MMAARRTTIINNRREEAA IINNTTEERRNNAATTIIOONNAALL IINNCC..
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2018
MESSAGE TO SHAREHOLDERS
Welcome to 2019, a year which we look forward to with great anticipation, as we intend to continue to
develop and apply our One Martinrea culture in our business, with a view to increasing year over year
revenues, profits and operating margins, continuing to improve our leading safety and quality metrics,
delighting our customers, providing meaningful work and job satisfaction to our employees, performing for
our shareholders and leading the way in good corporate citizenship in our communities. Even in a
challenging environment in terms of some of the geopolitical, trade and economic issues we all face. In
sum, we will continue to perform well, as we did in 2018, and in the years before that.
The year 2018 was a year of highlights for Martinrea, and let’s summarize some of them:
We recorded revenues of $3.66 billion, similar to 2017 revenues. Excluding a change in certain customer
contracts in 2017, moving from a pass through model to a value added model, our business increased year
over year.
For the tenth year in a row, we improved earnings, and achieved a record earnings performance in 2018,
with adjusted net earnings of approximately $193 million, up 17% from last year, or fully diluted adjusted
net earnings per share of $2.22, the best EPS performance in our history.
Our adjusted operating income margins increased to 7.8% for the year, up from 6.4% last year, 5% in 2016,
4.6% in 2015 and 4.1% in 2014. We more than met our 2017 target of 6% by the end of 2017, and we are
well on our way to meeting our 8% target by 2019 with a strong year in 2018. Not only have these margins
increased steadily, our operating margins have been increasing at a faster rate than virtually any other
company in the sector. On an absolute basis, our operating margins are now higher than many of our direct
competitors in the areas in which we compete and in terms of general automotive parts suppliers.
Once again, we achieved record adjusted EBITDA performance in 2018, of $461 million, up from $401
million in 2017, a 15% increase year over year. Our company is becoming a significant cash flow
generator, and we will see increasing free cash flow this year and going forward.
Our balance sheet remains very strong, and we ended 2018 with a net debt:adjusted EBITDA ratio at 1.45:1,
about the same as at the end of 2017, despite an increased dividend and significant share repurchases in
2018. We also renewed and expanded our credit facilities with our banking syndicate, giving us a record
level of liquidity to finance our growth and investments.
We returned significant cash to our shareholders in 2018. We increased the dividend by 50% in early 2018
and we commenced a normal course issuer bid in the third quarter. By year end we had repurchased
approximately 2.5% of our outstanding common shares, returning approximately $40 million to
shareholders, inclusive of our dividend.
We continued to focus on improving our safety metrics, as we look to provide our employees with a safe
work environment. Overall, we are significantly better than industry average, covering our customers and
other parts manufacturers. Our internal objective was to be in the top quartile of our industry for safety
performance, and now it is to be in the top decile. We will get there. Our ultimate goal is to be the industry
leader. We note that this has been a journey for many of our plants, which we bought while they were in
financial distress and safety was not good.
1
Quality is critical for us, and 2018 was a year in which we continued to receive multiple quality awards
from multiple customers. We have also received supplier diversity awards.
2018 saw a year of heavy launch activity, which went very well for us.
We quoted much new business, and achieved new business awards with approximately $600 million in
annualized revenue in 2018, a record year for us. This work will launch over the next three years and will
support revenue growth for us.
We made a strategic investment in a graphene producing company, NanoXplore Inc., which we are very
excited about. Graphene is a wonderful material with huge lightweighting possibilities generally and for
our applications.
We have renewed our sales and marketing strategy to take advantage of opportunities created because of
current lightweighting and electrification trends and also our capabilities to build systems, launched to our
customers in early 2019 but developed internally in 2018. In addition to our historical portfolio of products
and capabilities, we will be delivering lightweight structures and propulsion systems using advanced
materials in steel, aluminum, or a combination, as well as other materials.
We had a record year despite some of the industry headwinds and the broader geopolitical, trade and
economic environment.
In terms of the industry, volumes were fairly flat across our markets, and the times of robust year over year
growth may be over, at least in some areas. Nevertheless, volumes are at a very healthy level today. And
our product offerings are essential to our customers. Every vehicle needs structure for safety reasons, and
we provide that. Every vehicle benefits from the lightweighting of products that we specialize in, whether
an electric vehicle, one propelled by gasoline or diesel, or one propelled by something else. Lightweight
products reduce emissions, increase distance on a tank of gas or an electric charge, reduce greenhouse gas
emissions somewhere, and so on. Our new business wins are a testament to the needs of our products.
They include battery trays and propulsion products for electric and hybrid vehicles. Our propulsion systems
products are mission critical for this industry. In sum, we believe we are positioned to be in a very good
place.
In addition to the usual industry challenges, in 2018 we dealt with, and are continuing to deal with, some
broader issues. For example, in the area of trade, we are pleased with the signing, and hopefully pending
ratification, of the USMCA, as the updated form of NAFTA is generally termed. We were very busy with
a variety of governments and industry participants in the negotiations, and we believe the signed agreement
is a good one, with some potential opportunities for North American suppliers such as ourselves because
of the North American rules of origin provisions. We had to deal with the imposition of steel and aluminum
tariffs by the United States, and the retaliatory tariffs imposed by Canada. We are advocating for their
removal in 2019, but we do note that the direct impact to us, either initially or because of relief sought and
obtained, is minimal. We believe we have had the opportunity to be part of the conversation and that, in
the final analysis, we will end up with a very healthy North American automotive and automotive parts
industry. In terms of broader tariff and trade discussions, involving the United States, China and others,
we believe there will eventually be a resolution that works for the industry. Martinrea has a small presence
in China, but there is opportunity there if the risks can be addressed.
On a positive note, challenges present opportunities to nimble, entrepreneurial, lean and resilient companies
with great people, and we believe we have shown an ability to take advantage of opportunities over the
2
years. In 2001, we were not an automotive parts supplier, and we became one just before 9/11. For the
next seven years there were many challenges in the industry, as it saw many insolvencies and restructurings,
and we grew and bought distressed assets at good prices—that we needed to fix. Then came the Great
Recession, which was not fun, but we came out of that with more assets and a full footprint. Since that
time, in the recovery, we have continued to improve, and especially since 2014 when we launched our
Martinrea 2.0 initiatives, all resulting in the improving financial, safety, quality and other metrics shown
by our 2018 results. We get stronger through meeting challenges well. Bring it on!
We talk about culture a lot at Martinrea. Why? Because it matters. It matters a lot. It matters to us, but
most importantly, it matters to our people here at Martinrea. Just last week we reviewed the results of our
employee surveys, and 91% of our employees, worldwide, reported that they know our vision, mission and
principles! That is a telling statistic. The employees were from 45 plants and two major corporate offices
in eight countries on four continents, and included recent hires and those who have been with us for many
years. Our culture is having a profound impact on our company and our people, and on us. So we take it
very seriously. Peter Drucker once said culture eats strategy for breakfast. And we think he is right.
So, we come to maybe the biggest highlight for us from 2018, and that is our development of culture.
Working with our people at the leadership level and in other areas of our company, we updated our vision,
which has been simplified and shortened to the following: Making lives better by being the best supplier
we can be in the products we make and the services we provide. Our people need a why, and that’s a “why”
vision. Our mission was updated to Making People’s Lives Better by: (i) Delivering outstanding quality
products and services to our customers; (ii) Providing meaningful opportunity, job satisfaction and job
security for our people; (iii) Providing superior long term investment returns to our stakeholders; and (iv)
Being positive contributors to our communities. And our Ten Guiding Principles remain the same:
1. We make great, high quality products
2. Every location must be a centre of excellence
3. Discipline is key
4. We attract, train and work with excellent people, and we motivate our people to perform well
5. We are a team
6. Challenges make us better
7. Think differently
8. Work hard, play hard
9. The Golden Rule – Treat everyone with dignity and respect
10. Our leadership team has to drive these messages consistently and simply.
We don’t stop with the Vision, Mission and Ten Guiding Principles, not any longer. In 2018, we articulated,
in a cohesive yet simple way, our company culture, comprised of entrepreneurship, lean manufacturing
principles and the Golden Rule philosophy core to our Ten Guiding Principles, as demonstrated in a picture.
3
MAKING PEOPLE’S LIVES BETTER
The Company has been entrepreneurial in nature since inception, a company that has embraced
characteristics of encouraging executives, general managers and all employees to act and think like an
owner with a stake in the enterprise; supporting a can do attitude; promoting an ability and willingness to
urgently get things done; acting to avoid unnecessary bureaucracy; developing an ability to learn from
mistakes openly and constructively; and the trust of working in a team. As a Company, we embrace new
initiatives every day, and we focus on new products, new technologies, new locations and new ways of
doing things consistently.
The Company embraces lean thinking as part of its culture too. Simply stated, the lean thinking way is a
focus on eliminating waste in all aspects of the Company’s business and operations. The elimination of
waste allows us to take out unnecessary cost, thereby making us competitive. It enables us to see problems
that we can fix in our operations more easily. It allows us to simplify processes so that we can have safer,
cleaner, more efficient and more sustainable workplaces. It is a culture of continuous improvement in
whatever we do.
At the core of our One Martinrea culture is a Golden Rule philosophy, based on treating others the way we
want to be treated, with dignity and respect, but more also. It means following our Ten Guiding Principles
in our business and operations, and in how we deal with our customers, employees, suppliers, stakeholders
(lenders and shareholders) and our communities. Being lean or being entrepreneurial is not enough. These
cultural elements overlap but are tied together with our Golden Rule approach. We make people’s lives
better in what we do, and we can only do that with a service oriented approach to our work and our
colleagues at work, and all those who we deal with in our work.
At Martinrea, we believe that our culture is and will be a sustainable competitive advantage for the
Company over the long term, and we believe it has driven the improving financial, safety, and quality
performance over the past several years.
We don’t profess to understand the stock market or how investors make their decisions, and frankly we are
not sure we are alone in that. But we do believe one thing. Sustainable companies with great cultures will
be around for a long time. We believe we have a company poised to excel over the next decade and beyond,
and we, and our people, are committed to that.
4
We thank all our stakeholders for their support! We will continue to do our best for you in 2019 and beyond.
The future is there for us to seize.
(Signed) “Rob Wildeboer”
(Signed) “Pat D’Eramo”
Rob Wildeboer
Executive Chairman
Pat D’Eramo
President and Chief Executive Officer
5
MANAGEMENT DISCUSSION AND ANALYSIS
OF OPERATING RESULTS AND FINANCIAL POSITION
For the Year ended December 31, 2018
The following management discussion and analysis (“MD&A”) was prepared as of February 28, 2019 and should be read in conjunction
with the Company’s audited consolidated financial statements for the year ended December 31, 2018 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, 2018, 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 45 operating divisions in Canada, the United States,
Mexico, Brazil, Germany, Slovakia, Spain and China.
Martinrea’s vision is to make lives better by being the best supplier we can be in the products we make and the services we provide. The
Company’s mission is to make people’s lives better by: delivering outstanding quality products and services to our customers; providing
meaningful opportunity, job satisfaction, and job security to our people through competitiveness and prudent growth; being positive
contributors to our communities; and providing superior long-term investment returns to our stakeholders.
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, 2018 and 2017. Refer
to the Company’s audited consolidated financial statements for the year ended December 31, 2018 for a detailed account of the
Company’s performance for the periods presented in the tables 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
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
$
$
$
$
$
$
$
Year ended
December 31, 2018
3,662,900 $
556,161
276,472
185,883
185,883 $
2.15 $
2.14 $
283,981 $
7.8%
461,223
12.6%
193,166
2.23 $
2.22 $
Year ended
December 31, 2017
3,690,499
484,601
246,624
159,266
$ Change % Change
(0.7%)
14.8%
12.1%
16.7%
(27,599)
71,560
29,848
26,617
159,543
1.84
1.84
26,340
0.31
0.30
16.5%
16.8%
16.3%
236,807
6.4%
401,493
10.9%
165,519
1.91
1.91
47,174
19.9%
59,730
14.9%
27,647
0.32
0.31
16.7%
16.8%
16.2%
The following table sets out a detailed account of the Company’s performance for the fourth quarters of 2018 and 2017 (unaudited).
Page 1 ▌Martinrea International Inc.
Three months
ended December
31, 2018
Three months
ended December
31, 2017
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
Loss on disposal of property, plant and equipment
Impairment of assets
Restructuring costs
Gain on disposal of land and building
Operating Income
Finance expense
Other finance income (expense)
Income before taxes
Income tax expense
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
926,154 $
(751,605)
(39,982)
134,567
(7,189)
(58,363)
(2,971)
(535)
(93)
(5,436)
(2,073)
-
57,907 $
(7,013)
(389)
50,505 $
(12,689)
37,816 $
0.44 $
65,416 $
7.1%
111,785
12.1%
43,840
0.51 $
$ Change % Change
5.4%
4.8%
6.1%
8.5%
8.9%
11.1%
14.4%
0.9%
(35.4%)
(27.4%)
(100.0%)
(100.0%)
(14.2%)
22.3%
(114.5%)
(21.7%)
(60.5%)
16.8%
18.9%
47,512
(34,678)
(2,309)
10,525
(589)
(5,832)
(375)
(5)
51
2,052
(2,073)
(13,374)
(9,620)
(1,278)
(3,070)
(13,968)
19,418
5,450
0.07
3,775
6.1%
5,955
5.6%
878,642
(716,927)
(37,673)
124,042
(6,600)
(52,531)
(2,596)
(530)
(144)
(7,488)
-
13,374
67,527
(5,735)
2,681
64,473
(32,107)
32,366
0.37
61,641
7.0%
105,830
12.0%
43,179
0.50
661
0.01
1.5%
2.0%
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”.
Page 2 ▌Martinrea International Inc.
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
Unusual and Other Items (after-tax)*
Adjusted Net Income Attributable to Equity Holders of the Company
Three months ended
December 31, 2018
37,816 $
6,024
43,840 $
Year ended
December 31, 2018
185,883 $
7,283
193,166 $
$
$
$
$
Three months ended
December 31, 2017
32,366
10,813
43,179
Year ended
December 31, 2017
159,543
5,976
165,519
*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
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
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
Three months ended
December 31, 2018
37,816 $
12,689
(59)
7,013
7,957
65,416 $
42,953
3,323
93
111,785 $
Year ended
December 31, 2018
185,883 $
-
60,943
401
27,358
9,396
283,981 $
163,298
13,482
462
461,223 $
$
$
$
$
$
$
Three months ended
December 31, 2017
32,366
32,107
(359)
5,735
(8,208)
61,641
40,269
3,776
144
105,830
Year ended
December 31, 2017
159,543
(277)
69,970
(1,442)
22,527
(13,514)
236,807
149,670
15,399
(383)
401,493
*Unusual and other items are explained in the "Adjustments to Net Income" section of this MD&A
The year-over-year changes in significant accounts and financial highlights are discussed in detail in the sections below.
SALES
Three months ended December 31, 2018 to three months ended December 31, 2017 comparison
Three months ended
December 31, 2018
$
$
735,876 $
167,533
27,571
(4,826)
926,154 $
Three months ended
December 31, 2017
674,852
163,949
41,904
(2,063)
878,642
$ Change
61,024
3,584
(14,333)
(2,763)
47,512
% Change
9.0%
2.2%
(34.2%)
(133.9%)
5.4%
North America
Europe
Rest of the World
Eliminations
Total Sales
Page 3 ▌Martinrea International Inc.
The Company’s consolidated sales for the fourth quarter of 2018 increased by $47.6 million or 5.4% to $926.2 million as compared to
$878.6 million for the fourth quarter of 2017. The total increase in sales was driven by year-over-year increases in the North America and
Europe operating segments, partially offset by a decrease in the Rest of the World.
Sales for the fourth quarter of 2018 in the Company’s North America operating segment increased by $61.0 million or 9.0% to $735.9
million from $674.9 million for the fourth quarter of 2017. The increase was due to the launch of new programs during or subsequent to
the fourth quarter of 2017, including the next generation GM Silverado/Sierra and RAM pick-up trucks, and the new Chevrolet Blazer; the
impact of foreign exchange on the translation of U.S. denominated production sales, which had a positive impact on overall sales for the
fourth quarter of 2018 of approximately $23.4 million as compared to the fourth quarter of 2017; and an increase in tooling sales of $18.0
million, which are typically dependant on the timing of tooling construction and final acceptance by the customer. These positive factors
were partially offset by lower year-over-year production volumes on certain light-vehicle platforms including the Chevrolet Malibu, Ford
Escape and Chrysler 300/Challenger/Charger, and programs that ended production during or subsequent to the fourth quarter of 2017.
Sales for the fourth quarter of 2018 in the Company’s Europe operating segment increased by $3.6 million or 2.2% to $167.5 million from
$164.0 million for the fourth quarter of 2017. The increase can be attributed to the launch of new programs during or subsequent to the
fourth quarter of 2017, including a 2.0L aluminum engine block for Ford and the ramp up of new aluminum structural components work
and the new V8 AMG engine block for Daimler; a $4.7 million increase in tooling sales; and a $2.1 million positive foreign exchange
impact from the translation of Euro denominated production sales as compared to the fourth quarter of 2017. These positive factors were
partially offset by lower year-over-year production volumes on certain Jaguar Land Rover platforms.
