MMAARRTTIINNRREEAA IINNTTEERRNNAATTIIOONNAALL IINNCC..
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2017
MESSAGE TO SHAREHOLDERS
2017 was an outstanding year for Martinrea and our people. It was a year in which we continued to drive
our culture throughout the organization, as we focused on our vision, delivered on our mission and applied
our Ten Guiding Principles. We continued to instill our lean thinking way into our operations, and our
entrepreneurial can do attitude was evident in our locations. And, side by side with driving our culture, we
saw a record year in financial performance, as earnings, earnings per share, and cash flow all improved to
all time highs. Just as importantly, the promises we made at the end of 2014, that we would see a 50%
improvement in operating margin by the end of 2017, and that we would see a significantly strengthened
balance sheet with a net debt:adjusted ebitda ratio of 1.5:1 by the end of 2017, were met. We made
commitments to you, and we met them, on time and as promised.
Let’s outline key operational and financial highlights of 2017, as discussed in detail in this annual report:
Revenues of $3.69 billion, down somewhat from 2016, as we saw a change in certain customer
contracts, moving to a value added model from a pass through model
We achieved record earnings performance, with adjusted net earnings of approximately $166
million, up 27.2% from 2016, or fully diluted adjusted net earnings per share of $1.91, the best
performance in our history, and our eighth consecutive year of increased adjusted earnings
Our adjusted operating income margin increased to 6.4% for the year, up from 5% last year,
4.6% in 2015 and 4.1% in 2014, as we more than met our publicly announced target of 6% by
the end of 2017
We achieved record adjusted EBITDA performance in 2017 of approximately $401 million, up
from approximately $350 million in 2016, representing a 14.6% increase
Our net debt:adjusted EBITDA ratio ended the year at 1.45:1, compared to 1.89:1 at the end of
2016, 2.17:1 at the end of 2015 and 2.37:1 at the end of 2014, as we met 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 Nissan, Ford, GM, JLR and FCA. We also have received supplier
diversity awards as we work with a culturally diverse supply base
We launched many new programs in 2017, successfully
Company wide safety performance continued to improve; already we were better than industry
averages, but we will not settle for average. We strive towards our goal of being the industry
leader in safety.
These financial metrics were achieved in an industry where volumes were flattish across our markets, on
average. Overall, we continue to remain bullish about the state of our industry and our position in it. The
automotive industry is a wonderful place to be, at the leading edge of many technologies, ranging from
electrification initiatives to driverless and many others. Our core product offerings remain essential to our
markets, as every vehicle, regardless of how it is propelled or who is at the wheel, requires safe and strong
structures, as well as a power plant, that are lightweight. We are at the forefront of the trend to
lightweighting of vehicles, in order to improve fuel economy or reduce carbon footprint. Electric vehicles
give us great opportunities in a variety of new products, such as battery housings and electric motors. Our
fluid management products will be core products on vehicles for a very long time, as we remain a leading
1
edge provider of environmentally friendly fluid systems, including thermal management, with some great
products such as capless filler systems and battery cooling systems for electric vehicles.
At Martinrea, we are spending a lot of time on culture. Because culture matters. It drives operational and
financial performance over time. We believe that the improvements in our financial metrics go hand in
hand with driving our culture as expressed in our vision, mission and Ten Guiding Principles. People don’t
come to work just to hit a margin percentage, or make a part, or fix a machine, or to get a paycheque. In
most cases at least. People need to believe in something bigger than their job. They want to make people’s
lives better, and that is more true of today’s workforce than ever before. People come to work, and perform
well, when they are treated with dignity and respect, when they can see that they are part of a team, when
they are provided with a safe work environment both physically and psychologically, and when they can
see how they help make people’s lives better. Study after study shows that commitment firms that operate
this way outperform over time. They tend to have higher profitability ratios, tend to be leaner, tend to have
fewer middle managers, tend to have engaged employees, tend to have less employee turnover, tend to have
more employee satisfaction, and tend to “own” their work.
We are seeing the results of our focus on corporate culture in our improving performance. We remember
that Martinrea was built in part through acquisitions of distressed assets, where more than operating
performance was weak; where morale and culture also needed some improvement. Our One Martinrea
culture and focus is driving results, and we believe will drive performance that our people have not yet
seen.
Looking forward to 2018 we anticipate another record year of financial performance. We anticipate
continuing margin improvement in 2018 and the years beyond. We will continue to drive quality,
entrepreneurship, lean thinking and safety. And yes we will continue to embrace our culture of making
people’s lives better, by being the best supplier of products and services we can be, fulfilling our mission
and driving a principles based company, built to last and thrive. You can count on that.
We are blessed with great stakeholders, and we thank all for their continuing support. Our strength is in
our people and we thank our employees. We thank our customers for their strong support. Our lenders and
shareholders have been very supportive and we thank you. And we continue to be privileged by having our
operations in great communities, who contribute to our success and where we work hard to improve
people’s lives.
At Martinrea, we are writing a great book, we believe, and 2017 was a really good chapter. We look forward
to the next one, which we are currently writing for you, as we continue to form our future.
(Signed) “Rob Wildeboer”
(Signed) “Pat D’Eramo”
Rob Wildeboer
Executive Chairman
Pat D’Eramo
President and Chief Executive Officer
2
MANAGEMENT DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL POSITION
For the Year ended December 31, 2017
The following management discussion and analysis (“MD&A”) was prepared as of March 1, 2018 and should be read in conjunction
with the Company’s audited consolidated financial statements for the year ended December 31, 2017 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, 2017, 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 tables set out certain highlights of the Company’s performance for the years ended December 31, 2017 and 2016. Refer
to the Company’s audited consolidated financial statements for the year ended December 31, 2017 for a detailed account of the
Company’s performance for the periods presented in the table below.
Sales
Gross Margin
Operating Income
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
Adjusted Net Earnings per Share – Diluted
$
$
$
$
$
$
Year ended
December 31, 2017
3,690,499 $
484,601
246,624
159,266
159,543 $
1.84 $
236,807 $
6.4%
401,493
10.9%
165,519
1.91 $
1.91 $
Year ended
December 31, 2016
3,968,407
432,050
159,444
91,961
$ Change % Change
(7.0%)
(277,908)
12.2%
52,551
54.7%
87,180
73.2%
67,305
92,380
1.07
67,163
0.77
72.7%
72.0%
197,707
5.0%
350,357
8.8%
130,085
1.51
1.50
39,100
19.8%
51,136
14.6%
35,434
0.40
0.41
27.2%
26.5%
27.3%
Page 1 ▌Martinrea International Inc.
The following table sets out a detailed account of the Company’s performance for the fourth quarters of 2017 and 2016 (unaudited).
Three months
ended December
31, 2017
Three months
ended December
31, 2016
Sales
Cost of sales (excluding depreciation)
Depreciation of property, plant and equipment (production)
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
Gain on sale of land and building
Loss on disposal of property, plant and equipment
Operating Income
Finance expense
Other finance income
Income before 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
878,642 $
(716,927)
(37,673)
124,042
(6,600)
(52,531)
(2,596)
(530)
(7,488)
13,374
(144)
67,527 $
(5,735)
2,681
64,473 $
(32,107)
32,366
32,366 $
0.37 $
61,641 $
7.0%
105,830
12.0%
43,179
0.50 $
$ Change % Change
(11.3%)
(15.9%)
12.9%
18.9%
(8.8%)
9.5%
15.0%
(11.2%)
-
-
(46.9%)
46.9%
(5.7%)
305.6%
59.0%
223.6%
5.7%
5.2%
2.8%
(111,765)
135,805
(4,310)
19,730
639
(4,560)
(338)
67
(7,488)
13,374
127
21,551
349
2,020
23,920
(22,184)
1,736
1,613
0.01
15,665
34.1%
19,758
23.0%
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
12,426
0.14
40.4%
38.9%
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
$
$
32,366 $
10,813
43,179 $
30,753
-
30,753
Three months ended
December 31, 2017
Three months ended
December 31, 2016
Page 2 ▌Martinrea International Inc.
Net Income Attributable to Equity Holders of the Company
Non-controlling interest
Income tax expense
Other finance income – excluding Unusual and Other Items*
Finance expense
Unusual and Other Items (before-tax)*
Adjusted Operating Income
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
Adjusted EBITDA
Three months ended
December 31, 2017
Three months ended
December 31, 2016
$
$
$
32,366 $
-
32,107
(359)
5,735
(8,208)
61,641 $
40,269
3,776
144
105,830 $
30,753
(123)
9,923
(661)
6,084
-
45,976
35,621
4,204
271
86,072
*Unusual and other items are explained in the "Adjustments to Net Income" section of this MD&A
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
Net Income Attributable to Equity Holders of the Company
Non-controlling interest
Income tax expense
Other finance expense (income) – excluding Unusual and Other Items*
Finance expense
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
Year ended
December 31, 2017
Year ended
December 31, 2016
159,543 $
5,976
165,519 $
92,380
37,705
130,085
Year ended
December 31, 2017
Year ended
December 31, 2016
159,543 $
(277)
69,970
(1,442)
22,527
(13,514)
236,807 $
149,670
15,399
(383)
401,493 $
92,380
(419)
41,378
1,909
24,196
38,263
197,707
136,344
15,959
347
350,357
$
$
$
$
$
*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. Certain
comparative information has been reclassified where relevant to conform to the current financial statement presentation adopted in
2017.
SALES
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
North America
Europe
Rest of the World
Eliminations
Total Sales
Three months ended
December 31, 2017
$
$
674,852 $
163,949
41,904
(2,063)
878,642 $
Three months ended
December 31, 2016
805,487
150,983
38,165
(4,228)
990,407
$ Change
(130,635)
12,966
3,739
2,165
(111,765)
% Change
(16.2%)
8.6%
9.8%
(51.2%)
(11.3%)
The Company’s consolidated sales for the fourth quarter of 2017 decreased by $111.8 million or 11.3% to $878.6 million as compared
to $990.4 million for the fourth quarter of 2016. The decrease in sales was driven by a decrease in the North America operating
segment, partially offset by year-over-year increases in sales in Europe and the Rest of the World.
Page 3 ▌Martinrea International Inc.
Sales for the fourth quarter of 2017 in the Company’s North America operating segment decreased by $130.6 million or 16.2% to
$674.9 million from $805.5 million for the fourth quarter of 2016. The decrease was due to a $48.8 million decrease in tooling sales,
which are typically dependent on the timing of tooling construction and final acceptance by the customer; the impact of foreign
exchange on the translation of U.S. denominated production sales, which had a negative impact on overall sales for the fourth quarter
of 2017 of approximately $31.2 million as compared to the fourth quarter of 2016; and lower year-over-year OEM production volumes
on certain light-vehicle platforms including the Ford Fusion, Chevrolet Malibu, and other platforms late in their life cycle, and programs
that ended production during or subsequent to the fourth quarter of 2016 such as the previous version of the GM Equinox/Terrain.
These negative factors were partially offset by higher year-over-year OEM production volumes on certain light-vehicle platforms such
as the Ford Escape and FCA’s Pentastar engine block program; and the launch of new programs during or subsequent to the fourth
quarter of 2016 including the GM Bolt and next generation GM Equinox/Terrain, fourth quarter production volumes of which were
impacted by an employee strike at GM’s assembly plant in Ingersoll, Ontario.
Sales for the fourth quarter of 2017 in the Company’s Europe operating segment increased by $13.0 million or 8.6% to $164.0 million
from $151.0 million for the fourth quarter of 2016. The increase can be attributed to a $6.4 million increase in tooling sales, a $2.5
million positive foreign exchange impact from the translation of Euro denominated production sales as compared to the fourth quarter of
2016, and higher overall production volumes in the Company’s Martinrea Honsel German operations including the ramp up of new
structural components work and the new V8 AMG engine block for Daimler.
Sales for the fourth quarter of 2017 in the Company’s Rest of the World operating segment increased by $3.7 million or 9.8% to $41.9
million from $38.2 million in the fourth quarter of 2016. The increase was due to a $4.0 million increase in tooling sales and higher year-
over year production sales in the Company’s operating facility in Brazil; partially offset by a $1.1 million negative foreign exchange
impact from the translation of foreign denominated production sales as compared to the fourth quarter of 2016, and lower year-over-
year OEM production volumes on the Ford Mondeo/Taurus platforms in China.
Overall tooling sales decreased by $38.4 million to $68.8 million for the fourth quarter of 2017 from $107.2 million for the fourth quarter
of 2016.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
North America
Europe
Rest of the World
Eliminations
Total Sales
Year ended
December 31, 2017
2,913,786 $
657,029
132,067
(12,383)
3,690,499 $
Year ended
December 31, 2016
3,222,660
636,082
122,989
(13,324)
3,968,407
$
$
$ Change
(308,874)
20,947
9,078
941
(277,908)
% Change
(9.6%)
3.3%
7.4%
(7.1%)
(7.0%)
The Company’s consolidated sales for the year ended December 31, 2017 decreased by $277.9 million or 7.0% to $3,690.5 million as
compared to $3,968.4 million for the year ended December 31, 2016. The total decrease in sales was driven by a decrease in the
Company’s North America operating segment, partially offset by year-over-year increases in sales in Europe and the Rest of the World.
