Annual report 2013
Front Cover:
Velan Securaseal™
metal-seated ball
valve.
Above: On December 3, 2012, inauguration ceremonies
were held at our new plant, Velan Valves India, located in
Coimbatore in the Tamil Nadu province of India.
Left: Ramesh Babu, Managing Director, Velan Valves India
(left), and Tom Velan, President and CEO, Velan (right), watch
as the guest of honor, Mr. Stewart Beck, Canadian High
Commissioner to The Republic of India, cuts the ribbon during
the inauguration ceremonies of Velan Valves India.
Velan’s newly launched
advertising campaign
featuring Velan employees.
Velan 10” Class 150 Securaseal™ severe service ball
valves installed in a nickel mining facility.
2013 Highlights
Sales(1)
(in millions of U.S. dollars)
560
520
480
440
400
360
320
280
240
200
160
120
80
40
0
Consolidated
Overseas
U.S.A.
Canada
Adjusted net earnings(3)
(in millions of indicated currency)
Prior Canadian GAAP
Canadian dollars
*7.6%
IFRS
U.S. dollars
*7.7%
*5.6%
*3.1%
*1.3%
40
35
30
25
20
15
10
5
0
(2)
2009
2010
2011
2012
2013
2009
2010
*Adjusted net earnings %
2011
2012
2013
(in thousands of indicated currency, except per share amounts
and number of employees)
Years Ended
Income statement data
Sales
Gross profit
Gross profit %
Administration costs
Income before income taxes
Adjusted net earnings (3)
Adjusted net earnings (3) %
Adjusted net earnings (3) per share
Net earnings (4)
Net earnings (4) %
Net earnings (4) per share (5)
Statement of financial position data
Net cash (6)
Working capital
Property, plant and equipment
Total assets
Total debt
Equity
Number of employees
Canada
United States
Overseas
Total
IFRS
In U.S. Dollars
Feb 2012
12 months
Feb 2013
12 months
Prior Canadian GAAP
In Canadian Dollars
Feb 2011
12 months
Feb 2010
12 months
Feb 2009
9 months
$ 500,574
113,899
22.8%
$ 437,135
87,262
20.0%
$ 380,706
101,426
26.6%
$ 465,945
149,012
32.0%
$ 326,859
92,302
28.2%
90,985
12,018
15,425
3.1%
0.70
6,169
1.2%
0.28
83,620
6,097
5,662
1.3%
0.26
7,892
1.8%
0.36
73,597
28,424
21,224
5.6%
0.96
21,224
5.6%
0.96
74,635
56,304
35,523
7.6%
1.60
35,523
7.6%
1.60
57,497
69,987
25,143
7.7%
1.13
61,733
18.9%
2.77
$ 19,787
213,814
90,630
619,774
26,850
328,173
$ 35,376
217,522
72,961
601,970
9,587
335,577
$ 113,024
264,930
64,622
516,037
5,011
337,723
$ 103,741
275,928
73,418
512,697
4,002
346,184
$ 62,955
258,074
70,270
506,520
4,927
327,115
923
182
925
2,030
926
178
877
1,981
923
178
667
1,768
911
189
640
1,740
937
198
668
1,803
(1) Prior Canadian GAAP sales figures converted at average CAD-USD foreign exchange rate for the applicable fiscal year.
(2) The 2009 sales data is composed of the sales for the nine month 2009 fiscal year plus the fourth quarter of the Company’s 2008 fiscal year.
(3) This measure is not a measure of performance defined under Prior Canadian GAAP and IFRS. Therefore, it is unlikely to be comparable to similar measures shown
by other companies. However, it is used by management to assess the operating performance of the Company. This measure is defined as net income attributable
to Subordinate and Multiple Voting Shares excluding any goodwill impairment loss and positive fair value adjustments to the purchase price proceeds payable as a
result of the acquisition of Velan ABV S.p.A. The 2009 fiscal year amount further excludes a tax exempt gain of $36.6 million resulting from the sale by the Company
of its 50% interest in an Italian joint venture company for net proceeds of $44.1 million on July 21, 2008.
(4) Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
(5) See note 22 in the Notes to the Consolidated Financial Statements.
(6) This measure is not a measure of financial condition defined under Prior Canadian GAAP and IFRS. Therefore, it is unlikely to be comparable to similar measures
shown by other companies. However, it is used by management to assess the financial condition of the Company. This measure is defined as cash & cash equivalents
plus short-term investments less bank indebtedness, short-term bank loans and the current portion of long-term bank borrowings.
1
Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated)
Highlights
• Sales of $500.6 million
• Adjusted net earnings (1) of $15.4 million
• Order backlog of $531 million
• Order bookings of $370.1 million
This was a milestone year with sales surpassing $500 million for
the first time in our history. This represents a sales increase of
14.5% from last year and 270% in 10 years.
We made adjusted net earnings(1) of $15.4 million which excludes
a non-cash goodwill impairment writedown of $11.7 million and
positive fair value adjustments to the purchase price proceeds
payable of $2.4 million related to our acquisition of ABV Energy
S.p.A. (“ABV”) in Italy in 2011.
Tom Velan, President and Chief Executive Officer (left), with A.K. Velan,
Founder and Executive Chairman of the Board (right).
Sales, order bookings and backlog
Our record sales of $500.6 million, which represents a 14.5%
increase, would have been $11.2 million higher if not for
the negative currency change. Our sales were diversified by
customer, market, and geography including in the “BRIC”
countries (Brazil, Russia, India, and China) where we sold $118
million. During the year we sold more than 600,000 valves to
customers in 64 countries. Our valves range in price from about
$15 to $800,000 and weigh from less than 0.3 kg to more than
34 tons.
Order bookings were $370.1 million, a decline of 30% from
the previous year. The decline was mainly due to our large
backlog, which necessitated quoting longer lead-times than many
customers could accept. Another factor in the decline was weaker
demand in some of our key markets and, in particular, the nuclear
market following the Fukushima accident.
Billings exceeded bookings so our backlog declined by 19.8% to
$531 million, of which $132.8 million is scheduled for delivery
after February 2014. We expect that the decline in backlog and
resulting shorter lead-times will give us opportunities to increase
bookings this year.
Earnings
Our adjusted net earnings(1) were $15.4 million compared to
$5.7 million in the prior year. Our adjusted net operating
results(2) were $19.2 million compared to $12.5 million last year.
The net earnings(3) were $6.2 million compared to $7.9 million
in the previous year. While results at ABV improved this year,
there was still a loss so the analysis of the goodwill concluded
that there was an impairment requiring a partial writedown of
the goodwill.
(1) The term “adjusted net earnings” is defined as net income attributable to Subordinate and Multiple Voting Shares excluding the goodwill impairment loss and
positive fair value adjustments to the ABV purchase price proceeds payable. This is not a term of performance defined under International Financial Reporting
Standards (“IFRS”) and, therefore, it is unlikely to be comparable to similar measures shown by other companies. However, it is used by management to assess the
operating performance of the company.
(2) The term “adjusted net operating results” is defined as net income attributable to Subordinate and Multiple Voting Shares excluding the net loss of ABV, the
goodwill impairment loss, the purchase price accounting and interest accretion adjustments, the positive fair value adjustments to the ABV purchase price proceeds
payable, and the impact of currency changes. This is not a term of performance defined under IFRS and, therefore, it is unlikely to be comparable to similar
measures shown by other companies. However, it is used by management to assess the operating performance of the company.
(3) Net earnings refer to net income attributable to Subordinate and Multiple Voting Shares.
2
Message to our shareholders and employees
Our gross profit improved 2.8 percentage points from 20% to
22.8% mainly due to the increased volume and product mix.
Excluding the results of ABV, purchase price adjustments from
the acquisition, and impact of currency changes, the gross profit
percentage would have been 24.8%.
As we explained in our last Annual Report, similar to some other
U.S. valve manufacturers, our U.S. subsidiary has been named as
a defendant in a number of pending lawsuits brought on behalf of
individuals seeking to recover damages for their alleged asbestos
exposure. These lawsuits are related to products manufactured
and sold many years ago. Our costs related to these asbestos
lawsuits were $8.8 million, compared to $6.9 million last year.