Sales for the fourth quarter of 2018 in the Company’s Rest of the World operating segment decreased by $14.3 million or 34.2% to $27.6
million from $41.9 million in the fourth quarter of 2017. The decrease was due to lower year-over-year production volumes on the Ford
Mondeo vehicle platform in China; a $6.3 million decrease in tooling sales; and a $1.8 million negative foreign exchange impact from the
translation of foreign denominated production sales as compared to the fourth quarter of 2017. These negative factors were partially
offset by the launch of new aluminum structural components work for Jaguar Land Rover in China, which began to ramp up in the first
quarter of 2018.
Overall tooling sales increased by $16.4 million to $85.2 million for the fourth quarter of 2018 from $68.8 million for the fourth quarter of
2017.
Year ended December 31, 2018 to year ended December 31, 2017 comparison
North America
Europe
Rest of the World
Eliminations
Total Sales
Year ended
December 31, 2018
2,827,527 $
713,861
135,322
(13,810)
3,662,900 $
Year ended
December 31, 2017
2,913,786
657,029
132,067
(12,383)
3,690,499
$
$
$ Change
(86,259)
56,832
3,255
(1,427)
(27,599)
% Change
(3.0%)
8.6%
2.5%
11.5%
(0.7%)
The Company’s consolidated sales for the year ended December 31, 2018 decreased by $27.6 million or 0.7% to $3,662.9 million as
compared to $3,690.5 million for the year ended December 31, 2017. The total 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.
Sales for the year ended December 31, 2018 in the Company’s North America operating segment decreased by $86.3 million or 3.0% to
$2,827.5 million from $2,913.8 million for the year ended December 31, 2017. The decrease was due to lower year-over-year production
volumes on certain light-vehicle platforms including the Ford Escape, Ford Fusion, Chevrolet Malibu, Chrysler 300/Challenger/Charger,
and programs that ended production during or subsequent to the year ended December 31, 2017 such as the previous version of the GM
Equinox/Terrain; and 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, 2018 of approximately $21.1 million as compared to the corresponding period
of 2017. These negative factors were partially offset by the launch of new programs during or subsequent to the year ended December
31, 2017, including the next generation GM Equinox/Terrain, GM Silverado/Sierra and RAM pick-up trucks, and the new Chevrolet Blazer;
and an increase in tooling sales of $39.7 million, which are typically dependant on the timing of tooling construction and final acceptance
by the customer.
Sales for the year ended December 31, 2018 in the Company’s Europe operating segment increased by $56.9 million or 8.6% to $713.9
million from $657.0 million for the year ended December 31, 2017. The increase can be attributed to the launch of new programs during
Page 4 ▌Martinrea International Inc.
or subsequent to the year ended December 31, 2017, including a 2.0L aluminum engine block for Ford and the ramp up of new aluminum
structural components work and the new V8 AMG engine block for Daimler; the impact of foreign exchange on the translation of Euro
denominated production sales, which had a positive impact on overall sales for the year ended December 31, 2018 of approximately
$30.1 million as compared to the corresponding period of 2017; and a $13.9 million increase in tooling sales. These factors were partially
offset by lower year-over-year production volumes on certain Jaguar Land Rover platforms and the Ford Mondeo in Europe.
Sales for the year ended December 31, 2018 in the Company’s Rest of the World operating segment increased by $3.2 million or 2.5%
to $135.3 million from $132.1 million for the year ended December 31, 2017. The increase was due to the launch of new aluminum
structural components work for Jaguar Land Rover in China, which began to ramp up in the first quarter of 2018; higher year-over-year
production sales in the Company’s operating facility in Brazil; and a $4.7 million increase in tooling sales. These negative factors were
partially offset by lower year-over-year production volumes on the Ford Mondeo platform in China, and a $5.3 million negative foreign
exchange impact from the translation of foreign denominated production sales as compared to corresponding period of 2017.
Overall tooling sales increased by $58.3 million to $269.2 million for the year ended December 31, 2018 from $210.9 million for the year
ended December 31, 2017.
GROSS MARGIN
Three months ended December 31, 2018 to three months ended December 31, 2017 comparison
Gross margin
% of Sales
Three months ended
December 31, 2018
134,567
14.5%
$
Three months ended
December 31, 2017
124,042
14.1%
$
$ Change
10,525
% Change
8.5%
The gross margin percentage for the fourth quarter of 2018 of 14.5% increased as a percentage of sales by 0.4% as compared to the
gross margin percentage for the fourth quarter of 2017 of 14.1%. The increase in gross margin as a percentage of sales was generally
due to:
•
•
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 2017.
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 new business in the process of being launched, higher tariffs on steel,
and an increase in tooling sales which typically earn low margins for the Company.
Year ended December 31, 2018 to year ended December 31, 2017 comparison
Gross margin
% of Sales
Year ended
December 31, 2018
556,161
15.2%
Year ended
December 31, 2017
484,601
13.1%
$
$
$ Change
71,560
% Change
14.8%
The gross margin percentage for the year ended December 31, 2018 of 15.2% increased as a percentage of sales by 2.1% as compared
to the gross margin percentage for the year ended December 31, 2017 of 13.1%. Consistent with the year-over-year increase in the fourth
quarter of 2018 as explained above, the increase in gross margin for the year ended December 31, 2018, as a percentage of sales, was
generally due to:
•
•
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, 2017.
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 new business in the process of being launched, higher tariffs on steel,
and an increase in tooling sales which typically earn low margins for the Company.
Page 5 ▌Martinrea International Inc.
SELLING, GENERAL & ADMINISTRATIVE ("SG&A")
Three months ended December 31, 2018 to three months ended December 31, 2017 comparison
Selling, general & administrative
% of Sales
Three months ended
December 31, 2018
58,363
6.3%
Three months ended
December 31, 2017
52,531
6.0%
$
$
$ Change
5,832
% Change
11.1%
SG&A expense for the fourth quarter of 2018 increased by $5.8 million to $58.4 million as compared to $52.5 million for the fourth quarter
of 2017. 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, an increase in outbound freight costs, 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, 2018 to year ended December 31, 2017 comparison
Selling, general & administrative
% of Sales
Year ended
December 31, 2018
232,313
6.3%
Year ended
December 31, 2017
211,533
5.7%
$
$
$ Change
20,780
% Change
9.8%
SG&A expense for the year ended December 31, 2018 increased by $20.8 million to $232.3 million as compared to $211.5 million for the
year ended December 31, 2017. Excluding the unusual and other item 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 year ended December 31, 2018
increased by $22.5 million to $232.3 from $209.8 million for the comparative period of 2017. 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, higher year-over-year incentive compensation based
on the performance of the business, an increase in outbound freight costs, and higher year-over-year leasing costs as a result of the sale-
leaseback transactions completed in 2017; partially offset by lower litigation costs related to certain employee related matters in the
Company’s operating facility in Brazil.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT ("PP&E") AND AMORTIZATION OF INTANGIBLE ASSETS
Three months ended December 31, 2018 to three months ended December 31, 2017 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, 2018
39,982
2,971
Three months ended
December 31, 2017
37,673
2,596
$
$
$ Change
2,309
375
% Change
6.1%
14.4%
535
2,788
46,276
$
530
3,246
44,045
5
(458)
2,231
0.9%
(14.1%)
5.1%
$
Total depreciation and amortization expense for the fourth quarter of 2018 increased by $2.3 million to $46.3 million as compared to $44.0
million for the fourth quarter of 2017. The increase in total depreciation and amortization expense was primarily due to an increase in
depreciation expense on a larger PP&E base connected to both new and replacement business that commenced during or subsequent
to the fourth quarter of 2017.
A significant portion of the Company’s recent investments relates to various new and replacement programs that commenced during or
subsequent to the fourth quarter of 2017 and new and replacement programs scheduled to launch over the next two to three years in all
of the Company’s various product offerings. The Company continues to make significant investments in the operations of the Company
in light of its growing backlog of business and growing global footprint.
Despite the year-over-year increase, depreciation of PP&E (production) expense as a percentage of sales for the fourth quarter of 2018
remained consistent year-over-year at 4.3% due to higher year-over-year sales as previously discussed.
Page 6 ▌Martinrea International Inc.
Year ended December 31, 2018 to year ended December 31, 2017 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, 2018
152,597
10,701
2,140
11,342
176,780
$
$
Year ended
December 31, 2017
140,018
9,652
$ Change
12,579
1,049
% Change
9.0%
10.9%
2,162
13,237
165,069
(22)
(1,895)
11,711
(1.0%)
(14.3%)
7.1%
Total depreciation and amortization expense for the year ended December 31, 2018 increased by $11.7 million to $176.8 million as
compared to $165.1 million for the year ended December 31, 2017. Consistent with the year-over-year increase in the fourth quarter of
2018 as explained above, the increase in total depreciation and amortization expense for the year ended December 31, 2018 was primarily
due to an increase in depreciation expense on a larger PP&E base connected to new and replacement business that commenced during
or subsequent to the year ended December 31, 2017.
Depreciation of PP&E (production) expense as a percentage of sales increased year-over-year to 4.2% for the year ended December 31,
2018 from 3.8% for the year ended December 31, 2017 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, 2018 to three months ended December 31, 2017 comparison
NET INCOME (A)
$37,816
$32,366
$5,450
For the three months ended For the three months ended
December 31, 2018
(a)
December 31, 2017
(b)
(a)-(b)
Change
Add Back - Unusual and Other Items:
Unrealized loss (gain) on derivative instruments (1)
Impairment of assets (2)
Restructuring costs (3)
Gain on sale of land and building (4)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
Tax impact of above items
Impact of US tax reforms on deferred tax asset (6)
TOTAL UNUSUAL AND OTHER ITEMS - AFTER TAX (B)
448
5,436
2,073
-
$7,957
(1,933)
-
$6,024
(2,322)
7,488
-
(13,374)
2,770
(2,052)
2,073
13,374
($8,208) $16,165
(292)
19,313
(1,641)
(19,313)
$10,813
($4,789)
ADJUSTED NET INCOME (A + B)
$43,840
$43,179
$661
Number of Shares Outstanding – Basic (‘000)
Adjusted Basic Net Earnings Per Share
Number of Shares Outstanding – Diluted (‘000)
Adjusted Diluted Net Earnings Per Share
85,829
$0.51
86,032
$0.51
86,593
$0.50
87,101
$0.50
Page 8 ▌Martinrea International Inc.
TABLE B
Year ended December 31, 2018 to year ended December 31, 2017 comparison
NET INCOME (A)
$185,883
$159,543
$26,340
For the year ended
December 31, 2018
(a)
For the year ended
December 31, 2017
(b)
(a)-(b)
Change
Add Back - Unusual and Other Items:
Unrealized loss (gain) on derivative instruments (1)
Impairment of assets (2)
Restructuring costs (3)
Gain on sale of land and building (4)
Executive separation agreement (5)
TOTAL UNUSUAL AND OTHER ITEMS BEFORE TAX
Tax impact of above items
Impact of US tax reforms on deferred tax asset (6)
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
(1) Unrealized loss (gain) on derivative instruments
1,887
5,436
2,073
-
-
$9,396
(2,113)
-
$7,283
$193,166
86,549
$2.23
86,988
$2.22
(3,697)
7,488
-
(19,072)
1,767
5,584
(2,052)
2,073
19,072
(1,767)
($13,514) $22,910
177
19,313
(2,290)
(19,313)
$5,976
$1,307
$165,519
$27,647
86,527
$1.91
86,779
$1.91
In the third quarter of 2017, the Company acquired 5,500,000 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 2,750,000 common shares in NanoXplore at a price of $0.70 per share for a period of up to
two years after issuance.
During the first quarter of 2018, the Company acquired an additional 411,800 common shares in NanoXplore for a total of $0.7 million
through another private placement offering. As part of the transaction to acquire the additional common shares, the Company also
received warrants entitling the Company to acquire up to an additional 205,900 common shares in NanoXplore at a price of $2.30
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, 2018, the warrants had a fair value of $2.2 million. Based on the fair value of the warrants as at December 31,
2018, an unrealized loss of $1.9 million was recognized for the year ended December 31, 2018, of which $0.4 million was recognized
in the fourth quarter in other finance income. This unrealized loss has been added back for Adjusted Net Income purposes.
As at December 31, 2017, the warrants had a fair value of $4.0 million. Based on the fair value of the warrants of December 31,
2017, an unrealized gain of $3.7 million was recognized for the year ended December 31, 2017, of which $2.3 million was recognized
in the fourth quarter in other finance income. This unrealized gain has been added back for Adjusted Net Income purposes.
(2) Impairment of assets
Page 9 ▌Martinrea International Inc.
During the fourth quarter of 2018, in conjunction with General Motors’ (“GM”) announcement that it will be closing its vehicle assembly
facility in Oshawa, Ontario, the Company recorded an impairment charge on property, plant, equipment totaling $5.4 million related
to a facility in Ajax, Ontario (included in the North America operating segment) that the Company will be forced to close because the
operation is entirely dependent on GM’s facility in Oshawa. The impairment charge was recorded where the carrying amount of the
assets exceeded their estimated recoverable amounts.
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.
(3) Restructuring costs
Additions to the restructuring accrual during 2018 totaled $2.1 million and represent expected employee-related severance payouts
and lease termination costs resulting from the planned closure of the facility in Ajax, Ontario, as described above.
(4) 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.
(5) 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.
(6) 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, 2018 to three months ended December 31, 2017 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, 2018
37,816
43,840
Three months ended
December 31, 2017
32,366
43,179
$
$
$ Change
5,450
661
% Change
16.8%
1.5%
0.44
$
0.51
$
0.37
0.50
Net income, before adjustments, for the fourth quarter of 2018 increased by $5.4 million to $37.8 million from $32.4 million for the fourth
quarter of 2017 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 three months ended December 31, 2018 and 2017 as explained in Table A under “Adjustments to
Net Income”. Excluding the unusual and other items recognized during the fourth quarter of 2018, as explained in Table A under
“Adjustments to Net Income”, net income for the fourth quarter of 2018 increased to $43.8 million or $0.51 per share, on a basic and
diluted basis, from $43.2 million or $0.50 per share, on a basic and diluted basis, for the fourth quarter of 2017.
Adjusted Net Income for the fourth quarter of 2018, as compared to the fourth quarter of 2017, was positively impacted by the following:
•
•
•
higher gross profit on increased year-over-year sales as previously explained;
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 2017.
These positive factors were partially offset by the following:
•
•
•
•
•
•
operational inefficiencies and other costs at certain other facilities including higher tariffs on steel;
a year-over-year increase in SG&A expense as previously discussed;
a year-over-year increase in depreciation expense as previously discussed;
a year-over-year increase in finance expense on the Company’s revolving bank debt as a result of increased debt levels and
borrowing rates;
a net unrealized foreign exchange loss of $0.1 million for the fourth quarter of 2018 compared to a net unrealized foreign
exchange gain of $0.3 million for the fourth quarter of 2017; and
a higher effective tax rate on adjusted income due generally to the mix of earnings (25.0% for the fourth quarter of 2018 compared
to 23.3% for the fourth quarter of 2017).
Three months ended December 31, 2018 actual to guidance comparison:
On November 8, 2018, the Company provided the following guidance for the fourth quarter of 2018:
Production sales (in millions)
Adjusted Net Earnings per Share
Basic and Diluted
Guidance
820 - 860
0.49 - 0.53
$
$
$
$
Actual
841
0.51
For the fourth quarter of 2018, production sales of $841 million and Adjusted Net Earnings per Share of $0.51 were within the published
guidance ranges provided.
Page 11 ▌Martinrea International Inc.
Year ended December 31, 2018 to year ended December 31, 2017 comparison
Net Income
Adjusted Net Income
Net Earnings per Share
Basic
Diluted
Adjusted Net Earnings per Share
Basic
Diluted
Year ended
December 31, 2018
185,883
193,166
2.15
2.14
2.23
2.22
$
$
$
$
$
$
$
$
$
$
$
$
Year ended
December 31, 2017
159,543
165,519
$ Change
26,340
27,647
% Change
16.5%
16.7%
1.84
1.84
1.91
1.91
Net Income, before adjustments, for the year ended December 31, 2018 increased by $26.3 million to $185.8 million from $159.5 million
for the year ended December 31, 2017 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 years ended December 31, 2018 and 2017 as explained in Table B under
“Adjustments to Net Income”. Excluding these unusual and other items, net income for the year ended December 31, 2018 increased to
$193.2 million or $2.23 per share, on a basic basis, and $2.22 per share on a diluted basis, from $165.5 million or $1.91 per share, on a
basic and diluted basis, for the year ended December 31, 2017.
Adjusted Net Income for the year ended December 31, 2018, as compared to the year ended December 31, 2017, 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; 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, 2017.
