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MDA Space — Interim / Quarterly Report 2022
Nov 11, 2022
48075_rns_2022-11-11_c9a612f4-93a4-47b5-ae18-9c17339a345d.pdf
Interim / Quarterly Report
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Page 1 of 16
MDA LTD.
Interim Condensed Consolidated Financial Statements
For the three and nine months ended
September 30, 2022 and 2021
(In millions of Canadian dollars)
MDA Ltd.
Unaudited Interim Condensed Consolidated Statement of Operations and Comprehensive Income
For the three and nine months ended September 30, 2022 and 2021
(In millions of Canadian dollars except per share figures)
| Note | 2022 | Three months 2021 | 2022 | Nine months 2021 | |
|---|---|---|---|---|---|
| Revenue | 4 | $ 172.0 | $ 111.3 | $ 455.1 | $ 361.4 |
| Cost of revenue | |||||
| Materials, labour and subcontractors | 6 | (109.8) | (66.1) | (268.2) | (221.6) |
| Depreciation and amortization of assets | 8, 9, 10 | (5.8) | (5.8) | (17.4) | (17.4) |
| Gross profit | 56.4 | 39.4 | 169.5 | 122.4 | |
| Operating expenses | |||||
| Selling, general and administration | 6 | (15.5) | (15.1) | (43.6) | (41.2) |
| Research and development, net | 6 | (7.8) | (7.5) | (25.0) | (12.8) |
| Amortization of intangible assets | 10 | (12.8) | (13.9) | (39.7) | (42.3) |
| Share-based compensation | 13 | (2.5) | (2.3) | (5.5) | (9.6) |
| Operating income | 17.8 | 0.6 | 55.7 | 16.5 | |
| Other income (expenses) | |||||
| Government grant income | — | 9.1 | — | 24.0 | |
| Unrealized gain (loss) on financial instruments | 14 | 0.3 | 1.5 | (9.1) | 1.3 |
| Foreign exchange gain (loss) | 5.6 | 2.9 | 5.5 | (2.0) | |
| Finance costs | 12 | (2.4) | (5.7) | (31.4) | (30.0) |
| Other | — | — | — | 0.9 | |
| Income before income taxes | 21.3 | 8.4 | 20.7 | 10.7 | |
| Income tax expense | (3.4) | (4.4) | (3.2) | (8.4) | |
| Net income | 17.9 | 4.0 | 17.5 | 2.3 | |
| Other comprehensive income | |||||
| Gain on translation of foreign operations | 0.5 | 0.1 | 1.0 | 1.1 | |
| Remeasurement gain (loss) on defined benefit plans | 17 | (1.2) | — | 16.6 | — |
| Total comprehensive income | $ 17.2 | $ 4.1 | $ 35.1 | $ 3.4 | |
| Earnings per share: | |||||
| Basic | 15 | $ 0.15 | $ 0.03 | $ 0.15 | $ 0.02 |
| Diluted | 15 | 0.15 | 0.03 | 0.14 | 0.02 |
| Weighted-average common shares outstanding: | |||||
| Basic | 15 | 118,942,451 | 118,691,628 | 118,776,154 | 106,137,609 |
| Diluted | 15 | 122,528,404 | 128,492,429 | 122,085,504 | 113,578,887 |
The accompanying notes are an integral part of interim condensed consolidated financial statements
Page 2 of 16
MDA Ltd.
Unaudited Interim Condensed Consolidated Statement of Financial Position
September 30, 2022
(In millions of Canadian dollars)
| As at | Note | September 30, 2022 | December 31, 2021 |
|---|---|---|---|
| Assets | |||
| Current assets: | |||
| Cash and equivalents | $ — | $ 83.6 | |
| Trade and other receivables | 151.4 | 92.6 | |
| Unbilled receivables | 120.8 | 83.7 | |
| Inventories | 7.6 | 8.0 | |
| Income taxes receivable | 20.3 | 13.1 | |
| Other current assets | 7 | 19.4 | 12.8 |
| 319.5 | 293.8 | ||
| Non-current assets: | |||
| Property, plant and equipment | 8 | 200.7 | 109.9 |
| Right-of-use assets | 9 | 9.0 | 14.8 |
| Intangible assets | 10 | 557.9 | 571.2 |
| Goodwill | 419.9 | 419.9 | |
| Deferred income tax assets | 21.6 | 19.3 | |
| Other non-current assets | 7 | 143.8 | 105.7 |
| Total assets | $ 1,672.4 | $ 1,534.6 | |
| Liabilities and shareholders’ equity | |||
| Current liabilities: | |||
| Bank indebtedness | $ 1.1 | $ — | |
| Accounts payable and accrued liabilities | 110.2 | 71.3 | |
| Income taxes payable | 12.4 | 11.8 | |
| Contract liabilities | 118.3 | 91.5 | |
| Current portion of net employee benefit payable | 40.0 | 38.8 | |
| Current portion of lease liabilities | 9 | 7.7 | 7.9 |
| Other current liabilities | 3.3 | 4.6 | |
| 293.0 | 225.9 | ||
| Non-current liabilities: | |||
| Net employee defined benefit payable | 22.7 | 33.8 | |
| Lease liabilities | 9 | 2.5 | 7.8 |
| Long-term debt | 11 | 193.5 | 144.7 |
| Deferred income tax liabilities | 158.0 | 158.4 | |
| Other non-current liabilities | 2.0 | 2.3 | |
| Total liabilities | 671.7 | 572.9 | |
| Shareholders’ equity | |||
| Common shares | 951.5 | 950.7 | |
| Contributed surplus | 22.0 | 16.9 | |
| Accumulated other comprehensive income | 26.1 | 8.5 | |
| Retained earnings (deficit) | 1.1 | (14.4) | |
| Total equity | 1,000.7 | 961.7 | |
| Total liabilities and equity | $ 1,672.4 | $ 1,534.6 |
The accompanying notes are an integral part of the interim condensed consolidated financial statements
Page 4 of 16
MDA Ltd.