We strongly believe that our products, which were supplied
with encapsulated packing and gaskets in accordance with valve
industry practice and customer-mandated specifications, did
not contribute to any asbestos-related sicknesses. We also have
independent laboratory test results that support this conclusion.
We think that any asbestos-related health problems were caused
by friable, asbestos-containing products such as the spray
application of asbestos insulation and the process of removing
asbestos from buildings or confined spaces, which resulted in
heavy concentrations of asbestos fibers in the air. Unfortunately,
these companies are no longer in existence so plaintiffs are
pursuing valve and other equipment manufacturers like Velan.
Velan has invested in robotic seat seal and wedge guide welding
machines to improve efficiency.
We will continue to vigorously defend against these claims but
given the ongoing course of asbestos litigation in the U.S. and
the unpredictability of jury trials, it is not possible to make an
estimate of our settlement costs and legal fees related to these
claims.
Investments in our global manufacturing infrastructure
During the last year we invested $28.5 million in our
global manufacturing infrastructure with an aim to improve
efficiency, increase our global presence, and improve our cost
competitiveness. In our North American operations we invested in
Members of Velan’s North American TPI Kaizen team responsible for implimenting improved production flow in accordance with lean principles.
3
Message to our shareholders and employees
large test fixtures, robotic welding, and computer numeric control
(“CNC”) machines capable of operating unattended. We also
modified some of our production cells for improved production
flow in accordance with Lean principles.
This year, we completed construction of a new greenfield plant in
southern India and started to manufacture small forged valves; the
plant will expand into other products in the future and will supply
valves to the Indian and global markets.
In China, we invested in test fixtures, CNC machines, and robotic
welding to produce pressure seal valves for the Chinese power
market. In Korea, we are establishing a new production line for
larger valves to better service Korean engineering, procurement,
and construction customers.
Financial strength
We continue to have a strong balance sheet with net cash(4) of
$19.8 million or $0.90 per share and equity of $328.2 million
or $14.97 per share. The net cash(4) decreased by $15.6 million
during the year, mainly due to unfavourable non-cash working
capital movements, specifically an increase in accounts receivable
resulting from the higher sales volume.
Outlook
16” Velan Velflex cryogenic butterfly valve on an LNG Carrier.
We are pleased to have reached the $500 million sales milestone
and we are starting this year with a good order backlog of
$531 million. Our challenge will be to continue the high level
of production of our complex project order backlog while using
our shorter lead-times to increase our order bookings from last
year’s level. We have expanded our local manufacturing presence
in Korea, China, and India with an objective to lower production
costs and increase our local sales in Asia.
We are continuing to take measures to improve our operational
excellence and cost competitiveness, while strengthening
our presence in international markets in order to improve our
performance. We would like to take this opportunity to thank
our 2,030 employees around the world for the record sales
output and improved operating results. Now we are working to
continue to build on the positive momentum to further improve
our performance and operating results.
A.K. Velan
Founder and Executive Chairman of the Board
T. C. Velan
President and Chief Executive Officer
(4) The term “net cash” is defined as cash and cash equivalents plus short-term investments less bank indebtedness, short-term bank loans, and current portion
of long-term bank borrowings. This is not a term of financial condition defined under IFRS and, therefore, it is unlikely to be comparable to similar measures
shown by other companies. However, it is used by management to assess the financial condition of the company.
4
Management’s discussion and analysis
May 28, 2013
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 28, 2013. This Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2013 and February 29,
2012. The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The significant accounting policies upon
which these consolidated financial statements have been prepared are detailed in Note 2 of the Company’s audited consolidated
financial statements. All foreign currency transactions, balances and overseas operations have been converted to U.S. dollars, the
Company’s reporting currency. Selected annual information for the three most recently completed reporting periods and a summary
of quarterly results for each of the eight most recently completed quarters is included further in this report. Additional information
relating to the Company, including the Annual Information Form and Proxy Information Circular, can be found on SEDAR at
www.sedar.com.
BASIS OF PRESENTATION AND ANALYSIS
In this MD&A, the Company has presented measures of performance or financial condition which are not defined under IFRS
(“non-IFRS measures”) and are, therefore, unlikely to be comparable to similar measures presented by other companies. These
measures are used by management in assessing the operating results and financial condition of the Company and are reconciled with
the performance measures defined under IFRS. Reconciliations of these amounts can be found at the end of this report.
FORWARD-LOOKING INFORMATION
This MD&A may include forward-looking statements, all of which are subject to risks and uncertainties. These risks and
uncertainties are disclosed in the Company’s filings with the appropriate securities commissions and include among other matters,
risks related to foreign exchange, raw material pricing, tax matters, foreign investment and operations as well as contingent
liabilities. No forward-looking statement can be guaranteed and actual future results may differ materially from those expressed
herein. The Company disclaims any responsibility to update or revise these forward-looking statements except as required by the
applicable securities laws.
OVERVIEW
The Company designs, manufactures and markets on a worldwide basis a broad range of industrial valves for use in most industry
applications including power generation, oil and gas, refining and petrochemicals, chemical, LNG and cryogenics, pulp and paper,
geothermal processes and shipbuilding. The Company is a world leader in steel industrial valves operating 16 manufacturing plants
worldwide with 2,030 employees. The Company’s head office is located in Montreal, Canada. The Company’s business strategy is
to design, manufacture, and market new and innovative valves with emphasis on quality, safety, ease of operation, and long service
life. The Company’s strategic goals include, but are not limited to, increasing market share in power markets, investing in talent
development of high-potential employees, adding talent where necessary, providing high customer service, enhancing manufacturing
and/or sales capabilities in emerging markets such as Brazil, Russia, India and China, and continually improving operational
excellence.
The consolidated financial statements of the Company include the North American operations comprising four manufacturing plants
and one distribution facility in Canada, as well as one manufacturing plant and three distribution facilities in the U.S. Significant
overseas operations include manufacturing plants in France, Italy, Portugal, U.K., Korea, Taiwan, India, and China. The Company’s
operations also include a 50%-owned Korean foundry and a distribution facility in Germany.
5
Management’s discussion and analysis
CONSOLIDATED HIGHLIGHTS1
(millions, excluding per share amounts)
Consolidated statements of earnings
Sales
Gross profit
Gross profit %
Net earnings2
Net earnings2 %
Earnings (Loss) per share – basic
– diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Demand data
Net new orders received
Period ending backlog of orders
Fiscal year
ended
February 28,
2013
Fiscal year
ended
February 29,
2012
Increase
(decrease)
%
Increase
(decrease)
$500.6
113.9
22.8%
6.2
1.2%
0.28
0.28
22.0
14.4
(23.9)
4.8
370.1
531.0
$437.1
87.3
20.0%
7.9
1.8%
0.36
0.36
22.2
(12.8)
(56.7)
(11.4)
529.0
661.8
$63.5
26.6
14.5%
30.5%
(1.7)
(21.5)%
(0.08)
(0.08)
(22.2)%
(22.2)%
27.2
32.8
16.2
(158.9)
(130.8)
212.5%
57.8%
142.1%
(30.0)%
(19.8)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
6
Management’s discussion and analysis
Highlights of fiscal 2013 as well as factors that may impact fiscal 2014
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net earnings1 amounted to $6.2 million or $0.28 per share compared to $7.9 million or $0.36 per share last year. Net
earnings1 for the current year were significantly impacted by an $11.7 million non-cash goodwill impairment charge related
to the Company’s 70%-owned Italian subsidiary, Velan ABV S.p.A. (“ABV”). Excluding this charge, as well as other
ABV and currency impacts, the Company’s adjusted net operating results2 would have been $19.2 million or $0.87 per
share this year compared to $12.5 million or $0.56 per share last year.
Net new orders received (“bookings”) amounted to $370.1 million, a decrease of $158.9 million or 30.0% compared to last
year. Excluding the results of ABV, bookings decreased by $138.9 million or 28.7%. Further adjusting for currency
impacts, the decrease would have been $144.2 million or 27.3%. The Company ended the current year with a backlog of
$531.0 million, a decrease of $130.8 million from the end of the prior year. Excluding currency impacts, the backlog
would have decreased by $124.0 million to $537.8 million.
