
0.36
0.34
0.44
0.38
0.34
0.30
0.39
0.36
The Company prepares its financial statements in accordance with IFRS. However, the Company considers certain non-IFRS financial
measures as useful additional information in measuring the financial performance and condition of the Company. These measures,
which the Company believes are widely used by investors, securities analysts and other interested parties in evaluating the Company’s
performance, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled
measures presented by other publicly traded companies, nor should they be construed as an alternative to financial measures
determined in accordance with IFRS. Non-IFRS measures include “Adjusted Net Income”, “Adjusted Net Earnings per Share (on a
basic and diluted basis)”, “Adjusted Operating Income” and "Adjusted EBITDA”. Please refer to the Company’s previously filed annual
and interim management discussion and analysis of operating results and financial position for the fiscal years 2016 and 2015 for a full
reconciliation of IFRS to non-IFRS measures.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial condition remains solid, which can be attributed to the Company’s low cost structure, reasonable level of debt
and prospects for growth. As at December 31, 2016, the Company had total equity attributable to equity holders of the Company of
$830.2 million. As at December 31, 2016, the Company’s ratio of current assets to current liabilities was 1.3:1 (December 31, 2015 -
1.2:1). The Company’s current working capital level of $198.0 million at December 31, 2016, up from $164.0 million at December 31,
2015, and credit facilities (discussed below) are expected to be sufficient to cover the anticipated working capital needs of the
Company. Management expects that all future capital expenditures will be financed by cash flow from operations, utilization of existing
bank credit facilities or asset backed financing.
Page 13 ▌Martinrea International Inc.
CASH FLOWS
Cash provided by operations before changes in non-
cash working capital items
$
Change in non-cash working capital items
Interest paid
Income taxes paid
Three months ended
December 31, 2016
Three months ended
December 31, 2015 $ Change % Change
87,503 $
81,046
6,457
8.0%
23,108
110,611
(7,025)
(9,172)
15,062
96,108
(6,825)
(2,905)
8,046
14,503
(200)
(6,267)
53.4%
15.1%
2.9%
215.7%
Cash provided by operating activities
94,414
86,378
8,036
9.3%
Cash used in financing activities
(17,854)
(20,175)
2,321
(11.5%)
Cash used in investing activities
(64,871)
(45,913)
(18,958)
41.3%
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase in cash and cash equivalents
$
(92)
11,597 $
713
(805)
(112.9%)
21,003
(9,406)
(44.8%)
Cash provided by operating activities during the fourth quarter of 2016 was $94.4 million, compared to cash provided by operating
activities of $86.4 million in the corresponding period of 2015. The components for the fourth quarter of 2016 primarily include the
following:
cash provided by operations before changes in non-cash working capital items of $87.5 million;
•
• working capital items source of cash of $23.1 million comprised of a decrease in trade and other receivables of $61.4 million, a
decrease in inventories of $23.9 million and a decrease in prepaid expenses and deposits of $0.5 million; partially offset by a
decrease in trade, other payables and provisions of $62.7 million;
interest paid (excluding capitalized interest) of $7.0 million; and
income taxes paid of $9.2 million.
•
•
Cash used in financing activities during the fourth quarter of 2016 was $17.9 million, compared to cash used by financing activities of
$20.2 million in the corresponding period in 2015, as a result of a $16.0 million net decrease in long-term debt (including repayments on
the Company’s revolving banking facility and asset backed financing arrangements), and $2.6 million in dividends paid; partially offset
by $0.7 million in proceeds from the exercise of employee stock options. The $20.2 million in cash used in financing activities during
the fourth quarter of 2015 was the result of an $18.1 million net decrease in long-term debt (including repayments on the Company’s
revolving banking facility and asset backed financing arrangements), and $2.6 million in dividends paid; partially offset by $0.5 million in
proceeds from the exercise of employee stock options.
Cash used in investing activities during the fourth quarter of 2016 was $64.9 million, compared to $45.9 million in the corresponding
period in 2015. The components for the fourth quarter of 2016 primarily include the following:
•
•
•
cash additions to PP&E of $62.0 million;
capitalized development costs relating to upcoming new program launches of $3.0 million; partially offset by
proceeds from the disposal of PP&E of $0.1 million.
The cash used in investing activities of $45.9 million in the fourth quarter of 2015 included $42.5 million in cash additions to PP&E and
$3.6 million in capitalized development costs relating to upcoming new program launches; partially offset by $0.2 million in proceeds
from the disposal of PP&E.
Taking into account the opening cash balance of $47.6 million at the beginning of the fourth quarter of 2016, and the activities
described above, the cash and cash equivalents balance at December 31, 2016 was $59.2 million.
Page 14 ▌Martinrea International Inc.
Cash provided by operations before changes in non-
cash working capital items
$
Change in non-cash working capital items
Interest paid
Income taxes paid
Year ended
December 31, 2016
Year ended
December 31, 2015 $ Change % Change
348,031 $
307,511
40,520
13.2%
(15,986)
332,045
(22,361)
(49,967)
(38,635)
22,649
(58.6%)
268,876
63,169
(24,259)
(51,990)
1,898
2,023
23.5%
(7.8%)
(3.9%)
Cash provided by operating activities
259,717
192,627
67,090
34.8%
Cash provided by (used in) financing activities
11,713
(46,818)
58,531
(125.0%)
Cash used in investing activities
(239,096)
(171,456)
(67,640)
39.5%
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase (decrease) in cash and cash equivalents
$
(2,068)
30,266 $
2,145
(4,213)
(196.4%)
(23,502)
53,768
(228.8%)
Cash provided by operating activities during the year ended December 31, 2016 was $259.7 million, compared to cash provided by
operating activities of $192.6 million in the corresponding period of 2015. The components for the year ended December 31, 2016
primarily include the following:
cash provided by operations before changes in non-cash working capital items of $348.0 million;
•
• working capital items use of cash of $16.0 million comprised of an increase in trade and other receivables of $4.5 million, an
increase in prepaid expenses and deposits of $1.0 million and a decrease in trade, other payables and provisions of $40.3
million; partially offset by a decrease in inventories of $29.9 million;
interest paid (excluding capitalized interest) of $22.4 million; and
income taxes paid of $50.0 million.
•
•
Cash provided in financing activities during the year ended December 31, 2016 was $11.7 million, compared to cash used of $46.8
million in the corresponding period in 2015, as a result of a $21.3 million net increase in long-term debt (net of repayments on the
Company’s revolving credit facility and asset based financing arrangements) and $0.8 million in proceeds from the exercise of
employee stock options; partially offset by $10.4 million in dividends paid. The $46.8 million in cash used in financing activities during
the year ended December 31, 2015 was the result of a $47.6 million net decrease in long-term debt (including repayments on the
Company’s revolving credit facility and asset backed financing arrangements) and $10.3 million in dividends paid; partially offset by
$11.1 million in proceeds from the exercise of employee stock options during the period.
Cash used in investing activities during the year ended December 31, 2016 was $239.1 million, compared to $171.5 million in the
corresponding period in 2015. The components for the year ended December 31, 2016 primarily include the following:
•
•
•
cash additions to PP&E of $226.9 million;
capitalized development costs relating to upcoming new program launches of $12.6 million; partially offset by
proceeds from the disposal of PP&E of $0.4 million.
The cash used in investing activities of $171.5 million during the year ended December 31, 2015 included $179.6 million in cash
additions to PP&E and $15.2 million in capitalized development costs relating to upcoming new program launches; partially offset by
$23.3 million in proceeds from the disposal of PP&E and assets and liabilities held for sale.
Taking into account the opening cash balance of $28.9 million at the beginning of 2016, and the activities described above, the cash
and cash equivalents balance at December 31, 2016 was $59.2 million.
Page 15 ▌Martinrea International Inc.
Financing
On April 29, 2016, the Company’s banking facility was amended to extend its maturity date and increase the total available revolving
credit lines under the facility. The primary terms of the amended banking facility, with a syndicate of nine banks, are as follows:
•
•
•
•
•
•
available revolving credit lines of $350 million and US $400 million;
available asset based financing capacity of $205 million;
no mandatory principal repayment provisions;
an accordion feature which provides the Company with the ability to increase the revolving credit facility by up to $150 million;
pricing terms at market rates; and
a maturity date of April 2020.
There were no changes to pricing terms or financial covenants under the facility adverse to the Company.
As at December 31, 2016, the Company had drawn $273.0 million (December 31, 2015 - $273.0 million) on the Canadian revolving
credit line and US$270.0 million (December 31, 2015 – US$220.0 million) on the U.S. revolving credit line.
Net debt (i.e. long-term debt less cash on hand) decreased by $25.9 million from $688.1 million at December 31, 2015 to $662.2 million
at December 31, 2016. The Company’s net debt to Adjusted EBITDA (on a trailing twelve months basis) leverage ratio improved to
1.89x at the end of the fourth quarter of 2016 from 1.96x at the end of the third quarter of 2016 and 2.17x at the end of 2015.
The Company was in compliance with its debt covenants as at December 31, 2016.
Dividends
In the second quarter of 2013, Martinrea's Board of Directors approved, for the first time, a dividend to be paid to all holders of
Martinrea common shares. Annual dividends are to be $0.12 per share, to be paid in four quarterly payments of $0.03 per share. The
first quarterly dividend payment of $0.03 per share was paid on July 11, 2013; with successive quarterly dividends paid thereafter, the
most recent quarterly dividend being paid on January 15, 2017. The declaration and payment of future dividends will be subject to the
Company’s cash requirements as well as satisfaction of statutory tests. In addition, the Board will assess future dividend payment
levels from time to time, in light of the Company’s financial performance and then current and anticipated needs at that time.
Guarantees
The Company is a guarantor under certain tooling finance programs negotiated originally in 2004 and amended in 2016 that provide
direct financing for the tooling on specific programs. The tooling finance program involves a third party that provides tooling suppliers
with financing subject to a Company guarantee for a period of six to eighteen months depending upon the duration of the tooling
program and the subsequent customer tooling payment. The amounts loaned to tooling suppliers through this financing arrangement
do not appear on the Company’s balance sheet. At December 31, 2016 the amount of off-balance sheet program financing was $65.5
million (December 31, 2015 - $85.5 million). As is customary in the automotive industry, tooling costs are ultimately paid for by
customers of the Company generally upon acceptance of the final prototypes and commencement of commercial production.
ACQUISITIONS
On July 29, 2011, the Company closed an agreement to purchase a controlling interest in the assets of Honsel, a German-based
leading supplier of aluminum components for the automotive and industrial sectors forming the Martinrea Honsel group. The Company
partnered with Anchorage Capital Group L.L.C. (“Anchorage”) in the transaction, acquiring 55%, with Anchorage owning the remaining
45%.
Martinrea Honsel develops and manufactures complex aluminum products using state-of-the-art production technologies including high
pressure die-casting, permanent mold, sand casting and rolling.
The Martinrea Honsel group provides the Company with a significant presence in the aluminum automotive parts market, and broadens
the Company’s metal forming capabilities and offerings. It also creates a more significant geographic presence outside North America,
which the Company intends to grow over time. The Company’s customer base was further expanded with the acquisition, with many of
the larger European based OEMs being significant customers of Martinrea Honsel.
Page 16 ▌Martinrea International Inc.
Initially, the 2011 purchase transaction envisaged the purchase of all of Honsel’s operations, which included plants in Germany located
in Meschede, Nuremburg, Soest, and Nuttlar, as well as Madrid, Spain, Queretaro, Mexico, and Monte Mor, Brazil. The Nuremburg
facility was subsequently sold to ZF Friedrichshafen AG (“ZF”), the primary customer of the facility, immediately after the closing of the
purchase transaction. After factoring in the sale of the Nuremburg facility to ZF, the net cash consideration for the acquisition was
€62,125 ($85,272), of which Martinrea’s 55% portion was €34,169 ($46,900).
As part of the transaction, the Company granted Anchorage a put option which, if exercised, would have required the Company to
purchase Anchorage’s 45% interest in Martinrea Honsel Holdings B.V. The put option would have become effective on April 1, 2015
with an expiry date of October 1, 2017. The put option provided a formula for determining the purchase price of the shares, designed to
estimate the fair value of the non-controlling interest at the time the option is exercised. The put option provided an arbitration
mechanism in the event that the two parties were unable to agree on the ultimate price.
On August 7, 2014, prior to the put option becoming exercisable, Martinrea acquired from Anchorage the remaining 45% equity interest
in the Martinrea Honsel group for a negotiated purchase price of €160,000 ($235,667 Canadian). Effective August 7, 2014, the
Martinrea Honsel group is wholly owned by Martinrea.
During the second quarter ended June 30, 2015, certain assets and liabilities of the Company’s operating facility in Soest, Germany,
which formed part of the above described Martinrea Honsel group, were transferred to assets held for sale. The Soest facility
specializes in aluminum extrusions which the Company determined was not core to the strategy of the overall business going forward.
The agreement to sell the Soest facility was closed on August 31, 2015. The net assets of the facility were sold for proceeds of
$20,638 (€14,588) resulting in a pre-tax loss on sale of $370 (€257).
The acquisition while bringing many benefits to Martinrea also provides some risks for the Company. Both the initial 2011 purchase of
the 55% controlling interest and subsequent purchase of the remaining 45% equity interest in Martinrea Honsel were financed by the
Company using available credit lines, which has increased the Company’s debt levels. See also “Risks and Uncertainties”.
RISKS AND UNCERTAINTIES
The following risk factors, as well as the other information contained in this MD&A, the Company’s Annual Information Form for the year
ended December 31, 2016 (“AIF”) (of which the section entitled “Automotive Industry Trends and Highlights” contained in the AIF is
incorporated by reference herein) or otherwise incorporated herein by reference, should be considered carefully. These risk factors
could materially and adversely affect the Company’s future operating results and could cause actual events to differ materially from
those described in forward-looking statements relating to the Company.
The Company’s success is primarily dependent upon the levels of car and light truck production by its customers and the relative
amount of content the Company has on their various vehicle programs. OEM production volumes may be impacted by many factors
including general economic and political conditions, interest rates, credit availability, energy and fuel prices, international conflicts,
infrastructure considerations, legislative changes, and
labour relations
environmental emissions standards and safety issues.
issues, regulatory requirements,
trade agreements,
North American and Global Economic and Political Conditions
The automotive industry is global, and is cyclical in the fact that it is sensitive to changes in economic and political conditions, including
interest rates, currency issues, energy prices and international or domestic conflicts or political crises.
The Company operates in the midst of a volatile industry, which in the past decade has experienced a significant recession, particularly
severe in North America and more recently Europe. Although there has been stabilization or growth in North America, current
conditions continue to cause economic uncertainty about the future in different regions. It is uncertain what the Company’s prospects
will be in the future. While the Company believes it has sufficient liquidity and a strong balance sheet to deal with present economic
conditions, lower sales and production volumes in certain areas may occur. It is unknown at this stage the impact of the views of the
new U.S. administration on NAFTA and any effects on the automotive industry from any changes to NAFTA. See “Changes in Law and
Governmental Regulation”.
Consumer confidence has a significant impact on consumer demand for vehicles, which in turn impacts vehicle production. A
significant decline in vehicle production volumes from current levels could have a material adverse effect on profitability.
Page 17 ▌Martinrea International Inc.
Automotive Industry Risks
The automotive industry is generally viewed as highly cyclical. It is dependent on, among other factors, consumer spending and
general economic conditions in North America and elsewhere. Future sales and production volumes are anticipated to grow modestly
or stabilize in North America over the next several years, and have grown in the past several years, but growth rates are uncertain, and
volume levels can decrease at any time. In Europe, the automotive industry has significant overcapacity as well as reduced sales and
production levels, which can lead to downsizing and restructuring costs, or costs associated with overcapacity. Increased emphasis on
the reduction of fuel consumption, fuel emissions and greenhouse gas emissions could also reduce demand for automobiles overall or
specific platforms on which the Company has product, especially in the light truck segment. There can be no assurance that North
American or European automotive production overall or on specific platforms will not decline in the future or that the Company will be
able to utilize any existing unused capacity or any additional capacity it adds in the future. A continued or a substantial additional
decline in the production of new automobiles overall or by customer or by customer platform may have a material adverse effect on the
Company’s financial condition and results of operations and ability to meet existing financial covenants. It is unknown at this stage the
impact of the views of the new U.S. administration on NAFTA and any effects on the automotive industry from any changes to NAFTA.
See “Changes in Law and Governmental Regulation”.
Dependence Upon Key Customers
Due to the nature of the Company’s business, it is dependent upon several large customers such that cancellation of a significant order
by any of these customers, the loss of any such customers for any reason or the insolvency of any such customers, reduced sales of
automotive platforms of such customers, or shift in market share on vehicles on which we have significant content, could significantly
reduce the Company’s ongoing revenue and/or profitability, and could materially and adversely affect the Company’s financial
condition. In addition, a work disruption at one or more of the Company’s customers resulting from labour stoppages at or insolvencies
of key suppliers to such customers or an extended customer shutdown (scheduled or unscheduled ) could have a significant impact on
the Company’s revenue and/or profitability. Our largest North American customers typically halt production for approximately two
weeks in July and one week in December. These shutdowns could cause fluctuations in the Company’s quarterly results.
Financial Viability of Suppliers
The Company relies on a number of suppliers to supply a wide range of products and components required in connection with the
business. Economic conditions, production volume cuts, intense pricing pressures, increased commodity prices and a number of other
factors including acts of God (fires, hurricanes, earthquakes) can result in many automotive suppliers experiencing varying degrees of
financial distress. The continued financial distress or the insolvency or bankruptcy of any such supplier could disrupt the supply of
products, materials or components to Martinrea or to customers, potentially causing the temporary shut-down of the Company’s or
customers’ production lines. Martinrea has experienced supply disruptions of varying natures in the past, including in cases where an
equipment supplier has gone out of business, or an act of God resulted in the shortage of a key commodity. There is a risk some
suppliers may not have adequate capacity to timely accommodate increases in demand for their products which could lead to
production disruption for the customer. Any prolonged disruption in the supply of critical components, the inability to re-source
production of a critical component from a distressed automotive components sub-supplier, or any temporary shut-down of production
lines or the production lines of a customer, could have a material adverse effect on profitability. Additionally, the insolvency,
bankruptcy, financial restructuring or force majeure event of any critical suppliers could result in the Company incurring unrecoverable
costs related to the financial work-out or resourcing costs of such suppliers and/or increased exposure for product liability, warranty or
recall costs relating to the components supplied by such suppliers to the extent such supplier is not able to assume responsibility for
such amounts, each of which could have an adverse effect on the Company’s profitability. Also see “Dependence Upon Key
Customers”.