Sales for the year ended December 31, 2017 in the Company’s North America operating segment decreased by $308.9 million or 9.6%
to $2,913.8 million from $3,222.7 million for the year ended December 31, 2016. The decrease was due to the impact of foreign
exchange on the translation of U.S. denominated production sales, which had a negative impact on overall sales for the year ended
December 31, 2017 of approximately $47.7 million as compared to the comparative period of 2016; a $44.9 million decrease in tooling
sales; and lower year-over-year OEM production volumes on certain light-vehicle platforms including the Chrysler 200, customer
production of which ended at the end of 2016, Ford Fusion, Chevrolet Malibu, and other platforms late in their product life cycle, and
programs that ended production during or subsequent to the year ended December 31, 2016 such as the previous version of the GM
Equinox/Terrain. These negative factors were partially offset by a year-over-year increase in production volumes on FCA’s Pentastar
engine block program which was down during the first quarter of 2016 for re-tooling; higher year-over-year volumes on certain light
vehicle platforms such as the Ford Escape, GM Pick-up truck/SUV platform and other GM programs previously impacted by unplanned
OEM shutdowns during the second quarter of 2016 because of an earthquake in Japan which disrupted the supply chain; and the
launch of new programs during or subsequent to the year ended December 31, 2016 including the GM Bolt and next generation GM
Equinox/Terrain, 2017 production volumes of which were impacted by an employee strike at GM’s assembly plant in Ingersoll, Ontario
that lasted four weeks.
Page 4 ▌Martinrea International Inc.
Sales for the year ended December 31, 2017 in the Company’s Europe operating segment increased by $20.9 million or 3.3% to
$657.0 million from $636.1 million for the year ended December 31, 2016. The increase can be attributed to higher production volumes
in the Company’s Martinrea Honsel German operations including the ramp up of new structural components work and the new V8 AMG
engine block for Daimler, and an $8.0 million increase in tooling sales; partially offset by the impact of foreign exchange on the
translation of Euro denominated production sales, which had a negative impact on overall sales for the year ended December 31, 2017
of approximately $6.3 million as compared to the comparative period of 2016.
Sales for the year ended December 31, 2017 in the Company’s Rest of the World operating segment increased by $9.1 million or 7.4%
to $132.1 million from $123.0 million for the year ended December 31, 2016. The increase was mainly due to a year-over-year increase
in production sales in the Company’s operating facility in Brazil and higher year-over-year production sales in China related to GM’s
CT6 vehicle platform; partially offset by a $5.1 million decrease in tooling sales and a $0.6 million negative foreign exchange impact
from the translation of foreign denominated production sales as compared to the year ended December 31, 2016.
Overall tooling sales decreased by $42.0 million to $210.9 million for the year ended December 31, 2017 from $252.9 million for the
year ended December 31, 2016.
GROSS MARGIN
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
Gross margin
% of Sales
Three months ended
December 31, 2017
124,042
14.1%
$
Three months ended
December 31, 2016
104,312
10.5%
$
$ Change
19,730
% Change
18.9%
The gross margin percentage for the fourth quarter of 2017 of 14.1% increased as a percentage of sales by 3.6% as compared to the
gross margin percentage for the fourth quarter of 2016 of 10.5%. The increase in gross margin as a percentage of sales was generally
due to:
productivity and efficiency improvements at certain operating facilities;
general sales mix including new and replacement programs that launched, and old programs that ended production, during or
subsequent to the fourth quarter of 2016; and
a decrease in tooling sales which typically earn low margins for the Company.
These positive factors were partially offset by operational inefficiencies and other costs at certain other facilities including upfront costs
incurred in preparation of upcoming new programs and related to new business in the process of being launched.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
Gross margin
% of Sales
Year ended
December 31, 2017
484,601
13.1%
$
Year ended
December 31, 2016
432,050
10.9%
$
$ Change
52,551
% Change
12.2%
The gross margin percentage for the year ended December 31, 2017 of 13.1% increased as a percentage of sales by 2.2% as
compared to the gross margin percentage for the year ended December 31, 2016 of 10.9%. The increase in gross margin as a
percentage of sales was generally due to:
productivity and efficiency improvements at certain operating facilities;
general sales mix including new and replacement programs that launched, and old programs that ended production, during or
subsequent to the year ended December 31, 2016; and
a decrease in tooling sales which typically earn low margins for the Company.
These positive factors were partially offset by operational inefficiencies and other costs at certain other facilities including upfront costs
incurred in preparation of upcoming new programs and related to new business in the process of being launched.
Page 5 ▌Martinrea International Inc.
SELLING, GENERAL & ADMINISTRATIVE ("SG&A")
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
Selling, general & administrative
% of Sales
Three months ended
December 31, 2017
52,531
6.0%
$
Three months ended
December 31, 2016
47,971
4.8%
$
$ Change
4,560
% Change
9.5%
SG&A expense for the fourth quarter of 2017 increased by $4.6 million to $52.5 million as compared to $48.0 million for the fourth
quarter of 2016. The increase can be attributed to increased costs incurred at new and/or expanded facilities launching and ramping up
new work; a general increase in employment and other costs to support the evolution of the business and operating margin expansion
initiatives; and higher year-over-year incentive compensation based on the performance of the business. SG&A expenses are being
monitored and managed on a continuous basis in order to optimize costs.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
Selling, general & administrative
% of Sales
Year ended
December 31, 2017
211,533
5.7%
$
Year ended
December 31, 2016
198,109
5.0%
$
$ Change
13,424
% Change
6.8%
SG&A expense, before adjustments, for the year ended December 31, 2017 increased by $13.4 million to $211.5 million as compared
to $198.1 million for the year ended December 31, 2016. Excluding the unusual and other items recorded in SG&A expense incurred
during the year ended December 31, 2017 as explained in Table B under “Adjustments to Net Income”, SG&A expense for the year
ended December 31, 2017 increased by $11.7 million to $209.8 million from $198.1 million for the comparative period of 2016. The
increase can be attributed to approximately $5.0 million in litigation costs related to certain employee related matters in the Company’s
operating facility in Brazil; increased costs incurred at new and/or expanded facilities launching and ramping up new work; a general
increase in employment and other costs to support the evolution of the business and operating margin expansion initiatives; and higher
year-over-year incentive compensation based on the performance of the business.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT ("PP&E") AND AMORTIZATION OF INTANGIBLE ASSETS
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
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
Three months ended
December 31, 2017
37,673
2,596
$
Three months ended
December 31, 2016
33,363
2,258
$
$ Change
4,310
338
% Change
12.9%
15.0%
530
3,246
44,045
$
597
3,607
39,825
(67)
(361)
4,220
(11.2%)
(10.0%)
10.6%
$
Total depreciation and amortization expense for the fourth quarter of 2017 increased by $4.2 million to $44.0 million as compared to
$39.8 million for the fourth quarter of 2016. 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 new and replacement business.
A significant portion of the Company’s recent investments relates to various new programs that commenced during or subsequent to
the fourth quarter of 2016. 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 year-over-over to 4.3% for the fourth quarter of 2017
from 3.4% for the fourth quarter of 2016 due to lower year-over-year sales as previously discussed, and recent investments put into
production.
Page 6 ▌Martinrea International Inc.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
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
$
$
Year ended
December 31, 2017
140,018
9,652
2,162
13,237
165,069
$
$
Year ended
December 31, 2016
127,617
8,727
$ Change
12,401
925
% Change
9.7%
10.6%
2,307
13,652
152,303
(145)
(415)
12,766
(6.3%)
(3.0%)
8.4%
Total depreciation and amortization expense for the year ended December 31, 2017 increased by $12.8 million to $165.1 million as
compared to $152.3 million for the year ended December 31, 2016. 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 and amortization expense recognized at an operating facility in Detroit, Michigan due to certain assets having been
impaired during the second quarter of 2016.
Depreciation of PP&E (production) expense as a percentage of sales increased year-over-year to 3.8% for the year ended December
31, 2017 compared to 3.2% for the year ended December 31, 2016 due to lower year-over-year sales, as previously discussed, and
recent investments put into production.
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.
Page 7 ▌Martinrea International Inc.
TABLE A
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
NET INCOME (A)
$32,366
$30,753
$1,613
For the three months ended For the three months ended
December 31, 2017
(a)
December 31, 2016
(b)
(a)-(b)
Change
Add Back - Unusual and Other Items:
Gain on sale of land and building (1)
Unrealized gain on derivative instruments (2)
Impairment of assets (4)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
Tax impact of above items (6)
Impact of US tax reforms on deferred tax asset (7)
TOTAL UNUSUAL AND OTHER ITEMS - AFTER TAX (B)
ADJUSTED NET INCOME (A + B)
Number of Shares Outstanding – Basic (‘000)
Adjusted Basic Net Earnings Per Share
Number of Shares Outstanding – Diluted (‘000)
Adjusted Diluted Net Earnings Per Share
(13,374)
(2,322)
7,488
($8,208)
(292)
19,313
$10,813
$43,179
86,593
$0.50
87,101
$0.50
-
-
-
-
-
-
-
(13,374)
(2,322)
7,488
($8,208)
(292)
19,313
$10,813
$30,753
$12,426
86,404
$0.36
86,466
$0.36
Page 8 ▌Martinrea International Inc.
TABLE B
Year ended December 31, 2017 to year ended December 31, 2016 comparison
NET INCOME (A)
$159,543
$92,380
$67,163
For the year ended
December 31, 2017
(a)
For the year ended
December 31, 2016
(b)
(a)-(b)
Change
Add Back - Unusual and Other Items:
Gain on sale of land and building (1)
Unrealized gain on derivative instruments (2)
Executive separation agreement (3)
Impairment of assets (4)
Restructuring costs (5)
(19,072)
(3,697)
1,767
7,488
-
-
-
-
34,579
3,684
(19,072)
(3,697)
1,767
(27,091)
(3,684)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
($13,514)
$38,263
($51,777)
Tax impact of above items (6)
Impact of US tax reforms on deferred tax asset (7)
TOTAL UNUSUAL AND OTHER ITEMS - AFTER TAX (B)
ADJUSTED NET INCOME (A + B)
Number of Shares Outstanding – Basic (‘000)
Adjusted Basic Net Earnings Per Share
Number of Shares Outstanding – Diluted (‘000)
Adjusted Diluted Net Earnings Per Share
177
19,313
$5,976
$165,519
86,527
$1.91
86,779
$1.91
(558)
-
735
19,313
$37,705
($31,729)
$130,085
$35,434
86,389
$1.51
86,527
$1.50
(1) Gain on sale of land and building
During the fourth quarter of 2017, the Company finalized and closed a sale-leaseback arrangement involving the land and building
of two of its operating facilities in the Greater Toronto Area. The assets were sold for net proceeds of $31.0 million (net of closing
costs of $0.5 million) resulting in a pre-tax gain of $13.4 million. The corresponding leaseback of the assets is for a term of ten
years at market rates.
During the first quarter of 2017, in connection with the relocation of an existing operation to another manufacturing facility, a
building owned by the Company in Mississauga, Ontario was sold on an “as-is, where-is” basis. The building was sold for
proceeds of $9.9 million (net of closing costs of $0.4 million) resulting in a pre-tax gain of $5.7 million.
(2) Unrealized gain on derivative instruments
In the third quarter of 2017, the Company acquired 5.5 million common shares in NanoXplore Inc. (“NanoXplore”), a publicly listed
company on the TSX Venture Exchange trading under the ticker symbol GRA, for a total of $2.5 million through a private
placement offering (the investment is further described in note 7 of the consolidated financial statements and later on in this MD&A
under the section “Investments”). As part of the transaction to acquire the common shares, the Company also received warrants
entitling the Company to acquire up to an additional 2.75 million common shares in NanoXplore at a price of $0.70 per share for a
period of up to two years after issuance. The warrants in NanoXplore represent derivative instruments and are fair valued at the
end of each reporting period with the change in fair value recorded through profit or loss. As at December 31, 2017, the warrants
had a fair value of $4.0 million which resulted in an unrealized gain of $3.7 million for the year ended December 31, 2017, of which
$2.3 million was recognized in the fourth quarter, recorded in Other finance income. This unrealized gain has been added back for
Adjusted Net Income purposes.
Page 9 ▌Martinrea International Inc.
(3) Executive separation agreement
During the third quarter of 2017, David Rashid ceased to be an Executive Vice President of Operations of the Company. The costs
added back for Adjusted Net Income purposes represents Mr. Rashid’s termination benefits (included in SG&A expense) as set out
in his employment contract payable over a twelve-month period.
(4) Impairment of assets
During the fourth quarter of 2017, in conjunction with the Company’s annual business planning cycle, the Company recorded an
impairment charge on PP&E of $7.5 million. The impairment charge related to specific equipment at an operating facility in Canada
included in the North America operating segment. The equipment is no longer in use and is not expected to be re-deployed.