Sales amounted to a record total of $500.6 million, an increase of $63.5 million or 14.5%. Excluding the results of ABV
and currency impacts, sales would have increased by $52.4 million or 12.6%.
Gross profit percentage increased by 2.8 percentage points from 20.0% to 22.8%. Excluding the results of ABV and the
effects of purchase price accounting, the gross profit percentage increased by 2.4 percentage points from 22.2% to 24.6%.
Further adjusting for currency impacts, gross profit percentage would have been 24.8% for the current year.
The Company generated net cash2 from operations of $14.4 million. This source of net cash2 is primarily attributable to an
increase in operational profitability combined with improved non-cash working capital management.
While there were no significant fluctuations in the average rate of the U.S. dollar against the Canadian dollar over the
course of the current year, the Company’s results were impacted by the fluctuations of the euro. Based on average exchange
rates, the euro weakened 6.9% against the U.S. dollar when compared to the same period last year. This weakening resulted
in the Company’s net profits from its European subsidiaries being reported as lower U.S. dollar amounts in the current year.
Notwithstanding the goodwill impairment charge discussed below, the Company’s operational profitability improved over the
course of the year. It achieved a record sales level for a fiscal year as the Company began to work through its large order backlog by
shipping certain large export project orders which had encountered various supply chain issues, customer-related issues and internal
operational issues in the prior year. This increase in sales output coupled with lower bookings resulted in a decrease of the order
backlog over the course of the year. The decrease in bookings is primarily attributable to two factors, namely the Company’s
continued policy of quoting longer lead times in order to decrease its large order backlog, and a softening of demand for the
Company’s nuclear products, especially with respect to its French operations, as the effects of the Fukushima nuclear disaster in
Japan begin to take hold. Despite the drop in bookings, the Company believes that the global demand for its non-nuclear products is
on the rise. The increase in sales output and volume was also the most significant factor in the improvement of the Company’s gross
profit percentage, as well as the 53.6% increase of its adjusted net operating results2.
On an annual basis, the Company is required to perform an impairment test on goodwill acquired in a business combination. As a
result of this analysis, the Company determined that the carrying amount of the goodwill associated with ABV exceeded its
recoverable amount and, accordingly, the Company recorded a non-cash goodwill impairment loss of $11.7 million in the fourth
quarter of the current fiscal year. This impairment charge was the result of actual results of ABV coming in below the expectations
at the time of the acquisition. The reasons for these lower achieved results are due to a variety of factors, including a business
process integration that proved to be more difficult than planned, as well as profitability issues related to the complexity of the
manufactured products. In addition, the increasingly competitive landscape of the last two years, particularly amongst upstream oil
and gas flow control manufacturers in Italy, negatively impacted margins. As a result of these factors, ABV contributed a net loss
(including purchase price accounting adjustments) of $2.1 million to the Company’s consolidated results in fiscal year 2013 and $6.9
million in fiscal year 2012. Despite these poor results, the Company remains confident about the long term prospects of ABV and
its product range as the continued integration efforts have resulted in driving process improvements.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
7
Management’s discussion and analysis
Like many other U.S. valve manufacturers, two of the Company’s U.S. subsidiaries have been named as defendants in a number of
pending lawsuits brought on behalf of individuals seeking to recover damages for their alleged asbestos exposure. These lawsuits are
related to products manufactured and sold in the past. Management believes that any asbestos was incorporated entirely within the
product in such a way that it would not allow for any ambient asbestos during normal operation, inspection or repairs. Management
strongly believes its products, which were supplied in accordance with valve industry practice and customer mandated
specifications, did not contribute to any asbestos-related illness. The Company will continue to vigorously defend against these
claims but, given the ongoing course of asbestos litigation in the U.S. and the unpredictability of jury trials, it is not possible to make
an estimate of any legal or related costs. Settlement costs and legal fees increased from $6.9 million in fiscal year 2012 to $8.8
million in fiscal year 2013.
Other factors that may impact fiscal year 2014
The challenge facing the Company for fiscal year 2014 will be to improve the productive efficiency of its operations and to balance
its production lead times with its backlog and capacity. The Company is currently investing heavily in capital expenditures in order
to increase its global manufacturing capacity and presence, and improve production efficiency, on-time delivery and cost
competitiveness. In fiscal year 2013, the Company invested $28.5 million in capital expenditures and it expects to spend a further
$20 million in fiscal year 2014. The Company will also continue to work to improve its operational excellence through lean, global
sourcing, working capital management and cost controls. The Company believes that these initiatives will have a positive impact on
future profitability.
Despite the negative impact on its consolidated results to date, the Company continues to view the acquisition of ABV as a great
opportunity to grow its sales and earnings over the coming years. The Company continues to work with the local management of
ABV to help improve operations, as well as increase output and profitability.
After two challenging fiscal years, the Company turned the corner in fiscal year 2013 with record sales, improved gross profit and
higher operating results. As at February 28, 2013, the Company’s order backlog was $531 million and its net cash1 plus unused
credit facilities amounted to $47.9 million, which, it believes, along with future cash flows generated from operations, is sufficient to
meet its financial obligations, improve its capacity, satisfy its working capital requirements, and execute on its business strategy.
However, there can be no assurance that outside economic factors, such as the continued recession in Europe, will not materially
adversely affect the Company’s results of operations or financial condition.
1 Non-IFRS measures – see reconciliations at the end of this report.
8
Management’s discussion and analysis
SUMMARY OF RESULTS
Summary financial data derived from the Company’s financial statements prepared in accordance with IFRS for the three most
recently completed reporting periods are as follows:
For the reporting periods ended on the following dates
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fiscal year ended
February 28, 2013
Fiscal year ended
February 29, 2012
Fiscal year ended
February 28, 2011
Operating Data
Sales
Net Earnings1
Earnings per Share
- Basic
- Diluted
Balance Sheet Data
Total Assets
Total Long-term financial liabilities
Shareholder Data
Cash dividends per share
- Multiple Voting Shares2
- Subordinate Voting Shares
Outstanding Shares at report date
- Multiple Voting Shares2
- Subordinate Voting Shares
$437,135
7,892
0.36
0.36
601,970
17,109
0.32
0.32
$380,706
21,224
0.96
0.95
516,037
11,064
0.31
0.31
$500,574
6,169
0.28
0.28
619,774
24,393
0.32
0.32
15,566,567
6,357,201
Sales reached a record level for fiscal year 2013, increasing by $63.5 million or 14.5% compared to fiscal year 2012. The increase
was due to the Company increasing its sales volume due to improved production execution on large export project orders. Sales for
fiscal year 2012 increased by $56.4 million or 14.8%, compared to fiscal year 2011. The increase was due to the acquisition of
ABV, positive currency fluctuations and improved deliverable backlog. Adverse currency fluctuations and lower deliverable backlog
negatively impacted the reported sales figure for fiscal year 2011.
Gross profit for fiscal year 2013 amounted to $113.9 million, an increase of $26.6 million from fiscal year 2012. Gross profit
percentage for fiscal year 2013 also increased from the 20.0% reported in fiscal year 2012 to 22.8%. The increase in gross profit
percentage reported for fiscal year 2013 is attributable to a combination of sales mix, as well as the fixed cost component of cost of
sales as compared to the increased sales in the year. Gross profit for fiscal year 2012 amounted to $87.3 million, a decrease of $14.1
million from the $101.4 million reported for fiscal 2011. Gross profit percentage for fiscal year 2012 also decreased from the 26.6%
reported in fiscal 2011 to 20.0%. Higher material costs, lower-than-expected sales volume and adverse currency impacts were the
main reasons for the decrease.
Administration costs for fiscal year 2013 increased by $7.4 million when compared to fiscal 2012. Such increase was principally
due to an increase in sales commissions on international export orders, an increase in freight costs for the increased customer
shipments and an increase in costs associated with the Company’s ongoing asbestos litigation (see Contingencies section).