Competition
The markets for fluid management systems, cast aluminum products and fabricated metal products and assemblies for automotive and
industrial customers are highly competitive. Some of the Company’s competitors have substantially greater financial, marketing and
other resources than the Company. As the markets for the Company’s products and other services expand, additional competition may
emerge and competitors may commit more resources to products which directly compete with the Company’s products. There can be
no assurance that the Company will be able to compete successfully with existing competitors or that its business will not be adversely
affected by increased competition or by new competitors.
Page 18 ▌Martinrea International Inc.
Cost Absorption and Purchase Orders
Given the current trends in the automotive industry, the Company is under continuing pressure to absorb costs related to product
design and development, engineering, program management, prototypes, validation and tooling in addition to items previously paid for
directly by OEMs. In particular, OEMs are requesting that suppliers pay for the above costs and recover these costs through the piece
price of the applicable component. Contract volumes for customer programs not yet in production are based on the Company’s
customers’ estimates of their own future production levels. However, actual production volumes may vary significantly from these
estimates due to a reduction in consumer demand or new product launch delays, often without any compensation to the supplier by its
OEM customer. Purchase orders issued by customers typically do not require they purchase a minimum number of the Company’s
products. For programs currently under production, the Company is generally unable to request price changes when volumes differ
significantly from production estimates used during the quotation stage. If estimated production volumes are not achieved, the product
development, design, engineering, prototype and validation costs incurred by the Company may not be fully recovered. Similarly, future
pricing pressure or volume reductions by the Company’s customers may also reduce the amount of amortized costs otherwise
recoverable in the piece price of the Company’s products. Either of these factors could have an adverse effect on the Company’s
profitability. While it is generally the case that once the Company receives a purchase order for products of a particular vehicle
program it would continue to supply those products until the end of such program, customers could cease to source their production
requirements from the Company for a variety of reasons, including the Company’s refusal to accept demands for price reductions or
other concessions.
Material Prices
Prices for key raw materials and commodities used in parts production, particularly aluminum, steel, resin, paints, chemicals and other
raw materials, as well as energy prices, have proven to be volatile at certain times. Martinrea has attempted to mitigate its exposure to
price increases of key commodities, particularly steel and aluminum (through participation in steel resale programs or price adjustment
mechanisms); however, to the extent the Company is unable to fully do so through engineering products with reduced commodity
content, by passing commodity price increases to customers or otherwise, such additional commodity costs could have a material
adverse effect on profitability. Increased energy prices also impact on production or transportation costs which in turn could affect
competitiveness.
Outsourcing and Insourcing Trends
The Company is dependent on the outsourcing of components, modules and assemblies by OEMs. The extent of OEM outsourcing is
influenced by a number of factors, including relative cost, quality and timeliness of production by suppliers as compared to OEMs,
capacity utilization, and labour relations among OEMs, their employees and unions. As a result of any favourable terms in collective
bargaining agreements which may lower cost structures, the Detroit 3 OEMs may insource some production which had previously been
outsourced, or not outsource production which may otherwise be outsourced at some point. Outsourcing of some assembly is
particularly dependent on the degree of unutilized capacity at the OEMs’ own assembly facilities, in addition to the foregoing factors. A
reduction in outsourcing by OEMs, or the loss of any material production or assembly programs coupled with the failure to secure
alternative programs with sufficient volumes and margins, could have a material adverse effect on profitability.
Product Warranty, Recall and Liability Risk
Automobile manufacturers are increasingly requesting that each of their suppliers bear the costs of the repair and replacement of
defective products which are either covered under an automobile manufacturer’s warranty or are the subject of a recall by the
automobile manufacturer and which were improperly designed, manufactured or assembled by their suppliers. The obligation to repair
or replace such parts, or a requirement to participate in a product recall, could have an adverse effect on the Company’s operations and
financial condition.
Product Development and Technological Change
The automotive industry is characterized by rapid technological change and frequent new product introductions. Price pressure
downward by customers and unavoidable price increases from suppliers can have an adverse effect on the Company’s profitability.
Accordingly, the Company believes that its future success depends upon its ability to enhance manufacturing techniques offering
enhanced performance and functionality at competitive prices, and delivering lightweighting and other products that will enable it to
continue to have content on the cars of the future (including for example, electric and autonomous vehicles). The Company’s inability,
for technological or other reasons, to enhance operations in a timely manner in response to changing market conditions or customer
Page 19 ▌Martinrea International Inc.
requirements could have a material adverse effect on the Company’s results of operations. The ability of the Company to compete
successfully will depend in large measure on its ability to maintain a technically competent workforce and to adapt to technological
changes and advances in the industry, including providing for the continued compatibility of its products with evolving industry
standards and protocols. There can be no assurance that the Company will be successful in its efforts in these respects.
Dependence Upon Key Personnel
The success of the Company is dependent on the services of a number of the members of its senior management. The experience and
talents of these individuals will be a significant factor in the Company’s continued success and growth. The loss of one or more of these
individuals without adequate replacement measures could have a material adverse effect on the Company’s operations and business
prospects. The Company does not currently maintain key man insurance.
Limited Financial Resources/Uncertainty of Future Financing/Banking
The Company is engaged in a capital-intensive business and its financial resources are less than the financial resources of some of its
competitors. There can be no assurance that, if, as and when the Company seeks additional equity or debt financing, the Company will
be able to obtain the additional financial resources required to successfully compete in its markets on favourable commercial terms or
at all. Additional equity financings may result in substantial dilution to existing shareholders.
Acquisitions
The Company has acquired and anticipates that it will continue to acquire complementary businesses, assets, technologies, services or
products. The completion of such transactions poses additional risks to the Company’s business. The benefit to the Company of
previous and future acquisitions is highly dependent on the Company’s ability to integrate the acquired businesses and their
technologies, employees and products into the Company, and the Company may incur costs associated with integrating and
rationalizing the facilities (some of which may need to be closed in the future). The Company cannot be certain that it will successfully
integrate acquired businesses or that acquisitions will ultimately benefit the Company. Any failure to successfully integrate businesses
or failure of the businesses to benefit the Company could have a material adverse effect on its business and results of operations.
Such transactions may also result in additional dilution to the Company’s shareholders or increased debt. Such transactions may
involve partners, and the formula for determining contractual sale provisions may be subject to a variety of factors that may not be
easily quantified or estimated until the time of sale (such as market conditions and determining fair market value).
Potential Rationalization Costs and Turnaround Costs
The Company has incurred restructuring costs over the past several years. In response to the increasingly competitive automotive
industry conditions, it is likely that the Company will continue to rationalize some production facilities. In the course of such
rationalization, restructuring costs related to plant closings or alterations, relocations and employee severance costs will be incurred.
Such costs could have an adverse effect on short-term profitability. In addition, while the Company’s goal is for every plant to be
profitable, there is no assurance this will occur, which will likely result in a rationalizing or closing of the plant. Martinrea is working to
turn around any financially underperforming divisions, however, there is no guarantee that it will be successful in doing so with respect
to some or all such divisions. The continued underperformance of one or more operating divisions could have a material adverse effect
on the Company’s profitability and operations.
Launch and Operational Costs
The launch of new business, in an existing or new facility, is a complex process, the success of which depends on a wide range of
factors, including the production readiness of the Company and its suppliers, as well as factors related to tooling, equipment,
employees, initial product quality and other factors. A failure to successfully launch material new or takeover business could have an
adverse effect on profitability. Significant launch costs were incurred by the Company in recent years.
The Company’s manufacturing processes are vulnerable to operational problems that can impair its ability to manufacture its products
in a timely manner. The Company’s facilities contain complex and sophisticated machines that are used in its manufacturing
processes. The Company has in the past experienced equipment failures and could experience equipment failure in the future due to
wear and tear, design error or operator error, among other things, which could have an adverse effect on profitability.
Page 20 ▌Martinrea International Inc.
Potential Volatility of Share Prices
The market price of the Company’s common shares has been, and will likely continue to be, subject to significant fluctuations in
response to a variety of factors, many of which are beyond the Company’s control. These fluctuations may be exaggerated if the trading
volume of the common shares is low. In addition, due to the evolving nature of its business, the market price of the common shares
may fall dramatically in response to a variety of factors, including quarter-to-quarter variations in operating results, the gain or loss of
significant contracts, announcements of technological or competitive developments by the Company or its competitors, acquisitions or
entry into strategic alliances by the Company or its competitors, the gain or loss of a significant customer or strategic relationship,
changes in estimates of the Company’s financial performance, changes in recommendations from securities analysts regarding the
Company, the industry or its customers’ industries, litigation involving the Company or its officers and general market or economic
conditions.
Changes in Laws and Governmental Regulations
A significant change in the regulatory environment in which the Company currently carries on business could adversely affect the
Company’s operations. The Company’s operations could be adversely impacted by significant changes in tariffs and duties imposed on
its products, particularly significant changes to the North American Free Trade Agreement, the TPP, or the adoption of domestic
preferential purchasing policies in other jurisdictions, particularly the United States.
Labour Relations Matters
The Company has a significant number of its employees subject to collective bargaining agreements, as do many of the Company’s
customers and suppliers. To date, the Company has had no material labour relations disputes. However, production may be affected
by work stoppages and labour-related disputes (including labour disputes of the Company’s customers and suppliers), whether in the
context of potential restructuring or in connection with negotiations undertaken to ensure a division’s competitiveness, or otherwise,
which may not be resolved in the Company’s favour and which may have a material adverse effect on the Company’s operations. The
Company cannot predict whether and when any labour disruption may arise or how long such disruption could last. A significant labour
disruption could lead to a lengthy shutdown of the Company or its customers’ or suppliers’ facilities or production lines, which could
have a material adverse effect on the Company’s operations and profitability.
Litigation and Regulatory Compliance and Investigations
The Company has been and is involved in litigation from time to time and has received, in the past, letters from third parties alleging
claims and claims have been made against it including those described under “Legal Proceedings” in the Company’s AIF. Although
litigation claims may ultimately prove to be without merit, they can be time-consuming and expensive to defend. There can be no
assurance that third parties will not assert claims against the Company in the future or that any such assertion will not result in costly
litigation, or a requirement that the Company enter into costly settlement arrangements. There can be no assurance that such
arrangements will be available on reasonable terms, or at all. Due to the inherent uncertainties of litigation, it is not possible to predict
the outcome or determine the amount of any potential losses or the success of any claim of any law suit referenced under “Legal
Proceedings” in the AIF and any other claims to which the Company may be subject. In addition, there is no assurance that the
Company will be successful in a litigation matter. Any of these events may have a material adverse effect on the Company’s business,
financial condition and results of operations. See “Legal Proceedings” in the AIF. The Company’s policy is to comply with all applicable
laws. However, the Company may also be subject to regulatory risk in the markets in which it operates (for example, antitrust and
competition regulatory authorities, tax authorities, anti-bribery and corruption authorities, cybersecurity risk). Regulatory investigations,
if any, can continue for several years, and depending on the jurisdiction and type of proceeding can result in administrative or civil or
criminal penalties that could have a material adverse effect on the Company’s profitability or operations (even where the Company is
innocent, investigations can be expensive to defend). Additionally, the Company could be subject to other consequences including
reputational damage, which could have a material adverse effect on the Company.
Currency Risk - Hedging
A substantial portion of the Company’s revenues are now, and are expected to continue to be, realized in currencies other than
Canadian dollars, primarily the U.S. dollar. Fluctuations in the exchange rate between the Canadian dollar and such other currencies
may have a material effect on the Company’s results of operations. To date, the Company has engaged in some hedging activities to
mitigate the risk of identified exchange rate exposures. To the extent the Company may seek to implement more substantial hedging
Page 21 ▌Martinrea International Inc.
techniques in the future with respect to its foreign currency transactions, there can be no assurance that the Company will be
successful in such hedging activities.
Currency Risk – Competitiveness in Certain Jurisdictions
The appreciation of the Canadian dollar against the U.S. dollar (and other currencies) may negatively affect the competitiveness of the
Company’s Canadian operations in this respect against the operations in the U.S. and Mexico, as well as other jurisdictions, of
competitors and the operations of the Company in those jurisdictions. As a result of a Canadian dollar appreciation the Company may
move some existing work to the U.S. or Mexico, or may source work to U.S. or Mexican divisions as opposed to Canadian divisions, in
order for the Company to remain or become competitive. Any work shifts may entail significant restructuring and other costs as work is
shifted, as Canadian plants are consolidated, downsized or closed, or as plants in the U.S. or Mexico are expanded.
Fluctuations in Operating Results
The Company’s operating results have been and are expected to continue to be subject to quarterly and other fluctuations due to a
variety of factors including changes in purchasing patterns, production schedules of customers (which tend to include a shutdown
period in each of July and December), pricing policies, launch costs, or operational (or equipment or systems) failures, or product
introductions by competitors. This could affect the Company’s ability to finance future activities. Operations could also be adversely
affected by general economic downturns or limitations on spending.
Internal Controls Over Financial Reporting and Disclosure Controls and Procedures
Inadequate disclosure controls or ineffective internal controls over financial reporting could result in an increased risk of material
misstatements in the financial reporting and public disclosure record of the Company. Inadequate controls could also result in system
downtime, give rise to litigation or regulatory investigation, fraud or the inability of the Company to continue its business as presently
constituted. The Company has designed and implemented a system of internal controls and a variety of policies and procedures to
provide reasonable assurance that material misstatements in the financial reporting and public disclosures are prevented and detected
on a timely basis and other business risks are mitigated. In accordance with the guidelines adopted in Canada, the Company assesses
the effectiveness of its internal and disclosure controls using a top-down, risk-based approach in which both qualitative and quantitative
measures are considered. An internal control system, no matter how well conceived and operated, can provide only reasonable – not
absolute – assurance to management and the Board regarding achievement of intended results. The Company’s current system of
internal and disclosure controls also places reliance on key personnel across the Company to perform a variety of control functions
including key reviews, analysis, reconciliations and monitoring. The failure of individuals to perform such functions or properly
implement the controls as designed could adversely impact results.
Environmental Regulation
The Company is subject to a variety of environmental regulations by the federal, provincial and municipal authorities in Canada, the
United States, Mexico, South America, Europe and China that govern, among other things, soil, surface water and groundwater
contamination; the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge
of materials, including greenhouse gases, into the environment; and health and safety. If the Company fails to comply with these laws,
regulations or permits, the Company could be fined or otherwise sanctioned by regulators or become subject to litigation.
Environmental and pollution control laws, regulations and permits, and the enforcement thereof, change frequently, have tended to
become more stringent over time and may necessitate substantial capital expenditures or operating costs.
Under certain environmental requirements, the Company could be responsible for costs relating to any contamination at the Company’s
or a predecessor entity’s current or former owned or operated properties or third-party waste-disposal sites, even if the Company was
not at fault. In addition to potentially significant investigation and cleanup costs, contamination can give rise to third-party claims for
fines or penalties, natural resource damages, personal injury or property damage.
The Company’s customers are also under pressure to meet tighter emissions regulations, reduce fuel consumption and act with more
environmental responsibility.
The Company cannot provide assurances that the Company’s costs, liabilities and obligations relating to environmental matters (or any
issues that may arise as a result of its customers’ own environmental compliance) will not have a material adverse effect on the
Company’s business, financial condition, results of operations and cash flow.
Page 22 ▌Martinrea International Inc.
A Shift Away from Technologies in Which the Company is Investing
The Company continues to invest in technology and innovation which the Company believes will be critical to its long-term growth. The
Company’s ability to anticipate changes in technology and to successfully develop and introduce new and enhanced products and/or
manufacturing processes on a timely basis will be a significant factor in its ability to remain competitive. If there is a shift away from the
use of technologies in which the Company is investing, its costs may not be fully recovered. In addition, the Company may be placed at
a competitive disadvantage if other technologies in which the investment is not as great, or the Company’s expertise is not as
developed, emerge as the industry-leading technologies. This could have a material adverse effect on the Company’s profitability and
financial condition.
Competition with Low Cost Countries
The competitive environment in the automotive industry has intensified as customers seek to take advantage of low wage costs in
China, Korea, Thailand, India, Brazil and other low cost countries. As a result, there is potentially increased competition from suppliers
that have manufacturing operations in low cost countries. The loss of any significant production contract to a competitor in low cost
countries or significant costs and risks incurred to enter and carry on business in these countries could have an adverse effect on
profitability.
The Company’s ability to shift its manufacturing footprint to take advantage of opportunities in growing markets
Many of the Company’s customers have sought, and will likely continue to seek to take advantage of lower operating costs and/or other
advantages in China, India, Brazil, Russia and other growing markets. While the Company continues to expand its manufacturing
footprint with a view to taking advantage of manufacturing opportunities in some of these markets, the Company cannot guarantee that
it will be able to fully realize such opportunities. The inability to quickly adjust its manufacturing footprint to take advantage of
manufacturing opportunities in these markets could harm its ability to compete with other suppliers operating in or from such markets,
which could have an adverse effect on its profitability.
Risks of conducting business in foreign countries, including China, Brazil and other growing markets
The Company has or may establish foreign manufacturing, assembly, product development, engineering and research and
development operations in foreign countries, including in Europe, China and Brazil. International operations are subject to certain risks
inherent in doing business abroad, including:
•
•
•
•
•
•
•
•
•
political, civil and economic instability;
corruption risks;
trade, customs and tax risks;
currency exchange rates and currency controls;
limitations on the repatriation of funds;
insufficient infrastructure;
restrictions on exports, imports and foreign investment;
increases in working capital requirements related to long supply chains; and
difficulty in protecting intellectual property rights.