These positive factors were partially offset by the following:
•
•
•
•
•
•
operational inefficiencies and other costs at certain other facilities including higher tariffs on steel;
a year-over-year increase in SG&A as previously discussed;
a year-over-year increase in depreciation expense as previously discussed;
a year-over-year increase in finance expense on the Company’s revolving bank debt as a result of increased debt levels and
borrowing rates;
a net unrealized foreign exchange loss of $0.8 million for the year ended December 31, 2018 compared to a net unrealized
foreign exchange gain of $1.2 million for the year ended December 31, 2017; and
a higher effective tax rate on adjusted income due generally to the mix of earnings (24.6% for the year ended December 31,
2018 compared to 23.4% for the year ended December 31, 2017).
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Three months ended December 31, 2018 to three months ended December 31, 2017 comparison
Additions to PP&E
Three months ended
December 31, 2018
108,011
$
Three months ended
December 31, 2017
83,815
$
$ Change
24,196
% Change
28.9%
Additions to PP&E increased by $24.2 million year-over-year to $108.0 million or 11.7% of sales in the fourth quarter of 2018 from $83.8
million or 9.5% of sales in the fourth quarter of 2017 due in large part to the timing of expenditures and new incremental investment in
various sales and margin growth projects. The Company continues to make investments in the business including both new and
replacement business, as the Company’s global footprint expands and as it executes on its growing backlog of new business in all its
various product offerings.
Page 12 ▌Martinrea International Inc.
Year ended December 31, 2018 to year ended December 31, 2017 comparison
Additions to PP&E
Year ended
December 31, 2018
290,513
Year ended
December 31, 2017
251,920
$
$
$ Change
38,593
% Change
15.3%
Additions to PP&E increased by $38.6 million year-over-year to $290.5 million or 7.9% of sales for the year ended December 31, 2018
compared to $251.9 million or 6.8% of sales for the year ended December 31, 2017 due generally to new incremental investment in
various sales and margin growth projects. As noted above, the Company continues to make investments in the business, including in
both new and replacement business, as the Company’s global footprint expands and as it executes on its growing backlog of new business
in all its various product offerings.
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, 2018 to three months ended December 31, 2017 comparison
SALES
OPERATING INCOME (LOSS)
Three months ended
December 31, 2018
Three months ended
December 31, 2017
Three months ended
December 31, 2018
Three months ended
December 31, 2017
$
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 $7.5 million of unusual and other items for the
fourth quarter of 2018 and the $5.9 million of unusual and other items for the fourth quarter of 2017 were recognized in North America. The unusual and
other items noted are all fully explained under "Adjustments to Net Income" in this MD&A.
735,876 $
167,533
27,571
(4,826)
-
-
51,637
7,496
2,508
-
61,641
5,886
67,527
674,852 $
163,949
41,904
(2,063)
55,762 $
10,044
(390)
-
65,416 $
(7,509)
57,907 $
926,154 $
878,642 $
- $
-
$
North America
Adjusted Operating Income in North America increased by $4.2 million to $55.8 million or 7.6% of sales for the fourth quarter of 2018
from $51.6 million or 7.7% of sales for the fourth quarter of 2017 due generally to a $61.0 million year-over-year increase in sales as
previously explained. 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 2017; partially offset by operational inefficiencies and other costs at certain other
facilities, including higher SG&A expenses, as previously explained, upfront costs incurred in preparation of upcoming new programs and
related new business in the process of being launched, and higher tariffs on steel.
Europe
Adjusted Operating Income in Europe increased by $2.5 million to $10.0 million or 6.0% of sales for the fourth quarter of 2018 from $7.5
million or 4.6% of sales for the fourth quarter of 2017 due to incremental margin contribution from a $3.6 million year-over-year increase
in sales, and productivity and efficiency improvements at certain operating facilities, including lower upfront costs incurred in preparation
of upcoming new programs and related new business in the process of being launched; partially offset by general sales mix including
lower year-over-year production volumes on certain platforms. As noted previously, the year-over-year increase in sales can be attributed
to the launch of new programs during or subsequent to the fourth quarter of 2017, including a 2.0L aluminum engine block for Ford and
the ramp up of new aluminum structural components work and the new V8 AMG engine block for Daimler; a $4.7 million increase in
tooling sales; and a $2.1 million positive foreign exchange impact from the translation of Euro denominated production sales as compared
Page 13 ▌Martinrea International Inc.
to the fourth quarter of 2017. These positive factors were partially offset by lower year-over-year production volumes on certain Jaguar
Land Rover platforms.
Rest of the World
The operating results for the Rest of the World operating segment decreased year-over-year to an operating loss of $0.4 million for the
fourth quarter of 2018 from operating income of $2.5 million for the fourth quarter of 2017 due mainly to lower margin contribution from a
$14.3 million year-over-year decrease in sales, driven in large part by lower production volumes on the Ford Mondeo platform in China.
Year ended December 31, 2018 to year ended December 31, 2017 comparison
SALES
OPERATING INCOME (LOSS)*
Year ended
December 31, 2018
Year ended
December 31, 2017
Year ended
December 31, 2018
Year ended
December 31, 2017
North America
Europe
Rest of the World
Eliminations
Adjusted Operating Income
Unusual and Other Items*
Total
$
$
2,827,527 $
713,861
135,322
(13,810)
-
-
3,662,900 $
2,913,786 $
657,029
132,067
(12,383)
- $
-
3,690,499 $
236,626 $
46,790
565
-
283,981 $
(7,509)
276,472 $
203,676
38,388
(5,257)
-
236,807
9,817
246,624
*Operating income for the operating segments has been adjusted for unusual and other items. The $7.5 million of unusual and other items incurred
during the year ended December 31, 2018 and the $9.8 million benefit realized during the year ended December 31, 2017 were recognized in North
America. The unusual and other items noted are all fully explained under "Adjustments to Net Income" in this MD&A.
North America
Adjusted Operating Income in North America increased by $32.9 million to $236.6 million or 8.4% of sales for the year ended December
31, 2018 from $203.7 million or 7.0% of sales for the year ended December 31, 2017 despite lower sales as previously explained. 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, 2017; partially offset by operational inefficiencies and other costs at certain other facilities
including higher SG&A expenses, as previously explained, upfront costs incurred in preparation of upcoming new programs and related
new business in the process of being launched, and higher tariffs on steel.
Europe
Adjusted Operating Income in Europe increased by $8.4 million to $46.8 million or 6.6% of sales for the year ended December 31, 2018
from $38.4 million or 5.8% for the year ended December 31, 2017 due to incremental margin contribution from a $56.8 million year-over-
year increase in sales, partially offset by operational inefficiencies and other costs at certain other facilities, including upfront costs incurred
in preparation of upcoming new programs and related new business in the process of being launched, and general sales mix including
lower year-over-year production volumes on certain platforms. As noted previously the year-over-year increase in sales can be attributed
to the launch of new programs during or subsequent to the year ended December 31, 2017, including a 2.0L aluminum engine block for
Ford and the ramp up of new aluminum structural components work and the new V8 AMG engine block for Daimler; the impact of foreign
exchange on the translation of Euro denominated production sales, which had a positive impact on overall sales for the year ended
December 31, 2018 of approximately $30.1 million as compared to the corresponding period of 2017; and a $13.9 million increase in
tooling sales. These factors were partially offset by lower year-over-year production volumes on certain Jaguar Land Rover platforms and
the Ford Mondeo in Europe.
Page 14 ▌Martinrea International Inc.
Rest of the World
The operating results for the Rest of the World operating segment increased year-over-year to operating income of $0.6 million for the
year ended December 31, 2018 from an operating loss of $5.2 million for the year ended December 31, 2017 on slightly higher year-
over-year sales as previously explained and lower litigation costs related to certain employee related matters in the Company’s operating
facility in Brazil; partially offset by upfront costs incurred in the Company’s China operations in preparation of upcoming new programs
and related to new business in the process of being launched.
SUMMARY OF QUARTERLY RESULTS
(unaudited)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2018
2017
Sales
926,154
851,136
921,710
963,900
878,642
838,535
972,772 1,000,550
Gross Margin
134,567
127,130
150,035
144,429
124,042
113,418
128,926
118,215
Net Income for the period
37,816
36,381
55,727
55,959
32,366
36,022
47,411
43,467
Net Income attributable to equity
holders of the Company
Adjusted Net Income attributable to
equity holders of the Company *
37,816
36,381
55,727
55,959
32,366
36,229
47,346
43,602
43,840
37,169
55,527
56,630
43,179
36,263
47,346
38,731
Basic Net Earnings per Share
Diluted Net Earnings per Share
0.44
0.44
0.42
0.42
0.64
0.64
0.65
0.64
0.37
0.37
0.42
0.42
0.55
0.55
0.50
0.50
Adjusted Basic and Diluted Net
Earnings per Share *
*Non-IFRS Measures
0.51
0.43
0.64
0.65
0.50
0.42
0.55
0.45
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 2018 and 2017 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, 2018, the Company had total equity of $1,151.5 million (December
31, 2017 - $958.5 million). As at December 31, 2018, the Company’s ratio of current assets to current liabilities was 1.35:1 (December
31, 2017 - 1.3:1). The Company’s current working capital level of $312.6 million at December 31, 2018 is up from $226.9 million at
December 31, 2017 due in large part to the timing of cash inflows and outflows in relation to 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, 2018
Three months ended
December 31, 2017
$ 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
110,781 $
(6,232)
104,549
(8,546)
(17,450)
107,094
(23,175)
83,919
(5,543)
(12,912)
3,687
16,943
20,630
(3,003)
(4,538)
3.4%
(73.1%)
24.6%
54.2%
35.1%
Cash provided by operating activities
78,553
65,464
13,089
20.0%
Cash used in financing activities
(956)
(10,131)
9,175
(90.6%)
Cash used in investing activities
(91,748)
(37,381)
(54,367)
145.4%
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase (decrease) in cash and cash equivalents
$
619
(13,532) $
776
18,728
(157)
(32,260)
(20.4%)
(172.3%)
Cash provided by operating activities during the fourth quarter of 2018 was $78.6 million, compared to cash provided by operating
activities of $65.5 million in the corresponding period of 2017. The components for the fourth quarter of 2018 primarily include the
following:
cash provided by operations before changes in non-cash working capital items of $110.8 million;
•
• working capital items use of cash of $6.2 million comprised of a decrease in trade, other payables and provisions of $38.7 million,
an increase in inventories of $5.7 million, and an increase in prepaid expenses and deposits of $1.6 million; partially offset by a
decrease in trade and other receivables of $39.8 million;
interest paid (excluding capitalized interest) of $8.5 million; and
income taxes paid of $17.5 million.
•
•
Cash used by financing activities during the fourth quarter of 2018 was $1.0 million, compared to cash used in financing activities of $10.1
million in the corresponding period in 2017, as a result of the repurchase of common shares by way of normal course issuer bid (as
described in note 15 of the consolidated financial statements for the year ended December 31, 2018) of $16.6 million, and $3.9 million in
dividends paid; partially offset by a $19.4 million net increase in long-term debt (reflecting drawdowns on the Company’s revolving banking
facility of $24.8 million, net of additional deferred financing fees, partially offset by repayments made on equipment loans of $5.4 million).
Cash used in investing activities during the fourth quarter of 2018 was $91.7 million, compared to $37.4 million in the corresponding
period in 2017. The components for the fourth quarter of 2018 primarily include the following:
• cash additions to PP&E of $88.2 million;
• capitalized development costs relating to upcoming new program launches of $4.1 million; partially offset by
• proceeds from the disposal of PP&E of $0.4 million; and
•
the upfront recovery of development costs incurred of $0.1 million.
Taking into account the opening cash balance of $83.7 million at the beginning of the fourth quarter of 2018, and the activities described
above, the cash and cash equivalents balance at December 31, 2018 was $70.2 million.
Page 16 ▌Martinrea International Inc.
Year ended
December 31, 2018
Year ended
December 31, 2017
$ 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 provided by (used in) financing activities
461,012 $
(36,752)
424,260
(30,855)
(96,703)
296,702
20,181
406,207
(26,876)
379,331
(20,304)
(56,166)
54,805
(9,876)
44,929
(10,551)
(40,537)
13.5%
36.7%
11.8%
52.0%
72.2%
302,861
(6,159)
(2.0%)
(56,915)
77,096
(135.5%)
Cash used in investing activities
(319,757)
(230,620)
(89,137)
38.7%
Effect of foreign exchange rate changes on cash and
cash equivalents
Increase (decrease) in cash and cash equivalents
$
1,843
(1,031) $
(3,298)
12,028
5,141
(13,059)
(155.9%)
(108.6%)
Cash provided by operating activities during the year ended December 31, 2018 was $296.7 million, compared to cash provided by
operating activities of $302.9 million in the corresponding period of 2017. The components for the year ended December 31, 2018 primarily
include the following:
cash provided by operations before changes in non-cash working capital items of $461.0 million;
•
• working capital items use of cash of $36.8 million comprised of an increase in trade and other receivables of $7.6 million, an
increase in inventories of $91.6 million, and an increase in prepaid expenses and deposits of $7.0 million; partially offset by an
increase in trade, other payables and provisions of $69.4 million;
interest paid (excluding capitalized interest) of $30.9 million; and
income taxes paid of $96.7 million.
•
•
Cash provided by financing activities during the year ended December 31, 2018 was $20.2 million, compared to cash used of $56.9
million in the corresponding period in 2017, as a result of a $56.8 million net increase in long-term debt (reflecting drawdowns on the
Company’s revolving banking facility and new equipment loans totalling $114.5 million, net of additional deferred financing fees, partially
offset by repayments made on equipment loans of $57.7 million), and $1.9 million in proceeds from the exercise of employee stock
options; partially offset by the repurchase of common shares by way of normal course issuer bid (as described in note 14 of the
consolidated financial statements for the year ended December 31, 2018) of $25.5 million, and $13.0 million in dividends paid.
Cash used in investing activities during the year ended December 31, 2018 was $319.8 million, compared to $230.6 million in the
corresponding period in 2017. The components for the year ended December 31, 2018 primarily include the following:
•
•
•
•
•
cash additions to PP&E of $309.0 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, 2018) of $0.7 million; partially offset by
the upfront recovery of development costs incurred of $2.6 million; and
proceeds from the disposal of PP&E of $1.6 million.
Taking into account the opening cash balance of $71.2 million at the beginning of 2018, and the activities described above, the cash and
cash equivalents balance at December 31, 2018 was $70.2 million.
Financing
On July 23, 2018, the Company’s banking facility was amended to extend its maturity date and enhance certain provisions of the facility.
The primary terms of the amended facility, with now a syndicate of ten banks (up from nine), include the following:
Page 17 ▌Martinrea International Inc.
•
•
•
•
•
•
•
•
a move to an unsecured credit structure;
improved financial covenants;
available revolving credit lines of $370 million and US $420 million (up from $350 million and US $400 million, respectively);
available asset backed financing capacity of $300 million (up from $205 million);
an accordion feature which provides the Company with the ability to increase the revolving credit facility by up to US $200 million
(up from US $150 million);
pricing terms at market rates and consistent with the previous facility;
a maturity date of July 2022; and
no mandatory repayment provisions.
As at December 31, 2018, the Company had drawn $273.0 million (December 31, 2017 - $233.0 million) on the Canadian revolving credit
line and US$286.0 million (December 31, 2017 - US$256.0 million) on the U.S. revolving credit line.
Net debt (i.e. long-term debt less cash on hand) increased by $87.8 million from $582.8 million at December 31, 2017 to $670.6 million
at December 31, 2018 due essentially to the financing of the Company’s share repurchases in 2018 under the normal course issuer bid
and foreign exchange translation of the Company’s foreign denominated debt to the Company’s Canadian dollar reporting currency. The
Company’s net debt to Adjusted EBITDA (on a trailing twelve months basis) leverage ratio remained consistent year-over-year at 1.45x
at the end of both 2018 and 2017.
The Company was in compliance with its debt covenants as at December 31, 2018.
On April 20, 2018, the Company finalized an equipment loan in the amount of €23 million ($37 million) repayable in monthly installments
over six years at a fixed annual interest rate of 1.05%. The proceeds from the loan were used to pay-off loans at fixed annual interest
rates of 3.06%, 4.34% and 4.93%.
On October 2, 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 3.8%. 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 were 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.
Early in 2018, in view of the Company’s financial performance, and its future outlook and cash needs, the Board 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. The first such increased dividend was paid on July 15, 2018. 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 twenty-four months depending upon the duration of the tooling program.
The amounts loaned to tooling suppliers through this financing arrangement do not appear on the Company’s balance sheet. At
December 31, 2018, the amount of off-balance sheet program financing was $58.9 million (December 31, 2017 - $75.2 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, 2018 (the “AIF) or otherwise incorporated herein by reference (including the trends described in the AIF), 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
issues, regulatory requirements, trade agreements, infrastructure considerations, legislative changes, and environmental emissions
standards and safety issues.