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.
(5) Restructuring costs
As part of the acquisition of Honsel in 2011, a certain level of restructuring was contemplated, in particular, at the Company’s
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. No further costs related to this restructuring are expected.
Other additions to the restructuring accrual during 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.
(6) Tax impact of above items
The tax impact of the adjustments recorded to income in 2017 of $0.3 million reflects a lower tax effect on the gain on sale of land
and building and the unrealized gain on derivative instruments due to the capital nature of the gains for tax purposes (capital gains
are generally taxed at lower rates).
The tax impact of the adjustments recorded to income during 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 deferred tax assets. In assessing the realization of deferred tax assets at a
point in time, 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.
(7) Impact of US tax reforms on deferred tax asset
Extensive changes to the US tax system were enacted on December 22, 2017, which, among other changes, substantially reduced
the US federal corporate tax rate from 35% to 21% with effect from January 1, 2018. As a result of this change, the Company’s
deferred tax asset in the US decreased as at December 31, 2017 with a corresponding one-time, non-cash increase in income tax
expense of $19.3 million.
Page 10 ▌Martinrea International Inc.
NET INCOME
(ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY)
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
Net Income
Adjusted Net Income
Net Earnings per Share
Basic and Diluted
Adjusted Net Earnings per Share
Basic and Diluted
$
$
$
$
Three months ended
December 31, 2017
32,366
43,179
Three months ended
December 31, 2016
30,753
30,753
$
$
$ Change
1,613
12,426
% Change
5.2%
40.4%
0.37
$
0.50
$
0.36
0.36
Net Income, before adjustments, for the fourth quarter of 2017 increased by $1.6 million to $32.4 million from $30.8 million for the fourth
quarter of 2016. Excluding the unusual and other items recognized during the fourth quarter of 2017 as explained in Table A under
“Adjustments to Net Income”, Net Income for the fourth quarter of 2017 increased to $43.2 million or $0.50 per share, on a basic and
diluted basis, from $30.8 million or $0.36 per share, on a basic and diluted basis, for the fourth quarter of 2016.
Adjusted Net Income for the fourth quarter of 2017, as compared to the fourth quarter of 2016, was positively impacted by the following:
higher gross profit despite an overall decrease in year-over-year sales as previously explained;
productivity and efficiency improvements at certain operating facilities;
general sales mix including new and replacement programs that launched, and old programs that ended production, during or
a subsequent to the fourth quarter of 2016; and
a lower effective tax rate on adjusted income due generally to the mix of earnings (23.3% for the fourth quarter of 2017
compared to 24.5% for the fourth quarter of 2016).
These factors were partially offset by the following:
operational inefficiencies and other costs at certain other facilities;
a year-over-year increase in SG&A expense as previously discussed; and
a year-over-year increase in depreciation expense as previously discussed.
Three months ended December 31, 2017 actual to guidance comparison:
On November 14, 2017, the Company provided the following guidance for the fourth quarter of 2017:
Production sales (in millions)
Adjusted Net Earnings per Share
Basic and Diluted
Guidance
790 - 830
0.45 - 0.49
$
$
$
$
Actual
810
0.50
For the fourth quarter of 2017, while production sales of $810 million were within the published sales guidance range, Adjusted Net
Earnings per Share of $0.50 exceeded the published earnings guidance range due generally to better than expected financial
performance at certain operating facilities.
Page 11 ▌Martinrea International Inc.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
Net Income
Adjusted Net Income
Net Earnings per Share
Basic and Diluted
Adjusted Net Earnings per Share
Basic
Diluted
$
$
$
$
$
Year ended
December 31, 2017
159,543
165,519
Year ended
December 31, 2016
92,380
130,085
$
$
$ Change
67,163
35,434
% Change
72.7%
27.2%
1.84
$
1.91
1.91
$
$
1.07
1.51
1.50
Net Income, before adjustments, for the year ended December 31, 2017 increased by $67.1 million to $159.5 million from $92.4 million
for the year ended December 31, 2016 largely as a result of the increase in the Company’s gross margin, as previously discussed, and
the impact of the unusual and other items incurred during the year ended December 31, 2017 and 2016 as explained in Table B under
“Adjustments to Net Income”. Excluding these unusual and other items, net income for the year ended December 31, 2017 increased to
$165.5 million or $1.91 per share, on a basic and diluted basis, from $130.1 million or $1.51 per share, on a basic basis, and $1.50 per
share, on a diluted basis, for the year ended December 31, 2016.
Adjusted Net Income for the year ended December 31, 2017, as compared to the year ended December 31, 2016, was positively
impacted by the following:
higher gross profit despite an overall decrease in year-over-year sales as previously explained;
productivity and efficiency improvements at certain operating facilities;
general sales mix including new and replacement programs that launched, and old programs that ended production, during or
subsequent to the year ended December 31, 2016;
a net foreign exchange gain of $1.2 million for the year ended December 31, 2017 compared to a net foreign exchange loss of
$2.2 million for the year ended December 31, 2016;
a year-over-year decrease in finance expense on the Company’s bank debt and equipment loans; and
a lower effective tax rate on adjusted income due generally to the mix of earnings (23.4% for the year ended December 31,
2017 compared to 24.4% for the year ended December 31, 2016).
These factors were partially offset by the following:
operational inefficiencies and other costs at certain other facilities;
a year-over-year increase in SG&A as previously discussed;
a year-over-year increase in depreciation expense as previously discussed; and
an increase in research and development costs due to increased new product and process research and development activity.
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
Additions to PP&E
Three months ended
December 31, 2017
83,815
$
Three months ended
December 31, 2016
112,721
$
$ Change
(28,906)
% Change
(25.6%)
Additions to PP&E decreased by $28.9 million to $83.8 million in the fourth quarter of 2017 from $112.7 million in the fourth quarter of
2016 due generally to the timing of expenditures. Additions as a percentage of sales decreased year-over-year to 9.5% from 11.4% in
the fourth quarter of 2016. 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.
Page 12 ▌Martinrea International Inc.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
Additions to PP&E
Year ended
December 31, 2017
251,920
$
Year ended
December 31, 2016
249,454
$
$ Change
2,466
% Change
1.0%
Additions to PP&E increased slightly by $2.5 million year-over-year to $251.9 million for the year ended December 31, 2017 compared
to $249.5 million for the year ended December 31, 2016. Additions as a percentage of sales increased year-over-year to 6.8% for the
year ended December 31, 2017 from 6.3% for the year ended December 31, 2016. 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 2017
continued to be for manufacturing equipment for new and replacement programs that recently launched or will be launching over the
next 24 months.
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 Rest of the World. The Company measures segment operating performance based on operating
income.
Three months ended December 31, 2017 to three months ended December 31, 2016 comparison
SALES
OPERATING INCOME (LOSS)*
Three months ended
December 31, 2017
Three months ended
December 31, 2016
Three months ended
December 31, 2017
Three months ended
December 31, 2016
$
North America
Europe
Rest of the World
Eliminations
Adjusted Operating Income
Unusual and Other Items*
674,852 $
163,949
41,904
(2,063)
-
-
805,487 $
150,983
38,165
(4,228)
- $
-
51,637 $
7,496
2,508
-
61,641 $
5,886
35,759
9,642
575
-
45,976
-
Total
* Operating income for the operating segments has been adjusted for unusual and other items. The $5.9 million of unusual and other items for the fourth
quarter of 2017 was recognized in North America. The unusual and other items noted are all fully explained under “Adjustments to Net Income” in this
MD&A.
878,642 $
990,407 $
67,527 $
45,976
$
North America
Adjusted Operating Income in North America increased by $15.9 million to $51.6 million for the fourth quarter of 2017 from $35.8 million
for the fourth quarter of 2016 despite lower sales as previously discussed. Adjusted Operating Income in North America was positively
impacted by productivity and efficiency improvements at certain operating facilities and general sales mix including new and
replacement programs that launched, and old programs that ended production, during or subsequent to the fourth quarter of 2016;
partially offset by operational inefficiencies and other costs at certain other facilities.
Europe
Adjusted Operating Income in Europe decreased by $2.1 million to $7.5 million for the fourth quarter of 2017 from $9.6 million for the
fourth quarter of 2016 due in large part to upfront costs incurred in the Company’s German operations in preparation of upcoming new
programs and related to new business in the process of being launched; partially offset by incremental margin contribution from a year-
over-year increase in sales. As noted previously, the year-over-year increase in sales can be attributed to a $6.4 million increase in
tooling sales, a $2.5 million positive foreign exchange impact from the translation of Euro denominated production sales as compared to
the fourth quarter of 2016, and higher overall production volumes in the Company’s German operations including the ramp up of new
structural components work and the new V8 AMG engine block for Daimler.
Page 13 ▌Martinrea International Inc.
Rest of the World
The operating results for the Rest of the World operating segment improved year-over-year due in large part to higher year-over-year
sales. The increase in sales was due to a $4.0 million increase in tooling sales and higher year-over year production sales in the
Company’s operating facility in Brazil; partially offset by a $1.1 million negative foreign exchange impact from the translation of foreign
denominated production sales as compared to the fourth quarter of 2016 and lower year-over-year OEM production volumes on the
Ford Mondeo/Taurus platforms in China.
Year ended December 31, 2017 to year ended December 31, 2016 comparison
SALES
OPERATING INCOME (LOSS)*
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2017
Year ended
December 31, 2016
$
North America
Europe
Rest of the World
Eliminations
Adjusted Operating Income
Unusual and Other Items*
Total
* Operating income for the operating segments has been adjusted for unusual and other items. The $9.8 million of unusual and other items for the year
ended December 31, 2017 was recognized in North America. 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. The unusual and other items noted are all fully explained under
“Adjustments to Net Income” in this MD&A.
2,913,786 $
657,029
132,067
(12,383)
-
-
165,236
36,813
(4,342)
-
197,707
(38,263)
159,444
3,222,660 $
636,082
122,989
(13,324)
203,676 $
38,388
(5,257)
-
236,807 $
9,817
246,624 $
3,968,407 $
3,690,499 $
- $
-
$
North America
Adjusted Operating Income in North America increased by $38.4 million to $203.7 million for the year ended December 31, 2017 from
$165.2 million for the year ended December 31, 2016. Adjusted Operating Income in North America was positively impacted by
productivity and efficiency improvements at certain operating facilities and general sales mix including new and replacement programs
that launched, and old programs that ended production, during or subsequent to the year ended December 31, 2016; partially offset by
operational inefficiencies and other costs at certain facilities.
Europe
Adjusted Operating Income in Europe increased by $1.6 million to $38.4 million for the year ended December 31, 2017 from $36.8
million for the year ended December 31, 2016 due to higher year-over-year sales; partially offset by upfront costs incurred in the
Company’s German operations in preparation of upcoming new programs and related to new business in the process of being
launched. The increase in sales can be attributed to higher production volumes in the Company’s German operations including the
ramp up of new structural components work and the new V8 AMG engine block for Daimler, and an $8.0 million increase in tooling
sales; partially offset by the impact of foreign exchange on the translation of Euro denominated production sales, which had a negative
impact on overall sales for the year ended December 31, 2017 of approximately $6.3 million as compared to the comparative period of
2016.
Rest of the World
The operating results for the Rest of the World operating segment decreased year-over-year despite higher year-over-year sales. The
decrease in operating results was due to approximately $5.0 million in litigation costs related to certain employee-related matters in the
Company’s operating facility in Brazil, and upfront costs incurred in the Company’s China operations in preparation of upcoming new
programs; partially offset by incremental margin contribution from the higher year-over-year sales. The increase in sales was mainly
due to a year-over-year increase in production sales in the Company’s operating facility in Brazil and higher year-over-year production
sales in China related to GM’s CT6 vehicle platform; partially offset by a $5.1 million decrease in tooling sales and a $0.6 million
negative foreign exchange impact from the translation of foreign denominated production sales as compared to the year ended
December 31, 2016.
Page 14 ▌Martinrea International Inc.
SUMMARY OF QUARTERLY RESULTS
(unaudited)
2017
2016
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Sales
878,642
838,535
972,772 1,000,550
990,407
914,725 1,023,825 1,039,450
Gross Margin
124,042
113,418
128,926
118,215
104,312
99,698
116,222
111,818
Net Income (loss) for the period
32,366
36,022
47,411
43,467
30,630
28,827
(27)
32,531
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
32,366
36,229
47,346
43,602
30,753
29,098
(42)
32,571
43,179
36,263
47,346
38,731
30,753
29,098
37,663
32,571
0.37
0.42
0.55
0.50
0.36
0.34
-
0.38
0.50
0.42
0.55
0.45
0.36
0.34
0.44
0.38
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 MD&A of operating results and financial position for the fiscal years 2017 and 2016 for a full reconciliation of IFRS to non-
IFRS measures.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial condition remains solid and continues to strengthen, which can be attributed to the Company’s low cost
structure, reasonable level of debt and prospects for growth. As at December 31, 2017, the Company had total equity attributable to
equity holders of the Company of $958.5 million (December 31, 2016 - $830.2 million). As at December 31, 2017, the Company’s ratio
of current assets to current liabilities was 1.28:1 (December 31, 2016 - 1.26:1). The Company’s current working capital level of $226.9
million at December 31, 2017, up from $198.0 million at December 31, 2016 is due in large part to the timing of cash inflows and
outflows with tooling related accounts. 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 15 ▌Martinrea International Inc.