Expanding the Company’s business in growing markets is an important element of its strategy and, as a result, the Company’s
exposure to the risks described above may be greater in the future. The likelihood of such occurrences and their potential effect on the
Company vary from country to country and are unpredictable, however any such occurrences could have an adverse effect on the
Company’s profitability.
Potential Tax Exposures
The Company may incur losses in some countries which it may not be able to fully or partially offset against income the Company has
earned in those countries. In some cases, the Company may not be able to utilize these losses at all if the Company cannot generate
profits in those countries and/or if the Company has ceased conducting business in those countries altogether. The Company’s inability
to utilize material tax losses could materially adversely affect its profitability. At any given time, the Company may face other tax
exposures arising out of changes in tax laws, tax reassessments or otherwise. The taxation system and regulatory environment in some
Page 23 ▌Martinrea International Inc.
of the jurisdictions in which the Company operates are characterized by numerous indirect taxes and frequently changing legislation
subject to various interpretations by the various regulatory authorities and jurisdictions are empowered to impose significant fines,
penalties and interest charges. The Company’s subsidiary in Brazil is currently being assessed by the State of Sao Paulo tax authorities
for certain value added tax credits claimed. Although the Company believes that it has complied in all material respects with the
legislation in Brazil and has obtained legal advice to such effect there is no assurance that the Company will be successful with respect
to such assessment (see Note 21 to the Company’s consolidated financial statements for the year ended December 31, 2016). To the
extent the Company cannot implement measures to offset this and other tax exposures, it may have a material adverse effect on the
Company’s profitability.
Change in the Company’s mix of earnings between jurisdictions with lower tax rates and those with higher tax rates.
The Company’s effective tax rate varies in each country in which it conducts business. Changes in its mix of earnings between
jurisdictions with lower tax rates and those with higher tax rates could have a material adverse effect on the Company’s profitability.
Pension Plans and other post employment benefits
The Company’s pension plans acquired as a result of the acquisition of the North American body and chassis business of
ThyssenKrupp Budd in 2006 (the “TKB Acquisition”) had an aggregate funding deficiency as at the latest measurement date of
December 31, 2016, based on an actuarial estimate for financial reporting. The unfunded liability at December 31, 2016, on a solvency
basis which currently represents the basis for annual pension funding, is significant. Based on current interest rates, benefits and
projected investment returns, the Company is obligated to fund some amounts in 2017 and beyond. A significant portion of the
estimated funding is expected to be a payment towards the reduction of the unfunded liabilities. The unfunded liability could increase
due to a decline in interest rates, investment returns at less than the actuarial assumptions, or changes to the governmental regulations
governing funding and other factors. The Company could be adversely affected by the resulting increases in annual funding
obligations. See also Note 12 (“Pension and Other Post Retirement Benefits”) to the Company’s annual consolidated financial
statements for the year ended December 31, 2016, which reflects the financial position of the Company’s defined benefit pension plan
and other post-employment benefit plans at December 31, 2016.
The Company provides certain post-employment benefits to certain of its retirees acquired as a result of the TKB Acquisition. These
benefits include drug and hospitalization coverage. The Company does not pre-fund these obligations. At December 31, 2016, the
unfunded actuarial liability for these obligations was significant. Expected benefit payments for 2017 and beyond are significant. The
Company’s obligation for these benefits could increase in the future due to a number of factors including changes in interest rates,
changes to the collective bargaining agreements, increasing costs for these benefits, particularly drugs, and any transfer of costs
currently borne by government to the Company. The Company has in the past negotiated changes to its post-employment benefits
package in several of its facilities with its employees, in conjunction with the applicable union for the facility, setting maximum limits on
future post-employment benefits payments. The Company may negotiate similar arrangements in future in respect of such benefits at
other facilities, as applicable. See also Note 12 (“Pension and Other Post Retirement Benefits”) to the Company’s annual consolidated
financial statements for the year ended December 31, 2016, which reflect the financial position of the Company’s post-employment
benefits other than pension plans at December 31, 2016.
Impairment Charges
The Company may take, in the future, significant impairment charges, including charges related to long-lived assets. The early
termination, loss, renegotiation of the terms of, or delay in the implementation of, any significant production contract could be indicators
of impairment. In addition, to the extent that forward-looking assumptions regarding: the impact of turnaround plans on
underperforming operations; new business opportunities; program price and cost assumptions on current and future business; the
timing and success of new program launches; and forecast production volumes, are not met, any resulting impairment loss could have
a material adverse effect on the Company’s profitability.
Cybersecurity Threats
The reliability and security of the Company’s information technology (IT) systems is important to the Company’s business and
operations. Although the Company has established and continues to enhance security controls intended to protect the Company’s IT
systems and infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical
access or cyber-attacks. A significant breach of the Company’s IT systems could: cause disruptions in the Company’s manufacturing
operations (such as operational delays from production downtime, inability to manage the supply chain or produce product for
Page 24 ▌Martinrea International Inc.
customers, disruptions in inventory management), lead to the loss, destruction, corruption or inappropriate use of sensitive data,
including employee information, result in lost revenues due to theft of funds or due to a disruption of activities, including remediation
costs, or from litigation, fines and liability or higher insurance premiums, the costs of maintaining security and effective information
technology systems, which could negatively affect results of operations and the potential adverse impact of changing laws and
regulations related to cybersecurity or result in theft of the Company’s or its customers’ intellectual property or confidential information.
If any of the foregoing events occurs, the Company may be subject to a number of consequences, including reputational damage, a
diminished competitive advantage and negative impacts on future opportunities which could have a material adverse effect on the
Company.
DISCLOSURE OF OUTSTANDING SHARE DATA
As at March 2, 2017, the Company had 86,484,667 common shares outstanding. The Company’s common shares constitute its only
class of voting securities. As at March 2, 2017, options to acquire 3,010,617 common shares were outstanding.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET FINANCING
At December 31, 2016, the Company had contractual obligations requiring annual payments as follows (all figures in thousands):
Purchase obligations (i)
Long-term debt
Rent Commitments
Operating leases with third parties
Pension funding & post-employment
benefit payments
Total contractual obligations
Less than 1
year
$403,434
$27,982
$22,157
$5,329
1-2 years
2-3 years
3-4 years
$0
$12,883
$21,633
$3,289
$0
$3,139
$20,161
$2,413
$0
$638,812
$17,743
$2,059
4-5 years Thereafter
$0
$35,842
$83,002
$508
$0
$2,745
$15,206
$1,772
Total
$403,434
$721,403
$179,902
$15,370
$2,691
$461,593
$0
$37,805
$0
$25,713
$0
$658,614
$0
$19,723
$0
$2,691
$119,352 $1,322,800
(i)
Purchase obligations consist of those related to inventory, services, tooling and fixed assets in the ordinary course of
business.
The Company has negotiated tool financing facilities that provide direct financing for specific programs. The tool financing program
involves a third party that provides tooling suppliers with financing subject to a Company guarantee. Payments from the third party to
the tooling supplier are approved by the Company prior to the funds being advanced. The amounts loaned to tooling suppliers through
this financing arrangement do not appear on the Company's balance sheet. At December 31, 2016, the amount of the off balance
sheet program financing was $65.5 million representing the maximum amount of undiscounted future payments the Company could be
required to make under the guarantee. The Company would be required to perform under the guarantee in cases where a tooling
supplier could not meet its obligation to the third party. Since the amount advanced to the tooling supplier is required to be repaid
generally when the Company receives reimbursement from the final customer, and at this point the Company will in turn repay the
tooling supplier, the Company views the likelihood of a tooling supplier default as remote. Moreover, if such an instance were to occur,
the Company would obtain the tool inventory as collateral. The term of the guarantee will vary from program to program, but typically
ranges between 6-18 months.
Financial Instruments
The Company periodically utilizes certain financial instruments, principally forward currency exchange contracts, to manage the risk
associated with fluctuations in currency exchange rates. It is the Company's policy to not utilize financial instruments for trading or
speculative purposes. Forward currency exchange contracts are used to reduce the impact of fluctuating exchange rates on the
Company's foreign denominated sales and the Company’s purchases of materials and equipment. Gains and losses on forward foreign
exchange contracts are reflected in the consolidated financial statements in the same period as the hedged item. In the event that a
hedged item is sold or cancelled prior to the termination of the related hedging item, any unrealized gain or loss on the hedging item is
immediately recognized in income.
Hedge Accounting
The Company uses some portion of its US denominated long-term debt to manage foreign exchange rate exposures on net
investments made in certain US operations. At the inception of a hedging relationship, the Company designates and formally
documents the relationship between the hedging instrument and the hedged item, the risk management objective, and the strategy for
Page 25 ▌Martinrea International Inc.
undertaking the hedge. The documentation identifies the specific net investment that is being hedged, the risk that is being hedged, the
type of hedging instrument used and how effectiveness will be assessed.
At inception and at every quarter end thereafter, the Company formally assesses the effectiveness of these net investment hedges.
The change in fair value of the hedging US debt is recorded, to the extent effective, directly in Other Comprehensive Income (Loss).
These amounts will be recognized in earnings as and when the corresponding Accumulated Other Comprehensive Income (Loss) from
the hedged foreign operations is recognized in net earnings.
At December 31, 2016, the Company had committed to trade U.S. dollars in exchange for the following:
Buy Mexican Peso
Currency
Buy Euro
Currency
Amount of U.S.
dollars
Weighted average
exchange rate of U.S.
dollars
Maximum period in
months
22,809
20.6059
4
Amount of CAD
dollars
1,050
Weighted average
exchange rate of CAD
dollars
1.4002
Maximum period in
months
1
$
$
The aggregate value of these forward contracts as at December 31, 2016 was a loss of $208 and was recorded in trade and other
payables (December 31, 2015 - loss of $134 recorded in trade and other payables).
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure controls and procedures are designed to provide reasonable assurance that material information required to be publicly
disclosed by a public company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the
Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation
of the effectiveness of the Company’s disclosure controls and procedures was conducted as of December 31, 2016, based on the
criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) by and under the supervision of the Company’s management, including the CEO and the CFO.
Based on this evaluation, the CEO and the CFO have concluded that the Company’s disclosure controls and procedures (as defined in
National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators)
are effective in providing reasonable assurance that material information relating to the Company is made known to them and
information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods
specified in such legislation.
Under the supervision of the CEO and CFO, the Company has designed internal controls over financial reporting (as defined in National
Instrument 52-109) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with IFRS. The Company’s management team used COSO to design the Company’s
internal controls over financial reporting.
The CEO and CFO have caused an evaluation of the effectiveness of the Company’s internal controls over financial reporting as of
December 31, 2016. This evaluation included documentation activities, management inquiries, tests of controls and other reviews as
deemed appropriate by management in consideration of the size and nature of the Company’s business including those matters
described above. Based on that evaluation the CEO and the CFO concluded that the design and operating effectiveness of internal
controls over financial reporting was effective as at December 31, 2016 to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
It is important to understand that there are inherent limitations of internal controls as stated within COSO. Internal controls no matter
how well designed and operated can only provide reasonable assurance to management and the Board of Directors regarding
achievement of an entity’s objectives. A system of controls, no matter how well designed, has inherent limitations, including the
possibility of human error and the circumvention or overriding of the controls or procedures. As a result, there is no certainty that an
organization's disclosure controls and procedures or internal control over financial reporting will prevent all errors or all fraud. Even
disclosure controls and procedures and internal control over financial reporting determined to be effective can only provide reasonable
assurance of achieving their control objectives.
Page 26 ▌Martinrea International Inc.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal controls over financial reporting during the year ended December 31, 2016 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities.
The discussion below describes the Company’s significant policies and procedures.
The Company’s management bases its estimates on historical experience and various other assumptions that are believed to be
reasonable in the circumstances, the results of which form the basis for making judgments about the reported amounts of assets,
liabilities, revenue and expenses that are not readily apparent from other sources. On an ongoing basis, management evaluates these
estimates. However, actual results may differ from these estimates under different assumptions or conditions. In making and evaluating
its estimates, management also considers economic conditions generally and in the automotive industry in particular, which have more
recently been very different from historical patterns, as well as industry trends and the risks and uncertainties involved in its business
that could materially affect the reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other
sources. See “Automotive Industry Highlights and Trends” in the Company’s AIF and “Risks and Uncertainties” above.
Management believes that the accounting estimates discussed below are critical to the Company’s business operations and an
understanding of its results of operations or may involve additional management judgment due to the sensitivity of the methods and
assumptions necessary in determining the related asset, liability, revenue and expense amounts. Management has discussed the
development and selection of the following critical accounting estimates with the Audit Committee of the Board of Directors and the
Audit Committee has reviewed its disclosure relating to critical accounting estimates in this MD&A.
Revenue Recognition on Separately Priced Tooling Contracts
Revenue from tooling contracts is recognized at the date on which the Company transfers substantially all the risks and rewards of
ownership to the buyer and retains neither continuing managerial involvement nor effective control over the goods sold. This generally
corresponds to when the tool is inspected and accepted by the Customer, which is typically defined as the PPAP (production part
approval process or customer acceptance) date. Under tooling contracts, the related sale could be paid in full upon completion of the
contract, or in installments.
Revenue and cost of sales from tooling contracts are presented on a gross basis in the consolidated statements of operations.
Tooling contract prices are generally fixed; however, price changes, change orders and program cancellations may affect the ultimate
amount of revenue recorded with respect to a contract. Contract costs are estimated at the time of signing the contract and are
reviewed at each reporting date. Adjustments to the original estimates of total contract costs are often required as work progresses
under the contract and as experience is gained, even though the scope of the work under the contract may not change. When the
current estimates of total contract revenue and total contract costs indicate a loss, a provision for the entire loss on the contract is
made. Factors that are considered in arriving at the forecasted loss on a contract include, amongst others, cost over-runs, non-
reimbursable costs, change orders and potential price changes.
Intangible Assets
The Company’s intangible assets are comprised of customer contracts and relationships acquired in acquisitions and development
costs.
Customer contracts and relationships are amortized over their estimated economic life of up to 10 years on a straight line basis which
approximates a basis consistent with the contract value initially established upon acquisition.
Development costs are capitalized when the Company can demonstrate that:
•
•
it has the intention and the technical and financial resources to complete the development;
the intangible asset will generate future economic benefits; and
Page 27 ▌Martinrea International Inc.
•
the cost of the intangible asset can be measured reliably.
Capitalized development costs correspond to projects for specific customer applications that draw on approved generic standards or
technologies already applied in production. These projects are analyzed on a case-by-case basis to ensure they meet the criteria for
capitalization as described above. Development costs are subsequently amortized over the life of the program from the start of
production. Amortization of development costs is recognized in research and development costs in the statements of operations.
Research costs, including costs of market research and new product prototyping during the marketing stage, are expensed in the
period in which they are incurred.
Impairment of Non-financial Assets
The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. For intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount
is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit (“CGU”) is the greater of its value-in-use and its fair value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing,
assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (CGUs).
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment
losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated to the carrying amounts of the
other assets in the unit (group of units).
In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that
the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Management believes that accounting estimates related to the impairment of non-financial assets and potential reversal are critical
accounting estimates because: (i) they are subject to significant measurement uncertainty and are susceptible to change as
management is required to make forward-looking assumptions regarding the impact of improvement plans on current operations, in-
sourcing and other new business opportunities, program price and cost assumptions on current and future business, the timing of new
program launches and future forecasted production volumes; and (ii) any resulting impairment loss could have a material impact on
consolidated net income and on the amount of assets reported on the Company’s consolidated balance sheet.
Income Tax Estimates
The Company is subject to income taxes in numerous jurisdictions where it has foreign operations. Significant judgement is required in
determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax
determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional
taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such
differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
The Company is required to estimate the tax basis of assets and liabilities. The assessment for the recognition of a deferred tax asset
requires significant judgement. Where applicable tax laws and regulations are either unclear or subject to varying interpretations, it is
possible that changes in these estimates could occur that materially affect the amounts of deferred income tax assets and liabilities
recorded. Changes in deferred tax assets and liabilities generally have a direct impact on earnings in the period of changes. Unknown
future events and circumstances, such as changes in tax rates and laws, may materially affect the assumptions and estimates made
from one period to the next. Any significant change in events, tax laws, and tax rates beyond the control of the Company may materially
affect the consolidated financial statements.
Page 28 ▌Martinrea International Inc.
At December 31, 2016, the Company had recorded a net deferred income tax asset in respect of pensions and other post-retirement
benefits, loss carry-forwards and other temporary differences of $67.7 million. Deferred tax assets in respect of loss carry-forwards
relate to legal entities in Canada, the United States, Mexico and Europe. A deferred tax asset is recognized for unused tax losses, tax
credits and deductible temporary differences to the extent that it is probable that they can be utilized. Deferred tax assets are reviewed
at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The factors
used to assess the probability of realization are the Company’s forecast of future taxable income, the pattern and timing of reversals of
taxable temporary differences that give rise to deferred tax liabilities and available tax planning strategies that could be implemented to
realize the deferred tax assets. The Company has and continues to use tax planning strategies to realize deferred tax assets in order to
avoid the potential loss of benefits.
Employee Future Benefits
The Company provides pensions and other post-employment benefits including health care, dental care and life insurance to certain
employees. The determination of the obligation and expense for defined benefit pension plans and post-employment benefits is
dependent on the selection of certain assumptions used by the Company’s actuaries in calculating such amounts. Those assumptions
are disclosed in Note 12 to the Company’s annual consolidated financial statements for the year ended December 31, 2016 the most
significant of which are the discount rate, and the rate of increase in the cost of health care. The assumptions are reviewed annually
and the impact of any changes in the assumptions is reflected in actuarial gains or losses which are recognized in other comprehensive
income as they arise. The significant actuarial assumptions adopted are internally consistent and reflect the long-term nature of
employee future benefits. Significant changes in assumptions could materially affect the Company’s employee benefit obligations and
future expense.