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, trade issues, 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 for the past decade,
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 global
trade issues on the automotive industry, including resulting from any changes to trade agreements, tariffs or trade disputes. (See “Trade
Policies and Resulting Impact (USMCA, NAFTA and the CPTPP)” in the AIF under “Automotive Industry General” and “Changes in Law
and Governmental Regulation” below.)
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 global trade issues on the
automotive industry, including resulting from any changes to trade agreements, tariffs or trade disputes. See “Description of the Business
and Trends: Trade Policies and Resulting Impact (USMCA, NAFTA and the CPTPP)” in the AIF and “Changes in Law and Governmental
Regulation” below.
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.
Although the Company continues to diversify its business, there is no assurance that it will be successful. In addition, a work disruption
at one or more of the Company’s customers, including 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
Page 19 ▌Martinrea International Inc.
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.
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, including trade volatility, production volume cuts, intense pricing pressures, increased commodity prices
and a number of other factors including acts of God (fires, hurricanes, earthquakes, whether as a result of climate change or otherwise)
and scarcity of raw materials 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
“Risks: Dependence Upon Key Customers” and “Environmental Regulation”.
Competition
The markets for fluid management systems, cast aluminum products and fabricated metal products, assemblies and systems 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. In 2018 and 2019 to date, the Company and the
industry has experienced steel and aluminum tariffs imposed by the U.S. and Canada, among others, in the context of trade negotiations.
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 and, in the case of tariffs, largely through obtaining tariff relief in
most cases); however, to the extent the Company is unable to fully do so through engineering products with reduced commodity content,
Page 20 ▌Martinrea International Inc.
by passing commodity price increases to customers, by avoiding tariffs 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 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 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 or systems 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, who set the culture,
hire the talent, provide strategic direction, oversee operational excellence and drive financial discipline of the Company. The experience
and talents of these individuals has been and 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.
The Company’s business depends on its ability to attract, develop and retain experienced and highly skilled personnel. Such personnel
are in high demand in the areas in which we compete, and competition for their services is intense. As a result of the rapid changes and
the intense competition in the automotive industry, the Company has a growing need for skilled people and the Company may face
substantial competition for such personnel, from traditional and less traditional sources. The inability to attract and retain highly-skilled
personnel could have an adverse effect on the Company’s operations and its ability to fully implement its business strategy.
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.
Page 21 ▌Martinrea International Inc.
Acquisitions
The Company has acquired and anticipates that it will continue to acquire complementary businesses, assets, technologies, services or
products, at competitive prices. 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).
Joint Ventures
The Company has in the past and may from time to time conduct certain of its operations through joint ventures under contractual
arrangements under which it shares management responsibilities with one or more partners. Joint venture operations carry a range of
risks, including those relating to: failure of a joint venture partner to satisfy contractual obligations; potential conflicts between the Company
and the joint venture partner; strategic objectives of joint venture partner(s) that may differ from the Company’s; potential delays in
decision-making; a more limited ability to control legal and regulatory compliance within the joint venture(s); and other risks inherent to
non-wholly-owned operations. The likelihood of such occurrences and potential effect on the Company may vary depending on the joint
venture arrangement; however, the occurrence of any such risks could have an adverse effect on the Company’s operations, profitability
and reputation;
Potential Rationalization Costs and Turnaround Costs
The Company has incurred restructuring costs over the past several years, sometimes in conjunction with the cancelation of a customer
program or the closing of a customer plant. In response to the increasingly competitive automotive industry conditions, it is likely that the
Company will continue to rationalize some production facilities. In the course of such rationalization, restructuring costs related to plant
closings or alterations, relocations and employee severance costs will be incurred. Such costs could have an adverse effect on short-
term profitability. In addition, while the Company’s goal is for every plant to be profitable, there is no assurance this will occur, which will
likely result in a rationalizing or closing of the plant. Martinrea is working to turn around any financially underperforming divisions, however,
there is no guarantee that it will be successful in doing so with respect to some or all such divisions. The continued underperformance
of one or more operating divisions could have a material adverse effect on the Company’s profitability and operations.
Launch and Operational Costs
The launch of new business, in an existing or new facility, is a complex process, the success of which depends on a wide range of factors,
including the production readiness of the Company and its suppliers, as well as factors related to tooling, equipment, employees, initial
product quality and other factors. A failure to successfully launch material new or takeover business could have an adverse effect on
profitability. Significant launch costs were incurred by the Company in recent years.
The Company’s manufacturing processes are vulnerable to operational problems that can impair its ability to manufacture its products in
a timely manner. The Company’s facilities contain complex and sophisticated machines that are used in its manufacturing processes.
The Company has in the past experienced equipment failures and could experience equipment failure in the future due to wear and tear,
design error or operator error, among other things, which could have an adverse effect on profitability.
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.
Page 22 ▌Martinrea International Inc.
Trade Restrictions
The global growth of the automotive industry has been aided by the free movement of goods, services, people and capital through bilateral
and regional trade agreements, particularly in North America and Europe. Introduction of measures which impede free trade, including
new or increased tariffs and other trade barriers, could have a material adverse effect on the Company’s operations and profitability. (See
also “Changes in Laws and Governmental Regulations”).
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 (now USMCA, if, as and when ratified), the CPTPP or Brexit, the adoption of
domestic preferential purchasing policies in other jurisdictions, particularly the United States or China (such as increased tariffs or
investigations relating to anti-dumping) or positive or negative changes in tax or other legislation. In addition, the Company could be
exposed to increased customs audits due to governmental policy which could lead to additional administrative burden and costs. Changes
in legislation or regulation could lead to additional administrative burden and costs in general, and also carry the potential of a material
fine or significant reputational risk. Changes in laws or regulations could also result in the Company shifting its operations to more
favourable jurisdictions (see “Litigation and Regulatory Compliance and Investigations” “Potential Rationalization and Turnaround Costs”
and “Currency Risk: Competitiveness in Certain Jurisdictions”).
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”. 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 and privacy legislation such as GDPR). 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.
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
Currency fluctuations may negatively or positively affect the competitiveness of the Company’s operations in a particular jurisdiction. As
a result, the Company may move some existing work to another country, or may source work to different 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
plants are consolidated, downsized or closed, or as plants in other jurisdictions are expanded.
Page 23 ▌Martinrea International Inc.
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,
contamination or incidents, 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”.)
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 and its 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. The Company endeavours to be
environmentally responsible and recognizes that the competitive pressures for economic growth and cost efficiency must be integrated
with sound sustainability management, including environmental stewardship. The Company has adopted sourcing and other business
practices to address environmental concerns of its customers. Despite these efforts, evolving customer concerns could negatively affect
the Company’s reputation and financial performance.
The Company requires compliance with its policies both internally and, where relevant, for its suppliers. Although the Company requires
its suppliers to comply with these guidelines, there is no guarantee that these suppliers will not take actions that hurt the Company’s
reputation, as they are independent third parties that the Company does not control. However, if there is a lack of apparent compliance,
it may lead the Company to search for alternative suppliers. This may have an adverse effect on the Company’s financial results, by
increasing costs, potentially causing shortages in products, delays in delivery or other disruptions in operations. (See “Supply Chain
Responsibility” in the AIF.)
Page 24 ▌Martinrea International Inc.
The Company’s operations may also be impacted by any environmental policies or incidents at any of its customers or suppliers to the
extent that it affects production or volumes.
Due to the global nature of the Company’s business, suppliers may operate in regions that are susceptible to extreme weather events,
such as earthquakes, tsunamis or hurricanes, which could have a material impact on the availability of a product. The Company has
policies and procedures in place to mitigate such risk and obtain alternate supply; however, that may not be possible in all cases for a
critical component. Any interruption to the Company’s supply of product or resulting changes in price to the Company could lower the
Company’s revenues, increase its operating costs and impact its financial results. (See also “Financial Viability of Suppliers”.)
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 or incidents, including any environmental compliance or incidents
or trends that may impact their businesses) or from environmental matters in general, including any arising from climate change, 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 trends 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, or a change in trends 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 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;
environmental risk;
increases in working capital requirements related to long supply chains;
difficulty in protecting intellectual property rights; and
Page 25 ▌Martinrea International Inc.
•
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. Current relations, trade and otherwise, between China, the U.S. and Canada have increased some of the risks of operating
in China and dealing with Chinese operations.
Potential Tax Exposures
The Company may incur losses in some countries which it may not be able to fully or partially offset against income the Company has
earned in those countries. In some cases, the Company may not be able to utilize these losses at all if the Company cannot generate
profits in those countries and/or if the Company has ceased conducting business in those countries altogether. The Company’s inability
to utilize material tax losses could materially adversely affect its profitability. At any given time, the Company may face other tax exposures
arising out of changes in tax laws, tax reassessments or otherwise. The taxation system and regulatory environment in some 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, 2018). 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, 2018,
based on an actuarial estimate for financial reporting. The unfunded liability at December 31, 2018, 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 2019 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, 2018, which
reflects the financial position of the Company’s defined benefit pension plan and other post-employment benefit plans at December 31,
2018.
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, 2018, the
unfunded actuarial liability for these obligations was significant. Expected benefit payments for 2019 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, 2018, which reflect the financial position of the Company’s post-employment benefits other than pension
plans at December 31, 2018.
Page 26 ▌Martinrea International Inc.
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.
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.
In certain circumstances that the Company determines that its share price is undervalued, the Company may use funds, that would
otherwise be available for its operations or other uses, to repurchase its own shares as an investment. However, there can be no
assurances that any such repurchase of shares will have a positive impact on the Company’s share price.
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 may increase
the dividend 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 February 28, 2019, the Company had 82,808,607 common shares outstanding. The Company’s common shares constitute its only
class of voting securities. As at February 28, 2019, options to acquire 2,350,700 common shares were outstanding.
Page 27 ▌Martinrea International Inc.
During 2018, the Company received approval from the Toronto Stock Exchange (“TSX”) to acquire for cancellation, by way of normal
course issuer bid (“NCIB”), up to 4,348,479 common shares of the Company. The bid commenced on August 31, 2018 and spans a 12-
month period.
During 2018, since the commencement of the NCIB on August 31, 2018, the Company purchased for cancellation an aggregate of
2,150,400 common shares for an aggregate purchase price of $25.5 million, resulting in a decrease to stated capital of $17.7 million and
a decrease to retained earnings of $7.8 million. Subsequent to December 31, 2018, the Company purchased for cancellation another
2,120,577 common shares for an aggregate purchase price of $25.4 million under an automatic share repurchase program with a broker.
The shares were purchased for cancellation under the NCIB.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET FINANCING
At December 31, 2018, 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
369,928
16,804
39,601
426,333
$
$
$
$
1-2 years
-
13,887
34,838
48,725
2-3 years
-
13,901
29,979
43,880
3-4 years
-
673,985
26,583
700,568
4-5 years Thereafter
-
15,958
84,727
100,685
-
6,182
24,324
30,506
Total
369,928
740,717
240,052
1,350,697
(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, 2018, the amount of the off balance sheet
program financing was $58.9 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 6-24
months.
Hedge Accounting
The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign exchange
rates.
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 or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used,
and how effectiveness will be assessed.
At inception and each reporting date, the Company formally assesses the effectiveness of these designated hedges.
Cash flow hedges:
During the year ended December 31, 2018, the Company started hedging variability in cash flows of certain forecasted foreign currency
sales due to fluctuations in foreign exchange rates.
The Company has designated these foreign currency sales in a cash flow hedge. In such hedges, to the extent that the changes in fair
value of the hedging instrument offset the changes in the fair value of the hedged item, they are recorded in other comprehensive income
(loss) until the hedged item affects net income (i.e. when settled or otherwise derecognized). Any excess of the change in fair value of
the derivative that does not offset changes in the fair value of the hedged item is recorded in net income.
Page 28 ▌Martinrea International Inc.
When a cash flow hedge relationship is discontinued, any subsequent change in fair value of the hedging instrument is recognized in net
income.
If the hedge is discontinued before the end of the original hedge term, then any cumulative adjustment to either the hedged item or other
comprehensive income (loss) is recognized in net income, at the earlier of when the hedged item affects net income, or when the
forecasted item is no longer expected to occur.
Net investment hedges:
The Company continues to use some portion of its US denominated long-term debt to manage foreign exchange rate exposures on net
investments in certain US operations.
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 income as and when the corresponding accumulated other comprehensive income from the hedged foreign
operations is recognized in net income. The Company has not identified any ineffectiveness in these hedge relationships as at December
31, 2018.
Financial Instruments
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. It is the Company's policy to not utilize financial instruments for trading or speculative purposes.
At December 31, 2018, the Company had committed to trade the following foreign exchange contracts:
Foreign exchange contracts not accounted for a hedges and fair valued through profit or loss:
Buy Canadian Dollars
Buy Mexican Peso
Currency
Amount of U.S.
dollars
$
$
40,000
23,857
Weighted average
exchange rate of U.S.
dollars
1.3462
20.1200
Maximum period in
months
1
1
The aggregate value of these forward contracts as at December 31, 2018 was a pre-tax gain of $0.07 million and was recorded in trade
and other receivables ((December 31, 2017 – loss of $0.1 million recorded in trade and other payables).
Foreign exchange contracts accounted for as hedges and fair valued through other comprehensive income:
Currency
Amount of U.S.
dollars
Weighted average
exchange rate of U.S.
dollars
Maximum period in
months
Buy Canadian Dollars
$
57,900
1.2780
48
The aggregate value of these forward contracts as at December 31, 2018 was a pre-tax loss of $4.1 million and was recorded in trade
and other payables (December 31, 2017 – nil).
INVESTMENTS
In the third quarter of 2017, the Company acquired 5,500,000 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. As part of the transaction to acquire the common shares, the Company also received warrants entitling the Company to acquire
up to an additional 2,750,000 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.
Page 29 ▌Martinrea International Inc.
During the first quarter of 2018, the Company acquired an additional 411,800 common shares in NanoXplore for a total of $0.7 million
through another private placement offering. As part of the transaction to acquire the additional common shares, the Company also
received warrants entitling the Company to acquire up to an additional 205,900 common shares in NanoXplore at a price of $2.30 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 using the Black-
Scholes-Merton valuation model, with the change in fair value recorded through profit or loss. As at December 31, 2018, the warrants
had a fair value of $2.2 million. Based on the fair value of the warrants as at December 31, 2018, an unrealized loss of $1.9 million was
recognized for the year ended December 31, 2018 (2017 - unrealized gain of $3.7 million), recorded in other finance income (expense)
in the consolidated statement of operations. The table below summarizes the assumptions used, on a weighted average basis, in valuing
the warrants under the Black-Scholes-Merton valuation model during the year ended December 31, 2018:
Expected volatility
Risk free interest rate
Expected life (years)
2018 Acquisition
66.87%
1.88%
2
December 31, 2018
74.23%
1.86%
1
The NanoXplore common shares are recorded at their fair value at the end of each reporting period based on publically quoted prices,
with the change in fair value recorded in other comprehensive income. As at December 31, 2018, the common shares had a fair value of
$8.6 million. Based on the fair value of the common shares as at December 31, 2018, an unrealized loss of $3.3 million ($2.9 million net
of tax) was recognized for the year ended December 31, 2018 (2017 - unrealized gain of $9.1 million, $8.0 million net of tax).
Subsequent to December 31, 2018, on January 11, 2019, the Company acquired an additional 11,538,000 common shares in NanoXplore
for a total of approximately $15.0 million through another private placement offering. Subsequent to the completion of the transaction,
Martinrea holds an aggregate of 17,449,800 common shares of NanoXplore which represents approximately 16% of the issued and
outstanding common shares of NanoXplore.
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, 2018, 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, 2018. 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, 2018 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
Page 30 ▌Martinrea International Inc.
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, 2018 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities.
The discussion below describes the Company’s significant policies and procedures.
The Company’s management bases its estimates on historical experience and various other assumptions that are believed to be
reasonable in the circumstances, the results of which form the basis for making judgments about the reported amounts of assets, liabilities,
revenue and expenses that are not readily apparent from other sources. On an ongoing basis, management evaluates these estimates.
However, actual results may differ from these estimates under different assumptions or conditions. In making and evaluating its estimates,
management also considers economic conditions generally and in the automotive industry in particular, which have more recently been
very different from historical patterns, as well as industry trends and the risks and uncertainties involved in its business that could
materially affect the reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. See
“Automotive Industry Highlights and Trends” in the Company’s AIF and “Risks and Uncertainties” above.
Management believes that the accounting estimates discussed below are critical to the Company’s business operations and an
understanding of its results of operations or may involve additional management judgment due to the sensitivity of the methods and
assumptions necessary in determining the related asset, liability, revenue and expense amounts. Management has discussed the
development and selection of the following critical accounting estimates with the Audit Committee of the Board of Directors and the Audit
Committee has reviewed its disclosure relating to critical accounting estimates in this MD&A.
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 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 of CGU. 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
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
Page 31 ▌Martinrea International Inc.
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; (ii) the determination of the Company’s CGUs requires judgement; and (iii) 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, 2018, 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 $61.0 million (2017 - $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.
Revenue Recognition
The Company recognizes sales from two categories of goods: production (including finished production parts, assemblies and modules),
and tooling. Revenue for these goods is recognized at the point in time control of the goods is transferred to the customer.