Unaudited Interim Condensed Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2022 and 2021
(In millions of Canadian dollars)
| Note | Common shares | Contributed surplus | Accumulated other comprehensive income (loss) | Retained earnings (deficit) | Total shareholders' equity | ||
|---|---|---|---|---|---|---|---|
| Number | Amount | ||||||
| As at January 1, 2022 | 118,691,628 | $ 950.7 | $ 16.9 | $ 8.5 | $ (14.4) | $ 961.7 | |
| Impact of change in accounting policy | 3 | — | — | — | — | (2.0) | (2.0) |
| Share-based awards exercised | 13 | 309,908 | 0.8 | (0.4) | — | — | 0.4 |
| Net income | — | — | — | — | 17.5 | 17.5 | |
| Other comprehensive income | — | — | — | 17.6 | — | 17.6 | |
| Share-based compensation | 13 | — | — | 5.5 | — | — | 5.5 |
| As at September 30, 2022 | 119,001,536 | $ 951.5 | $ 22.0 | $ 26.1 | $ 1.1 | $ 1,000.7 | |
| As at January 1, 2021(1) | 80,735,983 | $ 480.4 | $ 4.9 | $ (10.6) | $ (17.3) | $ 457.4 | |
| Share capital issued(1) | 37,955,645 | 470.3 | — | — | — | 470.3 | |
| Net income | — | — | — | — | 2.3 | 2.3 | |
| Other comprehensive income | — | — | — | 1.1 | — | 1.1 | |
| Share-based compensation | 13 | — | — | 8.0 | — | — | 8.0 |
| As at September 30, 2021 | 118,691,628 | $ 950.7 | $ 12.9 | $ (9.5) | $ (15.0) | $ 939.1 |
(1) Number of common shares reflect the six-to-one share consolidation effected upon the Company's initial public offering on April 7, 2021.
The accompanying notes are an integral part of the interim condensed consolidated financial statements
MDA Ltd.
Unaudited Interim Condensed Consolidated Statement of Cash Flows
For the three and nine months ended September 30, 2022 and 2021
(In millions of Canadian dollars)
| Note | Three months | Nine months | |||
|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||
| Cash flows from operating activities | |||||
| Net income | $ 17.9 | $ 4.0 | $ 17.5 | $ 2.3 | |
| Items not affecting cash: | |||||
| Income tax expense | 3.4 | 4.4 | 3.2 | 8.4 | |
| Depreciation of property, plant and equipment | 8 | 2.3 | 2.3 | 7.2 | 6.1 |
| Depreciation of right-of-use assets | 9 | 2.1 | 2.2 | 6.2 | 7.9 |
| Amortization of intangible assets | 10 | 14.2 | 15.2 | 43.7 | 45.7 |
| Share-based compensation expense | 13 | 2.5 | 2.3 | 5.5 | 9.6 |
| Investment tax credits accrued during the period | 16 | (10.7) | (4.1) | (42.3) | (13.3) |
| Finance costs | 12 | 2.4 | 5.7 | 31.4 | 30.0 |
| Unrealized loss (gain) on financial instruments | (0.3) | (1.5) | 9.1 | (1.3) | |
| Changes in operating assets and liabilities | 18 | (21.9) | (30.3) | (47.9) | (48.8) |
| Interest paid | (2.9) | (1.1) | (13.9) | (15.5) | |
| Income tax received (paid) | (2.0) | 0.4 | (3.0) | 0.3 | |
| Net cash from (used in) operating activities | 7.0 | (0.5) | 16.7 | 31.4 | |
| Cash flows from investing activities | |||||
| Purchases of property and equipment | 8 | (32.9) | (25.7) | (100.6) | (30.2) |
| Purchase/development of intangible assets | 10 | (8.0) | (4.6) | (32.4) | (27.4) |
| Proceeds from disposal of assets | — | 2.0 | — | 2.0 | |
| Net cash used in investing activities | (40.9) | (28.3) | (133.0) | (55.6) | |
| Cash flows from financing activities | |||||
| Repayment of second lien notes | 11 | — | — | (150.0) | (424.1) |
| Borrowings from senior credit facility | 11 | 25.0 | — | 195.0 | — |
| Transaction costs incurred on debt refinancing | 11 | — | — | (8.9) | — |
| Payment of lease liability (principal portion) | (1.9) | (2.2) | (5.9) | (6.0) | |
| Proceeds from stock options exercised | 0.4 | — | 0.4 | — | |
| Proceeds from issuance of shares, net of costs | — | — | — | 462.6 | |
| Net cash provided by (used in) financing activities | 23.5 | (2.2) | 30.6 | 32.5 | |
| Net increase (decrease) in cash and cash equivalents | (10.4) | (31.0) | (85.7) | 8.3 | |
| Net foreign exchange differences on cash | 0.5 | 0.1 | 1.0 | 1.1 | |
| Cash and cash equivalents, beginning of period | 8.8 | 118.9 | 83.6 | 78.6 | |
| Cash and cash equivalents (bank indebtedness), end of period | $ (1.1) | $ 88.0 | $ (1.1) | $ 88.0 |
The accompanying notes are an integral part of interim condensed consolidated financial statements
Page 5 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
1. Nature of operations