Deferred Share Unit Plan
On May 3, 2016, a Deferred Share Unit Plan (the “DSU Plan”) was established as a means of compensating non-executive directors
and designated employees of the Company and of promoting share ownership and alignment with the shareholders’ interests. Non-
executive directors of Martinrea are automatically required to participate in the DSU Plan while employees may be designated from time
to time to participate, at the sole discretion of the Board of Directors.
Vesting conditions may be attached to the DSUs at the Board of Directors’ discretion. To date, DSUs granted to directors vest
immediately. DSU plan participants receive additional DSUs equivalent to cash dividends paid on common shares. DSUs are paid out
in cash upon termination of service, based on their fair market value, which is defined as the average closing share price of the
Company’s common shares for the 20 days preceding the termination date.
DSUs are considered cash-settled awards. The fair value of DSUs, at the date of grant to the DSU Plan participants, is recognized as
compensation expense over the vesting period, with a liability recorded in trade and other payables. In addition, the DSUs are fair
valued at the end of every reporting period and at the settlement date. Any change in the fair value of the liability is recognized as
compensation expense in earnings.
Recently adopted accounting standards
IFRS 11, Joint Arrangements
Effective January 1, 2016, the Company adopted the amendment made to IFRS 11, Joint Arrangements. The amendment to this
standard requires business combination accounting to be applied to acquisitions of interests in a joint operation that constitute a
business.
The adoption of this amended standard did not have a significant impact on the interim condensed consolidated financial statements in
the current or comparative periods.
Recently issued accounting standards
The IASB issued the following new standards and amendments to existing standards, which have not yet been adopted by the
Company:
IFRS 15, Revenue from Contracts with Customer (IFRS 15)
Page 29 ▌Martinrea International Inc.
In May 2014, the IASB issued IFRS 15 which introduces a single model for recognizing revenue from contracts with customers except
leases, financial instruments and insurance contracts. The core principle of the new standard is for companies to recognize revenue to
depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be
entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide
guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element
arrangements. The standard is effective for annual periods beginning on or after January 1, 2018.
IFRS 9, Financial Instruments (IFRS 9)
In July 2014, the IASB issued the final publication of the IFRS 9 standard, superseding IAS 39 Financial Instruments: Recognition and
Measurement. IFRS 9 standard establishes principles for the reporting of financial assets and financial liabilities that will present
relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an
entity’s future cash flows. This new standard also includes a new general hedge accounting standard which will align hedge accounting
more closely with risk management. It does not fully change the types of hedging relationships or the requirement to measure and
recognize ineffectiveness, however, it will provide more hedging strategies that are used for risk management to qualify for hedge
accounting and introduce more judgment to assess the effectiveness of a hedging relationship. The standard is effective for annual
periods beginning on or after January 1, 2018 with early adoption permitted.
IFRS 16, Leases (IFRS 16)
In January 2016, the IASB issued the final publication of IFRS 16, superseding IAS 17, Leases and IFRIC 4, Determining Whether an
Arrangement Contains a Lease. The standard applies a control model to the identification of leases, distinguishing between leases and
service contracts on the basis of whether there is an identified asset controlled by the customer. The standard removes the distinction
between operating and finance leases with assets and liabilities recognized in respect of all leases. The standard is effective for annual
periods beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 has been adopted.
Amendments to IFRS 2, Share-Based Payments (IFRS 2)
In June 2016, the IASB issued amendments to IFRS 2 Share-Based Payment. The amendments provide clarification on how to account
for certain types of share-based payment transactions. The Company intends to adopt the amendments to IFRS 2 in its consolidated
financial statements for the annual period beginning January 1, 2018.
Amendments to IAS 7, Statement of Cash Flows (IAS 7)
In January 2016, the IASB issued amendments to IAS 7, Statement of Cash Flows. The amendments require disclosures that enable
users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash
flows and non-cash changes. The Company intends to adopt the amendments to IAS 7 in its consolidated financial statements for the
annual period beginning January 1, 2017.
The Company is assessing the impact of these standards and amendments, if any, on the consolidated financial statements.
Selected Annual Information
The following table sets forth selected information from the Company’s consolidated financial statements for the years ended December
31, 2016, December 31, 2015 and December 31, 2014.
Page 30 ▌Martinrea International Inc.
Sales
Gross Margin
Operating Income
Net Income for the period
Net Income Attributable to Equity Holders of the Company
Net Earnings per Share – Basic
Net Earnings per Share – Diluted
Non-IFRS Measures*
Adjusted Operating Income
% of sales
Adjusted EBITDA
% of sales
Adjusted Net Income Attributable to Equity Holders of the
Company
Adjusted Net Earnings per Share - Basic
Adjusted Net Earnings per Share - Diluted
Total Assets
Cash and Cash Equivalents
Total Interest Bearing Debt
Dividends Declared
2016
3,968,407
432,050
159,444
91,961
92,380
1.07
1.07
197,707
5.0%
350,357
8.8%
130,085
1.51
1.50
2,468,494
59,165
721,403
10,366
$
$
$
$
$
$
$
$
$
$
$
$
2015
3,866,771 $
402,232
161,761
107,173
107,030 $
1.25 $
1.24 $
178,870 $
4.6%
317,750
8.2%
118,788
$
1.38 $
1.38 $
2,463,928 $
28,899 $
717,012 $
10,336 $
$
$
$
$
$
$
$
$
$
$
$
$
2014
3,598,645
347,892
131,900
89,416
71,304
0.84
0.83
147,748
4.1%
270,370
7.5%
83,386
0.99
0.98
2,114,895
52,401
692,442
10,159
The year-over-year trends in the selected information above have been discussed previously in this MD&A, as well as the MD&A from
December 31, 2015, including the unusual items in Table B under "Adjustments to Net Income".
*Non-IFRS Measures
The Company prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”). However, the
Company considers certain non-IFRS financial measures as useful additional information in measuring the financial performance and
condition of the Company. These measures, which the Company believes are widely used by investors, securities analysts and other
interested parties in evaluating the Company’s performance, do not have a standardized meaning prescribed by IFRS and therefore
may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an
alternative to financial measures determined in accordance with IFRS. Non-IFRS measures include “Adjusted Net Income”, “Adjusted
Net Earnings per Share (on a basic and diluted basis)”, “Adjusted Operating Income” and "Adjusted EBITDA”. Refer to page 2 of this
MD&A for a full reconciliation of the Non-IFRS measures for the years ended December 31, 2016 and 2015 and the Company’s MD&A
for the year ended December 31, 2015, as previously filed and available at www.sedar.com, for a full reconciliation of the Non-IFRS
measures for the year ended December 31, 2014.
FORWARD-LOOKING INFORMATION
Special Note Regarding Forward-Looking Statements
This MD&A and the documents incorporated by reference therein contains forward-looking statements within the meaning of applicable
Canadian securities laws including related to the Company’s expectations as to the growth of the Company and pursuit of its strategies,
the ramping up and launching of new programs, investments in its business, the opportunity to increase sales, the future amount and
type of restructuring expenses to be expensed (including the expectation as to no further restructuring costs from the Honsel
acquisition), the financing of future capital expenditures, the Company’s views of the likelihood of tooling and component part supplier
default, the Company’s ability to capitalize on opportunities in the automotive industry, the Company’s views on its liquidity and ability to
deal with present economic conditions, growth of future sales or production volumes and the payment of dividends as well as other
forward-looking statements. The words “continue”, “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “views”, “intend”, “believe”,
“plan” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on estimates
and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and expected
future developments, as well as other factors that the Company believes are appropriate in the circumstances. Many factors could
cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by the forward-
looking statements, including, without limitation, the following factors, some of which are discussed in detail in the Company’s Annual
Information Form for the year ended December 31, 2016 and other public filings which can be found at www.sedar.com:
Page 31 ▌Martinrea International Inc.
• North American and global economic and political conditions;
•
the highly cyclical nature of the automotive industry and the industry’s dependence on consumer spending and general
economic conditions;
the Company’s dependence on a limited number of significant customers;
financial viability of suppliers;
the Company's reliance on critical suppliers and on suppliers for components and the risk that suppliers will not be able to
supply components on a timely basis or in sufficient quantities;
competition;
the increasing pressure on the Company to absorb costs related to product design and development, engineering, program
management, prototypes, validation and tooling;
increased pricing of raw materials;
outsourcing and in-sourcing trends;
the risk of increased costs associated with product warranty and recalls together with the associated liability;
the Company’s ability to enhance operations and manufacturing techniques;
dependence on key personnel;
limited financial resources;
risks associated with the integration of acquisitions;
costs associated with rationalization of production facilities;
launch costs;
the potential volatility of the Company’s share price;
changes in governmental regulations or laws including any changes to the North American Free Trade Agreement;
labour disputes;
litigation;
currency risk;
fluctuations in operating results;
internal controls over financial reporting and disclosure controls and procedures;
environmental regulation;
a shift away from technologies in which the Company is investing;
competition with low cost countries;
the Company’s ability to shift its manufacturing footprint to take advantage of opportunities in emerging markets;
risks of conducting business in foreign countries, including China, Brazil and other growing markets;
potential tax exposures;
a change in the Company’s mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well
as the Company’s ability to fully benefit from tax losses;
under-funding of pension plans; and
the cost of post-employment benefits
impairment charges; and
cyber security threats.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
These factors should be considered carefully, and readers should not place undue reliance on the Company’s forward-looking
statements. The Company has no intention and undertakes no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except as required by law.
Page 32 ▌Martinrea International Inc.
MARTINREA INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2016
Martinrea International Inc.
Table of Contents
Management's responsibility for financial reporting
Independent auditors' report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Inventories
Intangible assets
1. Basis of preparation
2. Significant accounting policies
3. Trade and other receivables
4.
5. Sale of assets and liabilities held for sale
6. Property, plant and equipment
7.
8. Trade and other payables
9.
Impairment of Assets
10. Provisions
11. Long-term debt
12. Pensions and other post-retirement benefits
13. Income taxes
14. Capital stock
15. Earnings per share
16. Research and development costs
17. Personnel expenses
18. Finance expense and other finance income
19. Operating segments
20. Financial instruments
21. Commitments and contingencies
22. Guarantees
23. Transactions with key management personnel
24. List of consolidated entities
Page
1
2
3
4
5
6
7
8
9
17
17
17
18
18
19
19
20
20
22
25
27
28
28
29
29
29
30
34
35
35
35
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Martinrea International Inc. are the responsibility of management
and have been prepared in accordance with International Financial Reporting Standards and, where appropriate, reflect
best estimates based on management’s judgment. In addition, all other information contained in the annual report to
shareholders and Management Discussion and Analysis for the year ended December 31, 2016 is also the responsibility
of management. The Company maintains systems of internal accounting and administrative controls designed to provide
reasonable assurance that the financial information provided is accurate and complete and that all assets are properly
safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting, for
overseeing management’s performance of its financial reporting responsibilities, and is ultimately responsible for
reviewing and approving the consolidated financial statements. The Board of Directors delegates certain responsibility to
the Audit Committee, which is comprised of independent non-management directors. The Audit Committee meets with
management and KPMG LLP, the external auditors, multiple times a year to review among other things accounting
policies, observations, if any, relating to internal controls over the financial reporting process that may be identified during
the audit process, as influenced by the nature, timing and extent of audit procedures performed, annual financial
statements, the results of the external audit examination and the Management Discussion and Analysis included in the
report to shareholders for the year ended December 31, 2016. The external auditors and internal auditors have
unrestricted access to the Audit Committee. The Audit Committee reports its findings to the Board of Directors so that the
Board may properly approve the consolidated financial statements for issuance to shareholders.
(Signed) “Pat D’Eramo”
(Signed) “Fred Di Tosto”
Pat D’Eramo
Fred Di Tosto
President & Chief Executive Officer
Chief Financial Officer
KPMG LLP
Chartered Public Accountants
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto Ontario M5H 2S5
Telephone
Fax
Internet
(416) 777-8500
(416) 777-8818
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Martinrea International Inc.
We have audited the accompanying consolidated financial statements of Martinrea International Inc., which comprise the consolidated
balance sheets as at December 31, 2016 and December 31, 2015, the consolidated statements of operations, comprehensive income,
changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and
other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, 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.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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 entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
Martinrea International Inc. as at December 31, 2016 and December 31, 2015, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 2, 2017
Toronto, Canada
Note
December 31,
2016
December 31,
2015
3
4
6
13
7
8
10
11
11
12
13
14
$
$
$
$
59,165 $
568,445
306,130
14,758
9,786
958,284
1,257,247
179,702
73,261
1,510,210
2,468,494 $
707,007 $
6,689
18,622
27,982
760,300
693,421
66,863
118,234
878,518
1,638,818
710,510
42,660
117,048
(40,020)
830,198
(522)
829,676
2,468,494 $
28,899
586,024
356,969
13,651
10,401
995,944
1,202,162
182,232
83,590
1,467,984
2,463,928
743,096
15,598
29,873
43,399
831,966
673,613
67,552
114,571
855,736
1,687,702
709,396
42,648
147,442
(123,157)
776,329
(103)
776,226
2,463,928
Martinrea International Inc.
Consolidated Balance Sheets
(in thousands of Canadian dollars)
ASSETS
Cash and cash equivalents
Trade and other receivables
Inventories
Prepaid expenses and deposits
Income taxes recoverable
TOTAL CURRENT ASSETS
Property, plant and equipment
Deferred income tax assets
Intangible assets
TOTAL NON-CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
Trade and other payables
Provisions
Income taxes payable
Current portion of long-term debt
TOTAL CURRENT LIABILITIES
Long-term debt
Pension and other post-retirement benefits
Deferred income tax liabilities
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
EQUITY
Capital Stock
Contributed surplus
Accumulated other comprehensive income
Accumulated deficit
TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Non-controlling interest
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Commitment and Contingencies (note 21)
See accompanying notes to the consolidated financial statements.
On behalf of the Board:
“Robert Wildeboer”
Director
“Scott Balfour”
Director
Page 3 ▌Martinrea International Inc.
Year ended
December 31,
2016
Note
$
3,968,407 $
Year ended
December 31,
2015
3,866,771
(3,347,152)
(117,387)
(3,464,539)
402,232
(21,765)
(193,610)
(7,485)
(2,134)
-
(15,337)
(370)
230
161,761
(25,266)
4,925
141,420
(34,247)
107,173
(3,408,740)
(127,617)
(3,536,357)
432,050
(24,853)
(198,109)
(8,727)
(2,307)
(34,579)
(3,684)
-
(347)
159,444
(24,196)
(1,909)
133,339
(41,378)
91,961 $
419
(143)
92,380 $
107,030
1.07 $
1.07 $
1.25
1.24
16
9
10
5
18
18
13
15
15
$
$
$
$
Martinrea International Inc.
Consolidated Statements of Operations
(in thousands of Canadian dollars, except per share amounts)
SALES
Cost of sales (excluding depreciation of property, plant and equipment)
Depreciation of property, plant and equipment (production)
Total cost of sales
GROSS MARGIN
Research and development costs
Selling, general and administrative
Depreciation of property, plant and equipment (non-production)
Amortization of customer contracts and relationships
Impairment of assets
Restructuring costs
Loss on sale of assets and liabilities held for sale
Gain (loss) on disposal of property, plant and equipment
OPERATING INCOME
Finance costs
Other finance income (expense)
INCOME BEFORE INCOME TAXES
Income tax expense
NET INCOME FOR THE PERIOD
Non-controlling interest
NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Basic earnings per share
Diluted earnings per share
See accompanying notes to the consolidated financial statements.
Page 4 ▌Martinrea International Inc.
Martinrea International Inc.
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars)
NET INCOME FOR THE PERIOD
Other comprehensive income (loss), net of tax:
Items that may be reclassified to net income
Foreign currency translation differences for foreign operations
Items that will not be reclassified to net income
Actuarial gains (losses) from the remeasurement of defined benefit plans
Other comprehensive income (loss), net of tax
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD
Attributable to:
Equity holders of the Company
Non-controlling interest
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD
See accompanying notes to the consolidated financial statements.
Year ended
December 31,
2016
Year ended
December 31,
2015
$
91,961 $
107,173
(30,394)
91,515
1,123
(29,271)
62,690 $
63,109
(419)
62,690 $
(371)
91,144
198,317
198,174
143
198,317
$
$
Page 5 ▌Martinrea International Inc.
Martinrea International Inc.
Consolidated Statements of Changes in Equity
(in thousands of Canadian dollars)
Equity attributable to equity holders of the Company
Capital
stock
694,198 $
-
Contributed
surplus
45,347 $
-
$
Cumulative
translation
account
55,927 $
-
Accumulated
deficit
(219,480) $
107,030
-
-
15,198
1,384
-
(4,083)
-
-
-
-
(10,336)
-
Balance at December 31, 2014
Net income for the period
Compensation expense related to
stock options
Dividends ($0.12 per share)
Exercise of employee stock options
Other comprehensive income (loss),
net of tax
-
-
709,396
-
-
-
1,114
-
-
42,648
-
333
-
(321)
-
91,515
147,442
-
-
-
-
(371)
-
(123,157)
92,380
-
(10,366)
-
Non-
controlling
interest
(246) $
143
Total
equity
575,746
107,173
-
-
-
1,384
(10,336)
11,115
-
-
(103)
(419)
(371)
91,515
776,226
91,961
-
-
-
333
(10,366)
793
Total
575,992 $
107,030
1,384
(10,336)
11,115
(371)
91,515
776,329
92,380
333
(10,366)
793
-
-
710,510 $
-
-
42,660 $
-
(30,394)
117,048 $
1,123
-
(40,020) $
1,123
(30,394)
830,198 $
-
-
(522) $
1,123
(30,394)
829,676
Actuarial losses from the remeasurement of
defined benefit plans
Foreign currency translation differences
Balance at December 31, 2015
Net income for the period
Compensation expense related to
stock options
Dividends ($0.12 per share)
Exercise of employee stock options
Other comprehensive income (loss),
net of tax
Actuarial gains from the remeasurement of
defined benefit plans
Foreign currency translation differences
Balance at December 31, 2016
$
See accompanying notes to the consolidated financial statements.