CASH FLOWS
Three months ended
December 31, 2017
Three months ended
December 31, 2016
$ Change % Change
Cash provided by operations before changes in non-
cash working capital items
Change in non-cash working capital items
$
Interest paid
Income taxes paid
Cash provided by operating activities
Cash used in financing activities
Cash used in investing activities
107,094 $
(23,175)
83,919
(5,543)
(12,912)
65,464
(10,131)
(37,381)
87,503
23,108
110,611
(7,025)
(9,172)
19,591
(46,283)
(26,692)
1,482
(3,740)
22.4%
(200.3%)
(24.1%)
(21.1%)
40.8%
94,414
(28,950)
(30.7%)
(17,854)
7,723
(43.3%)
(64,871)
27,490
(42.4%)
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase in cash and cash equivalents
$
776
18,728 $
(92)
11,597
868
7,131
(943.5%)
61.5%
Cash provided by operating activities during the fourth quarter of 2017 was $65.5 million, compared to cash provided by operating
activities of $94.4 million in the corresponding period of 2016. The components for the fourth quarter of 2017 primarily include the
following:
cash provided by operations before changes in non-cash working capital items of $107.1 million;
non-cash working capital items use of cash of $23.2 million comprised of an increase in trade and other receivables of $30.4
million; partially offset by a decrease in inventories of $5.1 million, a decrease in prepaid expenses and deposits of $1.9
million, and a combined increase in trade and other payables and provisions of $0.2 million;
interest paid (excluding capitalized interest) of $5.5 million; and
income taxes paid of $12.9 million.
Cash used in financing activities during the fourth quarter of 2017 was $10.1 million, compared to $17.9 million in the corresponding
period in 2016, as a result of repayments on the Company’s revolving banking facility and asset backed financing arrangements
totalling $49.5 million, and $2.6 million in dividends paid; partially offset by proceeds from a new equipment loan in the amount of $40
million, and $1.9 million in proceeds from the exercise of employee stock options. The $17.9 million in cash used in financing activities
during the fourth quarter of 2016 was the 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.
Cash used in investing activities during the fourth quarter of 2017 was $37.4 million, compared to $64.9 million in the corresponding
period in 2016. The components for the fourth quarter of 2017 primarily include the following:
cash additions to PP&E of $67.1 million;
capitalized development costs relating to upcoming new program launches of $3.6 million; partially offset by
proceeds from the disposal of PP&E of $2.3 million and proceeds from the sale of land and building of $31.0 million.
The cash used in investing activities of $64.9 million in the fourth quarter of 2016 included $62.0 million in cash additions to PP&E and
$3.0 million in capitalized development costs relating to upcoming new program launches; partially offset by $0.1 million in proceeds
from the disposal of PP&E.
Taking into account the opening cash balance of $52.5 million at the beginning of the fourth quarter of 2017, and the activities
described above, the cash and cash equivalents balance at December 31, 2017 was $71.2 million.
Page 16 ▌Martinrea International Inc.
Year ended
December 31, 2017
Year ended
December 31, 2016
$ Change
% Change
Cash provided by operations before changes in non-
cash working capital items
Change in non-cash working capital items
$
Interest paid
Income taxes paid
406,207 $
(26,876)
379,331
(20,304)
(56,166)
348,031
(15,986)
332,045
(22,361)
(49,967)
58,176
(10,890)
47,286
2,057
(6,199)
16.7%
68.1%
14.2%
(9.2%)
12.4%
Cash provided by operating activities
302,861
259,717
43,144
16.6%
Cash provided by (used) in financing activities
(56,915)
11,713
(68,628)
(585.9%)
Cash used in investing activities
(230,620)
(239,096)
8,476
(3.5%)
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase in cash and cash equivalents
$
(3,298)
12,028 $
(2,068)
30,266
(1,230)
(18,238)
59.5%
(60.3%)
Cash provided by operating activities during the year ended December 31, 2017 was $302.9 million, compared to $259.7 million in the
corresponding period of 2016. The components for the year ended December 31, 2017 primarily include the following:
cash provided by operations before changes in non-cash working capital items of $406.2 million;
non-cash working capital items use of cash of $26.9 million comprised of a decrease in trade and other receivables of $0.1
million, an increase in prepaid expenses and deposits of $1.3 million and an increase in inventories of $80.5 million; partially
offset by a combined increase in trade and other payables and provisions of $55.0 million;
interest paid (excluding capitalized interest) of $20.3 million; and
income taxes paid of $56.2 million.
Cash used in financing activities during the year ended December 31, 2017 was $56.9 million, compared to cash provided by financing
activities of $11.7 million in the corresponding period in 2016, as a result of repayments on the Company’s revolving banking facility and
asset backed financing arrangements totalling $88.6 million, and $10.4 million in dividends paid; partially offset by proceeds from a new
equipment loan of $40.0 million and $2.1 million in proceeds from the exercise of employee stock options. The $11.7 million in cash
provided in financing activities during the year ended December 31, 2016 was the result of a $21.3 million net increase in long-term
debt (net of repayments on the Company’s revolving banking facility and asset backed financing arrangements) and $0.8 million in
proceeds from the exercise of employee stock options; partially offset by $10.4 million in dividends paid.
Cash used in investing activities during the year ended December 31, 2017 was $230.6 million, compared to $239.1 million in the
corresponding period in 2016. The components for the year ended December 31, 2017 primarily include the following:
cash additions to PP&E of $259.6 million;
capitalized development costs relating to upcoming new program launches of $14.2 million;
an investment in NanoXplore Inc. (as described in note 7 of the consolidated financial statements for the year ended
December 31, 2017) of $2.5 million; partially offset by
proceeds from the disposal of PP&E of $3.6 million, proceeds from the sale of land and building of $40.9 million, and the
upfront recovery of development costs incurred of $1.2 million.
The cash used in investing activities of $239.1 million during the year ended December 31, 2016 included $226.9 million in cash
additions to PP&E and $12.6 million in capitalized development costs relating to upcoming new program launches; partially offset by
$0.4 million in proceeds from the disposal of PP&E.
Taking into account the opening cash balance of $59.2 million at the beginning of 2017, and the activities described above, the cash
and cash equivalents balance at December 31, 2017 was $71.2 million.
Page 17 ▌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 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, 2017, the Company had drawn $233.0 million (December 31, 2016 - $273.0 million) on the Canadian revolving
credit line and US$256.0 million (December 31, 2016 - US$270.0 million) on the U.S. revolving credit line.
Net debt (i.e. long-term debt less cash on hand) decreased by $79.4 million during 2017 from $662.2 million at December 31, 2016 to
$582.8 million at December 31, 2017. The Company’s net debt to Adjusted EBITDA (on a trailing twelve months basis) leverage ratio
improved to 1.45x at the end of the fourth quarter of 2017, from 1.89x at the end of 2016.
The Company was in compliance with its debt covenants as at December 31, 2017.
During the fourth quarter of 2017, the Company finalized an equipment loan in the amount of $40 million repayable in monthly
installments over five years at a fixed interest rate of 3.80%. The loan agreement was executed on October 2, 2017.
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, with
the most recent quarterly dividend being paid on January 15, 2018. The declaration and payment of future dividends will be subject to
the Company’s cash requirements as well as satisfaction of statutory tests. In view of the Company’s financial performance, and its
future outlook and cash needs, the Board has decided to increase the annual dividends by 50% to $0.18 per share, to be paid in four
quarterly installments of $0.045 per share, commencing with the release of the first quarter results of 2018. 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, 2017 the amount of off-balance sheet program financing was $75.2
million (December 31, 2016 - $65.5 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.
Page 18 ▌Martinrea International Inc.
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, 2017 (“AIF”) (of which the section entitled “Automotive Industry General”, describing 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,
labour relations
legislative changes, and
environmental emissions standards and safety issues.
issues, regulatory requirements,
infrastructure considerations,
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
U.S. administration on the North American Free Trade Agreement (“NAFTA”) and any effects on the automotive industry from any
NAFTA changes. (See “Trade Policies and Resulting Impact (NAFTA and the Comprehensive and Progressive Agreement for Trans-
Pacific Partnership (“CPTPP”)” under “Automotive Industry General” in the AIF and “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.
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 U.S. administration on NAFTA and any effects on the automotive industry from any NAFTA changes. See
“Trade Policies and Resulting Impact (NAFTA and the CPTPP)” in the AIF and “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 typically seasonal shutdowns could cause fluctuations in the Company’s quarterly
results.
Page 19 ▌Martinrea International Inc.
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.
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, 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
Page 20 ▌Martinrea International Inc.
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
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.
Page 21 ▌Martinrea International Inc.
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.
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 NAFTA, the CPTPP, or the adoption of domestic preferential purchasing policies in other
jurisdictions, particularly the United States such as increased tariffs or investigations relating to anti-dumping. In addition, the Company
could be exposed to increased customs audits due to governmental policy which could lead to additional administrative burden and
costs.
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 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 or 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 or its directors and officers 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 or any of its officers or directors 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.
Page 22 ▌Martinrea International Inc.
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
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
and corrected 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. Environmental regulation in
any one jurisdiction in which the Company operates may impact the business of the Company to the extent that jurisdiction becomes
less competitive. In addition to the foregoing, the Company may also incur costs and expenses resulting from environmental
compliance, such as any changes to facilities to address physical, health and safety or regulatory constraints, repair or rebuilding
facilities impacted by adverse weather events, or research and development activities related to more environmentally efficient
operations and processes, as well as other potential costs. (See also “Financial Viability of Suppliers” in the AIF.)
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, which may impact the Company’s business and operations.
Page 23 ▌Martinrea International Inc.
The Company’s operations may also be impacted by any environmental policies at any of its customers or suppliers to the extent that it
affects production or volumes.
The Company cannot provide assurances that the Company’s costs, liabilities and obligations or any resulting impact on its revenues
due to customer requirements or changes in supply chain requirements relating to environmental matters (or any issues that may arise
as a result of its customers’ or suppliers’ own environmental compliance, including any environmental compliance or trends that may
impact their businesses) will not have a material adverse effect on the Company’s business, financial condition, results of operations
and cash flow.
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;
difficulty in protecting intellectual property rights; and
different and challenging legal systems.
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
Page 24 ▌Martinrea International Inc.
exposures arising out of changes in tax laws, tax reassessments or otherwise. The taxation system and regulatory environment in some
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 that 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, 2017). 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, 2017, based on an actuarial estimate for financial reporting. The unfunded liability at December 31, 2017, 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 2018 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 consolidated financial statements for
the year ended December 31, 2017, which reflects the financial position of the Company’s defined benefit pension plan and other post-
employment benefit plans at December 31, 2017.
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, 2017, the
unfunded actuarial liability for these obligations was significant. Expected benefit payments for 2018 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 consolidated financial
statements for the year ended December 31, 2017, which reflect the financial position of the Company’s post-employment benefits
other than pension plans at December 31, 2017.
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, among other things, 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 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’, or suppliers’ intellectual property or
confidential information. If any of the foregoing events (or other events related to cybersecurity) 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.
Page 25 ▌Martinrea International Inc.
Dividends
The declaration and payment of dividends, including the dividend rate, is subject to the Board’s discretion taking into account the
Company’s cash flow, capital requirements, financial condition and other factors the Board considers relevant. These factors are, in
turn, subject to various risks, including the risk factors set out above. While the Company aims to pay a consistent dividend and
increase the dividend rate over time, the Company’s Board may in certain circumstances determine that it is in the best interests of the
Company to reduce or suspend the dividend. In such event, the trading price of the Common Shares of the Company may be materially
affected.
DISCLOSURE OF OUTSTANDING SHARE DATA
As at March 1, 2018, the Company had 86,745,834 common shares outstanding. The Company’s common shares constitute its only
class of voting securities. As at March 1, 2018, options to acquire 1,844,450 common shares were outstanding.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET FINANCING
At December 31, 2017, the Company had contractual obligations requiring annual payments as follows (all figures in thousands):
Purchase obligations (i)
Long-term debt
Lease commitments
Total contractual obligations
Less than 1
year
412,116
24,795
34,735
471,646
1-2 years
2-3 years
3-4 years
4-5 years
2,007
11,211
32,005
45,223
1,976
566,296
27,139
595,411
31
12,180
22,379
34,590
-
39,535
18,566
58,101
Thereafter
-
-
75,365
75,365
Total
416,130
654,017
210,189
1,280,336
(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, 2017, the amount of the off balance
sheet program financing was $75.2 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.
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 26 ▌Martinrea International Inc.
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.