Control of finished production parts, assemblies and modules transfers when the goods are shipped from the Company’s manufacturing
facilities to the customer. Control of tooling transfers when the tool has been accepted by the customer. For certain tooling contracts for
which the customer makes progress payments in advance of obtaining control of the tool, the Company recognizes a liability for the
progress payments until the performance obligation is complete. Such payments from the customer generally do not contain a financing
component.
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.
Page 32 ▌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, 2018 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.
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 consolidated statements of operations.
Judgement is required to assess the division of activities between research and development, technical and commercial feasibility, and
the availability of future economic benefit. Further, estimates are used to test the recoverability of development costs. Any resulting
impairment loss could have a material impact on consolidated net income and the amount of assets reported on the Company’s
consolidated balance sheet.
Expenditure on research activities, including costs of market research and new product prototyping during the marketing stage, is
recognized in profit or loss when incurred.
RECENTLY ADOPTED AND APPLICABLE ACCOUNTING STANDARDS AND POLICIES (INCLUDING ANY CHANGES TO
CRITICAL ACCOUNTING ESTIMATES)
The Company adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), IFRS 9, Financial Instruments (“IFRS 9”) and
amendments made to Share-Based Payments (“IFRS 2”), effective January 1, 2018.
IFRS 15, Revenue from Contracts with Customers
The Company adopted IFRS 15 using the full retrospective approach. The adoption of the standard did not result in any restatement of
previously reported results and did not have a material impact on the consolidated financial statements. The Company’s revenue
recognition accounting policy has been updated accordingly as described above and in note 2(j) of the consolidated financial statements
for the year ended December 31, 2018.
Upon adoption of the new standard, additional disclosures related to the nature, amount, timing and uncertainty of the Company’s
revenues and cash flows arising from contracts with customers have been included in the consolidated financial statements, with
comparative information, including a continuity of contract liabilities and a breakdown of the Company’s revenues between production
and tooling.
Page 33 ▌Martinrea International Inc.
IFRS 9, Financial Instruments
The adoption of IFRS 9 did not have a material impact on the consolidated financial statements. The Company’s accounting policies on
financial instruments have been updated accordingly as described in note 2(c) of the consolidated financial statements for the year ended
December 31, 2018.
IFRS 9 includes an accounting policy choice between deferring the adoption of the new hedge accounting standard under IFRS 9 and
continuing with the current IAS 39 hedge accounting standards. The Company has decided to continue to apply IAS 39 hedge accounting
standards.
Amendments to IFRS 2, Share-Based Payments
The adoption of the amendments to IFRS 2 did not have a material impact on the consolidated financial statements.
Recently issued accounting standards
The IASB issued the following new standards:
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. IFRS 16 introduces a single accounting model for lessees unless the underlying asset is of low value. A
lessee will be required to recognize, on its statement of financial position, a right-of-use asset, representing its right to use the underlying
leased asset, and a lease liability, representing its obligation to make lease payments. The standard is effective for annual periods
beginning on or after January 1, 2019.
The Company will adopt the standard January 1, 2019, by applying the modified retrospective approach which involves recognizing
transitional adjustments in opening retained earnings on the date of initial application without restating comparative prior periods, as
permitted by the transitional guidance. The impact of adoption will result in the recognition of right-of-use assets estimated in the range
of $200 million to $250 million, with corresponding lease liabilities in the same range. The adoption of IFRS 16 will also result in a decrease
in operating rent expense, and increases in finance and depreciation expenses as recognized in the consolidated statement of operations.
The standard will not have a significant impact on the Company’s overall consolidated operating results and cash flows.
SELECTED ANNUAL INFORMATION
The following table sets forth selected information from the Company’s consolidated financial statements for the years ended December
31, 2018, December 31, 2017 and December 31, 2016.
Page 34 ▌Martinrea International Inc.
Sales
Gross Margin
Operating Income
Net Income for the period
Net Income Attributable to Equity Holders of the Company
Net Earnings per Share - Basic
Net Earnings per Share - Diluted
Non-IFRS Measures*
Adjusted Operating Income
% of sales
Adjusted EBITDA
% of sales
Adjusted Net Income Attributable to Equity Holders of the Company
Adjusted Net Earnings per Share - Basic
Adjusted Net Earnings per Share - Diluted
Total Assets
Cash and Cash Equivalents
Total Interest Bearing Debt
Dividends Declared
$
$
$
$
$
$
$
$
$
$
$
$
2018
3,662,900 $
556,161
276,472
185,883
185,883 $
2.15 $
2.14 $
283,981 $
7.8%
461,223
12.6%
193,166 $
2.23 $
2.22 $
2,913,811 $
70,162 $
740,717 $
14,213 $
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
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, 2017, 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 3 and 4 of
this MD&A for a full reconciliation of the Non-IFRS measures for the years ended December 31, 2018 and 2017 and the Company’s
MD&A for the year ended December 31, 2017, as previously filed and available at www.sedar.com, for a full reconciliation of the Non-
IFRS measures for the year ended December 31, 2016.
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 those related to the Company’s expectations as to, or its views, or beliefs in or on, the growth of the
Company and pursuit of, and belief in, its strategies, investments in its business and technologies, the management and monitoring of
SG&A expenses, the financing of future capital expenditures, and ability to fund anticipated working capital needs, the Company’s views
on its liquidity and ability to deal with present economic conditions, the impact of tariffs, the USMCA and trade disputes and negotiations
on the automotive industry, global markets and the Company’s profitability, for the growth of the automotive market, the effect of regulation
on demand for automobiles, the potential for future acquisitions, the potential volatility of the Company’s shares, the potential for
fluctuation of operating results, the compliance in Brazil tax legislation and its success in defending the claims, the funding and reduction
of liability in pension plans, the likelihood of tooling supplier default under tooling guarantee programs, and the payment of dividends as
well as other forward looking statements. The words “continue”, “expect”, “anticipate”, “estimate”, “may”, “will”, “should”, “views”, “intend”,
“believe”, “plan” and similar expressions are intended to identify forward looking statements. Forward-looking statements are based on
estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and
expected future developments, as well as other factors that the Company believes are appropriate in the circumstances. Many factors
could cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by the
forward looking statements, including, without limitation, the following factors, some of which are discussed in detail in the Company’s
Annual Information Form for the year ended December 31, 2018 and other public filings which can be found at www.sedar.com:
Page 35 ▌Martinrea International Inc.
• North American and global economic and political conditions;
•
the highly cyclical nature of the automotive industry and the industry’s dependence on consumer spending and general economic
conditions;
the Company’s dependence on a limited number of significant customers;
financial viability of suppliers;
the Company’s reliance on critical suppliers and on suppliers for components and the risk that suppliers will not be able to supply
components on a timely basis or in sufficient quantities;
competition;
the increasing pressure on the Company to absorb costs related to product design and development, engineering, program
management, prototypes, validation and tooling;
increased pricing of raw materials and commodities;
outsourcing and insourcing 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;
the risks associated with joint ventures;
costs associated with rationalization of production facilities;
launch and operational costs;
labour disputes;
changes in governmental regulations or laws including any changes to trade;
litigation and regulatory compliance and investigations;
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 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;
cybersecurity threats;
the potential volatility of the Company’s share price; 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 36 ▌Martinrea International Inc.
MARTINREA INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2018
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
6
7
8
9
10
11
12
19
19
20
21
21
22
22
23
23
25
28
30
32
33
33
33
33
34
39
40
40
40
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 judgement. In addition, all other information contained in the annual report to
shareholders and Management Discussion and Analysis for the year ended December 31, 2018 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 matters, accounting policies, any
observations relating to internal controls over the financial reporting process that may be identified during the audit, as
influenced by the nature, timing and extent of audit procedures performed, annual financial statements, the results of the
external audit and the Management Discussion and Analysis included in the report to shareholders for the year ended
December 31, 2018. 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
100 New Park Place, Suite 1400
Vaughan, ON L4K 0J3
Tel 905-265 5900
Fax 905-265 6390
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Martinrea International Inc.
Opinion
We have audited the accompanying consolidated financial statements of
Martinrea International Inc. (the Entity), which comprise:
the consolidated balance sheets as at December 31, 2018 and December
31, 2017
the consolidated statements of operations for the years then ended
the consolidated statements of comprehensive income for the years then
ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of
significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at December 31, 2018 and
December 31, 2017, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting
Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Our responsibilities under those standards are further
described in the “Auditors’ Responsibilities for the Audit of the Financial
Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements
that are relevant to our audit of the financial statements in Canada and we have
fulfilled our other responsibilities in accordance with these requirements.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Other Information
Management is responsible for the other information. Other information
comprises:
the information included in Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon,
included in the Report to Shareholders filed with the relevant Canadian Securities
Commissions.
Our opinion on the financial statements does not cover the other information and
we do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to
read the other information identified above and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit, and remain alert for indications that the
other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis
and the Report to Shareholders filed with the relevant Canadian Securities
Commissions as at the date of this auditors’ report. If, based on the work we
have performed on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact in the
auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for
the Financial Statements
Management is responsible for the preparation and fair presentation of the
financial statements in accordance with (IFRS), and for such internal control as
management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing
the Entity’s ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Entity or to cease
operations, or has no realistic alternative but to do so.
2
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with Canadian generally accepted auditing
standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing
standards, we exercise professional judgment and maintain professional
skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Entity's
internal control.
Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
Conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Entity's ability to continue as a going
3
concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditors’ report. However, future events or conditions may
cause the Entity to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves
fair presentation.
Communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we
identify during our audit.
Provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and
communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable,
related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the group Entity to
express an opinion on the financial statements. We are responsible for the
direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is W. G. Andrew
Smith.
Vaughan, Canada
February 28, 2019
4
Note
December 31, 2018
December 31, 2017
3
4
5
13
6
7
9
10
11
11
12
13
14
$
$
$
$
70,162
597,796
492,759
23,275
21,301
1,205,293
1,481,452
145,354
70,931
10,781
1,708,518
2,913,811
$
$
862,699
$
5,393
7,816
16,804
892,712
723,913
61,267
84,370
869,550
1,762,262
680,157
42,016
158,395
270,981
1,151,549
2,913,811
$
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
2,541,173
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
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Subsequent Event (note 7)
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 6 ▌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
Gain (loss) on disposal of property, plant and equipment
Impairment of assets
Restructuring costs
Gain on sale of land and building
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
Note
$
Year ended
December 31, 2018
3,662,900 $
Year ended
December 31, 2017
3,690,499
(2,954,142)
(152,597)
(3,106,739)
556,161
(3,065,880)
(140,018)
(3,205,898)
484,601
16
8
10
5
18
18
13
$
$
(26,564)
(232,313)
(10,701)
(2,140)
(462)
(5,436)
(2,073)
-
276,472
(27,358)
(2,288)
246,826
(60,943)
185,883 $
-
(26,597)
(211,533)
(9,652)
(2,162)
383
(7,488)
-
19,072
246,624
(22,527)
5,139
229,236
(69,970)
159,266
277
185,883 $
159,543
Basic earnings per share
Diluted earnings per share
15
$
15 $
2.15 $
2.14 $
1.84
1.84
See accompanying notes to the consolidated financial statements.
Page 7 ▌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 investments
Cash flow hedging derivative and non-derivative financial instruments:
Unrealized loss in fair value of financial instruments
Reclassification of losses to net income
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, 2018
Year ended
December 31, 2017
$
185,883 $
159,266
72,610
(2,867)
(6,036)
420
4,079
68,206
254,089 $
254,089
-
254,089 $
(30,737)
7,957
-
-
1,539
(21,241)
138,025
138,302
(277)
138,025
$
$
Page 8 ▌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
other
Retained
earnings/
Capital
stock
Contributed
comprehensive
(accumulated
surplus
income
deficit)
Total
$
710,510 $
42,660 $
117,048 $
-
-
-
-
-
-
(30,737)
7,957
94,268
-
-
-
-
-
(40,020) $
159,543
(1,849)
-
(10,388)
-
1,539
-
-
108,825
185,883
-
(14,213)
-
(7,814)
830,198 $
159,543
(1,849)
123
(10,388)
2,113
1,539
(30,737)
7,957
958,499
185,883
651
(14,213)
1,907
(25,513)
-
(5,779)
(23,871)
-
72,610
(2,867)
4,079
-
-
4,079
72,610
(2,867)
Non-
controlling
interest
(522) $
(277)
799
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
equity
829,676
159,266
(1,050)
123
(10,388)
2,113
1,539
(30,737)
7,957
958,499
185,883
651
(14,213)
1,907
(25,513)
(23,871)
4,079
72,610
(2,867)
(6,036)
420
158,395 $
-
-
(6,036)
420
270,981 $
1,151,549 $
-
-
- $
(6,036)
420
1,151,549
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 investments
BALANCE AT DECEMBER 31, 2017
Net income for the period
Compensation expense related to stock options
Dividends ($0.165 per share)
Exercise of employee stock options
Repurchase of common shares
Estimated repurchase of common shares
subsequent to year-end under an automatic share
repurchase program with a broker
Other comprehensive income (loss),
net of tax
Remeasurement of defined benefit plans
Foreign currency translation differences
Change in fair value of investments
Cash flow hedging derivative and non-derivative
financial instruments:
Unrealized loss in fair value of financial
instruments
Reclassification of losses to net income
BALANCE AT DECEMBER 31, 2018
-
-
-
-
2,915
-
-
-
713,425
-
-
-
2,523
(17,699)
(18,092)
-
-
-
-
-
-
-
123
-
(802)
-
-
-
41,981
-
651
-
(616)
-
-
-
-
-
-
-
$
680,157 $
42,016 $
See accompanying notes to the consolidated financial statements.
Page 9 ▌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 loss (gain) on foreign exchange forward contracts
Unrealized loss (gain) on warrants (note 7)
Finance expense
Income tax expense
Loss (gain) on disposal of property, plant and equipment
Deferred and restricted share units expense
Stock options expense
Gain on sale of land and building (note 5)
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:
Repurchase of common shares
Increase in long-term debt (net of addition to deferred financing fees)
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 property, plant and equipment
Upfront recovery of development costs incurred
Proceeds on disposal of land and building (note 5)
NET CASH USED IN INVESTING ACTIVITIES
Effect of foreign exchange rate changes on cash and cash equivalents
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
Year ended
December 31, 2018
Year ended
December 31, 2017
$
185,883 $
163,298
2,140
11,342
5,436
(66)
1,887
27,358
60,943
462
2,454
651
-
4,066
(4,842)
461,012
(7,550)
(91,590)
(6,964)
69,352
424,260
(30,855)
(96,703)
296,702 $
(25,513)
114,496
(57,710)
(12,999)
1,907
20,181 $
(309,049)
(14,171)
(680)
1,577
2,566
-
(319,757) $
1,843
(1,031)
71,193
70,162 $
$
$
$
$
159,266
149,670
2,162
13,237
7,488
146
(3,697)
22,527
69,970
(383)
2,751
123
(19,072)
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)
3,586
1,170
40,910
(230,620)
(3,298)
12,028
59,165
71,193
*As at December 31, 2018, $45,341 (December 31, 2017 - $63,877) 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 10 ▌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, 2018 were approved by the Board of Directors on
February 28, 2019.
(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 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
Page 11 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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.
Judegements in determining the timing of revenue recognition for tooling sales.
Judgements in determining whether sales contracts contain material rights.
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 12 ▌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 foreign currency translation differences, net of
income tax.
(c)
Financial instruments
(i) Financial assets and liabilities
The Company recognizes financial assets and financial liabilities initially at fair value and subsequently measures these at either fair value or
amortized cost based on their classification as described below:
Fair value through profit or loss (FVTPL):
Financial assets and financial liabilities purchased or incurred, respectively, with the intention of generating earnings in the near term, and
derivatives other than cash flow hedges, are classified as FVTPL. This category includes cash and cash equivalents, and derivative instruments
that do not qualify for hedge accounting. For items classified as FVTPL, the Company initially recognizes such financial assets on the
consolidated balance sheet at fair value and recognizes subsequent changes in the consolidated statement of operations. Transaction costs
incurred are expensed in the consolidated statement of operations. The Company does not currently hold any liabilities designated as FVTPL.
Fair value through other comprehensive income:
This category includes the Company’s investments in equity securities. Subsequent to initial recognition, they are measured at fair value on the
consolidated balance sheet 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 the consolidated statement of operations.
Amortized cost:
The Company classifies financial assets held to collect contractual cash flows at amortized cost, including trade and other receivables.
The Company initially recognizes the carrying amount of such assets on the consolidated balance sheet at fair value plus directly attributable
transaction costs, and subsequently measures these at amortized cost using the effective interest rate method, less any impairment losses.
Other financial liabilities:
This category is for financial liabilities that are not classified as FVTPL and includes trade and other payables and long-term debt. These financial
liabilities are recorded at amortized cost on the consolidated balance sheet.