Page 6 ▌Martinrea International Inc.
Martinrea International Inc.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net Income for the period
Adjustments for:
Depreciation of property, plant and equipment
Amortization of customer contracts and relationships
Amortization of development costs
Impairment of assets (note 9)
Unrealized losses on foreign exchange forward contracts
Change in fair value of deferred share units
Finance costs
Income tax expense
Loss on sale of assets and liabilities held for sale (note 5)
Loss (gain) on disposal of property, plant and equipment
Stock-based compensation
Pension and other post-retirement benefits expense
Contributions made to pension and other post-retirement benefits
Changes in non-cash working capital items:
Trade and other receivables
Inventories
Prepaid expenses and deposits
Trade, other payables and provisions
Interest paid (excluding capitalized interest)
Income taxes paid
NET CASH PROVIDED BY OPERATING ACTIVITIES
FINANCING ACTIVITIES:
Increase in long-term debt
Repayment of long-term debt
Dividends paid
Exercise of employee stock options
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
INVESTING ACTIVITIES:
Purchase of property, plant and equipment*
Capitalized development costs
Proceeds sale of assets and liabilities held for sale (note 5)
Proceeds on disposal of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
Effect of foreign exchange rate changes on cash and cash equivalents
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
Year ended
December 31,
2016
Year ended
December 31,
2015
$
91,961 $
107,173
136,344
2,307
13,652
34,579
208
568
24,196
41,378
-
347
333
4,274
(2,116)
348,031
(4,537)
29,923
(1,038)
(40,334)
332,045
(22,361)
(49,967)
259,717 $
90,784
(69,499)
(10,365)
793
11,713 $
(226,910)
(12,624)
-
438
(239,096) $
124,872
2,134
12,104
-
134
-
25,266
34,247
370
(230)
1,384
4,264
(4,207)
307,511
(9,883)
(15,395)
(2,488)
(10,869)
268,876
(24,259)
(51,990)
192,627
51,271
(98,911)
(10,293)
11,115
(46,818)
(179,578)
(15,193)
20,638
2,677
(171,456)
(2,068)
2,145
30,266
28,899
59,165 $
(23,502)
52,401
28,899
$
$
$
$
* As at December 31, 2016, $71,557 (December 31, 2015, $49,013) of purchases of property, plant and equipment remain unpaid and are recorded in
trade, other payables and provisions.
See accompanying notes to the consolidated financial statements.
Page 7 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Martinrea International Inc. (the “Company”) was formed by the amalgamation under the Ontario Business Corporations Act of several predecessor
Corporations by articles of amalgamation dated May 1, 1998. The Company is a leader in the development and production of quality metal parts,
assemblies and modules, fluid management systems and complex aluminum products focused primarily on the automotive sector.
1.
BASIS OF PREPARATION
(a)
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”).
The consolidated financial statements of the Company for the year ended December 31, 2016 were approved by the Board of Directors on
March 2, 2017.
(b)
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency. All financial
information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts and where otherwise
indicated.
(c)
Use of estimates and judgements
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual
results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.
Information about significant areas of estimation uncertainty that have the most significant effect on the amounts recognized in the
consolidated financial statements relate to the following (assumptions made are disclosed in individual notes throughout the financial
statements where relevant):
Estimates of the economic life of property, plant and equipment and intangible assets;
Estimates of income taxes. The Company is subject to income taxes in numerous jurisdictions. There are many transactions and
calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues,
based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts
that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which
such determination is made;
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible
temporary difference or tax loss carry-forwards can be utilized. The recognition of temporary differences and tax loss carry-forwards is
based on the Company’s estimates of future taxable profits in different tax jurisdictions against which the temporary differences and loss
carry-forwards may be utilized;
Estimates used in testing non-financial assets for impairment including the recoverability of development costs;
Assumptions employed in the actuarial calculation of pension and other post-retirement benefits. The cost of pensions and other post
retirement benefits earned by employees is actuarially determined using the projected unit credit method prorated on service, and the
Company’s best estimate of salary escalation and mortality rates. Discount rates used in actuarial calculations are based on long-term
interest rates and can have a significant effect on the amount of plan liabilities and service costs. The Company employs external
experts when deciding upon the appropriate estimates to use to value employee benefit plan obligations and expenses. To the extent
that these estimates differ from those realized, employee benefit plan liabilities and comprehensive income will be affected in future
periods;
Revenue recognition on separately priced tooling contracts: Tooling contract prices are generally fixed; however, price changes, change
orders and program cancellations may affect the ultimate amount of revenue recorded with respect to a contract. Contract costs are
estimated at the time of signing the contract and are reviewed at each reporting date. Adjustments to the original estimates of total
Page 8 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
contract costs are often required as work progresses under the contract and as experience is gained, even though the scope of the work
under the contract may not change. When the current estimates of total contract revenue and total contract costs indicate a loss, a
provision for the entire loss on the contract is made. Factors that are considered in arriving at the forecasted loss on a contract include,
amongst others, cost over-runs, non-reimbursable costs, change orders and potential price changes.
Estimates used in determining the fair value of stock option grants. These estimates include assumptions about the volatility of the
Company’s stock, forfeiture rates, and expected life of the options.
Information about significant areas of critical judgements in applying accounting policies that have the most significant effect on the amounts
recognized in the consolidated financial statements relate to the following (judgements made are disclosed in individual notes throughout the
financial statements where relevant):
Accounting for provisions including assessments of possible legal and tax contingencies, and restructuring. Whether a present obligation
is probable or not requires judgement. The nature and type of risks for these provisions differ and judgement is applied regarding the
nature and extent of obligations in deciding if an outflow of resources is probable or not.
Accounting for development costs – judgement is required to assess the division of activities between research and development,
technical and commercial feasibility, and the availability of future economic benefit.
Acquisitions – at initial recognition and subsequent remeasurement, judgements are made both for key assumptions in the purchase
price allocation for each acquisition and regarding impairment indicators in the subsequent period. The purchase price is assigned to the
identifiable assets, liabilities, and contingent liabilities based on fair values. Any remaining excess value is reported as goodwill. This
allocation requires judgement as well as the definition of cash generating units for impairment testing purposes. Other judgements might
result in significantly different results and financial position in the future.
The decisions made by the Company in each instance are set out under the various accounting policies in these notes.
2.
SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless
otherwise indicated.
(a)
Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been
changed when necessary to align them with the policies adopted by the Company.
(ii) Transactions eliminated on consolidation
Intra-company balances and transactions, and any unrealized income and expenses arising from intra-company transactions, are eliminated in
preparing the consolidated financial statements.
(iii) Business combinations
For every business combination, the Company identifies the acquirer, which is the combining entity that obtains control of the other combining
entities or businesses. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. In assessing control, the Company takes into consideration potential voting rights that currently are
exercisable. The acquisition date is the date on which control is transferred to the acquirer. Judgement is applied in determining the acquisition
date and determining whether control is transferred from one party to another.
Non-controlling interest:
The Company measures, on a transaction-by-transaction basis, any non-controlling interest at fair value at the acquisition date, or at its
proportionate interest in the identifiable assets and liabilities of the acquiree.
Page 9 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Measuring goodwill:
In a business combination, the Company measures goodwill as the fair value of the consideration transferred including the recognized amount
of any non-controlling interest in the acquired entity, less the net recognized amount (generally fair value) of the identifiable assets acquired
and liabilities assumed, all measured as at the acquisition date.
Consideration transferred includes the fair values of the assets transferred, including cash, liabilities incurred by the Company to the previous
owners of the acquiree, and equity interests issued by the Company. Consideration transferred also includes contingent consideration and
share-based payment awards exchanged in the business combination. Payments that effectively settle pre-existing relationships between the
Company and the acquiree, payments to compensate employees or former owners for future services, and a reimbursement of transaction
costs incurred by the acquiree on behalf of the Company are not accounted for as part of the business combination.
Transaction costs that the Company incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees,
and other professional and consulting fees, are excluded from acquisition accounting, and are expensed as incurred.
Contingent liabilities:
Contingent liabilities that are present obligations that arose from past events are recognized at fair value at the acquisition date. Future
changes in acquisition date contingent liabilities are recorded in earnings.
(b)
Foreign currency
Each subsidiary of the Company maintains its accounting records in its functional currency. A subsidiary’s functional currency is the currency
of the principal economic environment in which it operates.
(i) Foreign currency transactions
Transactions carried out in foreign currencies are translated using the exchange rate prevailing at the transaction date. Monetary assets and
liabilities denominated in a foreign currency at the reporting date are translated at the exchange rate at that date. The foreign currency gain or
loss on such monetary items is recognized as income or expense for the period. Non-monetary assets and liabilities denominated in a foreign
currency are translated at the historical exchange rate prevailing at the transaction date.
(ii) Translation of financial statements of foreign operations
The assets and liabilities of subsidiaries whose functional currency is not the Canadian dollar are translated into Canadian dollars at the
exchange rate prevailing at the reporting date. The income and expenses of foreign operations whose functional currency is not the Canadian
dollar are translated to Canadian dollars at the exchange rate prevailing on the date of transaction.
Foreign currency differences on translation are recognized in other comprehensive income in the cumulative translation account net of income
tax.
(c)
Financial instruments
(i) Non-derivative financial assets
The Company initially recognizes loans and receivables and deposits at fair value on the date that they are originated. All other financial
assets (including assets designated at fair value through profit or loss) are recognized initially at fair value on the trade date at which the
Company becomes a party to the contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to
receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the
financial asset are transferred.
Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Company has a legal
right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Page 10 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The Company has the following non-derivative financial assets:
Financial assets at fair value through profit or loss:
Financial assets are designated at fair value through profit or loss if the Company manages such asset and makes purchase and sale
decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Upon initial
recognition, attributable transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are
measured at fair value, and changes therein are recognized in profit or loss.
Financial assets at fair value through profit or loss consist of cash and cash equivalents.
Cash and cash equivalents comprise cash balances and highly liquid investments with original maturities of three months or less. Bank
overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash
and cash equivalents for the purpose of the statement of cash flows.
Loans and receivables:
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are
measured at amortized cost using the effective interest method, less any impairment losses.
Loans and receivables consist of trade and other receivables.
(ii) Non-derivative financial liabilities
The Company has the following non-derivative financial liabilities: long-term debt and trade and other payables.
The Company initially recognizes debt and subordinated liabilities at fair value on the date that they are originated plus any directly attributable
transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest
method. Trade and other payables are recognized initially on the trade date at which time the Company becomes a party to the contractual
provisions of the instrument and subsequently at amortized cost.
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
(iii) Derivative financial instruments
The Company periodically uses derivative financial instruments such as foreign exchange forward contracts to manage its exposure to
changes in exchange rates related to transactions denominated in currencies other than the Canadian dollar. Such derivative financial
instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at
fair value with changes in fair value being recognized immediately in profit or loss.
(iv) Hedge Accounting
The Company uses some portion of its US denominated long-term debt to manage foreign exchange rate exposures on net investments made
in certain US operations. At the inception of a hedging relationship, the Company designates and formally documents the relationship between
the hedging instrument and the hedged item, the risk management objective, and the strategy for undertaking the hedge. The documentation
identifies the specific net investment that is being hedged, the risk that is being hedged, the type of hedging instrument used and how
effectiveness will be assessed.
At inception and at every quarter end thereafter, the Company formally assesses the effectiveness of these net investment hedges. The
change in fair value of the hedging US debt is recorded, to the extent effective, directly in Other Comprehensive Income (Loss). These
amounts will be recognized in earnings as and when the corresponding Accumulated Other Comprehensive Income (Loss) from the hedged
foreign operations is recognized in net earnings.
Page 11 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(d)
Property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost
includes the cost of material and labour and other costs directly attributable to bringing the asset to a working condition for its intended use.
When significant components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items
of property, plant and equipment.
Certain tooling is produced or purchased specifically for the purpose of manufacturing parts for customer orders, which are either a) not sold to
the customer, or b) paid for by the customer on delivery of each part, without the customer guaranteeing full financing of the costs incurred. In
accordance with IAS 16, this tooling is recognized as property, plant and equipment. It is depreciated to match the lesser of estimated useful
life and life of the program.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the
carrying amount of property, plant and equipment, and are recognized net within profit or loss.
The Company capitalizes borrowing costs directly attributable to the acquisition, construction or production of qualifying property, plant and
equipment as part of the cost of that asset, if applicable. Capitalized borrowing costs are amortized over the useful life of the related asset.
(ii) Subsequent costs
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that
the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of
the replaced part is derecognized. Maintenance and repair costs are expensed as incurred, except where they serve to increase productivity
or to prolong the useful life of an asset, in which case they are capitalized.
(iii) Depreciation
Depreciation is recognized in profit or loss over the estimated useful life of each item of property, plant and equipment, since this most closely
reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
Depreciation is provided for at the following bases and rates:
Basis
Rate
Buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other
Declining balance
Straight line
Declining balance and straight line
Straight line
Declining balance and straight line
4%
Lesser of estimated useful life and lease term
7% to 20%
Lesser of estimated useful life and life of program
20% to 30%
Land is not depreciated.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted prospectively, if appropriate.
(e)
Intangible assets
The Company’s intangible assets are composed of customer contracts acquired in previous acquisitions and development costs.
(i) Customer contracts and relationships:
Customer contracts and relationships have a finite useful life and are amortized over their estimated economic life of up to 10 years on a
straight line basis which approximates a basis, consistent with the contract value initially established upon acquisition.
Page 12 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(ii) Research and development:
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development
costs are capitalized only if:
the development costs can be measured reliably,
the product or process is technically and commercially feasible,
the future economic benefits are probable, and
the Company intends to and has sufficient resources to complete the development and to use or sell the asset.
Capitalized development costs correspond to projects for specific customer applications that draw on approved generic standards or
technologies already applied in production. These projects are analyzed on a case-by-case basis to ensure they meet the criteria for
capitalization as described above. Development costs are subsequently amortized over the life of the program from the start of production.
Amortization of development costs is recognized in research and development costs in the statements of operations.
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is
recognized in profit or loss when incurred.
(f)
Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and
includes expenditure incurred in acquiring the inventories, production or conversion costs and other direct costs incurred in bringing them to
their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of
production overheads, including depreciation, based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling
expenses. In determining the net realizable value, the Company considers factors such as yield, turnover, expected future demand and past
experience. Impairment losses are recognized on the basis of the net realizable value.
(g)
Impairment
(i) Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset
is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash
flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and
the present value of the estimated future cash flows discounted at the original effective interest rate.
All impairment losses are recognized in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event
occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or
loss.
(ii) Non-financial assets
The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets’ are reviewed at each reporting
date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is
estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit (“CGU”) is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset or CGU. Fair value less costs to sell is the amount obtainable from
the sale of an asset or CGU in an arm’s-length transaction between knowledgeable, willing parties, less the costs of disposal. Costs of
disposal are incremental costs directly attributable to the disposal of an asset or CGU, excluding finance costs and income tax expense. For
the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing
Page 13 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
use that are largely independent of the cash inflows of other assets or groups of assets.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses
are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated to the carrying amounts of the assets in the
unit (group of units).
In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss
has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
(h)
Pensions and other post-retirement benefits
The Company’s liability for pensions and other post-retirement benefits is based on valuations performed by independent actuaries using the
projected unit credit method. These valuations incorporate both financial assumptions (discount rate, and changes in salaries and medical
costs) and demographic assumptions, including rate of employee turnover, retirement age and life expectancy.
The liability for pensions and other post-retirement benefits is equal to the present value of the Company’s future benefit obligation less, where
appropriate, the fair value of plan assets in funds allocated to finance such benefits. The effects of differences between previous actuarial
assumptions and what has actually occurred (experience adjustments) and the effect of changes in actuarial assumptions (assumption
adjustments) give rise to actuarial gains and losses. The Company recognizes all actuarial gains and losses arising from defined benefit plans
immediately in accumulated deficit through other comprehensive income.
(i)
Provisions
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Where the Company expects some or
all of the provision to be reimbursed, the reimbursement is recognized as a separate asset when reimbursement is virtually certain.
Commitments resulting from restructuring plans are recognized when an entity has a detailed formal plan and has raised a valid expectation in
those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features.
When the effect of the time value of money is material, the amount of the provision is discounted using a rate that reflects the market’s current
assessment of this value and the risks specific to the liability concerned. The increase in the provision related to the passage of time is
recognized through profit and loss in other finance income.
(j)
Revenue recognition
Sales primarily include sales of finished goods and tooling revenues. Sales of finished goods and tooling revenues are recognized at the date
on which the Company transfers substantially all the risks and rewards of ownership to the buyer, retains neither continuing managerial
involvement nor effective control over the goods sold, and meets other revenue recognition criteria in accordance with IFRS. This generally
corresponds to when the goods are shipped or, in the case of the sale of tooling, when the tool has been inspected and accepted by the
customer.
(k)
Finance income and finance expense
Finance income comprises interest income on funds invested, changes in the fair value of financial assets at fair value through profit or loss,
and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the
effective interest method.
Finance expense is comprised of interest expense on long-term debt, amortization of deferred financing costs, unwinding of the discount on
provisions, changes in the fair value of financial assets at fair value through profit or loss, and losses on hedging instruments that are
recognized in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset
are recognized in profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis.
Page 14 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(l)
Income tax
Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates
to items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the balance sheet method, with respect to temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are
expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the
reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle
current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that
future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(m)
Guarantees
The Company accounts for guarantees in accordance with IAS 39, Financial Instruments, Recognition and Measurement (“IAS 39”). A
guarantee is a contract (including indemnity) that contingently requires the Company to make payments to the guaranteed party based on (i)
changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an
asset, liability or equity security of the counterparty, (ii) failure of another party to perform under an obligating agreement or (iii) failure of a third
party to pay indebtedness when due.