Administration costs for fiscal 2012 increased by $10.0 million when compared to fiscal 2011. The increase was mainly related to
the acquisition of ABV. Adjusting for this impact as well as currency impacts, administration costs would have increased by $3.4
million, such increase being principally due to increases in freight costs for customer shipments due to the higher sales volume, as
well as the professional fees related to the ABV acquisition and the establishment of a new subsidiary in India.
The fiscal year 2013 net earnings1 were also negatively impacted by an $11.7 million non-cash goodwill impairment loss related to
the acquisition of ABV.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Multiple Voting Shares (five votes per share) are convertible into Subordinate Voting Shares on a 1 to 1 basis.
9
Management’s discussion and analysis
RESULTS OF OPERATIONS – for the year ended February 28, 2013 compared to the year ended February 29, 2012
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2013
Year ended
February 29,
2012
(millions)
Sales
$500.6
$437.1
The Company realized record sales in the fiscal year with an increase of $63.5 million or 14.5% from the prior year. Excluding the
results of ABV and currency impacts, sales increased $52.4 million or 12.6% for the year. The increase in sales is primarily
attributable to the Company’s North American and Korean operations. For the North American operations, sales increased because
the Company began to ship certain large export project orders which had encountered various supply chain issues, customer-related
issues and internal operational issues in the prior year. The sales increase in the Korean operations was due to the prior year’s
increase in backlog working its way through the production cycle.
Net bookings and backlog
(millions)
Year ended
February 28,
2013
Year ended
February 29,
2012
Net bookings
$370.1
$529.0
Net bookings decreased by $158.9 million or 30.0% for the fiscal year. Excluding the results of ABV and currency impacts, the
decrease would have been $144.2 million or 27.3% for the year. The decrease in net bookings is primarily attributable to two factors,
namely the Company’s continued policy of quoting longer lead times in order to decrease its large order backlog to ease pressure on
production, and a softening of demand for the Company’s nuclear products, especially with respect to its French operations, as the
effects of the Fukushima nuclear disaster in Japan take hold. Notwithstanding this drop in nuclear order bookings, the Company
believes that the long-term outlook for the nuclear industry is generally positive. The Company is now quoting shorter delivery times
in order to increase its sales output and its net bookings for the future.
(millions)
Backlog
February
2013
February
2012
February
2011
$531.0
$661.8
$548.0
For delivery within the subsequent fiscal year
$398.2
$460.5
$350.8
For delivery beyond the subsequent fiscal year
$132.8
$201.3
$197.2
Percentage – beyond the subsequent fiscal year
25.0%
30.4%
36.0%
The Company’s book-to-bill ratio was 0.74 resulting in a $130.8 million or 19.8% decrease in backlog since the beginning of the
fiscal year. The decrease is mainly attributable to higher sales output and lower net bookings, as described above. The Company
ended the year with a backlog of $531.0 million.
Gross profit
(millions)
Year ended
February 28,
2013
Year ended
February 29,
2012
Gross profit
$113.9
$87.3
Gross profit percentage
22.8%
20.0%
10
Management’s discussion and analysis
Excluding the results of ABV and the effects of purchase price accounting, the gross profit percentage for the year would have been
24.6% or an increase of 2.4 percentage points from the prior year. Further adjusting for currency impacts, the gross profit percentage
would have been 24.8% for the current year. The improvement in the gross profit percentage was attributable to a combination of
sales mix, as well as the fixed cost component of cost of sales as compared to the increased sales in the current year.
Administration costs
(millions)
Year ended
February 28,
2013
Year ended
February 29,
2012
Administration costs
$91.0
$83.6
As a percentage of sales
18.2%
19.1%
Administration costs increased by $7.4 million, or 8.9%. Excluding the results of ABV and currency impacts, administration costs
would have increased by $8.9 million or 11.3%. The increase was mainly a result of a $4.3 million increase in sales commissions on
international export orders coupled with a $0.8 million increase in freight costs for the increased customer shipments. There was also
a $1.9 million increase in costs associated with the Company’s ongoing asbestos litigation (see Contingencies section). Like many
other U.S. valve manufacturers, two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending
lawsuits brought on behalf of individuals seeking to recover damages for their alleged asbestos exposure. These lawsuits are related
to products manufactured and sold in the past. Management believes that any asbestos was incorporated entirely within the product
in such a way that it would not allow for any ambient asbestos during normal operation, inspection or repairs. Management strongly
believes its products, which were supplied in accordance with valve industry practice and customer mandated specifications, did not
contribute to any asbestos-related illness. The Company will continue to vigorously defend against these claims but given the
ongoing course of asbestos litigation in the U.S. and the unpredictability of jury trials, it is not possible to make an estimate of any
settlement costs and legal fees.
Goodwill impairment loss and other income
(millions)
Year ended
February 28,
2013
Year ended
February 29,
2012
Goodwill impairment loss
$11.7
Other income
$3.4
$ -
$3.8
As a result of the annual goodwill impairment test required under IFRS, the Company recorded an impairment charge of $11.7
million in the current fiscal year related to its ABV cash-generating unit. See Highlights section above for more details.
The other income of $3.4 million for the current year consists primarily of a $2.4 million fair value adjustment on the contingent
payments related to the ABV acquisition and a $0.4 million unrealized foreign exchange gain on the remaining proceeds payable on
the ABV acquisition. During the first quarter of the year, the Company signed an agreement with the previous owners of ABV
extending the required disbursement date of the €1.5 million contingent payment to be paid in the event that ABV had satisfied
certain non-financial criteria from July 29, 2012 to March 15, 2013. In addition, the requirement that ABV satisfy the non-financial
criteria was removed. As a result, the Company recorded a $0.2 million fair value adjustment on the contingent payment to other
income. In the fourth quarter, the Company evaluated the likelihood that the financial criteria related to the second of two €2 million
contingent payments to be paid upon ABV satisfying certain earnings before interest, taxes, depreciation and amortization
(“EBITDA”) targets would be met. Based on this evaluation, the Company determined that it would be more likely than not that
such financial criteria would not be satisfied. As a result, the Company recorded an additional fair value adjustment with respect to
the applicable contingent payment of $2.2 million to other income in the current year.
For the first of the two €2 million contingent payments to be paid upon ABV satisfying certain EBITDA targets, the Company had
determined that it would be more likely than not that such financial criteria would not be satisfied in the fourth quarter of the prior
fiscal year. As such, it recorded a $2.2 million fair value adjustment on the contingent payment to other income in fiscal year 2012.
In addition, a $1.0 million unrealized foreign exchange gain on the remaining proceeds payable on the ABV acquisition was
recorded to other income in the prior year.
11
Management’s discussion and analysis
Net finance costs
(millions)
Year ended
February 28,
2013
Year ended
February 29,
2012
Net finance costs
$2.6
$1.4
The increase in net finance costs relates primarily to the increase in long-term debt and short-term borrowings discussed in the
Liquidity and Capital Resources section below.