MDA Ltd. and its subsidiaries (collectively "MDA" or the "Company") design, manufacture, and service space robotics, satellite systems and components, and intelligence systems. MDA also provides geointelligence and earth observation solutions that incorporate data from the Company's owned and operated satellite, RADARSAT-2, as well as third party satellite missions. MDA operates across three business areas: Geointelligence, Robotics & Space Operations, and Satellite Systems, with facilities and sites in Canada, the United Kingdom, and United States. The Company collaborates and partners with government agencies, prime contractors and emerging space companies. Notable MDA programs include the Canadarm family of space robotics for the U.S. Space Shuttle program and the International Space Station and three generations of RADARSAT Earth observation satellites for the Canadian Government.
MDA Ltd. is incorporated in Ontario and domiciled in Canada, with its head office located at 9445 Airport Road, Brampton, Ontario L6S4J3, Canada. MDA's common shares are traded on the Toronto Stock Exchange under the symbol "MDA".
2. Basis of preparation
(a) Statement of compliance
These accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with IAS 34, Interim Financial Reporting, using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The same accounting policies and methods of computation as those used in the preparation of the consolidated financial statements for the year ended December 31, 2021 were followed in the preparation of these interim condensed consolidated financial statements, except as described in note 3. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements and should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2021.
These interim condensed consolidated financial statements were approved by the Board of Directors of MDA on November 10, 2022.
(b) Basis of measurement
The interim condensed consolidated financial statements are presented in Canadian dollars, which is also the Company's functional currency.
The interim condensed consolidated financial statements of the Company have been prepared on the historical cost basis except for pension plan assets and liabilities and the following assets and liabilities which are measured at fair value: financial instruments at fair value through profit or loss ("FVTPL"), derivative financial instruments, and initial recognition of assets acquired and liabilities assumed in a business combination. Pension plan assets and liabilities are recognized as the present value of the defined benefit obligation net of the fair value of the plan assets.
(c) Seasonality and cyclicality
The Company's operations historically have not experienced seasonality. However, the Company's results period over period are affected by its stage in the work in progress in each of its long-term contracts. Therefore, the results of operations over a given interim period may not be indicative of full fiscal year results.
(d) Critical accounting estimates and judgments
The preparation of the Company's interim condensed financial statements requires management to make estimates, assumptions and judgments that affect the application of accounting policies and the reported
Page 6 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
amounts of assets, liabilities, revenues and expenses. Significant estimates and judgements used in preparation of the interim condensed consolidated financial statements are the same as those described in the Company's consolidated financial statements for the year ended December 31, 2021, which included considerations for the impacts of the COVID-19 pandemic.
3. Changes in accounting policies and new accounting pronouncements
Adoption of Amendment to IAS 37 Onerous Contracts – Costs of Fulfilling a Contract
The Company adopted the amendment to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, effective January 1, 2022. The amendment clarifies that when measuring an onerous contract provision, the costs relating directly to the contract include both incremental costs and an allocation of costs directly related to contract activities. The Company recognized a cumulative effect of $2.0 upon applying this amendment in the opening retained deficit as at January 1, 2022.