Under IAS 39, guarantees are fair valued upon initial recognition. Subsequent to initial recognition, the guarantees are re-measured at the
higher of (i) the amount determined in accordance with IAS 37, Provisions, Contingent Liabilities, and Contingent Assets and (ii) the amount
initially recognized less cumulative amortization.
(n)
Share-based payments
The Company accounts for all stock-based payments to employees and non-employees using the fair value based method of accounting. The
Company measures the compensation cost of stock-based option awards to employees at the grant date using the Black-Scholes option
pricing model to determine the fair value of the options. The stock-based compensation cost of the options is recognized as stock-based
compensation expense over the relevant vesting period of the stock options.
(o)
Earnings per share
The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit
or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the
period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of
common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise share
options granted to employees.
(p)
Segment reporting
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. All operating segments’
operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance, and for which discrete financial information is available.
Page 15 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(q)
Deferred Share Unit Plan
On May 3, 2016, a Deferred Share Unit Plan (the “DSU Plan”) was established as a means of compensating non-executive directors and
designated employees of the Company and of promoting share ownership and alignment with the shareholders’ interests. Non-executive
directors of Martinrea are automatically required to participate in the DSU Plan while employees may be designated from time to time, at the
sole discretion of the Board of Directors.
Vesting conditions may be attached to the DSUs at the Board of Directors’ discretion. To date, DSUs granted to directors vest immediately.
DSU Plan participants receive additional DSUs equivalent to cash dividends paid on common shares. DSUs are paid out in cash upon
termination of service, based on their fair market value, which is defined as the average closing share price of the Company’s common shares
for the 20 days preceding the termination date.
DSUs are considered cash-settled awards. The fair value of DSUs, at the date of grant to the DSU Plan participants, is recognized as
compensation expense over the vesting period, with a liability recorded in trade and other payables. In addition, the DSUs are fair valued at
the end of every reporting period and at the settlement date. Any change in the fair value of the liability is recognized as compensation
expense in earnings.
(r)
Recently adopted accounting standards
IFRS 11, Joint Arrangements
Effective January 1, 2016, the Company adopted the amendment made to IFRS 11, Joint Arrangements. The amendment to this standard
requires business combination accounting to be applied to acquisitions of interests in a joint operation that constitute a business.
The adoption of this amended standard did not have a significant impact on the consolidated financial statements in the current or comparative
periods.
(s)
Recently issued accounting standards
The IASB issued the following new standards and amendments to existing standards:
IFRS 15, Revenue from Contracts with Customer
In May 2014, the IASB issued IFRS 15 which introduces a single model for recognizing revenue from contracts with customers except leases,
financial instruments and insurance contracts. The core principle of the new standard is for companies to recognize revenue to depict the
transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange
for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that
were not previously addressed comprehensively and improve guidance for multiple-element arrangements. The standard is effective for
annual periods beginning on or after January 1, 2018.
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final publication of the IFRS 9 standard, superseding IAS 39 Financial Instruments: Recognition and
Measurement standard. IFRS 9 establishes principles for the reporting of financial assets and financial liabilities that will present relevant and
useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.
This new standard also includes a new general hedge accounting standard which will align hedge accounting more closely with risk
management. It does not fully change the types of hedging relationships or the requirement to measure and recognize ineffectiveness,
however, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more
judgment to assess the effectiveness of a hedging relationship. The standard is effective for annual periods beginning on or after January 1,
2018 with early adoption permitted.
Page 16 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
IFRS 16, Leases
In January 2016, the IASB issued the final publication of IFRS 16, superseding IAS 17, Leases and IFRIC 4, Determining Whether an
Arrangement Contains a Lease. The standard applies a control model to the identification of leases, distinguishing between leases and service
contracts on the basis of whether there is an identified asset controlled by the customer. The standard removes the distinction between
operating and finance leases with assets and liabilities recognized in respect of all leases. The standard is effective for annual periods
beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 has been adopted.
Amendments to IFRS 2, Share-Based Payments
In June 2016, the IASB issued amendments to IFRS 2 Share-Based Payment. The amendments provide clarification on how to account for
certain types of share-based payment transactions. The Company intends to adopt the amendments to IFRS 2 in its consolidated financial
statements for the annual period beginning January 1, 2018.
Amendments to IAS 7, Statement of Cash Flows
In January 2016, the IASB issued amendments to IAS 7, Statement of Cash Flows. The amendments require disclosures that enable users of
financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-
cash changes. The Company intends to adopt the amendments to IAS 7 in its consolidated financial statements for the annual period
beginning January 1, 2017.
The Company is assessing the impact of these standards, if any, on the consolidated financial statements.
3.
TRADE AND OTHER RECEIVABLES
Trade receivables
VAT and other receivables
December 31,
2016
555,074 $
13,371
568,445 $
December 31,
2015
567,704
18,320
586,024
$
$
The Company’s exposures to credit and currency risks, and impairment losses related to trade and other receivables, are disclosed in note 20.
4.
INVENTORIES
Raw materials
Work in progress
Finished goods
Tooling work in progress and other inventory
December 31,
2016
146,802 $
38,323
39,088
81,917
306,130 $
December 31,
2015
168,246
44,346
45,898
98,479
356,969
$
$
5.
SALE OF ASSETS AND LIABILITIES HELD FOR SALE
During the second quarter ended June 30, 2015, certain assets and liabilities of the Company’s operating facility in Soest, Germany were transferred to
assets held for sale. The Soest facility specializes in aluminum extrusions which the Company determined was not core to the strategy of the overall
business going forward. The agreement to sell the Soest facility was closed on August 31, 2015. The net assets of the facility were sold for proceeds of
$20,638 (€14,588) resulting in a pre-tax loss on sale of $370 (€257).
Page 17 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
6.
PROPERTY, PLANT AND EQUIPMENT
December 31, 2016
December 31, 2015
Accumulated
amortization
and
impairment
losses
(41,389) $
(33,316)
(876,359)
(34,387)
(23,038)
-
(1,008,489) $
Cost
161,438 $
58,303
1,684,395
42,806
40,795
277,999
2,265,736 $
$
$
Net book
value
120,049
24,987
808,036
8,419
17,757
277,999
1,257,247
$
$
Cost
151,354 $
54,861
1,552,322
39,286
37,262
259,806
2,094,891 $
Accumulated
amortization
and
impairment
losses
(38,031) $
(30,257)
(771,572)
(33,543)
(19,326)
-
(892,729) $
Net book
value
113,323
24,604
780,750
5,743
17,936
259,806
1,202,162
Land and buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other assets
Construction in progress and spare parts
Movement in property, plant and equipment is summarized as follows:
Net as of December 31, 2014
Additions
Sale of assets held for sale (note 5)
Disposals
Depreciation
Transfers from construction in progress
and spare parts
Foreign currency translation adjustment
Net as of December 31, 2015
Additions
Disposals
Depreciation
Impairment (note 9)
Transfers from construction in progress
and spare parts
Foreign currency translation adjustment
Net as of December 31, 2016
Land and
buildings
$ 105,417 $
-
(1,165)
-
(3,782)
307
12,546
$ 113,323 $
-
(4)
(4,038)
-
13,005
(2,237)
$ 120,049 $
Other
Leasehold Manufacturing Tooling and
fixtures
assets
6,313 $ 13,824 $
1,019
(183)
(29)
(3,594)
equipment
663,467 $
5,837
(3,552)
(1,604)
(111,482)
improvements
20,558 $
563
-
-
(3,894)
-
(955)
(157)
(2,120)
Construction in
progress and
spare parts
175,102 $
207,800
-
(657)
-
Total
984,681
215,219
(5,855)
(2,447)
(124,872)
5,060
2,317
24,604 $
221
-
(4,510)
(723)
6,131
(736)
24,987 $
137,712
90,372
780,750 $
7,083
(512)
(121,976)
(21,021)
1,866
796
5,242
1,657
5,743 $ 17,936 $
304
(62)
(4,216)
(26)
18
-
(1,604)
-
(150,187)
27,748
-
135,436
259,806 $ 1,202,162
249,454
241,828
(207)
(785)
(136,344)
-
(21,770)
-
188,457
(24,745)
808,036 $
4,310
(48)
4,417
(596)
8,419 $ 17,757 $
(216,320)
(7,108)
-
(35,470)
277,999 $ 1,257,247
The Company has entered into certain asset-backed financing arrangements that were structured as sale-and-leaseback transactions. At December 31,
2016, the carrying value of property, plant and equipment under such arrangements was $25,632 (December 31, 2015 – $32,834). The corresponding
amounts owing are reflected within long-term debt (note 11).
7.
INTANGIBLE ASSETS
December 31, 2016
Accumulated
amortization
and
impairment
Cost
losses
Net book
value
December 31, 2015
Accumulated
amortization
and
impairment
Cost
losses
Customer contracts and relationships
Development costs
$
$
62,044 $
138,416
200,460 $
(53,872) $
(73,327)
(127,199) $
8,172
65,089
73,261
$
$
62,556 $
129,906
192,462 $
(51,783) $
(57,089)
(108,872) $
Net book
value
10,773
72,817
83,590
Page 18 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Movement in intangible assets is summarized as follows:
Net as of December 31, 2014
Additions
Amortization
Foreign currency translation adjustment
Net as of December 31, 2015
Additions
Amortization
Impairment (note 9)
Foreign currency translation adjustment
Net as of December 31, 2016
8.
TRADE AND OTHER PAYABLES
Trade accounts payable and accrued liabilities
Foreign exchange forward contracts (note 20(d))
Customer
contracts and
relationships
Development
costs
11,796 $
-
(2,134)
1,111
10,773 $
-
(2,307)
-
(294)
8,172 $
60,010 $
15,193
(12,104)
9,718
72,817 $
12,624
(13,652)
(4,179)
(2,521)
65,089 $
$
$
$
Total
71,806
15,193
(14,238)
10,829
83,590
12,624
(15,959)
(4,179)
(2,815)
73,261
December 31,
2016
706,799 $
208
707,007 $
December 31,
2015
742,962
134
743,096
$
$
The Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 20.
9.
IMPAIRMENT OF ASSETS
During the second quarter of 2016, the Company recorded impairment charges on property, plant, equipment, intangible assets and inventories totalling
$34,579 (US $26,599) related to an operating facility in Detroit, Michigan included in the North American operating segment. The impairment charges
resulted from the cancellation of the main OEM light vehicle platform being serviced by the facility, representing the majority of the business, well before
the end of its expected life cycle. This led to a decision to close the facility. The impairment charges were recorded where the carrying amount of the
assets exceeded their estimated recoverable amounts.
Property, plant and equipment
Intangible assets - Development costs
Inventories
Total impairment
Year ended
December 31,
2016
21,770
4,179
8,630
34,579
$
$
Year ended
December 31,
2015
-
-
-
-
$
$
Page 19 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
10.
PROVISIONS
Net as of December 31, 2014
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2015
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2016
Restructuring
(a)
3,752
15,337
(5,633)
570
14,026
3,684
(12,118)
(344)
5,248
$
$
$
$
$
$
Claims and
Litigations
(b)
1,752
1,412
(1,339)
(253)
1,572
189
(512)
192
1,441
$
$
$
Total
5,504
16,749
(6,972)
317
15,598
3,873
(12,630)
(152)
6,689
Based on estimated cash outflows, all provisions as at December 31, 2016 and 2015 are presented on the consolidated balance sheet as current.
(a)
Restructuring
As part of the acquisition of Honsel in 2011, a certain level of restructuring activity was contemplated, resulting in $15,337 in restructuring
costs in the form of employee related severance incurred during 2015 ($15,007 in Meschede, Germany and $330 in Brazil). Additional
restructuring costs in Meschede, Germany in the form of employee related severance of $1,810 (€1,238) were incurred during the second
quarter of 2016. No further costs related to this restructuring are expected to be incurred.
Other additions to the restructuring accrual during 2016 totalled $1,874 (US$1,441) and represent expected employee related payouts
resulting from the closure of the operating facility in Detroit, Michigan as described in note 9.
(b)
Claims and litigation
In the normal course of business, the Company may be involved in disputes with its suppliers, former employees or other third parties. Where
the Company has determined that there is a probable loss that is expected from claims or litigation related to past events, a provision is
recorded to cover the related risks associated with these disputes. To the best of the Company’s knowledge, there are no claims or litigation in
progress or pending that are likely to have a material impact on the Company’s consolidated financial position.
11.
LONG-TERM DEBT
The Company’s interest-bearing loans and borrowings are measured at amortized cost. For more information about the Company’s exposure to interest
rate, foreign currency and liquidity risk, see note 20.
December 31,
2016
631,879 $
89,524
721,403
(27,982)
693,421 $
December 31,
2015
574,818
142,194
717,012
(43,399)
673,613
$
$
Banking facility
Equipment loans
Current portion
Page 20 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Terms and conditions of outstanding loans as at December 31, 2016, in Canadian dollar equivalents, are as follows:
Banking facility
Equipment loans
Currency
USD
CAD
Nominal
interest rate
Year of
maturity
December 31, 2016
Carrying amount
LIBOR+2.0%
BA+2.0%
2020 $
2020
362,529 $
269,350
December 31, 2015
Carrying amount
304,480
270,338
USD
EUR
EUR
EUR
USD
USD
EUR
EUR
EUR
EUR
USD
EUR
BRL
USD
USD
USD
USD
4.25%
3.06%
2.54%
4.93%
7.36%
4.25%
3.35%
4.34%
1.36%
3.37%
3.80%
0.26%
5.00%
3.99%
3.89%
3.65%
4.69%
2018
2024
2025
2023
2017
2017
2019
2025
2021
2017
2022
2025
2020
2017
2016
2016
2016
23,532
15,337
14,648
14,370
6,195
3,872
3,797
3,041
2,548
904
527
353
200
200
-
-
-
$
721,403 $
42,926
16,267
15,537
15,509
12,319
14,100
5,419
3,225
902
7,988
-
352
221
2,642
3,136
1,032
619
717,012
On April 29, 2016, the Company’s banking facility was amended to extend its maturity date and increase the total available revolving credit lines under
the facility. The primary terms of the amended banking facility, with a syndicate of nine banks, are as follows:
available revolving credit lines of $350 million and US $400 million;
available asset based financing capacity of $205 million;
no mandatory principal repayment provisions;
an accordion feature which provides the Company with the ability to increase the revolving credit facility by up to US $150 million;
pricing terms at market rates; and
a maturity date of April 2020.
There were no changes to pricing terms or financial covenants under the facility adverse to the Company.
As at December 31, 2016, the Company has drawn US$270,000 (December 31, 2015 - US$220,000) on the U.S. revolving credit line and drawn
$273,000 (December 31, 2015 - $273,000) on the Canadian revolving credit line. At December 31, 2016, the weighted average effective rate of the
banking facility credit lines was 2.7% (December 31, 2015 - 2.9%). The facility requires the maintenance of certain financial ratios with which the
Company was in compliance as at December 31, 2016.
Deferred financing fees of $4,194 (December 31, 2015 - $2,994) have been netted against the carrying amount of the long-term debt.
During 2016, the Company finalized the final drawdown on a five year equipment loan in the amount of €1,198 ($1,763) at a fixed interest rate of 1.36%
with scheduled repayments starting in 2017.
Future annual minimum principal repayments are as follows:
Within one year
One to two years
Two to three years
Three to four years
Thereafter
Page 21 ▌Martinrea International Inc.
$
$
27,982
12,883
3,139
638,812
38,587
721,403
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
12.
PENSIONS AND OTHER POST RETIREMENT BENEFITS
The Company has defined benefit and non-pension post-retirement benefit plans in Canada, the United States and Germany. The defined benefit plans
provide pensions based on years of service, years of contributions and earnings. The post-retirement benefit plans provide for the reimbursement of
certain medical costs.
The plans are governed by the pension laws of the jurisdiction in which they are registered. The Company’s pension funding policy is to contribute
amounts sufficient, at minimum, to meet local statutory funding requirements. Local regulatory bodies either define minimum funding requirements or
approve funding plans submitted by the Company. From time to time the Company may make additional discretionary contributions taking into account
actuarial assessments and other factors. Actuarial valuations for the Company’s defined benefit pension plans are completed based on the regulations
in place in the jurisdictions where the plans operate.
The assets of the defined benefit pension plans are held in segregated accounts isolated from the Company’s assets. The plans are administered
pursuant to applicable regulations, investment policies and procedures and to the mandate of an established pension committee. The pension
committee oversees the administration of the pension plans, which include the following principal areas:
Overseeing the funding, administration, communication and investment management of the plans;
Selecting and monitoring the performance of all third parties performing duties in respect of the plans, including audit, actuarial and investment
management services;
Proposing, considering and approving amendments to the defined benefit pension plans;
Proposing, considering and approving amendments of the investment policies and procedures;
Reviewing actuarial reports prepared in respect of the administration of the defined benefit pension plans; and
Reviewing and approving the audited financial statements of the defined benefit pension plan funds.
The assets of the defined benefit pension plans are invested and managed following all applicable regulations and investment policies and procedures,
and reflect the characteristics and asset mix of each defined benefit pension plan. Investment and market return risk is managed by:
Contracting professional investment managers to execute the investment strategy following the investment policies and procedures and
regulatory requirements;
Specifying the kinds of investments that can be held in plans and monitoring compliance;
Using asset allocation and diversification strategies; and
Purchasing annuities from time to time.
The pension plans are exposed to market risks such as changes in interest rates, inflation and fluctuations in investment values. The plans are also
exposed to non-financial risks in the nature of membership mortality, demographic changes and regulatory change.