At December 31, 2017, the Company had committed to the following foreign exchange contracts:
Currency
Sell Canadian Dollars
Buy Mexican Peso
Amount of U.S.
dollars
Weighted average
exchange rate of
U.S. dollars
Maximum period in
months
$
$
20,000
30,468
1.2835
19.3319
1
2
The aggregate value of these forward contracts as at December 31, 2017 was a pre-tax loss of $0.1 million and was recorded in trade
and other payables (December 31, 2016 - loss of $0.2 million).
INVESTMENTS
During the third quarter of 2017, the Company acquired 5.5 million common shares in NanoXplore Inc., a publicly listed company on the
TSX Venture Exchange trading under the ticker symbol GRA, for a total of $2.5 million through a private placement offering. As part of
the transaction to acquire the common shares, the Company also received warrants entitling the Company to acquire up to an
additional 2.75 million common shares in NanoXplore at a price of $0.70 per share for a period of up to two years after issuance.
NanoXplore is a graphene company, a manufacturer and supplier of high volume graphene powder for use in industrial markets
providing customers with a range of graphene-based solutions under the heXo-G brand, including graphene powder, graphene plastic
masterbatch pellets, and graphene-enhanced polymers. The company has its headquarters and graphene production facility in
Montreal, Quebec.
The initial purchase price of $2.5 million was allocated to the common shares and warrants acquired based on their relative fair values
at the time of issuance resulting in $2.2 million being initially allocated to the common shares and $0.3 million to the warrants.
The warrants in NanoXplore represent derivative instruments and are fair valued at the end of each reporting period using the Black-
Scholes valuation model, with the change in fair value recorded through profit or loss. As at December 31, 2017, the warrants had a fair
value of $4.0 million resulting in an unrealized gain of $3.7 million for the year ended December 31, 2017, which is recorded in Other
finance income (expense) in the consolidated statement of operations. The table below summarizes the assumptions used in valuing
the warrants using the Black-Scholes valuation model as at the acquisition date and December 31, 2017:
Expected volatility
Risk free interest rate
Expected life (years)
Acquisition
76.29%
1.31%
2
December 31, 2017
76.68%
1.68%
2
The acquired common shares in NanoXplore have been classified as available-for-sale for reporting purposes. As such, the common
shares are recorded at their fair value at the end of each reporting period based on publicly quoted prices, with the change in fair value
recorded in Other comprehensive income (loss). As at December 31, 2017, the common shares had a fair value of $11.3 million
resulting in an unrealized gain of $9.1 million ($8.0 million net of tax) for the year ended December 31, 2017.
Page 27 ▌Martinrea International Inc.
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, 2017, 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, 2017. 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, 2017 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.
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, 2017 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
Page 28 ▌Martinrea International Inc.
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
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).
Page 29 ▌Martinrea International Inc.
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 judgment 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 judgment. 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.
At December 31, 2017, 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 $59.8 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.
Page 30 ▌Martinrea International Inc.
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, 2017 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 income.
Performance and Restricted Share Unit Plan
On November 3, 2016, as amended on April 28, 2017, a Performance and Restricted Share Unit Plan (the PRSU Plan”) was
established as a means of compensating designated employees of the Company and promoting share ownership and alignment with
the shareholders’ interest. Under the PRSU Plan, the Company may grant Restricted Share Units (“RSUs”) and/or Performance Share
Units (“PSUs”) to its employees. The Company shall redeem vested RSUs or vested PSUs on their Redemption Date (as specified in
the PRSU Plan), at the Company’s option, for either common shares or cash. The RSUs and PSUs are redeemed at their fair value as
defined by the PRSU Plan; in addition, PSUs must meet the performance criteria specified in the PRSU Plan. The vesting conditions
are determined by the Board of Directors or as otherwise provided in the PRSU Plan.
The fair value of PSUs and RSUs at the date of grant to the PRSU Plan participants, determined using the Monte Carlo Simulation
model in the case of PSUs, are recognized as compensation expense over the vesting period, with a liability recorded in trade and
other payables. In addition, the RSUs and PSUs are fair valued at the end of every reporting period and at the settlement date. Any
change in fair value of the liability is recognized as compensation expense in income.
Recently adopted accounting standards
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 adopted the amendments to IAS 7 effective January 1, 2017. The adoption of this
amended standard resulted in some additional disclosure in note 11 (Long-term debt) of the consolidated financial statements for the
year ended December 31, 2017.
Page 31 ▌Martinrea International Inc.
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.
The Company has completed its assessment of the impact the adoption of IFRS 15 is expected to have on the consolidated financial
statements. As part of the assessment, which included consultation with industry peers, the Company analyzed the standard’s impact
on customer contracts, compared its historical accounting policies and practices to the requirements of the new standard, and identified
potential differences from the application of the new standard’s requirements. Based on the worked performed, the Company does not
expect that the adoption will have a material impact on its revenues, results of operations or financial position. As required by the
standard, the Company expects to make additional disclosure related to the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers.
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final publication of the IFRS 9 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.
The Company has assessed the impact of IFRS 9 on the consolidated financial statements and does not expect it to have a material
impact to the consolidated financial statements. IFRS 9 includes an accounting policy choice between deferring the adoption of the new
hedge accounting standards under IFRS 9 and continuing with the current IAS 39 hedge accounting standards. The Company has
decided to elect this policy choice. Revised hedge accounting disclosures that are required by the IFRS 9 related amendments to IFRS
7 “Financial Instruments: Disclosures” will be addressed upon adoption on January 1, 2018.
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. The Company is currently
assessing the impact of IFRS 16 on the consolidated financial statements. The extent of the impact has not yet been determined.
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. The Company has assessed the impact of the amendments to
IFRS 2 on the consolidated financial statements and does not expect it to have a material impact.
Page 32 ▌Martinrea International Inc.
Selected Annual Information
The following table sets forth selected information from the Company’s consolidated financial statements for the years ended December
31, 2017, December 31, 2016 and December 31, 2015.
$
$
$
$
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
$
Long-term Debt
$
Dividends Declared
$
2017
3,690,499 $
484,601
246,624
159,266
159,543 $
1.84 $
1.84 $
236,807 $
6.4%
401,493
10.9%
165,519 $
1.91 $
1.91 $
2,541,173 $
71,193 $
654,017 $
10,388 $
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
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, 2016, 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 and 3 of
this MD&A for a full reconciliation of the Non-IFRS measures for the years ended December 31, 2017 and 2016 and the Company’s
MD&A for the year ended December 31, 2016, as previously filed and available at www.sedar.com , for a full reconciliation of the Non-
IFRS measures for the year ended December 31, 2015.
FORWARD-LOOKING INFORMATION
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-
Page 33 ▌Martinrea International Inc.
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, 2017 and other public filings which can be found at www.sedar.com:
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;
the cost of post-employment benefits
impairment charges;
cyber security threats; and
dividends.
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 34 ▌Martinrea International Inc.
MARTINREA INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2017
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
Impairment of assets
Trade and other payables
Basis of preparation
Significant accounting policies
Trade and other receivables
Inventories
Property, plant and equipment
Intangible assets
1.
2.
3.
4.
5.
6.
7. Other assets
8.
9.
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
19
20
20
20
21
22
25
27
29
29
29
29
30
30
34
35
36
36
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, 2017 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, 2017. 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
100 New Park Place, Suite 1400
Vaughan, ON L4K 0J3
Telephone
Fax
Internet
905-265-5900
905-265-6390
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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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 1, 2018
Toronto, Canada
Note
December 31,
2017
December 31,
2016
$
$
$
3
4
5
13
6
7
9
10
11
11
12
13
14
71,193
556,049
376,972
15,504
12,979
1,032,697
1,282,624
142,173
68,414
15,265
1,508,476
2,541,173
$
$
741,549
$
5,048
34,429
24,795
805,821
629,222
65,258
82,373
776,853
1,582,674
713,425
41,981
94,268
108,825
958,499
-
958,499
$
2,541,173
$
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
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
Other 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
Retained earnings (accumulated deficit)
TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Non-controlling interest
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Commitments 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.
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
Gain on sale of land and building
Gain (loss) on disposal of property, plant and equipment
Restructuring costs
OPERATING INCOME
Finance expense
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
Year ended
December 31,
2017
3,690,499 $
Year ended
December 31,
2016
3,968,407
Note
$
(3,065,880)
(140,018)
(3,205,898)
484,601
(26,597)
(211,533)
(9,652)
(2,162)
(7,488)
19,072
383
-
246,624
(22,527)
5,139
229,236
(69,970)
159,266 $
277
(3,408,740)
(127,617)
(3,536,357)
432,050
(24,853)
(198,109)
(8,727)
(2,307)
(34,579)
-
(347)
(3,684)
159,444
(24,196)
(1,909)
133,339
(41,378)
91,961
419
159,543 $
92,380
16
8
5
10
18
18
13
$
$
Basic earnings per share
Diluted earnings per share
15 $
15 $
1.84 $
1.84 $
1.07
1.07
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
Change in fair value of available for sale investments
Items that will not be reclassified to net income
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,
2017
Year ended
December 31,
2016
$
159,266 $
91,961
(30,737)
7,957
1,539
(21,241)
138,025 $
138,302
(277)
138,025 $
(30,394)
-
1,123
(29,271)
62,690
63,109
(419)
62,690
$
$
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
Accumulated
Retained
other
comprehensive
income
147,442 $
earnings/
(accumulated
deficit)
(123,157) $
92,380
-
-
-
-
-
-
(30,394)
117,048
-
-
-
-
-
(10,366)
-
1,123
-
(40,020)
159,543
(1,849)
-
(10,388)
-
Non-
controlling
interest
(103) $
(419)
-
-
-
-
-
(522)
(277)
799
-
-
-
Total
776,329 $
92,380
333
(10,366)
793
1,123
(30,394)
830,198
159,543
(1,849)
123
(10,388)
2,113
Total
equity
776,226
91,961
333
(10,366)
793
1,123
(30,394)
829,676
159,266
(1,050)
123
(10,388)
2,113
-
(30,737)
7,957
94,268 $
1,539
-
-
108,825 $
1,539
(30,737)
7,957
958,499 $
-
-
1,539
(30,737)
-
- $
7,957
958,499
$
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
Remeasurement of defined benefit plans
Foreign currency translation differences
BALANCE AT DECEMBER 31, 2016
Net income for the period
Change in non-controlling interest
Compensation expense related to stock options
Dividends ($0.12 per share)
Exercise of employee stock options
Other comprehensive income (loss),
net of tax
Remeasurement of defined benefit plans
Foreign currency translation differences
Change in fair value of available for sale
investments
Capital
stock
709,396 $
Contributed
surplus
42,648 $
-
-
-
1,114
-
-
710,510
-
-
-
-
2,915
-
-
-
-
333
-
(321)
-
-
42,660
-
-
123
-
(802)
-
-
-
BALANCE AT DECEMBER 31, 2017
$
713,425 $
41,981 $
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 8)
Unrealized losses on foreign exchange forward contracts
Unrealized gain on derivative instruments (note 7)
Finance expense
Income tax expense
Gain on sale of land and building (note 5)
Loss (gain) on disposal of property, plant and equipment
Deferred and restricted share units expense
Stock options expense
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
Investment in NanoXplore Inc. (note 7)
Proceeds on disposal of land and building (note 5)
Proceeds on disposal of property, plant and equipment
Upfront recovery of development costs incurred
NET CASH USED IN INVESTING ACTIVITIES
Effect of foreign exchange rate changes on cash and cash equivalents
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
Year ended
December 31,
2017
Year ended
December 31,
2016
$
159,266 $
91,961
149,670
2,162
13,237
7,488
146
(3,697)
22,527
69,970
(19,072)
(383)
2,751
123
4,487
(2,468)
406,207
(77)
(80,483)
(1,344)
55,028
379,331
(20,304)
(56,166)
302,861 $
40,000
(88,648)
(10,380)
2,113
(56,915) $
(259,600)
(14,211)
(2,475)
40,910
3,586
1,170
(230,620) $
136,344
2,307
13,652
34,579
208
-
24,196
41,378
-
347
568
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)
(3,298)
(2,068)
12,028
59,165
71,193 $
30,266
28,899
59,165
$
$
$
$
*As at December 31, 2017, $63,877 (December 31, 2016, $71,557) of purchases of property, plant and equipment remain unpaid and are recorded in
trade and 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, 2017 were approved by the Board of Directors on
March 1, 2018.
(b)
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 and performance share unit grants. These estimates include assumptions
about the volatility of the Company’s stock, forfeiture rates, and expected life of the options/units granted, where relevant.
Estimates used in determining the fair value of derivative instruments associated with investments in equity securities. These estimates
include assumptions about the volatility of the investee’s stock and expected life of the instrument.
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.
The determination of the Company’s cash generating units for impairment testing.
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.
(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.
(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.
Page 9 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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.
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.
Available-for-sale financial assets:
Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and included in Other Assets.
The Company’s investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are
measured at fair value and changes therein are recognized in other comprehensive income. When an investment is derecognized, the
accumulated gain or loss in other comprehensive income is transferred to profit or loss.
(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.
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 derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired.