(ii)
Impairment of financial assets
A forward-looking “expected credit loss” (ECL) model is used in determining the allowance for doubtful accounts as it relates to trade and other
receivables. The Company’s allowance is determined by historical experiences, and considers factors including, the aging of the balances, the
customer’s credit worthiness, and updates based on the current economic conditions, expectation of bankruptcies, and the political and economic
volatility in the markets/location of customers.
(iii) Derivative financial instruments not accounted for as hedges
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 classified as fair value through profit or loss, 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 the consolidated statement of operations.
(iv) Hedge accounting
The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates.
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 or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used, and how effectiveness
will be assessed.
Page 13 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
At inception and each reporting date, the Company formally assesses the effectiveness of these designated hedges.
Cash flow hedges
During the year ended December 31, 2018, the Company started hedging variability in cash flows of forecasted foreign currency sales due to
fluctuations in foreign exchange rates.
The Company has designated these foreign currency sales in a cash flow hedge. In such hedges, to the extent that the changes in fair value of
the hedging instrument offset the changes in the fair value of the hedged item, they are recorded in other comprehensive income (loss) until the
hedged item affects net income (i.e. when settled or otherwise derecognized). Any excess of the change in fair value of the derivative that does
not offset changes in the fair value of the hedged item is recorded in net income.
When a cash flow hedge relationship is discontinued, any subsequent change in fair value of the hedging instrument is recognized in net income.
If the hedge is discontinued before the end of the original hedge term, then any cumulative adjustment to either the hedged item or other
comprehensive income (loss) is recognized in net income, at the earlier of when the hedged item affects net income, or when the forecasted
item is no longer expected to occur.
Net investment hedges
The Company continues to use some portion of its US denominated long-term debt to manage foreign exchange rate exposures on net
investments in certain US operations.
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 income as and when the corresponding accumulated other comprehensive income from the hedged foreign
operations is recognized in net income. The Company has not identified any ineffectiveness in these hedge relationships as at December 31,
2018.
(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.
Page 14 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(iii) Depreciation
Depreciation is recognized in profit or loss over the estimated useful life of each item of property, plant and equipment, since this most closely
reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
Depreciation is recorded on the following bases and at the following rates:
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%
Buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other
Land is not depreciated.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted prospectively, if appropriate.
(e)
Intangible assets
The Company’s intangible assets are composed of customer contracts acquired in previous acquisitions and development costs.
(i) Customer contracts and relationships:
Customer contracts and relationships have a finite useful life and are amortized over their estimated economic life of up to 10 years on a straight
line basis which approximates a basis consistent with the contract value initially established upon acquisition.
(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 consolidated 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 15 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(g)
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 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 retained earnings 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 the Company has a detailed formal plan and has raised a valid expectation in those
affected that it will carry out the restructuring by starting to implement that plan or announcing its main features.
When the effect of the time value of money is material, the amount of the provision is discounted using a rate that reflects the market’s current
assessment of this value and the risks specific to the liability concerned. The increase in the provision related to the passage of time is
recognized through profit and loss in other finance income (expense).
(j)
Revenue recognition
The Company recognizes sales from two categories of goods: production (including finished production parts, assemblies and modules), and
tooling. Revenue for these goods is recognized at the point in time control of the goods is transferred to the customer.
Control of finished production parts, assemblies and modules transfers when the goods are shipped from the Company’s manufacturing facilities
to the customer. Control of tooling transfers when the tool has been accepted by the customer. For certain tooling contracts for which the
customer makes progress payments in advance of obtaining control of the tool, the Company recognizes a liability for the progress payments
until the performance obligation is complete. Such payments from the customer generally do not contain a financing component.
Page 16 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(k)
Finance expense
Finance expense is comprised of interest expense on long-term debt and amortization of deferred financing costs. 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.
(l)
Other finance income (expense)
Other finance income (expense) comprises interest income on funds invested, unwinding of the discount on provisions, changes in the fair value
of derivative financial instruments not accounted for as hedges and unrealized foreign exchange gains and losses reported on a net basis.
Interest income is recognized as it accrues in profit or loss, using the effective interest method.
(m)
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.
(n)
Guarantees
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.
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.
(o)
Stock-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-Merton option
valuation 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.
(p)
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.
Page 17 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
(q)
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.
(r)
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.
(s)
Performance and Restricted Share Unit Plan
On November 3, 2016, as subsequently amended, 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) for 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.
(t)
Recently adopted accounting standards
The Company adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), IFRS 9, Financial Instruments (“IFRS 9”) and
amendments made to Share-Based Payments (“IFRS 2”), effective January 1, 2018.
IFRS 15, Revenue from Contracts with Customers
The Company adopted IFRS 15 using the full retrospective approach. The adoption of the standard did not result in any restatement of previously
reported results and did not have a material impact on the consolidated financial statements. The Company’s revenue recognition accounting
policy has been updated accordingly as described in note 2(j).
Upon adoption of the new standard, additional disclosures related to the nature, amount, timing and uncertainty of the Company’s revenues and
cash flows arising from contracts with customers have been included in the consolidated financial statements, with comparative information,
including a continuity of contract liabilities and a breakdown of the Company’s revenues between production and tooling.
IFRS 9, Financial Instruments
The adoption of IFRS 9 did not have a material impact on the consolidated financial statements. The Company’s accounting policies on financial
instruments have been updated accordingly as described in note 2(c).
Page 18 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
IFRS 9 includes an accounting policy choice between deferring the adoption of the new hedge accounting standard under IFRS 9 and continuing
with the current IAS 39 hedge accounting standards. The Company has decided to continue to apply IAS 39 hedge accounting standards.
Amendments to IFRS 2, Share-Based Payments
The adoption of the amendments to IFRS 2 did not have a material impact on the consolidated financial statements.
(u)
Recently issued accounting standards
The IASB issued the following new standards:
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. IFRS 16 introduces a single accounting model for lessees unless the underlying asset is of low value. A lessee
will be required to recognize, on its statement of financial position, a right-of-use asset, representing its right to use the underlying leased asset,
and a lease liability, representing its obligation to make lease payments. The standard is effective for annual periods beginning on or after
January 1, 2019.
The Company will adopt the standard January 1, 2019, by applying the modified retrospective approach which involves recognizing transitional
adjustments in opening retained earnings on the date of initial application without restating comparative prior periods, as permitted by the
transitional guidance. The impact of adoption will result in the recognition of right-of-use assets estimated in the range of $200 million to $250
million, with corresponding lease liabilities in the same range. The adoption of IFRS 16 will also result in a decrease in operating rent expense,
and increases in finance and depreciation expenses as recognized in the consolidated statement of operations. The standard will not have a
significant impact on the Company’s overall consolidated operating results and cash flows.
3.
TRADE AND OTHER RECEIVABLES
Trade receivables
Other receivables
Foreign exchange forward contracts not accounted for as hedges (note 20(d))
December 31, 2018
585,790 $
11,940
66
597,796 $
December 31, 2017
538,830
17,219
-
556,049
$
$
The Company’s exposures to credit and currency risks, and impairment losses related to trade and other receivables, are disclosed in note 20.
4.
INVENTORIES
Raw materials
Work in progress
Finished goods
Tooling work in progress and other inventory
December 31, 2018
173,123 $
39,591
37,761
242,284
492,759 $
December 31, 2017
154,293
38,618
34,962
149,099
376,972
$
$
Page 19 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
5.
PROPERTY, PLANT AND EQUIPMENT
December 31, 2018
December 31, 2017
Accumulated
amortization
and
impairment
losses
(22,546) $
(41,238)
(1,086,324)
(33,091)
(31,294)
-
(1,214,493) $
Cost
130,106 $
70,079
2,009,183
39,551
63,807
383,219
2,695,945 $
$
$
Net book
value
107,560
28,841
922,859
6,460
32,513
383,219
1,481,452
$
$
Cost
118,154 $
62,100
1,758,415
38,509
53,197
270,195
2,300,570 $
Accumulated
amortization
and
impairment
losses
(17,157) $
(35,897)
(909,065)
(31,034)
(24,793)
-
(1,017,946) $
Net book
value
100,997
26,203
849,350
7,475
28,404
270,195
1,282,624
Land and buildings
Leasehold improvements
Manufacturing equipment
Tooling and fixtures
Other assets
Construction in progress
Movement in property, plant and equipment is summarized as follows:
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
Additions
Disposals
Depreciation
Impairment (note 8)
Transfers from construction in
progress and spare parts
Foreign currency translation
adjustment
Net as of December 31, 2018
$
Land and
buildings
120,049 $
-
(22,497)
(4,068)
-
Leasehold
improvements
24,987 $
802
(311)
(4,173)
-
Manufacturing
equipment
808,036 $
565
(2,024)
(134,515)
(7,488)
Tooling and
fixtures
8,419 $
-
-
(1,435)
-
Other Construction in
progress
assets
Total
277,999 $ 1,257,247
17,757 $
251,920
250,311
242
(25,041)
-
(209)
(149,670)
-
(5,479)
(7,488)
-
-
12,537
5,272
213,526
987
16,583
(248,905)
-
(5,024)
100,997
8
-
(4,026)
-
(374)
26,203
140
(5)
(4,220)
-
(28,750)
849,350
-
(1,326)
(146,798)
(5,436)
(496)
7,475
-
-
(1,773)
-
(490)
28,404
66
(25)
(6,481)
-
(9,210)
270,195
290,299
(683)
-
-
(44,344)
1,282,624
290,513
(2,039)
(163,298)
(5,436)
3,868
5,786
176,593
306
9,444
(195,997)
-
6,713
107,560 $
$
937
28,841 $
50,476
922,859 $
452
6,460 $
1,105
32,513 $
19,405
79,088
383,219 $ 1,481,452
The Company has entered into certain asset-based financing arrangements that were structured as sale-leaseback transactions. At December 31, 2018,
the carrying value of property, plant and equipment under such arrangements was $18,108 (December 31, 2017 – $21,001). 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.
Page 20 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
6.
INTANGIBLE ASSETS
December 31, 2018
December 31, 2017
Accumulated
amortization
and
impairment
losses
Cost
Net book
value
Cost
Accumulated
amortization
and
impairment
losses
Customer contracts and relationships
Development costs
$
$
62,497 $
160,008
222,505 $
(58,498) $
(93,076)
(151,574) $
3,999
66,932
70,931
$
$
61,432 $
143,325
204,757 $
(55,512) $
(80,831)
(136,343) $
Movement in intangible assets is summarized as follows:
Net book
value
5,920
62,494
68,414
Total
73,261
14,211
(15,399)
(1,170)
(2,489)
68,414
14,171
(13,482)
(2,566)
4,394
70,931
Customer
contracts and
relationships
8,172
-
(2,162)
-
(90)
5,920
-
(2,140)
-
219
3,999
$
$
$
$
Development
costs
65,089
14,211
(13,237)
(1,170)
(2,399)
62,494
14,171
(11,342)
(2,566)
4,175
66,932
$
$
December 31, 2018
8,572 $
2,209
10,781 $
December 31, 2017
11,275
3,990
15,265
$
$
Net as of December 31, 2016
Additions
Amortization
Upfront recovery of development costs incurred
Foreign currency translation adjustment
Net as of December 31, 2017
Additions
Amortization
Upfront recovery of development costs incurred
Foreign currency translation adjustment
Net as of December 31, 2018
7.
OTHER ASSETS
Investment in common shares of NanoXplore Inc.
Warrants in NanoXplore Inc.
Investment in NanoXplore Inc.
In the third quarter of 2017, the Company acquired 5,500,000 common shares in NanoXplore Inc. (“NanoXplore”), a publicly listed company on the Toronto
Stock Exchange (“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 2,750,000 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.
During the first quarter of 2018, the Company acquired an additional 411,800 common shares in NanoXplore for a total of $680 through another private
placement offering. As part of the transaction to acquire the additional common shares, the Company also received warrants entitling the Company to
acquire up to an additional 205,900 common shares in NanoXplore at a price of $2.30 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 using the Black-Scholes-Merton
valuation model, with the change in fair value recorded through profit or loss. As at December 31, 2018, the warrants had a fair value of $2,209. Based on
the fair value of the warrants as at December 31, 2018, an unrealized loss of $1,887 was recognized for the year ended December 31, 2018 (2017 -
unrealized gain of $3,697), in other finance income (expense) in the consolidated statements of operations. The table below summarizes the assumptions
used, on a weighted average basis, in valuing the warrants under the Black-Scholes-Merton valuation model during the year ended December 31, 2018:
Page 21 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Expected volatility
Risk free interest rate
Expected life (years)
2018 Acquisition
66.87%
1.88%
2
December 31, 2018
74.23%
1.86%
1
The NanoXplore common shares are recorded at their fair value at the end of each reporting period based on publically-quoted prices, with the change in
fair value recorded in other comprehensive income. As at December 31, 2018 the common shares had a fair value of $8,572. Based on the fair value of
the common shares as at December 31, 2018, an unrealized loss of $3,277 ($2,867 net of tax) was recognized for the year ended December 31, 2018
(2017 - unrealized gain of $9,093, $7,957 net of tax).
Subsequent to December 31, 2018, on January 11, 2019, the Company acquired an additional 11,538,000 common shares in NanoXplore for a total of
$14,999 through another private placement offering. Subsequent to the completion of the transaction, Martinrea holds an aggregate of 17,449,800 common
shares of NanoXplore which represents approximately 16% of the issued and outstanding common shares of NanoXplore.
8.
IMPAIRMENT OF ASSETS
During the fourth quarter of 2018, in conjunction with General Motors’ (“GM”) announcement that it will be closing its vehicle assembly facility in Oshawa,
Ontario, the Company recorded an impairment charge on property, plant, equipment totaling $5,436 related to a facility in Ajax, Ontario (included in the
North America operating segment) that the Company will be forced to close because the operation is entirely dependent on GM’s facility in Oshawa. The
impairment charge was recorded where the carrying amount of the assets exceeded their estimated recoverable amounts.
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.
9.
TRADE AND OTHER PAYABLES
Trade accounts payable and accrued liabilities*
Estimated share repurchase liability
Foreign exchange forward contracts not accounted for as hedges (note 20(d))
Foreign exchange forward contracts accounted for as hedges (note 20(d))
December 31, 2018
834,732 $
23,871
-
4,096
862,699 $
December 31, 2017
741,403
-
146
-
741,549
$
$
The Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 20.
* Included in Trade accounts payable and accrued liabilities are contract liabilities related to advance consideration received from customers for tooling
contracts, summarized below, for which revenue is recognized when the tool has been accepted by the customer.
Balance as of December 31, 2016
Amount of opening balance recognized as tooling sales during the period
Advance cash consideration received during the period
Balance as of December 31, 2017
Amount of opening balance recognized as tooling sales during the period
Advance cash consideration received during the period
Balance as of December 31, 2018
Page 22 ▌Martinrea International Inc.
Contract Liabilities
(Advance tooling
consideration from
Customers)
12,866
(10,964)
16,598
18,500
(17,258)
105,513
106,755
$
$
$
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
10.
PROVISIONS
Net as of December 31, 2016
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2017
Net additions
Amounts used during the period
Foreign currency translation adjustment
Net as of December 31, 2018
Restructuring
5,248
-
(4,060)
(72)
1,116
2,073
(1,116)
-
2,073
$
$
$
$
Claims and
Litigations
1,441
5,840
(2,979)
(370)
3,932
2,046
(2,453)
(205)
3,320
$
$
Total
6,689
5,840
(7,039)
(442)
5,048
4,119
(3,569)
(205)
5,393
Based on estimated cash outflows, all provisions as at December 31, 2018 and December 31, 2017 are presented on the consolidated balance sheets as
current liabilities.
(a)
Restructuring
Additions to the restructuring accrual during 2018 totaled $2,073 and represent expected employee-related severance payouts and lease
termination costs resulting from the planned closure of the operating facility in Ajax, Ontario as described in note 8.
(b)
Claims and litigation
In the normal course of business, the Company may be involved in disputes with its suppliers, former employees or other third parties. Where
the Company has determined that there is a probable loss that is expected from claims or litigation related to past events, a provision is recorded
to cover the related risks associated with these disputes. To the best of the Company’s knowledge, there are no claims or litigation in progress
or pending that are likely to have a material impact on the Company’s consolidated financial position.
11.
LONG-TERM DEBT
The Company’s interest-bearing loans and borrowings are measured at amortized cost. For more information about the Company’s exposure to interest
rate, foreign currency and liquidity risk, see note 20.