Information about the Company’s defined benefit plans as at December 31, in aggregate, is as follows:
Accrued benefit obligation:
$
Balance, beginning of the year
Benefits paid by the plan
Current service costs
Interest costs
Actuarial gains/(losses) - experience
Actuarial gains/(losses) -
demographic assumptions
Actuarial gains/(losses) - financial
assumptions
Transfers
Settlements
Foreign exchange translation adjustment
$
Balance, end of year
Other post-
retirement
benefits
(48,744) $
1,772
(122)
(1,869)
299
Pensions
(63,053) $
3,132
(1,801)
(2,415)
182
December 31,
2016
(111,797) $
4,904
(1,923)
(4,284)
481
Other post-
retirement
benefits
(49,367) $
1,886
(168)
(1,960)
(118)
Pensions
(58,560) $
1,903
(1,926)
(2,276)
289
December 31,
2015
(107,927)
3,789
(2,094)
(4,236)
171
413
544
957
460
542
1,002
(848)
-
276
712
(48,111) $
(2,393)
-
-
1,253
(64,551) $
(3,241)
-
276
1,965
(112,662) $
4,500
-
253
(4,230)
(48,744) $
1,600
(2)
581
(5,204)
(63,053) $
6,100
(2)
834
(9,434)
(111,797)
Page 22 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Plan Assets:
Fair value, beginning of the year
Contributions paid into the plans
Benefits paid by the plans
Transfers
Interest income
Administrative costs
Remeasurements, return on plan
assets recognized in other
comprehensive income
Foreign exchange translation
adjustment
Fair value, end of year
$
Accrued benefit liability,
end of year
$
Other post-
retirement
benefits
- $
1,772
(1,772)
-
-
-
Pensions
44,245 $
344
(3,132)
-
1,746
(89)
December 31,
2016
44,245 $
2,116
(4,904)
-
1,746
(89)
Other post-
retirement
benefits
- $
1,886
(1,886)
-
-
-
-
-
- $
3,318
3,318
(633)
(633)
-
-
45,799 $
45,799 $
- $
44,245 $
Pensions
45,370 $
2,321
(1,903)
2
1,869
(56)
December 31,
2015
45,370
4,207
(3,789)
2
1,869
(56)
(6,776)
(6,776)
3,418
3,418
44,245
(48,111)
(18,752)
(66,863)
(48,744)
(18,808)
(67,552)
Pension benefit expense recognized in net income:
Current service costs
Net interest cost
Administrative costs
Curtailment/Settlements*
Net benefit plan expense
Other post-
retirement
benefits
122 $
1,869
-
(276)
1,715 $
$
$
Year ended
December 31,
Pensions
1,801 $
669
89
-
2,559 $
2016
1,923 $
2,538
89
(276)
4,274 $
Other post-
retirement
benefits
168 $
1,960
-
(253)
1,875 $
Year ended
December 31,
2015
2,094
2,367
56
(253)
4,264
Pensions
1,926 $
407
56
-
2,389 $
*As described in note 5, certain assets and liabilities of the Company’s operating facility in Soest, Germany were sold in the third quarter of 2015. As part
of that sale, the pension liability associated with the Soest facility was also transferred to the buyer resulting in a settlement gain of $581 which has been
recorded as part of the loss on sale of assets and liabilities held for sale.
Amounts recognized in other comprehensive income (loss) (before income taxes):
Actuarial gains (losses)
Year ended
December 31,
2016
1,515 $
Year ended
December 31,
2015
497
$
Plan assets are primarily composed of pooled funds that invest in fixed income and equities, common stocks and bonds that are actively traded. Plan
assets are composed of:
December 31,
2016
86.3%
13.7%
100.0%
December 31,
2015
85.7%
14.3%
100.0%
Description
Equity
Debt securities
Page 23 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The defined benefit obligation and plan assets are composed by country as follows:
Year ended December 31, 2016
Present value of funded obligations
Fair value of plan assets
Funding status of funded obligations
Present value of unfunded obligations
Total funded status of obligations
Canada
$
(27,083) $
24,842
(2,241)
(27,008)
(29,249) $
$
USA
(28,717) $
20,957
(7,760)
(22,933)
(30,693) $
Germany
- $
-
-
(6,921)
(6,921) $
Total Canada
Year ended December 31, 2015
Germany
- $
-
-
(5,497)
(5,497) $
USA
(29,138) $
21,160
(7,978)
(23,775)
(31,753) $
(26,520) $
23,085
(3,435)
(26,867)
(30,302) $
Total
(55,658)
44,245
(11,413)
(56,139)
(67,552)
(55,800) $
45,799
(10,001)
(56,862)
(66,863) $
There are significant assumptions made in the calculations provided by the actuaries and it is the responsibility of the Company to determine which
assumptions could result in a significant impact when determining the accrued benefit obligations and pension expense.
Principal actuarial assumptions, expressed as weighted averages, are summarized below:
Weighted average actuarial assumptions
Defined benefit pension plans
Discount rate used to calculate year end benefit obligation
Mortality table
Other post-employment benefit plans
Discount rate to calculate year end benefit obligation
Mortality table
Health care trend rates
Initial healthcare rate
Ultimate healthcare rate
Sensitivity of Key Assumptions
December 31, 2016
December 31, 2015
CPM - RPP 2014 Priv
3.7%
3.9%
CPM - RPP 2014 Priv
3.9%
CPM - RPP 2014 Priv
& Blue collar w/MP
4.0%
CPM - RPP 2014 Priv
& Blue collar w/MP
6.5%
4.8%
7.0%
4.8%
In the sensitivity analysis shown below, the Company determines the defined benefit obligation using the same method used to calculate the defined
benefit obligations recognized in the consolidated balance sheets. Sensitivity is calculated by changing one assumption while holding the others
constant. The actual change in defined benefit obligation will likely be different from that shown in the table, since it is likely that more than one
assumption will change at a time, and that some assumptions are correlated.
Pension Plans
Discount rate
Life Expectancy
Other post-retirement benefits
Discount rate
Medical costs
Impact on defined benefit obligation
Impact on defined benefit obligation
December 31, 2016
December 31, 2015
Change in
assumption
0.50%
1 Year
Increase in
assumption
Decrease by 7.7%
Increase by 3.10%
Decrease in
assumption
Increase by 8.6%
Decrease by 3.25%
Increase in
assumption
Decrease by 7.6%
Increase by 3.01%
Decrease in
assumption
Increase by 8.6%
Decrease by 3.02%
0.50%
1 Year
Decrease by 6.3%
Increase by 12.0%
Increase by 7.1%
Decrease by 9.9%
Decrease by 6.4%
Increase by 11.7%
Increase by 7.2%
Decrease by 9.7%
Page 24 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
13.
INCOME TAXES
The components of income tax expense are as follows:
Current income tax expense
Deferred income tax recovery
Total income tax expense
$
$
Taxes on items recognized in other comprehensive income or directly in equity in 2016 and 2015 were as follows:
Year ended
December 31, 2016
Year ended
December 31, 2015
43,246
(8,999)
34,247
42,572 $
(1,194)
41,378 $
Deferred tax charge on:
Employee benefit plan actuarial gains and losses
Cumulative Translation Adjustments
Reconciliation of effective tax rate
Year ended
December 31, 2016
Year ended
December 31, 2015
$
$
(392) $
(2,080)
(2,472) $
(868)
(1,456)
(2,324)
The provision for income taxes differs from the result that would be obtained by applying statutory income tax rates to income before income taxes. This
difference results from the following:
Income before income taxes
Tax at Statutory income tax rate of 26.5% (2015 - 26.5%)
Increase (decrease) in income taxes resulting from:
Manufacturing and processing profits deduction
Tax audit settlements and changes in estimates related to prior years
Revaluations due to foreign exchange and inflation
Rate differences and deductions allowed in foreign jurisdictions
Current year tax losses and withholding taxes for which no deferred tax asset is recognized
Recognition of previously unrecognized deferred tax assets
Stock-based compensation and other non-deductible expenses
$
Effective income tax rate applicable to earnings before income taxes
The movements of deferred tax assets are summarized below:
Year ended
December 31, 2016
$
133,339 $
Year ended
December 31, 2015
141,420
35,335
(910)
(2,455)
2,971
(2,430)
8,008
(1,099)
1,958
41,378 $
31.0%
37,476
(1,346)
5,748
6,292
(1,820)
6,116
(19,319)
1,100
34,247
24.2%
December 31, 2014
Benefit (charge) to income
Benefit (charge) to other comprehensive
income
Translation and other
December 31, 2015
Benefit (charge) to income
Benefit (charge) to other comprehensive
income
Translation and other
$
Losses
93,826 $
13,753
Employee
benefits
Interest and
accruals
18,679 $
551
12,429 $
(238)
-
18,056
125,635
(8,374)
-
(3,865)
(868)
2,313
20,675
198
(392)
(420)
-
1,392
13,583
11,739
-
(190)
PPE and
intangible
assets
22,261 $
(6,792)
-
1,598
17,067
(2,039)
-
(912)
Other
6,172 $
(3,807)
1,684
1,223
5,272
1,594
171
(40)
Total
153,367
3,467
816
24,582
182,232
3,118
(221)
(5,427)
December 31, 2016
$
113,396 $
20,061 $
25,132 $
14,116 $
6,997 $
179,702
Page 25 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The movements of deferred tax liabilities are summarized below:
December 31, 2014
Benefit to income
Charge to other comprehensive income
Translation and other
December 31, 2015
Benefit (charge) to income
Charge to other comprehensive income
Translation and other
December 31, 2016
Net deferred asset at December 31, 2015
Net deferred asset at December 31, 2016
PPE and
intangible
assets
(98,414) $
4,070
-
(14,456)
(108,800)
(2,477)
-
499
(110,778) $
$
$
Other
(3,230) $
1,462
(3,140)
(863)
(5,771)
553
(2,251)
13
(7,456) $
Total
(101,644)
5,532
(3,140)
(15,319)
(114,571)
(1,924)
(2,251)
512
(118,234)
$
$
67,661
61,468
The Company has accumulated approximately $580,792 (2015 - $603,669) in non-capital losses that are available to reduce taxable income in future
years. If unused these losses will expire as follows:
Year
2017-2019
2020-2024
2025-2036
Indefinite
$
$
4,043
14,687
515,112
46,950
580,792
Deferred tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is
probable. The ability to realize the tax benefits of these losses is dependent upon a number of factors, including the future profitability of operations in
the jurisdictions in which the tax losses arose.
A deferred tax asset of $72,746 in the United States (2015 - $65,017) has been recorded in excess of the reversing taxable temporary differences.
Income projections support the conclusion that the deferred tax asset is probable of being realized and consequently, it has been recognized.
At December 31, 2016, deferred tax assets have not been recognized in respect of the following items:
Tax losses in foreign jurisdictions
Deductible temporary differences in foreign jurisdictions
Other capital items
$
$
2016
98,202 $
1,575
188
99,965 $
2015
93,184
1,374
188
94,746
Deferred tax is not recognized on the unremitted earnings of foreign subsidiaries to the extent that the Company is able to control the timing of the
reversal of the temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future. The temporary
difference in respect of the amount of undistributed earnings and other differences including the outside basis difference of foreign subsidiaries is
approximately $441,009 at December 31, 2016 (December 31, 2015 - $393,311).
Future changes in tax law could significantly impact the Company’s provision for income taxes, taxes payable, and deferred tax asset and liability
balances. Recent proposals to lower the U.S. corporate income tax rate could result in a reduction in net deferred tax assets upon enactment of new tax
legislation, with a corresponding, one-time, non-cash increase in income tax expense. As a result of the possible lower corporate tax rate, income tax
expense and cash payments would be lower in subsequent years. Due to the uncertainty of potential new laws and rates that may be enacted in the
U.S., the Company is unable to provide an estimate of impact at this time.
Page 26 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
14.
CAPITAL STOCK
Common shares outstanding:
Balance, December 31, 2014
Exercise of stock options
Balance, December 31, 2015
Exercise of stock options
Balance, December 31, 2016
Number
Amount
84,925,083 $
1,449,584
86,374,667 $
110,000
86,484,667 $
694,198
15,198
709,396
1,114
710,510
The Company is authorized to issue an unlimited number of common shares. The Company’s shares have no par value.
Stock options
The Company has one stock option plan for key employees. Under the plan the Company may grant options to its key employees for up to 9,000,000
shares of common stock with option room available calculated in accordance with the terms of the stock option plan. Under the plan, the exercise price
of each option equals the market price of the Company's stock on the date of grant or such other date as determined in accordance with the stock option
plan and policies of the Company and the options have a maximum term of 10 years. Options are granted throughout the year and vest between zero
and four years.
The following is a summary of the activity of the outstanding share purchase options:
Balance, beginning of period
Granted during the period
Exercised during the period
Cancelled during the period
Balance, end of period
Options exercisable, end of period
Year ended
December 31, 2016
Number of
options
4,340,617 $
-
(110,000)
(1,220,000)
3,010,617 $
2,885,617 $
Weighted
average
exercise price
12.38
-
7.21
15.31
11.38
11.36
Year ended
December 31, 2015
Weighted
average
exercise price
11.13
13.87
7.67
10.40
12.38
12.41
Number of
options
5,645,202 $
150,000
(1,449,584)
(5,001)
4,340,617 $
4,090,617 $
The following is a summary of the issued and outstanding common share purchase options as at December 31, 2016:
Range of exercise price per share
$6.00 - 8.99
$9.00 - 9.99
$10.00 - 15.99
$16.00 - 17.75
Total share purchase options
Number
outstanding
999,868
50,000
1,220,749
740,000
3,010,617
Date of grant
2008 - 2012
2008
2007 - 2015
2007
Expiry
2018 - 2022
2018
2017 - 2025
2017
The table below summarizes the assumptions on a weighted average basis used in determining stock-based compensation expense under the Black-
Scholes option pricing model. The Black-Scholes option valuation model used by the Company to determine fair values was developed for use in
estimating the fair value of freely traded options, which are fully transferable and have no vesting restrictions. The Company’s stock options are not
transferable, cannot be traded, are subject to vesting restrictions and exercise restrictions under the Company’s black-out policy which would tend to
reduce the fair value of the Company’s stock options. Changes to subjective input assumptions used in the model can cause a significant variation in the
estimate of the fair value of the options.
Page 27 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Expected volatility
Risk free interest rate
Expected life (years)
Dividend yield
Weighted average fair value of options granted
Year ended
December 31, 2016
-
-
-
-
- $
Year ended
December 31, 2015
36.87%
0.87%
4
0.87%
3.80
$
For the year ended December 31, 2016, the Company expensed $333 (2015 - $1,384) to reflect stock-based compensation expense, as derived using
the Black-Scholes option valuation model.
Deferred Share Unit Plan
The details of the Company's DSUs described in Note 2 (q) are as follows:
Year ended
December 31, 2016
Year ended
December 31, 2015
Units outstanding, beginning of period
Units granted during the period
Units for dividends paid during the period
Units outstanding, end of period
-
67,623
214
67,837
Weighted average fair value per unit on date of grant
$
8.38 $
-
-
-
-
-
The 67,837 DSUs granted during the period were granted to non-executive directors and are not subject to vesting conditions. At December 31, 2016,
the intrinsic value of the DSUs amounted to $568. DSU compensation expense of $568 was recognized for the year ended December 31, 2016.
15.
EARNINGS PER SHARE
Details of the calculations of earnings per share are set out below:
Basic
Effect of dilutive securities:
Stock options
Diluted
Year ended
December 31, 2016
Year ended
December 31, 2015
Weighted
average
number of
shares
86,389,379 $
Per common
share amount
1.07
Weighted
average
number of
shares
85,863,135 $
Per common
share amount
1.25
137,904
86,527,283 $
-
1.07
506,194
86,369,329 $
(0.01)
1.24
The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices
for the period during which the options were outstanding.
During 2016, 2,010,749 options (2015 - 2,557,000) were excluded from the diluted weighted average per share calculation as they were anti-dilutive.
16.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, gross
Capitalized development costs
Amortization of capitalized development costs
Net expense
Page 28 ▌Martinrea International Inc.
Note
$
$
Year ended
December 31, 2016
23,825 $
(12,624)
13,652
24,853 $
Year ended
December 31, 2015
24,854
(15,193)
12,104
21,765
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
17.
PERSONNEL EXPENSES
The statements of operations present operating expenses by function. Operating expenses include the following personnel-related expenses:
Wages and salaries and other short-term employee benefits
Expenses related to pension and post-retirement benefits
Share based payments
18.
FINANCE EXPENSE AND OTHER FINANCE INCOME
Note
$
12
14
$
Year ended
December 31, 2016
878,242 $
4,274
333
882,849 $
Year ended
December 31, 2015
842,775
4,264
1,384
848,423
Debt interest, gross
Capitalized interest – at an average rate of 2.7% (2015 - 3.1 %)
Finance expense
$
$
Year ended
December 31, 2016
Year ended
December 31, 2015
28,418
(3,152)
25,266
27,404 $
(3,208)
24,196 $
Net foreign exchange loss (gain)
Other income, net
Other finance expense (income)
19.
OPERATING SEGMENTS
$
$
Year ended
December 31, 2016
Year ended
December 31, 2015
(4,846)
(79)
(4,925)
2,228 $
(319)
1,909 $
The Company designs, engineers, manufactures, and sells quality metal parts, assemblies, and fluid management systems primarily serving the global
automotive industry. It conducts its operations through divisions, which function as autonomous business units, following a corporate policy of functional
and operational decentralization. The Company’s products include a wide array of products, assemblies and systems for small and large cars,
crossovers, pickups and sport utility vehicles.
The Company defines its operating segments as components of its business where separate financial information is available and routinely evaluated by
management. The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer. Given the differences between the regions in
which the Company operates, Martinrea’s operations are segmented on a geographic basis between North America, Europe and Rest of the World.
The accounting policies of the segments are the same as those described in the significant accounting policies in note 2 of the consolidated financial
statements. The Company uses segment operating income as the basis for the CODM to evaluate the performance of each of the Company’s reportable
segments.