(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, as well as derivative instruments associated with investments in equity securities, are initially recognized at fair value on the date
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. These amounts will be
recognized in earnings as and when the corresponding accumulated other comprehensive income from the hedged foreign operations is
recognized in net earnings.
(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.
Page 11 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Depreciation is recorded on the following bases and at the following rates:
Buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other
Land is not depreciated.
Basis
Declining balance
Straight line
Rate
4%
Lesser of estimated useful life and lease term
Declining balance and straight line
7% to 20%
Straight line
Lesser of estimated useful life and life of program
Declining balance and straight line
20% to 30%
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.
(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.
Page 12 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(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
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.
Page 13 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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. Sales of finished goods and tooling 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.
(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 remeasured 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.
Page 14 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(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.
(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 income.
(r)
Performance and Restricted Share Unit Plan
On November 3, 2016, as amended on April 28, 2017, a Performance and Restricted Share Unit Plan (the “PRSU Plan”) was established as a
means of compensating designated employees of the Company and promoting share ownership and alignment with the shareholders’
interests. Under the PRSU Plan, the Company may grant Restricted Share Units (“RSUs”) and/or Performance Share Units (“PSUs”) to its
employees. The Company shall redeem vested RSUs or vested PSUs on their Redemption Date (as specified in the PRSU Plan), at the
Company’s option, for either common shares or cash. The RSUs and PSUs are redeemed at their fair value as defined by the PRSU Plan; in
addition, PSUs must meet the performance criteria specified in the PRSU Plan. The vesting conditions are determined by the Board of
Directors or as otherwise provided in the PRSU Plan.
The fair value of PSUs and RSUs at the date of grant to the PRSU Plan participants, determined using the Monte Carlo Simulation model in
the case of PSUs, are recognized as compensation expense over the vesting period, with a liability recorded in trade and other payables. In
addition, the RSUs and PSUs are fair valued at the end of every reporting period and at the settlement date. Any change in fair value of the
liability is recognized as compensation expense in income.
Page 15 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(s)
Recently adopted accounting standards
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 adopted the amendments to IAS 7 effective January 1, 2017. The adoption of this amended standard resulted
in some additional disclosure in note 11 (Long-term debt) of the consolidated financial statements for the year ended December 31, 2017.
(t)
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.
The Company has completed its assessment of the impact the adoption of IFRS 15 is expected to have on the consolidated financial
statements. As part of the assessment, which included consultation with industry peers, the Company analyzed the standard’s impact on
customer contracts, compared its historical accounting policies and practices to the requirements of the new standard, and identified potential
differences from the application of the new standard’s requirements. Based on the work performed, the Company does not expect that the
adoption will have a material impact on its revenues, results of operations or financial position. As required by the standard, the Company
expects to make additional disclosure related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers.
IFRS 9, Financial Instruments
In July 2014, the IASB issued the final publication of the IFRS 9 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.
The Company has assessed the impact of IFRS 9 on the consolidated financial statements and does not expect it to have a material impact to
the consolidated financial statements. IFRS 9 includes an accounting policy choice between deferring the adoption of the new hedge
accounting standards under IFRS 9 and continuing with the current IAS 39 hedge accounting standards. The Company has decided to elect
this policy choice. Revised hedge accounting disclosures that are required by the IFRS 9 related amendments to IFRS 7 Financial
Instruments: Disclosures will be addressed upon adoption on January 1, 2018.
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. The Company is currently assessing the
impact of IFRS 16 on the consolidated financial statements. The extent of the impact has not yet been determined.
Page 16 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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. The Company has assessed the impact of the amendments to IFRS 2 on the
consolidated financial statements and does not expect it to have a material impact.
3.
TRADE AND OTHER RECEIVABLES
Trade receivables
Other receivables
December 31, 2017
538,830 $
17,219
556,049 $
December 31, 2016
555,074
13,371
568,445
$
$
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
5.
PROPERTY, PLANT AND EQUIPMENT
December 31, 2017
154,293 $
38,618
34,962
149,099
376,972 $
December 31, 2016
146,802
38,323
39,088
81,917
306,130
$
$
Land and buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other assets
Construction in progress and spare parts
December 31, 2017
December 31, 2016
Accumulated
amortization
and
impairment
losses
(17,157) $
(35,897)
(909,065)
(31,034)
(24,793)
-
(1,017,946) $
Cost
118,154 $
62,100
1,758,415
38,509
53,197
270,195
2,300,570 $
$
$
Net book
value
100,997
26,203
849,350
7,475
28,404
270,195
1,282,624
$
$
Cost
161,438 $
58,303
1,684,395
42,806
40,795
277,999
2,265,736 $
Accumulated
amortization
and
impairment
losses
(41,389) $
(33,316)
(876,359)
(34,387)
(23,038)
-
(1,008,489) $
Net book
value
120,049
24,987
808,036
8,419
17,757
277,999
1,257,247
Page 17 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Movement in property, plant and equipment is summarized as follows:
Net as of December 31, 2015
Additions
Disposals
Depreciation
Impairment (note 8)
Transfers from construction in
progress and spare parts
Foreign currency translation
adjustment
Net as of December 31, 2016
Additions
Disposals
Depreciation
Impairment (note 8)
Transfers from construction in
progress and spare parts
Foreign currency translation
adjustment
Net as of December 31, 2017
$
Land and
buildings
113,323 $
-
(4)
(4,038)
-
Leasehold Manufacturing
equipment
780,750 $
7,083
improvements
24,604 $
221
-
(4,510)
(723)
(512)
(121,976)
(21,021)
Tooling and
fixtures
5,743 $
18
-
(1,604)
-
Other
assets
17,936 $
304
(62)
(4,216)
(26)
Construction in
progress and
spare parts
Total
259,806 $ 1,202,162
249,454
241,828
(785)
(136,344)
(21,770)
(207)
-
-
13,005
6,131
188,457
4,310
4,417
(216,320)
-
(2,237)
120,049
-
(22,497)
(4,068)
-
(736)
24,987
802
(311)
(4,173)
-
(24,745)
808,036
565
(2,024)
(134,515)
(7,488)
(48)
8,419
-
-
(1,435)
-
(596)
17,757
242
(209)
(5,479)
-
(7,108)
277,999
250,311
-
-
-
(35,470)
1,257,247
251,920
(25,041)
(149,670)
(7,488)
12,537
5,272
213,526
987
16,583
(248,905)
-
(5,024)
100,997 $
$
(374)
26,203 $
(28,750)
849,350 $
(496)
7,475 $
(490)
28,404 $
(9,210)
(44,344)
270,195 $ 1,282,624
The Company has entered into certain asset-backed financing arrangements that were structured as sales-leaseback transactions. At December 31,
2017, the carrying value of property, plant and equipment under such arrangements was $21,001 (December 31, 2016 – $25,632). The corresponding
amounts owing are reflected within long-term debt (note 11).
During the first quarter of 2017, in connection with the relocation of an existing operation to another manufacturing facility, a building owned by the
Company in Mississauga, Ontario was sold on an “as-is, where-is” basis. The building was sold for proceeds of $9,872 (net of closing costs of $378)
resulting in a pre-tax gain of $5,698.
During the fourth quarter of 2017, the Company finalized and closed a sale-leaseback arrangement involving the land and building of two of its operating
facilities in the Greater Toronto Area. The assets were sold for net proceeds of $31,038 (net of closing costs of $473) resulting in a pre-tax gain of
$13,374. The corresponding leaseback of the assets is for a term of ten years at market rates.
6.
INTANGIBLE ASSETS
December 31, 2017
December 31, 2016
Accumulated
amortization
and
impairment
losses
Cost
Net book
value
Cost
Accumulated
amortization
and
impairment
losses
Net book
value
Customer contracts and relationships
Development costs
$
$
61,432 $
143,325
204,757 $
(55,512) $
(80,831)
(136,343) $
5,920
62,494
68,414
$
$
62,044 $
138,416
200,460 $
(53,872) $
(73,327)
(127,199) $
8,172
65,089
73,261
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, 2015
Additions
Amortization
Impairment (note 8)
Foreign currency translation adjustment
Net as of December 31, 2016
Additions
Amortization
Upfront recovery of development costs incurred
Foreign currency translation adjustment
Net as of December 31, 2017
7.
OTHER ASSETS
Investment in common shares of NanoXplore Inc.
Warrants in NanoXplore Inc.
Investment in NanoXplore Inc.
Customer
contracts and
relationships
10,773
-
(2,307)
-
(294)
8,172
-
(2,162)
-
(90)
5,920
$
$
$
$
Development
costs
72,817
12,624
(13,652)
(4,179)
(2,521)
65,089
14,211
(13,237)
(1,170)
(2,399)
62,494
$
$
Total
83,590
12,624
(15,959)
(4,179)
(2,815)
73,261
14,211
(15,399)
(1,170)
(2,489)
68,414
December 31, 2017
11,275 $
3,990
15,265 $
December 31, 2016
-
-
-
$
$
In the third quarter of 2017, the Company acquired 5.5 million common shares in NanoXplore Inc. (“NanoXplore”), a publicly listed company on the TSX
Venture Exchange trading under the ticker symbol GRA, for a total of $2,475 through a private placement offering. As part of the transaction to acquire
the common shares, the Company also received warrants entitling the Company to acquire up to an additional 2.75 million common shares in
NanoXplore at a price of $0.70 per share for a period of up to two years after issuance.
NanoXplore is a graphene company, a manufacturer and supplier of high volume graphene powder for use in industrial markets providing customers
with a range of graphene-based solutions under the heXo-G brand, including graphene powder, graphene plastic masterbatch pellets, and graphene-
enhanced polymers. The company has its headquarters and graphene production facility in Montreal, Quebec.
The initial purchase price of $2,475 was allocated to the common shares and warrants acquired based on their relative fair values at the time of issuance
resulting in $2,182 being initially allocated to the common shares and $293 to the warrants.
The warrants in NanoXplore represent derivative instruments and are fair valued at the end of each reporting period using the Black-Scholes valuation
model, with the change in fair value recorded through profit or loss. As at December 31, 2017, the warrants had a fair value of $3,990 resulting in an
unrealized gain of $3,697 for the year ended December 31, 2017, which is recorded in Other finance income (expense) in the consolidated statement of
operations. The table below summarizes the assumptions used in valuing the warrants using the Black-Scholes valuation model as at the acquisition
date and December 31, 2017:
Expected volatility
Risk free interest rate
Expected life (years)
Acquisition
76.29%
1.31%
2
December 31, 2017
76.68%
1.68%
2
The acquired common shares in NanoXplore have been classified as available-for-sale for reporting purposes. As such, the common shares are
recorded at their fair value at the end of each reporting period based on publicly quoted prices, with the change in fair value recorded in other
comprehensive income. As at December 31, 2017, the common shares had a fair value of $11,275 resulting in an unrealized gain of $9,093 ($7,957 net
of tax) for the year ended December 31, 2017.
Page 19 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
8.
IMPAIRMENT OF ASSETS
Property, plant and equipment
Intangible assets - Development costs
Inventories
Total impairment
Year ended
December 31,
2017
7,488 $
-
-
7,488 $
Year ended
December 31,
2016
21,770
4,179
8,630
34,579
$
$
During the fourth quarter of 2017, in conjunction with the Company’s annual business planning cycle, the Company recorded an impairment charge on
property, plant and equipment of $7,488. The impairment charge related to specific equipment at an operating facility in Canada included in the North
America operating segment. The equipment is no longer in use and is not expected to be redeployed.
During the second quarter of 2016, the Company recorded impairment charges on property, plant, equipment, intangible assets and inventories totaling
$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.
9.
TRADE AND OTHER PAYABLES
Trade accounts payable and accrued liabilities
Foreign exchange forward contracts (note 20(d))
December 31, 2017
741,403 $
146
741,549 $
December 31, 2016
706,799
208
707,007
$
$
The Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 20.
10.
PROVISIONS
Net as of December 31, 2015
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2016
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2017
Restructuring
(a)
14,026
3,684
(12,118)
(344)
5,248
-
(4,060)
(72)
1,116
$
$
$
$
Claims and
Litigations
(b)
1,572
189
(512)
192
1,441
5,840
(2,979)
(370)
3,932
$
$
Total
15,598
3,873
(12,630)
(152)
6,689
5,840
(7,039)
(442)
5,048
Based on estimated cash outflows, all provisions as at December 31, 2017 and December 31, 2016 are presented on the consolidated balance sheets
as current liabilities.
(a)
Restructuring
As part of the acquisition of Honsel in 2011, a certain level of restructuring was contemplated. The restructuring accrual as at December 31,
2015 relates to restructuring activities undertaken in Martinrea Honsel for employee related severance. Additional restructuring costs for
Martinrea Honsel in Meschede, Germany of $1,810 (€1,238) were incurred during 2016. No further costs related to this restructuring are
expected.
Other additions to the restructuring accrual during 2016 totaled $1,874 (US$1,441) and represent employee-related payouts resulting from the
closure of the operating facility in Detroit, Michigan as described in note 8.