Income taxes
(in thousands, excluding percentages)
Year ended
February 28,
2013
%
$
Year ended
February 29,
2012
%
$
Income before income tax
12,018
100.0
6,097
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
4,277
35.6
2,659
43.6
(314)
3,147
178
(657)
(1,178)
(169)
(2.6)
26.2
1.5
(5.5)
(9.8)
(1.4)
(401)
-
266
(628)
(1,105)
(443)
(6.6)
-
4.4
(10.3)
(18.1)
(7.3)
5,284
44.0
348
5.7
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-deductible interest accretion of proceeds payable
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other permanent differences
Provision for income taxes
Net earnings1
(millions)
Net earnings1
As a percentage of sales
Adjusted net operating results2
As a percentage of sales
Year ended
February 28,
2013
Year ended
February 29,
2012
$6.2
1.2%
$19.2
3.8%
$7.9
1.8%
$12.5
2.9%
Net earnings1 for the current year were significantly impacted by the goodwill impairment loss. In order to adequately compare the
operations with the prior year, the Company normalized its net earnings1 by calculating the adjusted net operating results2 for the
two years in question. Adjusted net operating results2 amounted to $19.2 million or $0.87 per share for the current fiscal year
compared to $12.5 million or $0.56 per share achieved in the prior fiscal year. As a percentage of sales, the adjusted net operating
results2 margin was 3.8% for the current year, compared to 2.9% for the prior year. As discussed in the sections above, this increase
is due primarily to increased sales volume resulting from improved production execution, especially of large export project orders.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
12
Management’s discussion and analysis
SUMMARY OF QUARTERLY RESULTS
Summary financial data derived from the Company’s unaudited financial statements from each of the eight most recently completed
quarters are as follows:
For the quarters in months ending May, August, November and February
(in thousands of U.S. dollars, excluding per share amounts)
February
2013
$142,070
(3,555)
November
2012
$134,203
5,712
August
2012
$108,449
3,318
May
2012
$115,852
694
February
2012
$117,784
5,864
November
2011
$118,939
3,992
QUARTERS ENDED
May
August
2011
2011
$105,023
$95,389
147
(2,111)
(0.16)
(0.16)
0.26
0.26
0.15
0.15
0.03
0.03
0.27
0.27
0.18
0.18
(0.10)
(0.10)
0.01
0.01
Sales
Net Earnings1 (loss)
Earnings per share
- Basic
- Diluted
Sales were low in the August 2011 quarter. For various reasons, the Company could not ship certain project orders in the August
2011 quarter. In the quarters ended August 2012, May 2012, February 2012, November 2011 and May 2011, sales remained fairly
constant when adjusted for ABV and currency impacts. Sales can vary from one quarter to the next due to the timing of the shipment
of project orders. Sales were higher in February 2013 and November 2012 as the Company improved its production execution on
large export project orders. Net losses1 were recorded in the quarters ended August 2011, which was due to low sales, and in
February 2013, which was due to a goodwill impairment loss. Purchase price accounting adjustments lowered results for all eight
quarters discussed.
RESULTS OF OPERATIONS – quarter ended February 28, 2013 compared to the quarter ended February 29, 2012
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the last fiscal year)
Sales
(millions)
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Sales
$142.1
$117.8
Sales increased by $24.3 million or 20.6% for the quarter. Excluding currency impacts, sales increased $22.0 million or 18.7% for
the quarter. The increase in sales for the quarter is primarily attributable to the Company’s North American and Italian operations.
For the North American operations, sales increased because the Company began to ship certain large export project orders which
had encountered various supply chain issues, customer-related issues and internal operational issues in the prior year. The sales
increase in the Italian operations was due to improved production efficiencies at ABV which resulted from the Company’s continued
integration efforts with regards to this acquisition.
Net bookings and backlog
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
(millions)
Net bookings
$96.7
$125.9
Bookings decreased by $29.2 million, or 23.2% for the quarter. Excluding currency impacts, bookings would have decreased
24.7%. The decrease in net bookings is primarily attributable to the Company’s continued policy of quoting longer lead times in
order to decrease its large order backlog. While its bookings were down for the full year, the Company’s French operations showed
improved bookings in the quarter as it booked a significant amount of spare parts orders which offset the drop in demand for its
nuclear products following the Fukushima nuclear disaster in Japan.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
13
Management’s discussion and analysis
Gross profit
(millions)
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Gross profit
$30.4
$23.0
Gross profit percentage
21.4%
19.5%
Excluding currency impacts, the gross profit percentage for the quarter would have been 21.9% or an increase of 2.4 percentage
points from the prior year quarter. This favourable variance was principally due to higher sales volume to cover production overhead
expenses, especially in the Company’s North American operations, coupled with improved production efficiencies in its Italian
operations.
Administration costs
(millions)
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Administration costs
$22.4
$21.4
As a percentage of sales
15.8%
18.2%
Administration costs increased by $1.0 million, or 4.7%. The increase was due primarily to increased settlement costs and legal fees
associated with the Company’s ongoing asbestos litigation (see Contingencies section).
Goodwill impairment loss and other income
(millions)
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Goodwill impairment loss
$11.7
Other income
$2.6
$ -
$3.5
As a result of the annual goodwill impairment test required under IFRS, the Company recorded an impairment charge of $11.7
million in the quarter related to its ABV cash-generating unit. See Highlights section above for more details.
The $0.9 million decrease in other income is due principally to a $1.0 million decrease in the amount of unrealized foreign exchange
gain on the remaining proceeds payable on the ABV acquisition recognized in the current quarter compared to the prior year quarter.
Finance costs
(millions)
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Net finance costs
$0.5
$0.6
Net finance costs for the quarter remained relatively stable when compared to the prior year quarter.
14
Management’s discussion and analysis
Income taxes
(in thousands, excluding percentages)
Three-month period
ended February 28, 2013
%
$
Three-month period
ended February 29, 2012
%
$
Income (Loss) before income tax
(1,552)
100.0
4,543
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
(151)
9.7
1,809
39.8
-
3,147
42
(604)
(308)
(159)
-
(202.8)
(2.7)
38.9
19.9
10.3
(138)
-
68
(628)
(288)
(678)
(3.0)
-
1.5
(13.8)
(6.4)
(14.9)
1,967
(126.7)
145
3.2
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-deductible interest accretion of proceeds payable
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other permanent differences
Provision for income taxes
Net earnings1
(millions)
Net earnings1
As a percentage of sales
Adjusted net operating results2
As a percentage of sales
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
$(3.6)
(2.5)%
$6.3
4.4%
$5.9
5.0%
$2.5
2.1%
Net earnings1 for the current quarter were significantly impacted by the goodwill impairment loss. In order to adequately compare
the operations with the prior year quarter, the Company normalized its net earnings1 by calculating the adjusted net operating results2
for the two quarters in question. Adjusted net operating results2 amounted to $6.3 million or $0.28 per share for the current quarter
compared to $2.5 million or $0.11 per share achieved in the prior fiscal year quarter. As a percentage of sales, the adjusted net
operating results2 margin was 4.4% for the current quarter, compared to 2.1% for the prior year quarter. As discussed in the sections
above, this increase is due primarily to increased sales volume resulting from improved production execution, especially as it relates
to large export project orders.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
15
Management’s discussion and analysis
LIQUIDITY AND CAPITAL RESOURCES – a discussion of liquidity risk, credit facilities, cash flows and
proposed transactions (unless otherwise noted, all dollar amounts are denominated in U.S. dollars)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company
manages its liquidity risk by continually monitoring its future cash requirements. Cash flow forecasting is performed in the operating
entities and aggregated by the Company’s corporate finance team. The Company’s policy is to maintain sufficient cash and cash
equivalents and available credit facilities in order to meet its present and future operational needs.
The following table presents the Company’s financial obligations identified by type and future contractual dates of payment:
(In thousands)
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
Total
$
26,850
78,431
76,682
28,525
50,864
1,380
Less than
1 year
$
10,463
78,431
76,682
28,525
50,864
1,380
As at February 28, 2013
4 to 5
Years
$
After
5 years
$
2,013
2,158
-
-
-
-
-
-
-
-
-
-
1 to 3
Years
$
12,216
-
-
-
-
-
On February 28, 2013, the Company’s order backlog was $531 million and its net cash1 plus unused credit facilities amounted to
$47.9 million, which it believes, along with future cash flows generated from operations, is sufficient to meet its financial
obligations, increase its capacity, satisfy its working capital requirements, and execute on its business strategy. However, there can
be no assurance that the risk of another sharp downturn in the economy will not materially adversely affect the Company’s results of
operations or financial condition. The Company continues to closely monitor the continued weakness of the euro currency. The
Company is in compliance with all covenants related to its debt and credit facilities.
As a corollary to the managing its liquidity risk the Company also monitors the financial health of its key suppliers.
Proposed transactions
The Company has not committed to any material asset or business acquisitions or dispositions, other than those already discussed in
this MD&A.