Page 29 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The following is a summary of selected data for each of the Company’s segments:
North America
Canada
USA
Mexico
Europe
Germany
Spain
Slovakia
Rest of the World
Year ended December 31, 2016
Sales
Property, plant
and equipment
Operating
Income
Year ended December 31, 2015
Sales
Property, plant
and equipment
Operating
Income
$
$
816,285 $
1,534,526
861,317
3,212,128 $
176,901
408,430
418,353
$
1,003,684 $
128,783 $
410,565
167,575
55,150
633,290
122,989
93,061
78,443
13,066
184,570
68,993
35,003
(4,342)
827,321 $
1,500,913
766,229
3,094,463 $
500,021
133,963
50,231
684,215
88,093
159,027
473,643
339,124
971,794 $
77,616
70,058
15,612
163,286
67,082
$
3,968,407 $
1,257,247 $
159,444 $
3,866,771 $
1,202,162 $
153,201
18,048
(9,488)
161,761
Inter-segment sales are not significant for any period presented.
20.
FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, trade and other payables, long-term debt, and
foreign exchange forward contracts.
Fair Value
IFRS 13 “Fair Value Measurement” provides guidance about fair value measurements. Fair value is defined as the exchange price that would be
received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair value are required to maximize the use of observable
inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs. The first two levels are considered
observable and the last unobservable. These levels are used to measure fair values as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities, either directly or indirectly.
Level 2 – Inputs, other than Level 1 inputs that are observable for assets and liabilities, either directly or indirectly. Level 2 inputs include
quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
The following table summarizes the fair value hierarchy under which the Company’s applicable financial instruments are valued:
Cash and cash equivalents
Foreign exchange forward contracts (note 8)
Cash and cash equivalents
Foreign exchange forward contracts (note 8)
$
$
$
$
Total
59,165 $
(208) $
Total
28,899 $
(134) $
Page 30 ▌Martinrea International Inc.
December 31, 2016
Level 1
59,165 $
- $
Level 2
- $
(208) $
December 31, 2015
Level 1
28,899 $
- $
Level 2
- $
(134) $
Level 3
-
-
Level 3
-
-
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
December 31, 2016
FINANCIAL ASSETS:
Trade and other receivables
FINANCIAL LIABILITIES:
Trade and other payables
Long-term debt
Foreign exchange forward contracts
Net financial assets (liabilities)
December 31, 2015
FINANCIAL ASSETS:
Trade and other receivables
FINANCIAL LIABILITIES:
Trade and other payables
Long-term debt
Foreign exchange forward contracts
$
$
$
Fair value through
profit or loss
Loans and
receivables
Amortized
cost
Carrying
amount
Fair value
- $
-
568,445 $
568,445
- $
-
568,445 $
568,445
568,445
568,445
-
-
(208)
(208)
-
-
-
-
(706,799)
(721,403)
-
(1,428,202)
(706,799)
(721,403)
(208)
(1,428,410)
(706,799)
(721,403)
(208)
(1,428,410)
(208) $
568,445 $
(1,428,202) $
(859,965) $
(859,965)
Fair value through
profit or loss
Loans and
receivables
Amortized
cost
Carrying
amount
Fair value
- $
-
586,024 $
586,024
- $
-
586,024 $
586,024
586,024
586,024
-
-
(134)
(134)
-
-
-
-
(742,962)
(717,012)
-
(1,459,974)
(742,962)
(717,012)
(134)
(1,460,108)
(742,962)
(717,012)
(134)
(1,460,108)
Net financial assets (liabilities)
$
(134) $
586,024 $
(1,459,974) $
(874,084) $
(874,084)
The fair value of trade and other receivables and trade and other payables approximates their carrying amounts due to the short-term maturities of these
instruments. The estimated fair value of long-term debt approximates its carrying value since debt is subject to terms and conditions similar to those
available to the Company for instruments with comparable terms, and the interest rates are market-based.
Risk Management
The main risks arising from the Company’s financial instruments are credit risk, liquidity risk, interest rate risk and currency risk. These risks arise from
exposures that occur in the normal course of business and are managed on a consolidated Company basis.
(a) Credit risk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counterparties to meet their payment obligations. Financial
instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, trade and other receivables, and foreign
exchange forward contracts.
Credit risk associated with cash and short-term deposits is minimized by ensuring these financial assets are placed with financial institutions with
high credit ratings.
The credit risk associated with foreign exchange forward contracts arises from the possibility that the counterparty to one of these contracts fails to
perform according to the terms of the contract. Credit risk associated with foreign exchange forward contracts is minimized by entering into such
transactions with major Canadian and U.S. financial institutions.
In the normal course of business, the Company is exposed to credit risk from its customers. The Company has three customers whose sales were
31.5%, 28.6%, and 15.0% of its production sales for the twelve months ending December 31, 2016. A substantial portion of the Company’s
accounts receivables are with large customers in the automotive, truck and industrial sectors and are subject to normal industry credit risks. The
level of accounts receivable that was past due as at December 31, 2016 are part of normal payment patterns within the industry and the allowance
for doubtful accounts is less than 0.50% of total trade receivables for all periods and movements in the current year are minimal.
Page 31 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The aging of trade receivables at the reporting date was as follows:
0-60 days
61-90 days
Greater than 90 days
(b) Liquidity risk
December 31, 2016
526,483 $
16,540
12,051
555,074 $
December 31, 2015
515,741
22,729
29,234
567,704
$
$
Liquidity risk is the risk that the Company will not be able to meet its financial obligations when they become due. The Company manages liquidity
risk by monitoring sales volumes and collection efforts to ensure sufficient cash flows are generated from operations to meet its liabilities when they
become due. Management monitors consolidated cash flows on a weekly basis covering a rolling 12 week period, quarterly through forecasting and
annually through the Company’s budget process. At December 31, 2016, the Company had cash of $59,165 and banking facilities available as
discussed in note 11. All the Company’s financial liabilities other than long-term debt have maturities of approximately 60 days.
A summary of contractual maturities of long-term debt is provided in note 11.
(c)
Interest rate risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes
in the market interest rates. The Company is exposed to interest rate risk as a significant portion of the Company’s long-term debt bears interest at
rates linked to the US prime, Canadian prime, one month LIBOR or the Banker’s Acceptance rates. The interest on the bank facility fluctuates
depending on the achievement of certain financial debt ratios, and may cause the interest rate to increase by a maximum of 1.0%.
The interest rate profile of the Company’s long-term debt was as follows:
Variable rate instruments
Fixed rate instruments
Sensitivity analysis
Carrying amount
December 31, 2016
631,879 $
89,524
721,403 $
December 31, 2015
574,818
142,194
717,012
$
$
An increase or decrease of 1.0% in all variable interest rate debt would, all else being equal, have an effect of $6,246 (December 31, 2015 - $5,780) on
the Company’s consolidated financial results for the year ended December 31, 2016.
(d) Currency risk
Currency risk refers to the risk that the value of the financial instruments or cash flows associated with the instruments will fluctuate due to changes
in the foreign exchange rates. The Company undertakes sales and purchase transactions in foreign currencies, and therefore is subject to gains
and losses due to fluctuations in foreign currency exchange rates. The Company’s foreign exchange risk management includes the use of foreign
currency forward contracts to fix the exchange rates on certain foreign currency exposures.
At December 31, 2016, the Company had committed to the following foreign exchange contracts:
Buy Mexican Peso
Currency
Buy Euro
Currency
Page 32 ▌Martinrea International Inc.
Amount of U.S.
dollars
Weighted average
exchange rate of U.S.
dollars
Maximum period in
months
22,809
20.6059
4
Amount of CAD
dollars
Weighted average
exchange rate of CAD
dollars
Maximum period in
months
1,050
1.4002
1
$
$
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The aggregate value of these forward contracts as at December 31, 2016 was a pre-tax loss of $208 and was recorded in trade and other payables
(December 31, 2015 – loss of $134 and was recorded in trade and other payables)
The Company’s exposure to foreign currency risk reported in the foreign currency was as follows:
December 31, 2016
Trade and other receivables
Trade and other payables
Long-term debt
December 31, 2015
Trade and other receivables
Trade and other payables
Long-term debt
USD
289,124 €
(353,541)
(295,971)
(360,388) €
USD
298,727 €
(341,419)
(275,714)
(318,406) €
$
$
$
$
EURO
59,222 $
(73,297)
(38,813)
(52,888) $
EURO
60,643 $
(83,303)
(43,381)
(66,041) $
PESO
27,941 R$
(116,038)
-
(88,097) R$
PESO
29,467 R$
(168,509)
-
(139,042) R$
BRL
15,359 ¥
(17,432)
(495)
(2,568) ¥
CNY
156,848
(79,703)
-
77,145
BRL
10,964 ¥
(17,890)
(633)
(7,559) ¥
CNY
133,003
(90,216)
-
42,787
The following summary illustrates the fluctuations in the exchange rates applied during the year ended December 31, 2016 and 2015:
Average rate
Closing rate
Year ended December
31, 2016
1.3286
1.4727
0.0722
0.3780
0.2012
Year ended December
31, 2015
1.2607
1.4130
0.0806
0.3956
0.2013
Year ended December
31, 2016
1.3427
1.4169
0.0651
0.4125
0.1930
Year ended December
31, 2015
1.3840
1.5029
0.0805
0.3494
0.2131
USD
EURO
PESO
BRL
CNY
Sensitivity analysis
The Company does not have significant foreign currency exposure based on each subsidiary’s functional currency. However a 10% strengthening of the
Canadian dollar against the following currencies at December 31, would give rise to a translation risk on net income and would have increased
(decreased) equity, profit or loss and comprehensive income for the year ended December 31, 2016 by the amounts shown below, assuming all other
variables remain constant:
USD
EURO
BRL
CNY
Year ended
December 31, 2016
$
$
(1,226) $
(4,114)
671
(57)
(4,726) $
Year ended
December 31, 2015
(3,045)
(2,417)
565
604
(4,293)
A weakening of the Canadian dollar against the above currencies at December 31 would have had the equal but opposite effect on the above currencies
to the amounts shown above, on the basis that all other variables remain constant.
(e) Capital risk management
The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth combined with
complementary acquisitions and to provide returns to its shareholders. The Company defines capital that it manages as the aggregate of its
equity, which is comprised of issued capital, contributed surplus, accumulated other comprehensive income and accumulated deficit, and debt.
The Company manages its capital structure and makes adjustments in light of general economic conditions, the risk characteristics of the
underlying assets and the Company's working capital requirements. In order to maintain or adjust its capital structure, the Company, upon approval
from its Board of Directors, may issue or repay long-term debt, issue shares, repurchase shares, or undertake other activities as deemed
appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions out of the ordinary course of
business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.
Page 33 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
In addition to debt and equity the Company may use operating leases as additional sources of financing. The Company monitors debt leverage
ratios as part of the management of liquidity and shareholders’ return and to sustain future development of the business. The Company is not
subject to externally imposed capital requirements and its overall strategy with respect to capital risk management remains unchanged from the
prior year.
21.
COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain manufacturing facilities, office equipment and vehicles under operating leases and enters into purchase obligations in the
normal course of business related to inventory, services, tooling and property, plant and equipment. The aggregate expected payments towards those
obligations are as follows:
Future minimum lease payments under operating leases
Capital and other purchase commitments (all due in less than one year)
Future minimum lease payments under operating leases are due as follows:
Less than one year
Between one and five years
More than five years
Contingencies
December 31,
2016
195,272 $
403,434
598,706 $
December 31,
2015
140,732
481,448
622,180
December 31,
2016
27,486 $
84,276
83,510
195,272 $
December 31,
2015
24,314
66,004
50,414
140,732
$
$
$
$
The Company has contingent liabilities relating to legal and tax proceedings arising in the normal course of its business. Known claims and litigation
involving the Company or its subsidiaries were reviewed at the end of the reporting period. Based on the advice of legal counsel, all necessary
provisions have been made to cover the related risks. Although the outcome of the proceedings in progress cannot be predicted, the Company does not
believe they will have a material impact on the Company’s consolidated financial position. However, new proceedings may be initiated against the
Company as a result of facts or circumstances unknown at the date of this report or for which the risk cannot yet be determined or quantified. Such
proceedings could have a significant adverse impact on the Company’s financial results.
Tax contingency
The Company’s subsidiary in Brazil, Martinrea Honsel Brazil Fundicao e comercio de Pecas em Alumino Ltda., is currently being assessed by the State
of Sao Paulo’s tax authorities for certain historical value added tax (“VAT”) credits claimed on aluminum purchases from certain local suppliers that
occurred prior to the acquisition of the Brazil subsidiary in 2011. The taxation system and regulatory environment in Brazil is characterized by numerous
indirect taxes and frequently changing legislation subject to various interpretations by the various Brazilian regulatory authorities who are empowered to
impose significant fines, penalties and interest charges. The basis for the assessments stems from the classification of aluminum purchases, the
registration status of the aluminum suppliers in question and the differing treatments between manufactured and unmanufactured aluminum for VAT
purposes. The potential exposure under these assessments, based on the notices issued by the tax authorities, is approximately $82,453 (BRL
$199,886) including interest and penalties to December 31, 2016 (December 31, 2015 - $62,157 or BRL $177,898). The Company has sought external
legal advice and believes that it has complied, in all material respects, with the relevant legislation and will vigorously defend against the assessments.
The Company may be required to present guarantees totaling $57,829 at some point through a pledge of assets, bank letter of credits or cash deposit.
No provision has been recorded by the Company in connection with this contingency as at this stage the Company has concluded that it is not probable
that a liability will result from the matter.
Page 34 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
22.
GUARANTEES
The Company is a guarantor under a tooling financing program. The tooling financing program involves a third party that provides tooling suppliers with
financing subject to a Company guarantee. Payments from the third party to the tooling supplier are approved by the Company prior to the funds being
advanced. The amounts loaned to the tooling suppliers through this financing arrangement do not appear on the Company’s consolidated balance sheet.
At December 31, 2016, the amount of the program financing was $65,468 (December 31, 2015 - $85,514) representing the maximum amount of
undiscounted future payments the Company could be required to make under the guarantee.
The Company would be required to perform under the guarantee in cases where a tooling supplier could not meet its obligations to the third party. Since
the amount advanced to the tooling supplier is required to be repaid generally when the Company receives reimbursement from the final customer, and
at this point the Company will in turn repay the tooling supplier, the Company views the likelihood of the tooling supplier default as remote. No such
defaults occurred during 2016 or 2015. Moreover, if such an instance were to occur, the Company would obtain the tooling inventory as collateral. The
term of the guarantee will vary from program to program, but typically ranges from six to eighteen months.
23.
TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL
Key management personnel include the Directors and the most Senior Corporate Officers of the Company that are primarily responsible for planning,
directing and controlling the Company’s business activities.
The compensation expense associated with key management for employee services was included in employee salaries and benefits as follows:
Salaries, pension and other short-term employee benefits
DSU compensation expense
Stock-based compensation expense
24.
LIST OF CONSOLIDATED ENTITIES
The following is a summary of significant direct subsidiaries of the Company:
Martinrea Metallic Canada Inc.
Martinrea Automotive Systems Canada Ltd.
Martinrea Automotive Inc.
Royal Automotive Group Ltd.
Martinrea Metal Holdings (USA), Inc.
Martinrea Pilot Acquisition Inc.
Martinrea Slovakia Fluid Systems S.R.O.
Martinrea Pilot Acquisition II LLC
Martinrea Internacional de Mexico, S.A. de C.V.
Martinrea China Holdings Inc.
Martinrea Honsel Holdings B.V.
Year ended
December 31, 2016
11,660 $
568
333
12,561 $
Year ended
December 31, 2015
9,556
-
1,323
10,879
$
$
incorporation
Canada
Canada
Canada
Canada
United States of America
Canada
Slovakia
United States of America
Mexico
Canada
Netherlands
Country of Ownership
interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Page 35 ▌Martinrea International Inc.
CORPORATE INFORMATION
Corporate Head Office
Martinrea International Inc.
3210 Langstaff Road
Vaughan, Ontario L4K 5B2
E: investor@martinrea.com
W: www.martinrea.com
Board of Directors
Rob Wildeboer, Executive Chairman
Martinrea International Inc.
Scott Balfour (1), (2), (3)
Chief Operating Officer
Emera Inc.
Pat D’Eramo
President and Chief Executive Officer, Martinrea
International Inc.
Roman Doroniuk (1), (2), (3)
Independent Consultant, Financial and Strategic
Advisory Services
Terry Lyons (1), (2), (3)
Corporate Director and Lead Director, Canaccord
Genuity Group Inc.
Frank Macher (1), (2), (3)
Chief Executive Officer, Continental Structural
Plastics
Fred Olson (1), (2), (3), (4)
Retired, President and CEO, Webasto Product North
America
Sandra Pupatello (1), (2), (3)
Strategic Advisor: Industry, Global Markets and Public
Sector, PricewaterhouseCoopers Canada
(1)
(2)
(3)
(4)
Member, Human Resources and Compensation Committee
Member, Audit Committee
Member, Corporate Governance and Nominating Committee
Lead Director
Corporate Executive Officers
Pat D’Eramo, President and Chief Executive Officer
Rob Wildeboer, Executive Chairman
Fred Di Tosto, Chief Financial Officer
Armando Pagliari, Executive VP, Human Resources
Certificate Transfer and Address Change
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
T: 1 800 564-6523/1 514 982-7555
F: 1 866 249-7775
E: service@computershare.com
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
T: 1 800 564-6523/1 514 982-7555
F: 1 866 249-7775
E: service@computershare.com
Shareholder Inquiries/Investor Relations
All inquiries should be directed to:
Fred Di Tosto
Martinrea International Inc.
3210 Langstaff Road
Vaughan, Ontario L4K 5B2
T: 416 749-0314
F: 289 982-3001
Auditors
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, Ontario M5H 2S5
T: 416 777-8500
F: 416 777-8818
Stock Listing
The Toronto Stock Exchange (TSX: MRE)
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Website: www.martinrea.com
Investor Information: investor@martinrea.com