Banking facility
Equipment loans
Current portion
December 31, 2018
657,803 $
82,914
740,717
(16,804)
723,913 $
December 31, 2017
551,656
102,361
654,017
(24,795)
629,222
$
$
Page 23 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Terms and conditions of outstanding loans, as at December 31, 2018, in Canadian dollar equivalents, are as follows:
Banking facility
Equipment loans
Currency
USD
CAD
EUR
CAD
EUR
EUR
EUR
USD
EUR
BRL
EUR
EUR
USD
EUR
Nominal
interest rate
LIBOR + 1.70%
BA + 1.70%
Year of
maturity
2022
2022
$
December 31, 2018
Carrying amount
388,102
269,701
$
December 31, 2017
Carrying amount
321,152
230,504
1.05%
3.80%
2.54%
1.36%
3.35%
3.80%
0.26%
5.00%
3.06%
4.93%
4.25%
4.34%
2024
2022
2025
2021
2019
2022
2025
2020
2024
2023
2018
2025
$
32,076
31,334
16,093
1,544
966
463
362
76
-
-
-
-
740,717
$
-
38,785
15,561
2,100
2,504
413
375
135
15,210
15,131
8,917
3,230
654,017
On July 23, 2018, the Company’s banking facility was amended to extend its maturity date and enhance certain provisions of the facility. The primary
terms of the amended banking facility, with now a syndicate of ten banks (up from nine), include the following:
a move to an unsecured credit structure;
improved financial covenants;
available revolving credit lines of $370 million and US $420 million (up from $350 million and US $400 million, respectively);
available asset based financing capacity of $300 million (up from $205 million);
an accordion feature which provides the Company with the ability to increase the revolving credit facility by up to US $200 million (up from US
$150 million);
pricing terms at market rates and consistent with the previous facility;
a maturity date of July 2022; and
no mandatory principal repayment provisions.
As at December 31, 2018, the Company has drawn US$286,000 (December 31, 2017 - US$256,000) on the U.S. revolving credit line and $273,000
(December 31, 2017 - $233,000) on the Canadian revolving credit line. At December 31, 2018, the weighted average effective interest rate of the banking
facility credit lines was 3.7% (December 31, 2017 - 2.9%). The facility requires the maintenance of certain financial ratios with which the Company was in
compliance as at December 31, 2018.
Deferred financing fees of $3,299 (December 31, 2017 - $2,827) have been netted against the carrying amount of the long-term debt.
On April 20, 2018, the Company finalized an equipment loan in the amount of €23,000 ($36,886) repayable in monthly installments over six years at a
fixed annual interest rate of 1.05%. The proceeds from the loan were used to pay-off loans, without penalty, at fixed annual interest rates of 3.06%, 4.34%
and 4.93% that originally matured in 2024, 2025 and 2023, respectively.
On October 2, 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%.
Page 24 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Future annual minimum principal repayments as at December 31, 2018 are as follows:
Within one year
One to two years
Two to three years
Three to four years
Thereafter
Less: Deferred financing fees
Movement in long-term debt is summarized as follows:
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
Drawdowns
Equipment loan proceeds
Repayments
Deferred financing fee additions
Amortization of deferred financing fees
Foreign currency translation adjustment
Net as of December 31, 2018
$
$
$
$
$
$
16,804
13,887
13,901
673,985
22,140
740,717
(3,299)
737,418
Total
721,403
40,000
(88,648)
1,368
(20,106)
654,017
79,360
36,886
(57,710)
(1,750)
1,278
28,636
740,717
12.
PENSIONS AND OTHER POST RETIREMENT BENEFITS
The Company has defined benefit and non-pension post-retirement benefit plans in Canada, the United States and Germany. The defined benefit plans
provide pensions based on years of service, years of contributions and earnings. The post-retirement benefit plans provide for the reimbursement of
certain medical costs.
The plans are governed by the pension laws of the jurisdiction in which they are registered. The Company’s pension funding policy is to contribute amounts
sufficient, at minimum, to meet local statutory funding requirements. Local regulatory bodies either define minimum funding requirements or approve
funding plans submitted by the Company. From time to time the Company may make additional discretionary contributions taking into account actuarial
assessments and other factors. Actuarial valuations for the Company’s defined benefit pension plans are completed based on the regulations in place in
the jurisdictions where the plans operate.
The assets of the defined benefit pension plans are held in segregated accounts isolated from the Company’s assets. The plans are administered pursuant
to applicable regulations, investment policies and procedures and to the mandate of an established pension committee. The pension committee oversees
the administration of the pension plans, which include the following principal areas:
Overseeing the funding, administration, communication and investment management of the plans;
Selecting and monitoring the performance of all third parties performing duties in respect of the plans, including audit, actuarial and investment
management services;
Proposing, considering and approving amendments to the defined benefit pension plans;
Proposing, considering and approving amendments of the investment policies and procedures;
Reviewing actuarial reports prepared in respect of the administration of the defined benefit pension plans; and
Reviewing and approving the audited financial statements of the defined benefit pension plan funds.
The assets of the defined benefit pension plans are invested and managed following all applicable regulations and investment policies and procedures,
and reflect the characteristics and asset mix of each defined benefit pension plan. Investment and market return risk is managed by:
Contracting professional investment managers to execute the investment strategy following the investment policies and procedures and
regulatory requirements;
Page 25 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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
Balance, end of year
$
$
Plan assets:
Other post-
retirement
benefits
(44,621) $
1,543
(118)
(1,375)
4,058
Pensions
(69,546) $
2,090
(1,993)
(2,259)
(160)
December 31,
2018
(114,167) $
3,633
(2,111)
(3,634)
3,898
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
309
154
463
2,871
239
3,110
2,344
-
(1,381)
(39,241) $
4,884
93
(2,527)
(69,264) $
7,228
93
(3,908)
(108,505) $
(2,592)
-
1,512
(44,621) $
(4,304)
11
1,423
(69,546) $
(6,896)
11
2,935
(114,167)
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
$
- $
1,543
(1,543)
-
-
Pensions
48,909 $
3,299
(2,090)
1,720
(41)
December 31,
2018
48,909 $
4,842
(3,633)
1,720
(41)
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)
-
-
- $
(6,188)
1,629
47,238
$
(6,188)
1,629
47,238
$
-
-
- $
3,875
(1,368)
48,909
$
3,875
(1,368)
48,909
$
(39,241)
(22,026)
(61,267)
(44,621)
(20,637)
(65,258)
Pension benefit expense recognized in net income:
Current service costs
Net interest cost
Administrative costs
Net benefit plan expense
Other post-
retirement
benefits
118 $
1,375
-
1,493 $
$
$
Year ended
December 31,
2018
2,111 $
1,914
41
4,066 $
Pensions
1,993 $
539
41
2,573 $
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 $
Page 26 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Amounts recognized in other comprehensive income (loss) (before income taxes):
Actuarial gains (losses)
Year ended
December 31, 2018
$
5,401 $
Year ended
December 31, 2017
2,046
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, 2018
83.0%
17.0%
100.0%
December 31, 2017
82.9%
17.1%
100.0%
The defined benefit obligation and plan assets are composed by country as follows:
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
$
$
Year ended December 31, 2018
Year ended December 31, 2017
Canada
(29,944) $
26,611
(3,333)
(24,609)
(27,942) $
USA
(28,428) $
20,627
(7,801)
(16,313)
(24,114) $
Germany
- $
-
-
(9,211)
(9,211) $
Total
(58,372) $
47,238
(11,134)
(50,133)
(61,267) $
Canada
(30,698) $
27,464
(3,234)
(26,212)
(29,446) $
USA
(28,636) $
21,446
(7,190)
(20,195)
(27,385) $
Germany
Total
- $ (59,334)
48,910
-
(10,424)
-
(54,834)
(8,427)
(8,427) $ (65,258)
There are significant assumptions made in the calculations provided by the actuaries and it is the responsibility of the Company to determine which
assumptions could result in a significant impact when determining the accrued benefit obligations and pension expense.
Principal actuarial assumptions, expressed as weighted averages, are summarized below:
Weighted average actuarial assumptions
Defined benefit pension plans
Discount rate used to calculate year end benefit obligation
Mortality table
Other post-employment benefit plans
Discount rate to calculate year end benefit obligation
Mortality table
Health care trend rates
Initial healthcare rate
Ultimate healthcare rate
Sensitivity of Key Assumptions
December 31, 2018
December 31, 2017
3.7%
CPM - RPP 2014 Priv
3.3%
CPM - RPP 2014 Priv
3.9%
CPM - RPP 2014 Priv
& Blue collar w/MP
3.4%
CPM - RPP 2014 Priv
& Blue collar w/MP
5.5%
4.2%
5.9%
4.5%
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.
Page 27 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Impact on defined benefit obligation
December 31, 2018
Impact on defined benefit obligation
December 31, 2017
Change in
assumption
0.50%
1 Year
Increase in
assumption
Decrease by 7.1%
Increase by 3.0%
Decrease in
assumption
Increase by 8.0%
Decrease by 3.0%
Increase in
assumption
Decrease by 7.5%
Increase by 3.1%
Decrease in
assumption
Increase by 8.5%
Decrease by 3.2%
0.50%
1 Year
Decrease by 5.8%
Increase by 10.1%
Increase by 6.3%
Decrease by 8.4%
Decrease by 6.4%
Increase by 11.1%
Increase by 7.2%
Decrease by 9.2%
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:
Current income tax expense
Deferred income tax recovery (expense)
Total income tax expense
Year ended
December 31, 2018
(58,520) $
(2,423)
(60,943) $
Year ended
December 31, 2017
(73,316)
3,346
(69,970)
$
$
Taxes on items recognized in other comprehensive income or directly in equity in 2018 and 2017 were as follows:
Deferred tax charge on:
Employee benefit plan actuarial losses
US tax reform impact on employee benefit plans
Foreign currency translation
Reconciliation of effective tax rate
Year ended
December 31, 2018
(1,322) $
-
(1,043)
(2,365) $
Year ended
December 31, 2017
(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% (2017 - 26.5%)
Increase (decrease) in income taxes resulting from:
Utilization of losses previously not benefited
Tax audit settlements and changes in estimates
Revaluations 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
Impact of US tax reforms
Year ended
December 31, 2018
$
246,826 $
Year ended
December 31, 2017
229,236
65,409
(982)
(124)
3,161
(3,184)
4,468
(9,908)
2,103
-
$
60,943 $
60,748
(4,861)
(986)
1,403
(1,812)
6,085
(12,758)
2,838
19,313
69,970
30.5%
Effective income tax rate applicable to income before income taxes
24.7%
Page 28 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The movement of deferred tax assets are summarized below:
December 31, 2016
Benefit (charge) to income
Charge to other comprehensive income
Translation and other
December 31, 2017
Benefit (charge) to income
Benefit (charge) to other comprehensive
income
Translation and other
December 31, 2018
$
$
Losses
113,396 $
(18,389)
-
(6,523)
88,484
(8,573)
-
6,227
86,138 $
Employee
benefits
20,061 $
(1,732)
(1,749)
(583)
15,997
136
(1,322)
1,400
16,211 $
Interest and
accruals
25,132 $
(5,419)
-
(1,339)
18,374
4,161
-
1,529
24,064 $
PPE and
intangible
assets
14,116 $
(2,387)
-
801
12,530
(2,655)
-
347
10,222 $
Other
6,997 $
156
(74)
(291)
6,788
750
1,562
(381)
8,719 $
The movement of deferred tax liabilities are summarized below:
December 31, 2016
Benefit to income
Charge to other comprehensive income
Translation and other
December 31, 2017
Benefit (charge) to income
Charge to other comprehensive income
Translation and other
December 31, 2018
Net deferred asset at December 31, 2017
Net deferred asset at December 31, 2018
PPE and
intangible
assets
(110,778) $
29,917
-
5,179
(75,682)
4,967
-
(3,754)
(74,469) $
$
$
Other
(7,456) $
1,200
(184)
(251)
(6,691)
(1,208)
(2,605)
603
(9,901) $
$
$
Total
179,702
(27,771)
(1,823)
(7,935)
142,173
(6,181)
240
9,122
145,354
Total
(118,234)
31,117
(184)
4,928
(82,373)
3,759
(2,605)
(3,151)
(84,370)
59,800
60,984
The Company has accumulated approximately $478,216 (December 31, 2017 - $527,749) in non-capital losses that are available to reduce taxable
income in future years. If unused, these losses will expire as follows:
Year
2019-2021
2022-2026
2027-2038
Indefinite
$
$
2,238
7,227
426,845
41,906
478,216
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 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 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 $49,948 in the United States (December 31, 2017 - $60,369) 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 29 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
At December 31, 2018, 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
$
$
2018
40,128 $
2,740
188
43,056 $
2017
43,857
3,961
188
48,006
Deferred tax is not recognized on the unremitted earnings of foreign subsidiaries to the extent that the Company is able to control the timing of the reversal
of the temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future. The temporary difference in respect
of the amount of undistributed earnings and other differences including the outside basis difference of foreign subsidiaries is approximately $640,546 at
December 31, 2018 (December 31, 2017 - $612,983).
Future changes in tax law in any of the jurisdictions 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, 2016
Exercise of stock options
Balance, December 31, 2017
Exercise of stock options
Repurchase of common shares under normal course issuer bid
Estimated repurchase of common shares subsequent to year-end under an automatic share purchase program
with a broker
Balance, December 31, 2018 (including estimated repurchase of common shares subsequent to year-end)
Number
86,484,667
261,167
86,745,834
233,750
(2,150,400)
(2,198,079)
82,631,105
$
$
$
Amount
710,510
2,915
713,425
2,523
(17,699)
(18,092)
680,157
The Company is authorized to issue an unlimited number of common shares. The Company’s shares have no par value.
Repurchase of capital stock:
During 2018, the Company received approval from the TSX to acquire for cancellation, by way of normal course issuer bid (“NCIB”), up to 4,348,479
common shares of the Company. The bid commenced on August 31, 2018 and spans a 12-month period.
Since the commencement of the NCIB to December 31, 2018, the Company purchased for cancellation an aggregate of 2,150,400 common shares for an
aggregate purchase price of $25,513, resulting in a decrease to stated capital of $17,699 and a decrease to retained earnings of $7,814. The shares were
purchased and cancelled directly under the NCIB.
The Company entered into an Automatic Share Purchase Program (“ASPP”) with a broker that allows the purchase of common shares for cancellation
unto the NCIB at any time during the predetermined trading blackout period. As at December 31, 2018 an obligation for the repurchase of $23,871 (2017
– nil) was recognized under the ASPP in trade and other payables.
Stock options
The Company has one stock option plan for key employees. Under the plan the Company may grant options to its key employees for up to 9,000,000
shares of common stock with option room available calculated in accordance with the terms of the stock option plan. Under the plan, the exercise price
of each option equals the market price of the Company's stock on the date of grant or such other date as determined in accordance with the stock option
plan and the policies of the Company. The options have a maximum term of 10 years and generally vest between zero and five years.
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 is a summary of the activity of the outstanding share purchase options:
Balance, beginning of period
Granted during the period
Exercised during the period
Cancelled during the period
Balance, end of period
Options exercisable, end of period
Year ended
December 31, 2018
Number of
options
1,844,450
820,000
(233,750)
-
$
2,430,700 $
1,635,700 $
Weighted
average
exercise price
10.12
13.54
8.16
-
11.46
10.49
Year ended
December 31, 2017
Weighted
average
exercise price
11.38
-
8.09
14.91
10.12
10.12
$
Number of
options
3,010,617
-
(261,167)
(905,000)
1,844,450 $
1,844,450 $
The following is a summary of the issued and outstanding common share purchase options as at December 31, 2018:
Range of exercise price per share
$7.00 - 8.70
$10.67 - 16.06
Total share purchase options
Number
outstanding
533,700
1,897,000
2,430,700
Date of grant
2009 - 2012
2012 - 2018
Expiry
2019 - 2022
2022 - 2028
The table below summarizes the assumptions on a weighted average basis used in determining stock-based compensation expense under the Black-
Scholes-Merton option valuation model. The Black-Scholes-Merton option valuation model used by the Company to determine fair values was developed
for use in estimating the fair value of freely traded options, which are fully transferable and have no vesting restrictions. The Company’s stock options are
not transferable, cannot be traded and are subject to vesting restrictions and exercise restrictions under the Company’s black-out policy which would tend
to reduce the fair value of the Company’s stock options. Changes to subjective input assumptions used in the model can cause a significant variation in
the estimate of the fair value of the options.
The key assumptions, on a weighted average basis, used in the valuation of options granted during the year ended December 31, 2018 are shown in the
table below:
Expected volatility
Risk free interest rate
Expected life (years)
Dividend yield
Weighted average fair value of options granted
Year ended
December 31, 2018
36.67%
2.19%
4.88
1.36%
3.82
$
There were no options granted during the year ended December 31, 2017. For the year ended December 31, 2018, the Company expensed $651 (2017
- $123), to reflect stock-based compensation expense, as derived using the Black-Scholes-Merton option valuation model.
Deferred Share Unit Plan
The following is a summary of the issued and outstanding DSUs as at December 31, 2018 and 2017:
Units outstanding, beginning of period
Units granted during the period
Units redeemed during the period
Units for dividends earned during the period (issued twice a year)
Units outstanding, end of period
Year ended
December 31, 2018
123,313
49,551
-
1,710
174,574
Year ended
December 31, 2017
67,837
54,588
-
888
123,313
The DSUs granted during the years ended December 31, 2018 and 2017 were granted to non-executive directors, are not subject to vesting conditions
and had a weighted average fair value per unit of $13.27 and $10.99, respectively, on the date of grant. At December 31, 2018, the fair value of all
outstanding DSUs amounted to $1,806 (December 31, 2017 - $1,939). For the year ended December 31, 2018, DSU compensation expense/benefit
Page 31 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
reflected in the consolidated statement of operations, including changes in fair value during the year, amounted to a benefit of $131 (2017 – expense of
$1,371), recorded in selling, general and administrative expense.