Page 20 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(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.
The increase in claims and litigation provision for the year ended December 31, 2017 predominately related to certain employee-related
matters in the Company’s operating facility in Brazil.
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.
Banking facility
Equipment loans
Current portion
$
$
December 31, 2017
551,656 $
102,361
654,017
(24,795)
629,222 $
December 31, 2016
631,879
89,524
721,403
(27,982)
693,421
Terms and conditions of outstanding loans, as at December 31, 2017, in Canadian dollar equivalents, are as follows:
Banking facility
Equipment loans
USD
CAD
CAD
EUR
EUR
EUR
USD
EUR
EUR
EUR
USD
EUR
BRL
USD
USD
EUR
USD
Currency
Nominal
interest rate
Year of
maturity
LIBOR+1.75%
BA+1.75%
2020 $
2020
December 31, 2017
Carrying amount
321,152
230,504
$
December 31, 2016
Carrying amount
362,529
269,350
3.80%
2.54%
3.06%
4.93%
4.25%
4.34%
3.35%
1.36%
3.80%
0.26%
5.00%
7.36%
4.25%
3.37%
3.99%
2022
2025
2024
2023
2018
2025
2019
2021
2022
2025
2020
2017
2017
2017
2017
38,785
15,561
15,210
15,131
8,917
3,230
2,504
2,100
413
375
135
-
-
-
-
$
654,017
$
-
14,648
15,337
14,370
23,532
3,041
3,797
2,548
527
353
200
6,195
3,872
904
200
721,403
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.
Page 21 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
As at December 31, 2017, the Company has drawn US$256,000 (December 31, 2016 - US$270,000) on the U.S. revolving credit line and $233,000
(December 31, 2016 - $273,000) on the Canadian revolving credit line. At December 31, 2017, the weighted average effective rate of the banking facility
credit lines was 2.9% (December 31, 2016 - 2.7%). The facility requires the maintenance of certain financial ratios with which the Company was in
compliance as at December 31, 2017.
Deferred financing fees of $2,827 (December 31, 2016 - $4,194) have been netted against the carrying amount of the long-term debt.
During the quarter ended December 31, 2017, the Company finalized an equipment loan in the amount of $40,000 repayable in monthly installments
over five years at a fixed interest rate of 3.80%. The agreement was executed on October 2, 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
Movement in long-term debt is summarized as follows:
Net as of December 31, 2015
Draw downs and loan proceeds (net of capitalized deferred financing fees of $2,370)
Repayments
Amortization of deferred financing fees
Foreign currency translation adjustment
Net as of December 31, 2016
Equipment loan proceeds
Repayments
Amortization of deferred financing fees
Foreign currency translation adjustment
Net as of December 31, 2017
12.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
$
$
24,795
11,211
566,296
12,180
39,535
654,017
$
$
$
Total
717,012
90,784
(69,499)
1,169
(18,063)
721,403
40,000
(88,648)
1,368
(20,106)
654,017
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;
Page 22 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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
Settlements
Foreign exchange translation
adjustment
Balance, end of year
$
$
Plan Assets:
Other post-
retirement
benefits
(48,111) $
1,619
(121)
(1,791)
1,992
Pensions
(64,551) $
1,946
(1,936)
(2,339)
(35)
December 31,
2017
(112,662) $
3,565
(2,057)
(4,130)
1,957
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
2,871
239
3,110
413
544
957
(2,592)
-
1,512
(44,621) $
(4,304)
11
1,423
(69,546) $
(6,896)
11
2,935
(114,167) $
(848)
276
712
(48,111) $
(2,393)
-
1,253
(64,551) $
(3,241)
276
1,965
(112,662)
Fair value, beginning of the year
Contributions paid into the plans
Benefits paid by the plans
Interest income
Administrative costs
Remeasurements, return on plan
assets recognized in other
comprehensive income
Foreign exchange translation
Fair value, end of year
Accrued benefit liability,
end of year
Other post-
retirement
benefits
$
- $
1,619
(1,619)
-
-
Pensions
45,799 $
849
(1,946)
1,736
(36)
December 31,
2017
45,799 $
2,468
(3,565)
1,736
(36)
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)
-
-
- $
3,875
(1,368)
48,909 $
3,875
(1,368)
48,909 $
-
-
- $
3,318
(633)
45,799 $
3,318
(633)
45,799
$
(44,621)
(20,637)
(65,258)
(48,111)
(18,752)
(66,863)
Page 23 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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
121 $
1,791
-
-
1,912 $
$
$
Year ended
December 31,
2017
2,057 $
2,394
36
-
4,487 $
Pensions
1,936 $
603
36
-
2,575 $
Other post-
retirement
benefits
122 $
1,869
-
(276)
1,715 $
Year ended
December 31,
2016
1,923
2,538
89
(276)
4,274
Pensions
1,801 $
669
89
-
2,559 $
Amounts recognized in other comprehensive income (before income taxes):
Actuarial gains (losses)
$
2,046 $
Year ended
December 31, 2017
Year ended
December 31, 2016
1,515
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:
Description
Equity
Debt securities
December 31, 2017
82.9%
17.1%
100.0%
December 31, 2016
86.3%
13.7%
100.0%
The defined benefit obligation and plan assets are composed by country as follows:
Year ended December 31, 2017
Year ended December 31, 2016
Canada
USA
Germany
Total
Canada
USA
Germany
Total
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
$
$
(30,698) $
27,464
(3,234)
(26,212)
(29,446) $
(28,636) $
21,446
(7,190)
(20,195)
(27,385) $
- $
-
-
(8,427)
(8,427) $
(59,334) $
48,910
(10,424)
(54,834)
(65,258) $
(27,083) $
24,842
(2,241)
(27,008)
(29,249) $
(28,717) $
20,957
(7,760)
(22,933)
(30,693) $
- $
-
-
(6,921)
(6,921) $
(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
Page 24 ▌Martinrea International Inc.
December 31, 2017
December 31, 2016
3.3%
CPM - RPP 2014 Priv
3.7%
CPM - RPP 2014 Priv
3.4%
CPM - RPP 2014 Priv
& Blue collar w/MP
3.9%
CPM - RPP 2014 Priv
& Blue collar w/MP
5.9%
4.5%
6.5%
4.8%
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Sensitivity of Key Assumptions
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.
Change in
assumption
0.50%
1 Year
Impact on defined benefit obligation
December 31, 2017
Increase in
assumption
Decrease by 7.5%
Increase by 3.1%
Decrease in
assumption
Increase by 8.5%
Decrease by 3.19%
Impact on defined benefit obligation
December 31, 2016
Increase in
assumption
Decrease in
assumption
Increase by 8.6%
Increase by 3.10% Decrease by 3.25%
Decrease by 7.7%
0.50%
1 Year
Decrease by 6.4%
Increase by 11.1%
Increase by 7.2%
Decrease by 9.2%
Decrease by 6.3%
Increase by 12.0%
Increase by 7.1%
Decrease by 9.9%
Pension Plans
Discount rate
Life Expectancy
Other post-retirement benefits
Discount rate
Medical costs
13.
INCOME TAXES
The components of income tax expense are as follows:
Year ended
December 31, 2017
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 2017 and 2016 were as follows:
Year ended
December 31, 2016
(42,572)
1,194
(41,378)
(73,316) $
3,346
(69,970) $
Deferred tax charge on:
Employee benefit plan actuarial losses
US tax reform impact on employee benefit plans
Cumulative translation adjustments
Reconciliation of effective tax rate
Year ended
December 31, 2017
Year ended
December 31, 2016
(392)
-
(2,080)
(2,472)
(533) $
(1,216) $
(257)
(2,006) $
$
$
$
The provision for income taxes differs from the result that would be obtained by applying statutory income tax rates to income before income taxes. The
difference results from the following:
Income before income taxes
Tax at Statutory income tax rate of 26.5% (2016 - 26.5%)
Increase (decrease) in income taxes resulting from:
Impact of US tax reforms
Utilization of losses previously not benefited
Tax audit settlements and changes in estimates
Revaluation due to foreign exchange and inflation
Rate differences and deductions allowed in foreign jurisdictions
Current year tax losses not benefited and withholding tax expensed
Recognition of previously unrecognized deferred tax assets
Stock-based compensation and other non-deductible expenses
Effective income tax rate applicable to income before income taxes
Page 25 ▌Martinrea International Inc.
$
$
Year ended
December 31, 2017
229,236 $
Year ended
December 31, 2016
133,339
60,748
19,313
(4,861)
(986)
1,403
(1,812)
6,085
(12,758)
2,838
69,970 $
30.5%
35,335
-
-
(2,455)
2,971
(3,340)
8,008
(1,099)
1,958
41,378
31.0%
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The movement of deferred tax assets is summarized below:
December 31, 2015
Benefit (charge) to income
Benefit (charge) to other comprehensive income
Translation and other
December 31, 2016
Benefit (charge) to income
Charge to other comprehensive income
Translation and other
December 31, 2017
Losses
$ 125,635 $
(8,374)
-
(3,865)
113,396
(18,389)
-
(6,523)
$ 88,484 $
Employee
benefits
20,675 $
198
(392)
(420)
20,061
(1,732)
(1,749)
(583)
15,997 $
Interest
and
accruals
13,583 $
11,739
-
(190)
25,132
(5,419)
-
(1,339)
18,374 $
PPE and
intangible
assets
17,067 $
(2,039)
-
(912)
14,116
(2,387)
-
801
12,530 $
Other
5,272 $
1,594
171
(40)
6,997
156
(74)
(291)
6,788 $
Total
182,232
3,118
(221)
(5,427)
179,702
(27,771)
(1,823)
(7,935)
142,173
The movement of deferred tax liabilities is summarized below:
December 31, 2015
Benefit (charge) to income
Charge to other comprehensive income
Translation and other
December 31, 2016
Benefit to income
Charge to other comprehensive income
Translation and other
December 31, 2017
Net deferred asset at December 31, 2016
Net deferred asset at December 31, 2017
PPE and
intangible
assets
(108,800) $
(2,477)
-
499
(110,778)
29,917
-
5,179
(75,682) $
$
$
Other
(5,771) $
553
(2,251)
13
(7,456)
1,200
(184)
(251)
(6,691) $
Total
(114,571)
(1,924)
(2,251)
512
(118,234)
31,117
(184)
4,928
(82,373)
$
$
61,468
59,800
The Company has accumulated approximately $527,749 (December 31, 2016 - $580,792) in non-capital losses that are available to reduce taxable
income in future years. If unused these losses will expire as follows:
Year
2018-2020
2021-2025
2026-2037
Indefinite
$
$
4,153
873
477,074
45,649
527,749
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.
Extensive changes to the US tax system were enacted on December 22, 2017, which, among other changes, substantially reduced the US federal
corporate tax rate from 35% to 21% with effect from January 1, 2018. As a result of this change, the Company’s deferred tax asset in the US decreased
as at December 31, 2017 with a corresponding one-time, non-cash increase in income tax expense of $19,313.
A deferred tax asset of $60,369 in the United States (December 31, 2016 - $72,746) 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.
Page 26 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
At December 31, 2017, 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
$
$
2017
43,857 $
3,961
188
48,006 $
2016
98,202
1,575
188
99,965
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 the amount of undistributed earnings and other differences including the outside basis difference of foreign subsidiaries is
approximately $612,983 at December 31, 2017 (December 31, 2016 - $518,388).
Future changes in tax law, in any of the jurisdictions in which the Company has a presence, could significantly impact the Company’s provision for
income taxes, taxes payable, and deferred tax asset and liability balances.
14.
CAPITAL STOCK
Common shares outstanding:
Balance, December 31, 2015
Exercise of stock options
Balance, December 31, 2016
Exercise of stock options
Balance, December 31, 2017
Number
86,374,667
110,000
86,484,667
261,167
86,745,834
$
$
$
Amount
709,396
1,114
710,510
2,915
713,425
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 stock option
plan and the 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:
Year ended
December 31, 2017
Number of
options
3,010,617 $
(261,167)
(905,000)
1,844,450 $
1,844,450 $
Weighted
average
exercise price
11.38
8.09
14.91
10.12
10.12
Year ended
December 31, 2016
Weighted
average
exercise price
12.38
7.21
15.31
11.38
11.36
Number of
options
4,340,617 $
(110,000)
(1,220,000)
3,010,617 $
2,885,617 $
Balance, beginning of period
Exercised during the period
Cancelled during the period
Balance, end of period
Options exercisable, end of period
Page 27 ▌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 the issued and outstanding common share purchase options as at December 31, 2017:
Range of exercise price per share
$6.00 - 8.99
$9.00 - 9.99
$10.00 - 15.99
Total share purchase options
Number
outstanding
688,701
50,000
1,105,749
1,844,450
Date of grant
2008 - 2012
2008
2008 - 2015
Expiry
2018 - 2022
2018
2018 - 2025
For the year ended December 31, 2017, the Company expensed $123 (2016 - $333), to reflect stock-based compensation expense, as derived using
the Black-Scholes option valuation model.