4. Revenue from contracts with customers
All of the Company's revenue represents revenue from contracts with customers. Disaggregation of revenue by service lines are presented in the tables below:
| Three months | Nine months | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Service Lines | ||||
| Geointelligence | $ 45.5 | $ 40.7 | $ 141.4 | $ 137.9 |
| Robotics and space operations | 54.6 | 33.1 | 145.8 | 103.0 |
| Satellite systems | 71.9 | 37.5 | 167.9 | 120.5 |
| $ 172.0 | $ 111.3 | $ 455.1 | $ 361.4 |
5. Geographic information
Segmented information is reported in a manner consistent with the internal reporting provided to the chief operating decision maker ("CODM"), and reflects the way the CODM evaluates performance of, and allocates resources within, the business. The Company operates substantially all of its activities in one reportable segment, which includes the Geointelligence, Robotics & Space Operations and Satellite Systems operating segments. The reportable segment earns revenue by providing space solutions to customers in a similar market and is managed by the CODM.
Revenues are attributed to geographical regions based on the location of customers as follows:
| Three months | Nine months | |||
|---|---|---|---|---|
| 2022 | 2021(1) | 2022 | 2021 (1) | |
| Revenue | ||||
| Canada | $ 77.9 | $ 52.0 | $ 221.0 | $ 173.6 |
| United States | 67.7 | 31.0 | 145.9 | 104.1 |
| Europe | 18.1 | 21.2 | 62.9 | 65.4 |
| Asia and Middle East | 7.8 | 2.0 | 23.7 | 10.9 |
| Other | 0.5 | 5.1 | 1.6 | 7.4 |
| $ 172.0 | $ 111.3 | $ 455.1 | $ 361.4 |
(1) Certain comparative amounts for the prior period have been reclassified to conform to current period presentation.
Page 7 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
The Company's property, plant and equipment, right-of-use assets, intangible assets and goodwill are attributed to geographical regions based on the location of the assets as follows:
| September 30, 2022 | December 31, 2021 | |
|---|---|---|
| Canada | $ 1,186.1 | $ 1,115.0 |
| Other | 1.4 | 0.8 |
| $ 1,187.5 | $ 1,115.8 |
6. Cost of revenue and operating expenses
The following table shows the breakdown of materials, labour and subcontractors costs included in cost of revenue:
| Note | Three months | Nine months | |||
|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||
| Labour, material and other | $ 87.1 | $ 58.5 | $ 237.9 | $ 201.8 | |
| Subcontractors | 33.4 | 11.7 | 72.6 | 33.1 | |
| Investment tax credits recognized | 16 | (10.7) | (4.1) | (42.3) | (13.3) |
| $ 109.8 | $ 66.1 | $ 268.2 | $ 221.6 |
The following tables show the breakdowns of selling, general and administration expenses and research and development, net included in operating expenses:
| Three months | Nine months | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Selling, general and administration | ||||
| General and administration | $ 9.3 | $ 9.2 | $ 25.1 | $ 23.5 |
| Selling and marketing | 6.2 | 5.9 | 18.5 | 17.7 |
| $ 15.5 | $ 15.1 | $ 43.6 | $ 41.2 | |
| Research and development, net | ||||
| Research and development expense | $ 8.3 | $ 9.5 | $ 27.8 | $ 20.5 |
| Research and development expense recovery | (0.5) | (2.0) | (2.8) | (7.7) |
| $ 7.8 | $ 7.5 | $ 25.0 | $ 12.8 |
7. Other assets
| Note | September 30, 2022 | December 31, 2021 | |
|---|---|---|---|
| Prepaid expenses | $ 30.1 | $ 13.2 | |
| Advances to suppliers | 3.8 | 1.8 | |
| Investment tax credits receivable | 16 | 100.4 | 67.8 |
| Deferred financing fees on long-term debt | — | 6.0 | |
| Investment in equity securities | 3.3 | 7.7 | |
| Derivative financial assets | 3.6 | 9.5 | |
| Pension plan assets | 22.0 | 12.5 | |
| $ 163.2 | $ 118.5 | ||
| Current portion | $ 19.4 | $ 12.8 | |
| Non-current portion | $ 143.8 | $ 105.7 |
Page 8 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
8. Property, plant and equipment
| Land, buildings and leasehold improvements | Equipment | Furniture and fixtures and computer hardware | Capital in progress | Total | |
|---|---|---|---|---|---|
| Cost | |||||
| As at December 31, 2021 | $ 58.1 | $ 13.4 | $ 9.4 | $ 42.6 | $ 123.5 |
| Additions | 12.4 | 1.0 | 1.8 | 82.7 | 97.9 |
| Transfers | 0.4 | 0.8 | 1.3 | (2.4) | 0.1 |
| As at September 30, 2022 | $ 70.9 | $ 15.2 | $ 12.5 | $ 122.9 | $ 221.5 |
| Accumulated depreciation | |||||
| As at December 31, 2021 | $ (4.8) | $ (5.4) | $ (3.4) | $ — | $ (13.6) |
| Depreciation expense | (2.5) | (2.1) | (2.6) | — | (7.2) |
| As at September 30, 2022 | $ (7.3) | $ (7.5) | $ (6.0) | $ — | $ (20.8) |
| Net book value | |||||
| As at December 31, 2021 | $ 53.3 | $ 8.0 | $ 6.0 | $ 42.6 | $ 109.9 |
| As at September 30, 2022 | $ 63.6 | $ 7.7 | $ 6.5 | $ 122.9 | $ 200.7 |
Depreciation expense included in cost of revenue for the three and nine months ended September 30, 2022 is $2.3 and $7.2 (three and nine months ended September 30, 2021 – $2.3 and $6.1).