1 Non-IFRS measures – see reconciliations at the end of this report.
16
Management’s discussion and analysis
Cash flows (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to same period in the prior fiscal year)
Net cash1
(millions)
Net cash1
February
2013
November
2012
February
2012
November
2011
February
2011
$19.8
$5.5
$35.4
$27.7
$113.1
The Company’s net cash1 increased $14.3 million during the quarter and decreased $15.6 million from the beginning of the fiscal
year. The increase in the quarter was driven primarily by an increase in operating results as a result of the increase in sales volume
coupled with favourable non-cash working capital movements, specifically a decrease in inventory. The decrease in net cash1 for the
year was driven primarily by unfavourable non-cash working capital movements, specifically an increase in accounts receivable
resulting from the higher sales volume.
Cash provided (used) by operating activities
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Cash provided (used) by operating activities
$14.4
$(12.8)
$23.1
$15.6
Cash provided by operating activities for the current fiscal year increased by $27.2 million when compared to last year. This increase
was principally related to the increase in operating results as a result of the increase in sales volume which was only partially offset
by unfavourable non-cash working capital movements, specifically an increase in accounts receivable. Cash provided by operating
activities for the quarter increased by $7.5 million when compared to the prior year period. This increase was principally related to
non-cash working capital movements, specifically a decrease in inventory.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Accounts receivable decrease (increase)
$(23.3)
$(8.5)
$(2.2)
$15.8
Accounts receivable balances are a function of the timing of sales and cash collections. For all of the indicated periods, accounts
receivable increased when compared to the prior year period due to the increased sales volume in the second half of the year which
resulted in higher billings.
Inventory
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Inventory decrease (increase)
Customer deposits increase (decrease)
$11.3
$(10.2)
$(38.4)
$11.1
$17.7
$(8.4)
$(11.3)
$2.5
Inventory typically increases in times of rising backlog and order bookings and decreases when the opposite occurs. Inventory is
also a function of timing between receipts and shipments. For all of the indicated periods, inventory decreased as a result of the
increase in sales volume and the decrease in backlog for the corresponding period. In order to help finance its investment in
inventory, the Company, where possible, obtains customer deposits for large orders. The customer deposit decrease in all of the
indicated periods appears in line with the inventory decreases.
1 Non-IFRS measures – see reconciliations at the end of this report.
17
Management’s discussion and analysis
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Accounts payable and accrued liabilities (decrease) increase
$(3.8)
$4.7
$0.1
$3.9
For all of the indicated periods, the fluctuations in accounts payable and accrued liabilities were primarily related to timing.
Additions to property, plant and equipment
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Additions to property, plant and equipment
$28.5
$12.7
$5.8
$3.8
The additions to property, plant and equipment relate mainly to the Company’s North American and Indian operations. In North
America, the Company is investing in machinery and equipment in order to increase production capacity and improve operational
efficiency. In India, the Company completed construction of a new manufacturing plant which began trial production activities in
December 2012. The Company believes that its presence in India will improve its cost competitiveness as well as the ability to
access the rapidly growing Indian market.
Dividends
(millions)
Dividends paid
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
$7.1
$7.2
$1.8
$1.8
The Company maintained its dividend policy of CDN$0.32 per share, payable quarterly.
Long-term debt
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Increase in long-term debt
$21.1
$5.2
$0.3
$0.6
In order to fund its investment in property, plant and equipment, as well as its current working capital needs, the Company borrowed
$21.1 million during the year. Of this amount, $20.0 million consists of a term bank loan that bears interest at 2.74% and is
repayable in monthly installments of $0.4 million over a 48-month period, expiring in the 2016-2017 fiscal year.
Other Liabilities
(millions)
Fiscal Year
ended
February 28,
2013
Fiscal Year
ended
February 29,
2012
Three-month
period ended
February 28,
2013
Three-month
period ended
February 29,
2012
Payment of proceeds payable
$3.5
$ -
$0.6
$ -
In accordance with the provisions of the purchase and sale agreement for ABV, the Company paid $3.5 million to the former
majority shareholders of ABV over the course of the current fiscal year as partial settlement of the proceeds payable at the time of
the acquisition.
18
Management’s discussion and analysis
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk
and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk management program focuses on
mitigating unpredictable financial market risks and their potential adverse effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies approved by the
Board of Directors. The identification, evaluation and hedging of the financial risks are the responsibility of the corporate finance
team in conjunction with the finance teams of the Company’s subsidiary companies and SPEs. The Company uses derivative
financial instruments to hedge certain risk exposures. Use of derivative financial instruments is subject to a policy which requires
that no derivative transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary being
that all derivative transactions are to be entered into for risk management purposes only).
Risk overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following table:
Risks
Market risks
Financial instrument
Credit
Liquidity
Currency
Interest rate
x
x
x
x
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Dividend payable
Accrual for performance guarantees
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk arising
from various currency exposures. Currency risk arises when future commercial transactions and recognized assets and liabilities are
denominated in a currency other than a company’s functional currency. The Company has operations with different functional
currencies, each of which will be exposed to currency risk based on its specific functional currency.
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same currency. The
remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the Company uses foreign currency
derivatives, primarily foreign exchange forward contracts. These derivatives are not designated as hedges for accounting purposes.
19
Management’s discussion and analysis
The amounts outstanding as at February 28, 2013 and February 29, 2012 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2013
February 29,
2012
February 28,
2013
$
February 29,
2012
$
February 28,
2013
February 29,
2012
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 13 months
Buy US$ for € – 0 to 12 months
Buy ₤ for € – 0 to 12 months
Sell US$ for ₤ – 0 to 21 months
Sell US$ for KW – 0 to 12 months
Sell € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for US$ – 0 to 12 months
0.97-1.04
1.28-1.43
1.28-1.41
-
1.52
-
1.25-1.35
1.26
1.51-1.61
0.97-1.04
1.28-1.42
1.28-1.41
0.80-0.89
-
1,197-1,202
1.30-1.42
-
1.56-1.62
(951)
(192)
1
-
(6)
-
103
67
(62)
(13) US$43,245
US$8,664
51
US$33
(9)
-
30
US$1,485
-
-
19
€30,693
1,095
€1,420
-
£889
30
US$42,000
US$13,921
US$1,437
£1,564
-
US$333
€25,617
-
£1,919
Foreign exchange forward contracts are contracts whereby the Company has the obligation to sell or buy the currencies at the strike
price. The fair value of the foreign currency instruments is recorded in the consolidated statement of income and reflects the
estimated amounts the Company would have paid or received to settle these contracts as at the financial position date. Gains are
recorded as derivative assets and losses as derivative liabilities on the consolidated statement of financial position.
Cash flow and fair value interest rate risk
The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash and cash equivalents.
Items at variable rates expose the Company to cash flow interest rate risk, and items at fixed rates expose the Company to fair value
interest rate risk. The Company’s long-term debt and credit facilities predominantly bear interest, and its cash and cash equivalents
earn interest at variable rates. An assumed 0.5% change in interest rates would have no significant impact on the Company’s net
income or cash flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2013, three (February 29, 2012
– six) customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 6.2%
(February 29, 2012 – 10.9%), and the Company’s ten largest customers accounted for 43.1% (February 29, 2012 – 62.8%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific
evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts
receivable, historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established
for each customer and reviewed periodically. An allowance for doubtful accounts is recorded when, based on management’s
evaluation, the collection of an account receivable is not reasonably certain.
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash equivalents and short-term
investments, which it manages by dealing with highly rated financial institutions.
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on derivative assets.
20
Management’s discussion and analysis
The table below summarizes the ageing of the trade accounts receivable as at:
(In thousands of U.S. dollars)
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
The table below summarizes the movement in the allowance for doubtful accounts:
(In thousands of U.S. dollars)
Balance – Beginning of year
Bad debt expenses
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
February 28,
2013
$
February 29,
2012
$
97,741
10,351
8,702
10,793
127,587
1,525
126,062
8,312
78,838
13,221
5,054
10,482
107,595
1,144
106,451
5,405
134,374
111,856
February 28,
2013
$
February 29,
2012
$
1,144
916
(472)
(50)
(13)
1,525
1,661
331
(720)
(453)
325
1,144
Liquidity risk – see discussion in liquidity and capital resources section
CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover
damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past.