Performance Restricted Share Unit Plan
The following is a summary of the issued and outstanding RSUs and PSUs as at December 31, 2018 and 2017:
Units outstanding, December 31, 2016
Units granted during the period
Units for dividends earned during the period
Units redeemed during the period
Units forfeited during the period
Units outstanding, December 31, 2017
Units granted during the period
Units for dividends earned during the period
Units redeemed during the period
Units forfeited during the period
Units outstanding, December 31, 2018
RSUs
-
77,090
214
-
-
77,304
211,194
712
-
-
289,210
PSUs
-
77,090
214
-
-
77,304
211,194
712
-
-
289,210
Total
-
154,180
428
-
-
154,608
422,388
1,424
-
-
578,420
The RSUs and PSUs granted during the years ended December 31, 2018 and 2017 had a weighted average fair value per unit of $15.49 and $11.92,
respectively, on the date of grant. For the year ended December 31, 2018, RSU and PSU compensation expense reflected in the consolidated statement
of operations, including changes in fair value during the year, amounted to $2,585 (2017 - $1,380), recorded in selling, general and administrative expense.
Unrecognized RSU and PSU compensation expense as at December 31, 2018 was $2,868 (December 31, 2017 - $803) and will be recognized in income
over the next three years as the RSUs and PSUs vest.
The key assumptions, on a weighted average basis, used in the valuation of PSUs granted during the years ended December 31, 2018 and 2017 are
shown in the table below:
Expected life (years)
Risk free interest rate
15.
EARNINGS PER SHARE
Details of the calculations of earnings per share are set out below:
Basic
Effect of dilutive securities:
Stock options
Diluted
2018
2.49
2.05%
2017
2.38
1.15%
Year ended
December 31, 2018
Year ended
December 31, 2017
Weighted
average
number of
shares
86,548,599
439,416
86,988,015
$
$
Per common
share amount
2.15
Weighted
average
number of
shares
86,527,271
(0.01)
2.14
252,035
86,779,306
Per common
share amount
1.84
-
1.84
$
$
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, 2018, 100,000 options (2017 - 767,000) were excluded from the diluted weighted average per share calculation as they
were anti-dilutive.
Page 32 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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, 2018
29,393 $
(14,171)
11,342
26,564 $
Year ended
December 31, 2017
27,571
(14,211)
13,237
26,597
$
$
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 3.33% (2017 - 2.8%)
Finance expense
Net unrealized foreign exchange gain (loss)
Unrealized gain (loss) on derivative instruments (note 7)
Other income, net
Other finance income (expense)
19.
OPERATING SEGMENTS
Note
12
14
14
14
$
$
Year ended
December 31, 2018
889,117 $
4,066
2,585
(131)
651
896,288 $
Year ended
December 31, 2017
873,731
4,487
1,380
1,371
123
881,092
$
$
$
Year ended
December 31, 2018
(30,861) $
3,503
(27,358) $
Year ended
December 31, 2018
(768) $
(1,887)
367
(2,288)
Year ended
December 31, 2017
(25,817)
3,290
(22,527)
Year ended
December 31, 2017
1,167
3,697
275
5,139
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 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 operating segments:
Page 33 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
North America
Canada
USA
Mexico
Eliminations
Europe
Germany
Spain
Slovakia
Eliminations
Rest of the World
Eliminations
North America
Canada
USA
Mexico
Eliminations
Europe
Germany
Spain
Slovakia
Eliminations
Rest of the World
Eliminations
Production Sales
Tooling Sales
Total Sales
Property, plant and
equipment
Operating Income
Year ended December 31, 2018
622,576 $
1,186,013
982,086
(163,162)
2,627,513 $
460,115
141,440
53,301
-
654,856
121,112
(9,751)
3,393,730 $
96,129 $
106,568
94,331
(97,014)
200,014 $
34,038
19,885
6,269
(1,187)
59,005
14,210
(4,059)
269,170 $
718,705 $
1,292,581
1,076,417
(260,176)
2,827,527 $
494,153
161,325
59,570
(1,187)
713,861
135,322
(13,810)
3,662,900 $
160,325
480,016
483,013
-
1,123,354 $
152,738
113,048
14,186
-
279,972
78,126
-
1,481,452 $
229,117
46,790
565
-
276,472
Production Sales
Tooling Sales
Total Sales
Property, plant and
equipment
Operating Income
Year ended December 31, 2017
709,636 $
1,332,550
868,644
(156,254)
2,754,576 $
405,604
151,666
54,881
(178)
611,973
122,561
(9,552)
3,479,558 $
69,294 $
28,246
86,056
(24,386)
159,210 $
28,202
11,166
6,145
(457)
45,056
9,506
(2,831)
210,941 $
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 $
158,213
400,618
410,218
-
969,049 $
134,366
91,157
14,323
-
239,846
73,729
-
1,282,624 $
213,493
38,388
(5,257)
-
246,624
$
$
$
$
$
$
20.
FINANCIAL INSTRUMENTS
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 34 ▌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 not accounted for as hedges (note 3)
Foreign exchange forward contracts accounted for as hedges (note 9)
Cash and cash equivalents
Other assets (note 7)
Foreign exchange forward contracts not accounted for as hedges (note 9)
$
$
$
$
$
$
$
Total
70,162 $
10,781 $
66 $
(4,096) $
Total
71,193 $
15,265 $
(146) $
December 31, 2018
Level 1
70,162 $
8,572 $
- $
- $
Level 2
- $
2,209 $
66 $
(4,096) $
December 31, 2017
Level 1
71,193 $
11,275 $
- $
Level 2
- $
3,990 $
(146) $
Level 3
-
-
-
-
Level 3
-
-
-
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:
Fair value
through profit
or loss
Fair value
through other
comprehensive
income
Financial
assets at
amortized
cost
- $
597,730 $
December 31, 2018
FINANCIAL ASSETS:
Trade and other receivables
Other assets (note 7)
Foreign exchange forward contracts not
accounted for as hedges
$
FINANCIAL LIABILITIES:
Trade and other payables
Estimated share repurchase liability
Long-term debt
Foreign exchange forward contracts
accounted for as hedges
Net financial assets (liabilities)
$
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 not
accounted for as hedges
Net financial assets (liabilities)
$
- $
2,209
66
2,275
-
-
-
-
-
2,275 $
- $
3,990
3,990
-
-
(146)
(146)
3,844 $
8,572
-
8,572
-
-
-
(4,096)
(4,096)
4,476 $
Amortized
cost
Carrying
amount
Fair value
- $
-
-
-
(834,732)
(23,871)
(740,717)
597,730 $
10,781
66
608,577
(834,732)
(23,871)
(740,717)
597,730
10,781
66
608,577
(834,732)
(23,871)
(740,717)
-
(1,599,320)
(1,599,320) $
(4,096)
(1,603,416)
(994,839) $
(4,096)
(1,603,416)
(994,839)
Amortized
cost
Carrying
amount
Fair value
-
-
597,730
-
-
-
-
-
597,730 $
Financial
assets at
amortized
cost
- $
556,049 $
11,275
11,275
-
556,049
- $
-
-
556,049 $
15,265
571,314
-
-
-
-
-
-
-
-
11,275 $
556,049 $
(741,403)
(654,017)
(741,403)
(654,017)
-
(1,395,420)
(1,395,420) $
(146)
(1,395,566)
(824,252) $
(146)
(1,395,566)
(824,252)
556,049
15,265
571,314
(741,403)
(654,017)
Fair value
through profit
or loss
Fair value
through other
comprehensive
income
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.
Page 35 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
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 investments. These risks arise from exposures that occur in the normal course of business and are managed on a consolidated Company
basis.
(a) Credit risk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counterparties to meet their payment obligations. Financial
instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, trade and other receivables, and foreign exchange
forward contracts.
Credit risk associated with cash and 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
29.5%, 28.0%, and 15.7% of its production sales for the year ended December 31, 2018 (2017 - 32.5%, 28.1% and 14.9%). 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 level of accounts receivable that was past due as at December 31, 2018 is within the normal payment pattern of the industry. The allowance
for doubtful accounts is less than 0.50% of total trade receivables for all periods and movements in the year were 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, 2018
540,728 $
18,437
26,625
585,790 $
December 31, 2017
501,336
19,853
17,641
538,830
$
$
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, 2018, the Company had cash of $70,162 (2017 - $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
Page 36 ▌Martinrea International Inc.
Carrying amount
December 31, 2018
657,803 $
82,914
740,717 $
December 31, 2017
551,656
102,361
654,017
$
$
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
Sensitivity analysis
An increase or decrease of 1.0% in all variable interest rate debt would, all else being equal, have an effect of $6,010 (2017 - $6,015) on the Company’s
consolidated financial results for the year ended December 31, 2018.
(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, 2018, the Company had committed to the following foreign exchange contracts:
Foreign exchange forward contracts not accounted for as hedges and fair valued through profit or loss
Buy Canadian Dollars
Buy Mexican Peso
Currency
Amount of U.S.
dollars
$
$
40,000
23,857
Weighted average
exchange rate of U.S.
dollars
Maximum period in
months
1.3462
20.1200
1
1
The aggregate value of these forward contracts as at December 31, 2018 was a pre-tax gain of $66 and was recorded in trade and other receivables
(December 31, 2017 - loss of $146 and was recorded in trade and other payables).
Foreign exchange forward contracts accounted for as hedges and fair valued through other comprehensive income
Currency
Amount of U.S.
dollars
Weighted average
exchange rate of U.S.
dollars
Maximum period in
months
Buy Canadian Dollars
$
57,900
1.2780
48
The aggregate value of these forward contracts as at December 31, 2018 was a pre-tax loss of $4,096 and was recorded in trade and other payables
(December 31, 2017 - nil).
The Company’s exposure to foreign currency risk reported in the foreign currency was as follows:
December 31, 2018
Trade and other receivables
Trade and other payables
Long-term debt
December 31, 2017
Trade and other receivables
Trade and other payables
Long-term debt
USD
297,895
(383,618)
(286,341)
(372,064)
USD
282,095
(330,020)
(263,701)
(311,626)
€
€
€
€
$
$
$
$
EURO
66,826
(88,627)
(32,787)
(54,588)
EURO
64,926
(91,091)
(35,949)
(62,114)
$
$
$
$
PESO
84,181 R$
(219,130)
-
(134,949) R$
PESO
44,972 R$
(163,168)
-
(118,196) R$
¥
BRL
26,348
(37,578)
(218)
(11,448) ¥
BRL
19,424
(25,341)
(356)
¥
(6,273) ¥
CNY
89,887
(104,990)
-
(15,103)
CNY
174,033
(116,149)
-
57,884
Page 37 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
The following summary illustrates the fluctuations in the exchange rates applied during the years ended December 31, 2018 and 2017:
USD
EURO
PESO
BRL
CNY
Average rate
Closing rate
Year ended December
31, 2018
1.2910
1.5286
0.0674
0.3594
0.1960
Year ended December
31, 2017
1.3029
1.4576
0.0688
0.4077
0.1920
December 31, 2018
1.3570
1.5567
0.0686
0.3498
0.1985
December 31, 2017
1.2571
1.5089
0.0639
0.3795
0.1924
Sensitivity analysis
The Company does not have significant foreign currency exposure based on each subsidiary’s functional currency. However, a 10% strengthening of the
Canadian dollar against the following currencies at December 31, would give rise to a translation risk on net income and would have increased (decreased)
equity, profit or loss and comprehensive income for the year ended December 31, 2018 by the amounts shown below, assuming all other variables remain
constant:
USD
EURO
BRL
CNY
Year ended
December 31, 2018
(12,086) $
(5,454)
304
31
(17,205) $
Year ended
December 31, 2017
(6,333)
(4,559)
938
(305)
(10,259)
$
$
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 transaction 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.
Page 38 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
21.
COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain manufacturing facilities, office equipment and vehicles under operating leases and enters into purchase obligations in the
normal course of business related to inventory, services, tooling and property, plant and equipment. The aggregate expected payments towards those
obligations are as follows:
Future minimum lease payments under operating leases
Capital and other purchase commitments (all due in less than one year)
Future minimum lease payments under operating leases are due as follows:
Less than one year
Between one and five years
More than five years
Contingencies
December 31,
2018
240,052 $
369,928
609,980 $
December 31,
2017
210,189
416,130
626,319
December 31, 2018
39,601 $
115,724
84,727
240,052 $
December 31, 2017
34,735
100,090
75,364
210,189
$
$
$
$
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 these consolidated financial statements 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 and most recent developments surrounding the
assessments, is approximately $74,319 (BRL $212,462) including interest and penalties to December 31, 2018 (December 31, 2017- $83,110 or BRL
219,460). 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 $43,059 at some point through a pledge of
assets, bank letter of credits or cash deposit. No provision has been recorded by the Company in connection with this contingency as at this stage the
Company has concluded that it is not probable that a liability will result from the matter.
Page 39 ▌Martinrea International Inc.
Martinrea International Inc.
Notes to the Consolidated Financial Statements
(in thousands of Canadian dollars, except per share amounts)
22.
GUARANTEES
The Company is a guarantor under a tooling financing program. The tooling financing program involves a third party that provides tooling suppliers with
financing subject to a Company guarantee. Payments from the third party to the tooling supplier are approved by the Company prior to the funds being
advanced. The amounts loaned to the tooling suppliers through this financing arrangement do not appear on the Company’s consolidated balance sheet.
At December 31, 2018, the amount of off-balance sheet program financing was $58,871 (December 31, 2017 - $75,189) 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 2018 or 2017. Moreover, if such an instance were to occur, the Company would obtain the tooling inventory as collateral. The term of
the guarantee will vary from program to program, but typically ranges from six to eighteen months.
23.
TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL
Key management personnel include the Directors and the most Senior Corporate Officers of the Company that are primarily responsible for planning,
directing, and controlling the Company’s business activities.
The compensation expense associated with key management for employee services was included in employee salaries and benefits as follows:
Salaries, pension and other short-term employee benefits
RSU, PSU and DSU compensation expense (including changes in fair value during the year)
Stock-based compensation expense
Termination benefits *
Net expense
$
$
Year ended
December 31, 2018
13,580 $
1,665
381
-
15,626 $
Year ended
December 31, 2017
12,487
2,751
123
1,767
17,128
*In 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 2017.
24.
LIST OF CONSOLIDATED ENTITIES
The following is a summary of significant direct subsidiaries of the Company as at December 31, 2018:
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.
Martinrea Automotive Japan Inc.
Agility Tooling Inc.
Page 40 ▌Martinrea International Inc.
Country of incorporation
Canada
Canada
Canada
Canada
United States of America
Canada
Slovakia
United States of America
Mexico
Canada
Netherlands
Japan
Canada
Ownership interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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)
President and Chief Executive Officer
Emera Inc.
Pat D’Eramo
President and Chief Executive Officer, Martinrea
International Inc.
Roman Doroniuk (1)
Independent Consultant, Financial and Strategic Advisory
Services
Terry Lyons (2), (3)
Corporate Director and Lead Director, Canaccord Genuity
Group Inc.
Frank Macher
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 (3)
President, Canadian International Avenues Ltd.
Dave Schoch (2)
Retired, Group Vice President and President, Asia Pacific,
and Chairman and Chief Executive Officer, Ford China
(1)
(2)
(3)
(4)
Member, Human Resources and Compensation Committee
Member, Audit Committee
Member, Corporate Governance and Nominating Committee
Lead Director
Corporate Executive Officers
Pat D’Eramo, President and Chief Executive Officer
Rob Wildeboer, Executive Chairman
Fred Di Tosto, Chief Financial Officer
Armando Pagliari, Executive VP, Human Resources
Certificate Transfer and Address Change
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
T: 1 800 564-6523/1 514 982-7555
F: 1 866 249-7775
E: service@computershare.com
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
T: 1 800 564-6523/1 514 982-7555
F: 1 866 249-7775
E: service@computershare.com
Shareholder Inquiries/Investor Relations
All inquiries should be directed to:
Fred Di Tosto
Martinrea International Inc.
3210 Langstaff Road
Vaughan, Ontario L4K 5B2
T: 416 749-0314
F: 289 982-3001
Media Inquiries
All inquiries should be directed to:
Deanna S. Lorincz
Global Director, Communications and Marketing
Martinrea International Inc.
2100 N. Opdyke Rd
Auburn Hills, Michigan 48326
T: 248.392.9767
Auditors
KPMG LLP
100 New Park Place
Suite 1400
Vaughan, Ontario L4K 0J3
T: 905-265-5900
F: 905-265-6390
Stock Listing
The Toronto Stock Exchange (TSX: MRE)
MMAARRTTIINNRREEAA IINNTTEERRNNAATTIIOONNAALL IINNCC..
Website: www.martinrea.com
Investor Information: investor@martinrea.com