As at September 30, 2022, the Company is committed under legally enforceable agreements for purchases relating to property, plant and equipment of $11.0 in 2022, $4.6 in 2023 and onward.
9. Leases
The Company has lease contracts for buildings and furniture and fixtures and computer hardware used in its operations. Leases of buildings generally have lease terms between 5 and 10 years, while furniture and fixtures and computer hardware generally have lease terms between 1 and 5 years.
(a) Right-of-use assets
Set out below are the carrying amounts of right-of-use assets recognized and the movements during the period:
| Buildings | Furniture, fixtures and computer hardware | Total | |
|---|---|---|---|
| As at December 31, 2021 | $ 13.5 | $ 1.3 | $ 14.8 |
| Additions | 0.4 | — | 0.4 |
| Depreciation expense | (5.5) | (0.7) | (6.2) |
| As at September 30, 2022 | $ 8.4 | $ 0.6 | $ 9.0 |
Depreciation expense included in cost of revenue for the three and nine months ended September 30, 2022 is $2.1 and $6.2 (three and nine months ended September 30, 2021 – $2.2 and $7.9).
Page 9 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
(b) Lease liabilities
Set out below are the carrying amounts of lease liabilities and the movements during the period:
| Lease liabilities | |
|---|---|
| As at December 31, 2021 | $ 15.7 |
| Additions | 0.4 |
| Accretion of interest | 0.5 |
| Payments | (6.4) |
| As at September 30, 2022 | $ 10.2 |
Accretion of interest is included in finance costs in the consolidated statement of comprehensive income.
- Intangible assets
| Proprietary technologies(1) | Contractual backlog | Customer relationships | MDA trademark | Software(1) | Total | |
|---|---|---|---|---|---|---|
| Cost | ||||||
| As at December 31, 2021 | $ 123.3 | $ 41.2 | $ 459.9 | $ 25.6 | $ 26.9 | $ 676.9 |
| Additions | 25.6 | — | — | — | 4.9 | 30.5 |
| Transfers | — | — | — | — | (0.1) | (0.1) |
| As at September 30, 2022 | $ 148.9 | $ 41.2 | $ 459.9 | $ 25.6 | $ 31.7 | $ 707.3 |
| Accumulated amortization | ||||||
| As at December 31, 2021 | $ (14.7) | $ (24.9) | $ (56.4) | $ (2.4) | $ (7.3) | $ (105.7) |
| Amortization expense | (6.4) | (8.2) | (24.5) | (1.0) | (3.6) | (43.7) |
| As at September 30, 2022 | $ (21.1) | $ (33.1) | $ (80.9) | $ (3.4) | $ (10.9) | $ (149.4) |
| Net book value | ||||||
| As at December 31, 2021 | $ 108.6 | $ 16.3 | $ 403.5 | $ 23.2 | $ 19.6 | $ 571.2 |
| As at September 30, 2022 | $ 127.8 | $ 8.1 | $ 379.0 | $ 22.2 | $ 20.8 | $ 557.9 |
(1) Comparative amounts for the prior period have been reclassified to conform to current period presentation.
For the three and nine months ended September 30, 2022, the amortization expense related to proprietary technologies and software of $1.4 and $4.0 (three and nine months ended September 30, 2021 – $1.3 and $3.4) are included in cost of revenue. For the three and nine months ended September 30, 2022, the amortization expense related to all other intangible assets of $12.8 and $39.7 (three and nine months ended September 30, 2021 – $13.9 and $42.3) are included in operating expenses.
As at September 30, 2022, the Company is committed under legally enforceable agreements for purchases relating to intangible assets of $6.3 in 2022, $0.6 in 2023 and onward.
Page 10 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
11. Long-term debt
| September 30, 2022 | December 31, 2021 | ||
|---|---|---|---|
| Senior revolving credit facility | $ | 193.5 | $ — |
| Second lien notes | — | 144.7 | |
| $ | 193.5 | $ 144.7 | |
| Current | $ | — | $ — |
| Non-current | $ | 193.5 | $ 144.7 |
(a) Senior revolving credit facility
On May 5, 2022, the Company, through its wholly owned subsidiary NOL, amended its senior revolving credit facility. The available capacity of the senior credit facility was increased from $428.3 to $600.0 and the reducing feature of the available credit was eliminated. The maturity date of the senior credit facility was extended from April 8, 2025 to May 4, 2027. Transaction costs incurred to refinance the credit facility totalled $1.4 and were recognized in the second quarter of 2022.