Management believes it has a strong defence related to certain products that may have contained an internal asbestos containing
component. 764 claims were outstanding at the end of the reporting period (February 29, 2012 – 671). These claims were filed in
the states of Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland,
Massachusetts, Mississippi, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas,
Virginia, Washington and West Virginia. During the current fiscal year, the Company resolved 330 claims (February 29, 2012 –
262) and was the subject of 423 new claims (February 29, 2012 – 447). Because of the many uncertainties inherent in predicting the
outcome of these proceedings, as well as the course of asbestos litigation in the United States, management believes that it is not
possible to make an estimate of the Company’s asbestos liability. Accordingly, no provision has been set up in the accounts.
Settlement costs and legal fees related to these asbestos claims amounted to $3,173 for the quarter (February 29, 2012 - $1,293) and
$8,763 for the year (February 29, 2012 - $6,920).
21
Management’s discussion and analysis
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 23 and 26 of the
Company’s audited consolidated financial statements. The types of transactions entered into, all of which are in the normal course
of business, are as follows:
Performance bond guarantees related to product warranty and on-time delivery
•
• Letters of credit issued to overseas suppliers
• Operating leases
RELATED PARTY TRANSACTIONS (in thousands of U.S. dollars)
The Company has entered into the following transactions with related parties, which are measured at their exchange value.
a)
PDK Machine Shop Ltd. (“PDK”) is a company owned by certain relatives of the controlling shareholder. PDK is a
supplier of machined material components for use in Velan’s plants.
Purchases of material components
Sales of raw material
Three months ended Twelve months ended
Feb. 29,
Feb. 28,
2012
2013
$2,030
$385
131
9
Feb. 29,
2012
$436
24
Feb. 28,
2013
$1,909
168
The Company entered into an agreement with PDK pursuant to which it has the right to purchase the shares of PDK for a
consideration equal to the book value thereof in the event that they propose to sell their shares to a third party. In the event
that PDK proposes to sell all or substantially all of its assets to a third party, the Company has the right to purchase
inventory at cost and other assets at book value. In the event of a proposed liquidation or sale of sufficient assets such that
PDK cannot fulfill its obligations to the Company under any outstanding purchase orders, the Company also has the right
and the obligation to purchase PDK’s inventory at an amount equal to the cost thereof. The maximum obligation of the
Company pursuant to such put right is $200.
b)
SteamTree Systems, Inc. (“SteamTree”) is a company, which is 50%-owned by a different relative of the controlling
shareholder. SteamTree provides consulting and custom design services related to computer software and software
applications. SteamTree developed and implemented a computerized quotations system presently used by Velan’s
Marketing department.
Software development and consulting services
Three months ended Twelve months ended
Feb. 29,
Feb. 28,
2012
2013
$29
$3
Feb. 29,
2012
$1
Feb. 28,
2013
$17
c)
One of the Company`s subsidiaries and certain of its executives lease, on a weekly basis, a property from Velan Holdings
Co. Ltd., the controlling shareholder. Velan Holdings Co. Ltd. charges weekly rates based on usage.
Three months ended Twelve months ended
Feb. 29,
Feb. 28,
2012
2013
$29
$6
Feb. 29,
2012
$4
Feb. 28,
2013
$25
Rent
22
Management’s discussion and analysis
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and
reported to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a
timely manner so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in
Issuer’s Annual and Interim Filings) as at February 28, 2013 and have concluded that such disclosure controls and procedures were
designed and operating effectively.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with IFRS.
Management has evaluated the design and effectiveness of its internal controls and procedures over financial reporting (as defined in
National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings). The evaluation was based on the
“Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). This evaluation was performed by the CEO and the CFO of the Company with the assistance of other Company
Management and staff to the extent deemed necessary. Based on this evaluation, the CEO and the CFO concluded that the internal
controls and procedures over financial reporting were appropriately designed and operating effectively as at February 28, 2013.
In spite of its evaluation, Management does recognize that any controls and procedures no matter how well designed and operated,
can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen
event that lapses in the disclosure of internal controls and procedures occur and/or mistakes happen of a material nature, the
Company intends to take the steps necessary to minimize the consequences thereof.
Changes in internal control over financial reporting
The Company did not make any material changes to the design of internal control over financial reporting during the year and three-
month period ended February 28, 2013 that have materially affected, or are reasonably likely to have materially affected, the
Company’s internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements are prepared in accordance with IFRS as issued by the IASB. The Company’s significant
accounting policies as described in note 2 of the Company’s audited consolidated financial statements are essential to understanding
the Company’s financial positions, results of operations and cash flows. Certain of these accounting policies require critical
accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters
that are inherently uncertain and susceptible to change. The assumptions and estimates used are based on parameters which are
derived from the knowledge at the time of preparing the financial statements and believed to be reasonable under the circumstances.
In particular, the circumstances prevailing at this time and assumptions as to the expected future development of the global and
industry-specific environment were used to estimate the Company’s future business performance. Where these conditions develop
differently than assumed and beyond the control of the Company, the actual results may differ from those anticipated (see Forward-
looking information section above). These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is changed. There were no significant changes made to
critical accounting estimates during the past two financial years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are addressed below:
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management judgment and requires the
Company to perform continuous evaluations of their collectability and to record an allowance for doubtful accounts when required.
In performing its evaluation, the Company analyzes the ageing of accounts receivable, concentration of receivables by customer,
customer creditworthiness and current economic trends. Any change in the assumptions used could impact the carrying value of the
23
Management’s discussion and analysis
accounts receivable on the consolidated statement of financial position with a corresponding impact made to administration costs on
the consolidated statement of income.
Inventory
Inventories must be valued at the lower of cost and net realizable value. A writedown of inventory will occur when its estimated
market value less applicable variable selling expenses is below its carrying amount. This involves significant management judgment
and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future
demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in
assessing this valuation or selling costs could impact the carrying amount of the inventory on the consolidated statement of financial
position with a corresponding impact made to cost of sales on the consolidated statement of income.
Provisions
Provisions must be established for possible product warranty expenses. The Company estimates its warranty exposure by taking into
account past experience as well as any known technical problems and estimates of costs to resolve these issues. The Company
estimates its exposure under these obligations based on an analysis of all identified or expected claims. Any change in the
assumptions used could impact the value of the provision on the consolidated statement of financial position with a corresponding
impact made to cost of sales on the consolidated statement of income.
Accrual for performance guarantees
Accruals for performance guarantees must be established for possible late delivery and other contractual non-compliance penalties
or liquidated damages. The Company estimates its exposure by taking into account past experience, as well as any known non-
compliance with its contractual obligations, and estimates of costs to resolve these issues. The Company estimates its exposure
under these obligations based on an analysis of all identified or expected claims. Any change in the assumptions used could impact
the value of the accrual on the consolidated statement of financial position with a corresponding impact made to cost of sales on the
consolidated statement of income.
Asset impairment test
Assets that have an indefinite life, such as goodwill, are tested annually by the Company for impairment, or more frequently if
events or circumstances indicate there may be impairment. All other assets must be reviewed by the Company at the end of each
reporting period in order to determine whether there is an indication of possible impairment. For the purposes of impairment testing,
assets are grouped at the lowest levels for which there are separately identifiable cash flows. A cash-generating unit (“CGU”) is the
smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of
assets. If an indication of impairment exists, the Company estimates the recoverable amount of the CGU in order to determine the
extent of the impairment loss, if any. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is the greater of an asset’s fair value less costs to sell and its value in use. In
assessing value in use, the Company estimates future cash flows which are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. Any change in the
assumptions used could impact the carrying amount first of any goodwill allocated to the CGU and then to the other assets of the
CGU on a pro rata basis of the carrying amount of each asset in the CGU on the consolidated statement of financial position with a
corresponding impact made to the consolidated statement of income.
Income taxes
The Company must estimate its income taxes in each jurisdiction in which it operates. This involves assessing the probability of
using net operating losses against future taxable income as well as evaluating positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation. In the event these assessments are changed, there would be an
adjustment to income tax expense with a corresponding adjustment to income tax balances on the consolidated statement of financial
position.