Deferred Share Unit Plan
The following is a summary of the issued and outstanding DSUs as at December 31, 2017:
Units outstanding, beginning of period
Units granted during the period
Units settled during the period
Units for dividends earned during the period (issued twice a year)
Units outstanding, end of period
Year ended
December 31, 2017
67,837
54,588
-
888
123,313
Year ended
December 31, 2016
-
67,623
-
214
67,837
The DSUs granted during the years ended December 31, 2017 and 2016 were granted to non-executive directors, are not subject to vesting conditions
and had a weighted average fair value per unit of $10.99 and $8.87, respectively, on the date of grant. At December 31, 2017, the fair value of all
outstanding DSUs amounted to $1,939 (December 31, 2016 - $568). For the year ended December 31, 2017, DSU compensation expense, including
changes in fair value during the year, amounted to $1,371 (year-ended December 31, 2016 - $568), which was recorded in selling, general and
administrative expense in the consolidated statement of operations.
Performance Restricted Share Unit Plan
The following is a summary of the issued and outstanding RSU’s and PSUs for the year ended December 31, 2017:
Units outstanding, beginning of period
Units granted during the period
Units exercised during the period
Units forfeited during the period
Units outstanding, end of period
RSUs
-
77,304
-
-
77,304
PSUs
-
77,304
-
-
77,304
Total
-
154,608
-
-
154,608
The RSUs and PSUs granted during the year ended December 31, 2017 had a weighted average fair value per unit of $11.92 on the date of grant. For
the year ended December 31, 2017, RSU and PSU compensation expense, including changes in fair value during the year, amounted to $1,380 (year-
ended December 31, 2016 - $Nil), which was recorded in selling, general and administrative expense in the consolidated statement of operations.
Unrecognized RSU and PSU compensation expense as at December 31, 2017 was $803 (December 31, 2016 - $Nil) and will be recognized in profit and
loss over the next three years as the RSUs and PSUs vest.
The key assumptions used in the valuation of PSUs granted during the year ended December 31, 2017 are shown in the table below:
Expected life (years)
Risk free interest rate
Page 28 ▌Martinrea International Inc.
2017
2.38
1.15%
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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, 2017
Year ended
December 31, 2016
Weighted
average
number of
shares
86,527,271
252,035
86,779,306
$
$
Per common
share amount
1.84
Weighted
average
number of
shares
86,389,379
-
1.84
137,904
86,527,283
Per common
share amount
1.07
-
1.07
$
$
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.
For the year ended December 31, 2017, 767,000 options (year-ended December 31, 2016 - 2,010,749) 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
17.
PERSONNEL EXPENSES
Year ended
December 31, 2017
27,571 $
(14,211)
13,237
26,597 $
Year ended
December 31, 2016
23,825
(12,624)
13,652
24,853
$
$
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
RSU and PSU compensation expense (including changes in fair value during the year)
DSU compensation expense (including changes in fair value during the year)
Stock-based compensation expense
18.
FINANCE EXPENSE AND OTHER FINANCE INCOME (EXPENSE)
Debt interest, gross
Capitalized interest - at an average rate of 2.8% (2016 - 2.7%)
Finance expense
Net foreign exchange gain (loss)
Unrealized gain on derivative instruments (note 7)
Other income, net
Other finance income (expense)
Page 29 ▌Martinrea International Inc.
Note
Year ended
December 31, 2017
12
14
14
14
$
$
873,731 $
4,487
1,380
1,371
123
881,092 $
Year ended
December 31, 2016
877,674
4,274
-
568
333
882,849
Year ended
December 31, 2017
(25,817) $
3,290
(22,527) $
Year ended
December 31, 2017
1,167 $
3,697
275
5,139 $
Year ended
December 31, 2016
(27,404)
3,208
(24,196)
Year ended
December 31, 2016
(2,228)
-
319
(1,909)
$
$
$
$
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
19.
OPERATING SEGMENTS
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.
The following is a summary of selected data for each of the Company’s segments:
Year ended December 31, 2017
Year ended December 31, 2016
Sales
Property, plant
and equipment
Operating
Income
Sales
Property, plant
and equipment
Operating
Income
North America
Canada
USA
Mexico
Eliminations
Europe
Germany
Spain
Slovakia
Eliminations
Rest of the World
Eliminations
$
$
$
778,930 $
1,360,796
954,700
(180,640)
2,913,786 $
433,806
162,832
61,026
(635)
657,029
132,067
(12,383)
3,690,499 $
20.
FINANCIAL INSTRUMENTS
$
886,936 $
158,213
400,618
410,218
-
969,049 $
213,493 $
134,366
91,157
14,323
-
239,846
73,729
38,388
(5,257)
1,282,624 $
246,624 $
1,629,029
872,844
(166,149)
3,222,660
415,056
167,575
55,150
(1,699)
636,082
122,989
(13,324)
3,968,407 $
176,901
408,430
418,353
-
1,003,684 $
128,783
93,061
78,443
13,066
-
184,570
68,993
35,003
(4,342)
1,257,247 $
159,444
The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, other assets, 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.
Page 30 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The following table summarizes the fair value hierarchy under which the Company’s applicable financial instruments are valued:
Cash and cash equivalents
Other assets (note 7)
Foreign exchange forward contracts (note 9)
Cash and cash equivalents
Foreign exchange forward contracts (note 9)
Fair values versus carrying amounts
$
$
$
$
Total
71,193
15,265
$
(146) $
Total
59,165
$
(208) $
December 31, 2017
Level 1
71,193
11,275
-
$
$
Level 2
-
3,990
$
(146) $
December 31, 2016
Level 1
59,165
-
$
$
Level 2
-
$
(208) $
Level 3
-
-
-
Level 3
-
-
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
December 31, 2017
FINANCIAL ASSETS:
Trade and other receivables
Other assets (note 7)
$
FINANCIAL LIABILITIES:
Trade and other payables
Long-term debt
Foreign exchange forward contracts
Fair value
through profit
or loss
Fair value
through other
comprehensive
income
Loans and
receivables
Amortized
cost
Carrying
amount
Fair value
- $
3,990
3,990
-
-
(146)
(146)
- $
556,049 $
11,275
11,275
-
556,049
- $
-
-
556,049 $
15,265
571,314
556,049
15,265
571,314
-
-
-
-
-
-
-
-
(741,403)
(654,017)
-
(1,395,420)
(741,403)
(654,017)
(146)
(1,395,566)
(741,403)
(654,017)
(146)
(1,395,566)
Net financial assets (liabilities)
$
3,844 $
11,275 $
556,049 $
(1,395,420) $
(824,252) $
(824,252)
December 31, 2016
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)
Net financial assets (liabilities)
$
(208) $
568,445 $
(1,428,202) $
(859,965) $
(859,965)
The fair values of trade and other receivables and trade and other payables approximate 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, currency risk and market price risk related
to publicly-traded investment. These risks arise from exposures that occur in the normal course of business and are managed on a consolidated
Company basis.
Page 31 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(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 cash equivalents 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
32.5%, 28.1%, and 14.9% of its production sales for the year ended December 31, 2017 (December 31, 2016 - 31.5%, 28.6% and 15.0%). A
substantial portion of the Company’s trade receivables are with large customers in the automotive, truck and industrial sectors and are subject to
normal industry credit risks. The trade accounts receivable that were past due as at December 31, 2017 are part of the normal payment pattern
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.
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, 2017
501,336 $
19,853
17,641
538,830 $
December 31, 2016
526,483
16,540
12,051
555,074
$
$
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, 2017, the Company had cash of $71,193 and banking facilities available as
discussed in note 11. All of 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, 2017
551,656 $
102,361
654,017 $
December 31, 2016
631,879
89,524
721,403
$
$
An increase or decrease of 1.0% in all variable interest rate debt would, all else being equal, have an effect of $6,015 (December 31, 2016 - $6,246) on
the Company’s consolidated financial results for the year ended December 31, 2017.
Page 32 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(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 revenue 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, 2017, the Company had committed to the following foreign exchange contracts:
Sell Canadian Dollars
Buy Mexican Peso
Currency
Amount of U.S.
dollars
$
$
20,000
30,468
Weighted average
exchange rate of U.S.
dollars
1.2835
19.3319
Maximum period in
months
1
2
The aggregate value of these forward contracts as at December 31, 2017 was a pre-tax loss of $146 and was recorded in trade and other payables
(December 31, 2016 - loss of $208).
The Company’s exposure to foreign currency risk reported in the foreign currency was as follows:
December 31, 2017
Trade and other receivables
Trade and other payables
Long-term debt
December 31, 2016
Trade and other receivables
Trade and other payables
Long-term debt
USD
282,095
(330,020)
(263,701)
(311,626)
USD
289,124
(353,541)
(295,971)
(360,388)
€
€
€
€
$
$
$
$
EURO
64,926
(91,091)
(35,949)
(62,114)
EURO
59,222
(73,297)
(38,813)
(52,888)
$
$
$
$
PESO
44,972 R$
(163,168)
-
(118,196) R$
PESO
27,941 R$
(116,038)
-
(88,097) R$
¥
BRL
19,424
(25,341)
(356)
(6,273) ¥
¥
BRL
15,359
(17,432)
(495)
(2,568) ¥
CNY
174,033
(116,149)
-
57,884
CNY
156,848
(79,703)
-
77,145
The following summary illustrates the fluctuations in the exchange rates applied during the year ended December 31, 2017 and 2016:
USD
EURO
PESO
BRL
CNY
Sensitivity analysis
Average rate
Closing rate
Year ended December
31, 2017
1.3029
1.4576
0.0688
0.4077
0.1920
Year ended December
31, 2016
1.3286
1.4727
0.0722
0.3780
0.2012
Year ended December
31, 2017
1.2571
1.5089
0.0639
0.3795
0.1924
Year ended December
31, 2016
1.3427
1.4169
0.0651
0.4125
0.1930
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, 2017 by the amounts shown below, assuming all other
variables remain constant:
Page 33 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
USD
EURO
BRL
CNY
Year ended
December 31, 2017
(6,333) $
(4,559)
938
(305)
(10,259) $
Year ended
December 31, 2016
(1,226)
(4,114)
671
(57)
(4,726)
$
$
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) Market price risk related to publicly-traded investments
Market price risk related to publicly-traded investments refers to the risk that changes or fluctuations in the market prices of the Company’s
investments in publicly-traded companies will affect income, cash flows or the value of financial instruments. The Company manages risks related
to such changes by regularly reviewing publicly-available information related to these investments to ensure that any risks are within reasonable
levels of risk tolerance. The Company does not engage in risk management practices such as hedging, derivatives, or short selling with respect to
publicly-traded investments.
(f) 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 retained earnings, 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.
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)
December 31,
2017
210,189 $
416,130
626,319 $
December 31,
2016
195,272
403,434
598,706
$
$
Page 34 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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,
2017
34,735 $
100,090
75,364
210,189 $
December 31,
2016
27,486
84,276
83,510
195,272
$
$
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 $83,110 (BRL
$219,460) including interest and penalties to December 31, 2017 (December 31, 2016 - $82,453 or BRL 199,886). 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 $57,152 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.
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, 2017, the amount of the program financing was $75,189 (December 31, 2016 - $65,468) 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 2017 or 2016. 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.
Page 35 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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
Termination benefits *
RSU and PSU compensation expense (including changes in fair value during the year)
DSU compensation expense (including changes in fair value during the year)
Stock-based compensation expense
Net expense
$
$
Year ended
December 31, 2017
12,487 $
1,767
1,380
1,371
123
17,128 $
Year ended
December 31, 2016
11,660
-
-
568
333
12,561
*During the third quarter of 2017, David Rashid ceased to be an Executive Vice President of Operations of the Company. Upon his departure, David
Rashid was entitled to the termination benefit as set out in his employment contract in the aggregate amount of $1.8 million payable over a twelve-month
period. The $1.8 million termination benefit was set up as a liability and expensed during the third quarter of 2017. The liability is included in trade and
other payables.
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.
Country of incorporation
Canada
Canada
Canada
Canada
United States of America
Canada
Slovakia
United States of America
Mexico
Canada
Netherlands
Ownership interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Page 36 ▌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)
Senior Advisor to Teijin Corporation, Advisor to
Achates Power
Fred Olson (1), (2), (3), (4)
Retired, President and CEO, Webasto Product North
America
Sandra Pupatello (1), (2), (3)
President, Canadian International Avenues Ltd.
(1)
(2)
(3)
(4)
Member, Human Resources and Compensation Committee
Member, Audit Committee
Member, Corporate Governance and Nominating Committee
Lead Director
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
Corporate Executive Officers
Stock Listing
Pat D’Eramo, President and Chief Executive Officer
Rob Wildeboer, Executive Chairman
Fred Di Tosto, Chief Financial Officer
Armando Pagliari, Executive VP, Human Resources
The Toronto Stock Exchange (TSX: MRE)
MMAARRTTIINNRREEAA IINNTTEERRNNAATTIIOONNAALL IINNCC..
Website: www.martinrea.com
Investor Information: investor@martinrea.com