As at September 30, 2022, the Company had borrowings of $195.0 under the senior revolving credit facility in the form of Bankers' Acceptances, which is recorded at a carrying amount of $193.5 on the consolidated statement of financial position. This facility bears interest at the bank's prime rate or alternate base rate Canada plus an applicable margin of 45 to 175 basis points ("bps") or CDOR or LIBOR plus an applicable margin of 145 to 275 bps, based on the Company's total debt to EBITDA ratio. At September 30, 2022, the interest rate on the outstanding Bankers' Acceptances was 5.20%. The Company also had $21.2 letters of credit outstanding at September 30, 2022, bearing an applicable margin of 97 bps plus a fronting fee of 25 bps.
The Company accounted for its May 5, 2022 refinancing of the senior credit facility as a substantial debt modification under IFRS 9, where the previously existing credit facility was extinguished from the consolidated statement of financial position. The new credit facility was recognized at its fair value on May 5, 2022 and subsequently measured at amortised cost. The accounting treatment for the substantial debt modification resulted in a net expense of $4.3 recognized in finance costs in the consolidated statement of comprehensive income in the second quarter of 2022.
(b) Redemption of second lien notes
Concurrent with the amendment of the senior credit facility, on May 5, 2022, the Company exercised its option to redeem all amounts outstanding under the second lien notes using excess cash and drawings under the senior revolving credit facility. On redemption, the Company paid in cash the principal amount of $150.0, and a redemption premium of $7.5 due on exercise of its early redemption rights. The redemption premium was recorded in finance costs in the consolidated statement of comprehensive income.
The redemption of the second lien notes resulted in an expense of $2.8 upon derecognizing the redemption option derivative that is described in note 14, and an expense of $5.1 upon writing off the unamortized deferred financing costs. Both expenses were recorded in finance costs in the consolidated statement of comprehensive income.
The second lien notes were unsecured and bore interest of 10% per annum in cash, or 12% paid in-kind ("PIK") (6% cash, 6% in-kind). Interest was due semi-annually. The second lien notes would have matured on April 8, 2027, absent the early redemption thereof. The second lien notes were guaranteed by the same guarantors as the senior revolving credit facility and secured by a second lien on the same collateral. All guarantees and securities under the second lien notes were released upon redemption.
All of the financial impacts arising from the redemption were recognized in the second quarter of 2022.
Page 11 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
(c) Security and guarantees
The senior revolving credit facility is guaranteed by all subsidiaries of NOL (other than certain excluded subsidiaries, including immaterial subsidiaries and non-wholly owned subsidiaries) and secured by all of the present and future assets, property and undertakings of NOL and its subsidiary guarantors, as well as a limited recourse guarantee and pledge of NOL from the Company.
(d) Covenants
The Company must satisfy certain financial covenants as defined by the credit agreement, including the following:
- The Company is required to maintain an interest coverage ratio of at least 3.0 to 1 at all times; and
- The Company is required to maintain a specified total debt to EBITDA ratio of less than or equal to 4.0 to 1 at all times.
As at September 30, 2022 the Company was in compliance with these covenants.
- Finance costs
| Note | Three months | Nine months | |||
|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||
| Interest on credit facilities | $ 2.1 | $ 4.1 | $ 8.5 | $ 20.2 | |
| Other interest and borrowing fees | 1.2 | 1.6 | 2.7 | 4.4 | |
| Transaction costs on refinancing of senior revolving credit facility | 11(a) | — | — | 1.4 | — |
| Effect of modification of senior credit facility | 11(a) | — | — | 4.3 | 5.4 |
| Redemption premium on second lien notes | 11(b) | — | — | 7.5 | — |
| Derecognition of redemption option derivative | 11(b) | — | — | 2.8 | — |
| Write-off of unamortized deferred financing costs on second lien notes | 11(b) | — | — | 5.1 | — |
| Capitalised interest(1) | (0.9) | — | (0.9) | — | |
| $ 2.4 | $ 5.7 | $ 31.4 | $ 30.0 |
(1) Interest expense is capitalised on certain qualifying assets that take a substantial period of time to prepare for their intended use. Capitalised interest is a component of both property, plant and equipment and intangible assets. The capitalisation rate used to capitalise interest is 4.4%.
- Share-based compensation
In 2021, the Company established an Omnibus Long-term Incentive Plan ("Omnibus Plan"). The Omnibus Plan is a share-based plan, under which the Company receives services from directors and employees as consideration for equity instruments of the Company. The Company can issue stock options, deferred share units ("DSUs"), restricted share units ("RSUs"), and performance share units ("PSUs") pursuant to the terms and conditions of the Omnibus Plan and the related award agreements entered into thereunder.
The Company also has in place an Employee Share Trust Agreement arrangement, where eligible employees are issued shares held in a company trust ("Trustee Shares") and released upon meeting prescribed conditions.
(a) Stock Options
For the nine months ended September 30, 2022, the Company has granted stock options with exercise prices between $8.11 and $9.43. The stock options vest over 1 to 4 years in annual instalments. Vesting is conditional on continuous employment from the grant date to the vesting date. The stock options have a maximum term of 10 years.
Page 12 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
The stock options are measured at fair value using the Black-Scholes option pricing model on the grant date and subsequently expensed on a straight-line basis over the vesting period. The amount expensed for the three and nine months ended September 30, 2022 was $1.0 and $2.7 (three and nine months ended September 30, 2021 – $1.7 and $7.2).
The weighted average fair value of options granted during the nine months ended September 30, 2022 was between $3.54 and $4.24. The fair value of these options granted were estimated on the date of grant using the following assumptions:
| Nine months ended September 30, 2022 | |
|---|---|
| Dividend yield | 0.00% |
| Expected volatility | 40.00% - 43.87% |
| Risk-free interest rate | 1.39% - 3.15% |
| Expected life of share options | 5.3 to 7.0 years |
| Weighted average exercise share price | $8.88 |
The expected life of the stock options is based on current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility is based on the share price volatility observed for comparable publicly traded companies over a period similar to the life of the options.
(b) Trustee Shares
Trustee Shares vest over 1 to 4 years in annual instalments from the grant date. Vesting is conditional on continuous employment from the grant date to the vesting date and the meeting of specified price targets. The amount expensed for the three and nine months ended September 30, 2022 is $0.2 and $0.9 (three and nine months ended September 30, 2021 – $0.6 and $2.3).
(c) DSUs
The Company offers DSUs to the Company's independent directors, where they are entitled to receive all or a portion of their annual compensation in the form of DSUs in place of cash commencing in 2022. The DSUs vest immediately upon grant and are equity-settled, entitling participants to receive one common share for each DSU. The amount expensed for the three and nine months ended September 30, 2022 is $0.3 and $0.9 (three and nine months ended September 30, 2021 – $nil).
(d) RSUs and PSUs
In the second quarter of 2022, the Company granted RSUs and PSUs to eligible employees. The RSUs vest over 1 to 3 years in annual instalments from the grant date. Vesting is conditional on continuous employment from the grant date to the vesting date. The PSUs vest over 3 years from the grant date and is conditional on continuous employment as well as performance targets. The amount expensed for the three and nine months ended September 30, 2022 is $1.0 and $1.0 (three and nine months ended September 30, 2021 – $nil).
(e) Award units continuity
The table below shows the movement in the number of share-based awards outstanding over the nine months ended September 30, 2022:
Page 13 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
| Stock Options | Trustee Shares | DSUs | RSUs | PSUs | |
|---|---|---|---|---|---|
| As at January 1, 2022 | 9,066,978 | 547,292 | — | — | — |
| Granted | 260,000 | — | 102,986 | 630,935 | 219,786 |
| Forfeited/Cancelled | (557,063) | — | — | (10,633) | — |
| Exercised/Converted | (93,318) | (216,590) | — | — | — |
| Settled | — | — | (19,487) | — | — |
| As at September 30, 2022 | 8,676,597 | 330,702 | 83,499 | 620,302 | 219,786 |
Of the units outstanding as at September 30, 2022, the number of stock options exercisable are 4,230,473.
14. Financial instruments and fair value disclosures
The classification of financial instruments and their carrying amounts are as follows:
| September 30, 2022 | December 31, 2021 | |
|---|---|---|
| Financial assets (liabilities) measured at FVTPL | ||
| Derivative financial assets | $ 3.6 | $ 9.5 |
| Derivative financial liabilities | (0.1) | (0.9) |
| Investment in equity securities | 3.3 | 7.7 |
| Financial assets (liabilities) measured at amortized cost | ||
| Cash | $ — | $ 83.6 |
| Trade and other receivables | 151.4 | 92.6 |
| Unbilled receivables | 120.8 | 83.7 |
| Bank indebtedness | (1.1) | — |
| Accounts payable and accrued liabilities | (110.2) | (71.3) |
| Long-term debt | (193.5) | (144.7) |
Derivative financial assets and investment in equity securities are included in other assets on the consolidated statement of financial position, as presented in note 7. Derivative financial liabilities are included in other liabilities.
The fair values of cash, trade and other receivables, bank indebtedness and accounts payable and accrued liabilities approximate their carrying amounts due to their short-term nature. For the other financial instruments presented, the table below shows their respective fair values with their levels in the fair value hierarchy:
| As at September 30, 2022 | As at December 31, 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |
| Assets | ||||||||
| Derivative financial instruments | $ — | $ 3.6 | $ — | $ 3.6 | $ — | $ 1.4 | $ 8.1 | $ 9.5 |
| Investment in equity securities | 3.3 | — | — | 3.3 | 7.7 | — | — | 7.7 |
| Liabilities | ||||||||
| Derivative financial instruments | $ — | $ 0.1 | $ — | $ 0.1 | $ — | $ 0.9 | $ — | $ 0.9 |
| Long-term debt | — | 195.0 | — | 195.0 | — | 169.6 | — | 169.6 |
During the nine months period ended September 30, 2022, no transfers occurred between levels of the fair value hierarchy.
Page 14 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
Level 2 derivative financial instruments comprise foreign exchange embedded derivatives within revenue and purchase contracts. The Company determines fair value of its derivative financial instruments based on management estimates and observable market-based inputs. Management estimates include assumptions concerning the amount and timing of estimated future cash flows. Observable market-based inputs are sourced from third parties and include currency spot and forward rates. Level 2 long-term debt is further described in note 11. The Company determines fair value of the long-term debt based on the present value of future cash flows.
At December 31, 2021, the Level 3 security represented the redemption feature embedded in the former second lien notes. The fair value was determined using a present value of future cash flows model. A key estimate used in this calculation is the market yield, which is derived from inputs such as corporate bond credit spread and risk free rate. On May 5, 2022, the second lien notes were redeemed as part of the refinancing transaction described in note 11. The redemption feature was fair valued on the redemption date. The fair value decline from December 31, 2021 to May 5, 2022 of $5.3 was included in unrealized loss on financial instruments in the consolidated statement of comprehensive income for the nine months ended September 30, 2022. No amount was included in the three months ended September 30, 2022. In the prior year for the three and nine months ended September 30, 2021, an unrealized loss of $0.1 and $0.3, respectively, were recognized with respect to the fair value changes of the redemption feature.
15. Earnings per share
The following table reflects the net income and share data used in the basic and diluted earnings per share calculations:
| Three months | Nine months | |||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Net income | $ 17.9 | $ 4.0 | $ 17.5 | $ 2.3 |
| Weighted average shares outstanding – basic | 118,942,451 | 118,691,628 | 118,776,154 | 106,137,609 |
| Adjustments for | ||||
| Employee stock options | 2,613,973 | 9,253,509 | 2,731,153 | 7,082,428 |
| Trustee shares | 138,710 | 547,292 | 266,702 | 358,850 |
| DSUs | 48,603 | — | 24,767 | — |
| RSUs and PSUs | 784,667 | — | 286,728 | — |
| Weighted average shares outstanding – diluted | 122,528,404 | 128,492,429 | 122,085,504 | 113,578,887 |
| Basic earnings per share | $ 0.15 | $ 0.03 | $ 0.15 | $ 0.02 |
| Diluted earnings per share | 0.15 | 0.03 | 0.14 | 0.02 |
16. Investment tax credits
For the three and nine months ended September 30, 2022, the Company recognized investment tax credits of $10.7 and $42.3 (three and nine months ended September 30, 2021 – $4.1 and $13.3) as a reduction of cost of materials, labour, and subcontractors on the consolidated statement of operations and comprehensive income. Of these recognized amounts for the three and nine months ended September 30, 2022, $4.4 and $23.4 are related to expenses incurred in prior years respectively.
Page 15 of 16
MDA LTD.
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2022 and 2021
(Amounts in millions of Canadian dollars, except share-based compensation awards and per share amounts)
As at September 30, 2022, the Company has investment tax credits of $102.4 (December 31, 2021 – $69.5) available to offset future Canadian Federal and Provincial income taxes payable which expire between 2032 and 2042. Investment tax credits are only recognized in the financial statements when the recognition criteria have been met as described in note 3(p) of Company's annual consolidated financial statements as at December 31, 2021. Investment tax credits that are expected to be realized within 12 months are classified as current; investment tax credits that are expected to be realized beyond 12 months are classified as non-current.
17. Remeasurement gain (loss) on defined benefit plans
A remeasurement of the assets and obligations in the Company's defined benefit pension plans and other post-retirement benefit plans was performed and an actuarial loss of $1.2 and an actuarial gain of $16.6, net of tax, were recorded for the three and nine months ended September 30, 2022 (three and nine months ended September 30, 2021 – $nil) in other comprehensive income. The actuarial loss (gain) were primarily due to a decrease (an increase) in the discount rate and changes in the fair value of plan assets.
18. Supplementary cash flow information
The below table provides changes in operating assets and liabilities:
| Three months | Nine months | ||||
|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||
| Trade and other receivables | $ | (42.6) | (14.2) | (58.8) | (16.4) |
| Unbilled receivables | (20.3) | (10.8) | (37.1) | (21.6) | |
| Inventories | (0.1) | (2.0) | 0.4 | (1.7) | |
| Prepaid and advances to suppliers | (0.7) | (0.9) | (18.9) | (2.1) | |
| Other assets | (1.8) | (3.5) | (1.6) | (6.6) | |
| Trade and other payables | 24.8 | 1.0 | 43.1 | — | |
| Contract liabilities | 16.0 | 2.7 | 26.8 | 11.4 | |
| Employee benefits | 3.9 | (1.2) | 2.8 | 2.2 | |
| Other liabilities | (1.1) | (1.4) | (4.6) | (14.0) | |
| $ | (21.9) | (30.3) | (47.9) | (48.8) |