24
Management’s discussion and analysis
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after
January 1, 2013, with earlier application permitted. Based on a preliminary assessment, the Company does not expect any significant
impact on the consolidated financial statements upon adoption of these standards and amendments. The Company has also
determined that it will not early adopt these standards and amendments.
(i)
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and measurement of financial
assets. It replaces the multiple category and measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, for debt instruments with a new mixed measurement model having only two categories: amortized cost
and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments
are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where
equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or
loss to the extent that they do not clearly represent a return of investment; however, other gains and losses (including
impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing
requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through
profit or loss are generally recorded in other comprehensive income.
The above revisions are effective for annual periods beginning on or after January 1, 2015, with earlier application
permitted.
(ii)
(iii)
(iv)
(v)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has power over the
investee, is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the
power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC–12, Consolidation—Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial
Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the
venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing
IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11
supersedes IAS 31, Interests in Joint Ventures, and SIC–13, Jointly Controlled Entities—Non-monetary Contributions by
Venturers.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such
as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward
existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated
with, an entity’s interests in other entities.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure for use across
all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS,
guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and does not always reflect a clear measurement basis or consistent disclosures.
(vi) There have been amendments to existing standards, including IAS 27, Separate Financial Statements, and IAS 28,
Investments in Associates and Joint Ventures. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and
associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to
address the changes in IFRS 10 to 13.
(vii)
IAS 19, Employee Benefits, has been amended to make significant changes to the recognition and measurement of
defined benefit pension expense and termination benefits and to enhance the disclosure of all employee benefits. The
amended standard requires immediate recognition of actuarial gains and losses in other comprehensive income as they
arise, without subsequent recycling to net income. Past service cost (which will now include curtailment gains and losses)
will no longer be recognized over a service period but instead will be recognized immediately in the period of a plan
25
Management’s discussion and analysis
amendment. Pension benefit cost will be split between (i) the cost of benefits accrued in the current period (service cost)
and benefit changes (past-service cost, settlements and curtailments); and (ii) finance expense or income. The finance
expense or income component will be calculated based on the net defined benefit asset or liability. A number of other
amendments have been made to recognition, measurement and classification, including redefining short-term and other
long-term benefits, guidance on the treatment taxes related to benefit plans, guidance on risk/cost-sharing features, and
expanded disclosures.
(viii)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in other
comprehensive income into two groups, based on whether or not items may be recycled in the future. Entities that choose
to present other comprehensive income items before tax will be required to show the amount of tax related to the two
groups separately. The amendment is effective for annual periods beginning on or after July 1, 2012 with earlier
application permitted.
CERTAIN RISKS THAT COULD AFFECT OUR BUSINESS
Cyclical nature of end user markets
The demand for the Company’s products in any particular industry or market can vary significantly according to the level of
economic activity in that industry or market. These potential variations may be mitigated by the fact that the Company’s sales are
diversified geographically as well as by end user market. There can be no assurance that an economic recession or downturns in
certain industries or geographic locations will not have a significant adverse effect on the Company’s sales.
Competition
Competitive pressures in the Company’s markets could lead to a loss of market share, which could negatively impact revenues,
margins and net income. The Company also competes with manufacturers based in low wage countries that offer valves at
substantially lower prices. There can be no assurance that the Company will be able to compete successfully against its current or
future competitors or that competition will not have a material adverse effect on the Company's results of operations and financial
condition.
Backlog
The Company’s order backlog consists of sales orders that are considered firm. It is also an indication of future sales revenues.
However, there can be no assurance that subsequent cancellations or scope adjustments will not occur, that the order backlog will
ultimately result in earnings, or when the related revenues and earnings from such order backlog will be recognized.
Dependence upon key personnel
The Company is dependent upon the abilities and experience of its executive officers and other key employees. There can be no
assurance that the Company can retain the services of such executive officers and key employees. If several executive officers or
other key employees were to leave the employ of the Company, its operations could be adversely affected.
Foreign currency exchange risks
Due to the geographic mix of the Company’s customers and its operations, the Company is exposed to foreign currency exchange
risk. The Company enters into simple foreign currency forward contracts in order to manage a portion of its net exposure to foreign
currencies. Such forward contracts contain an inherent credit risk related to default on obligations by the counterparty, which the
company mitigates by entering into contracts with sound financial institutions that it anticipates will satisfy their obligations. Risk
related to currency fluctuations could have a material adverse effect on the Company's results of operations and its financial position.
Interest rate risk
A portion of the Company’s liabilities consist of debt instruments that bear interest at variable rates. As such, the Company is
exposed to the risk of interest rate fluctuations. This risk could have an adverse effect on the Company’s results of operations.
Availability and prices of raw materials
The price of raw materials, principally steel, represents a substantial portion of the cost of manufacturing the Company’s products.
Historically, there have been fluctuations in these raw material prices and, in some instances, price movements have been volatile.
There can be no certainty that the Company will be able to pass on increases resulting from higher costs of raw materials to its
customers through increases in selling prices, or otherwise absorb such cost increases without significantly affecting its margins.
26
Management’s discussion and analysis
In addition, certain raw materials are in short supply for a period of time. Typically, these shortages do not last long and the
Company is usually able to ensure that its needs are met. However, there can be no assurances that its sources of supply will be
adequate to supply all of its needs on a timely basis.
Labour relations
A substantial portion of the Company’s workforce is covered by union agreements. Although the Company has been successful in
the past in negotiating renewals, there can be no assurance that this will continue. Failure to renegotiate these agreements could lead
to work disruptions or higher labour costs, which could negatively impact results.
Reliance on key suppliers
The Company has several key suppliers with whom it has invested in forging dies and casting patterns. While the Company has
alternate sources for most material purchases, the loss of a key supplier could impact negatively on the Company.
Reliance on distributors and sales agents
The Company is directly affected by the ability of independent third party distributors and sales agents retained by the Company to
sell its products in their respective markets. The Company’s continued success is thus dependent on its ability to attract and retain
the distributors and sales agents it requires to support its existing business and to continue to grow.
Project undertakings
In competing for the sales of valves, the Company may enter into contracts that provide for the production of valves at specified
prices and in accordance with time schedules. These contracts may involve greater risks as a result of unforeseen increases in the
prices of raw materials and other costs due to more stringent terms and conditions. Although contract terms may vary from customer
to customer, production delays and other performance issues may call for liquidated damages or other penalties in case of non-
performance or warranty issues due to the more stringent terms and conditions of such contracts.
Political and economic risks associated with international sales and operations
Since the Company sells and manufactures its products worldwide, the business is subject to risks associated with doing business
internationally. The Company’s business and operating results could be impacted by trade protection measures, changes in tax laws,
possibility of expropriation and embargo, foreign exchange restrictions and political, military and/or terrorist disruptions or changes
in regulatory environments.
Force majeure events
Force majeure events are unforeseeable events or circumstances that occur beyond the control of the Company. Such events include
but are not limited to political unrest, war, terrorism, strikes, riots, and crime, as well as seismic or severe weather related events
such as earthquakes, hurricanes, tsunamis, tornadoes, ice storms, flooding and volcanic eruptions. The risk of occurrence of a force
majeure event is unpredictable and may result in delays or cancellations of orders and deliveries to customers, delays in the receipt
of materials from suppliers, damage to facilities or equipment, personal injury or fatality, and possible legal liability.
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover
damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past.
Management believes it has a strong defense related to certain products that may have contained an internal component containing
asbestos. Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail.
Unfavorable rulings, judgments or settlement terms could have a material adverse impact on the Company’s business, financial
condition, results of operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased
significantly during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability
insurance coverage will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be
followed to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a
27
Management’s discussion and analysis
lack of a strong health and safety program may expose it to lost production time, penalties and lawsuits, and may impact future
orders as customers may take into account the Company’s health and safety record when awarding sales contracts.
Environmental compliance matters
The Company’s operations and properties are subject to increasingly stringent laws and regulations relating to environmental
protection, including air and water discharges, waste management and disposal and employee safety. Such laws and regulations both
impose substantial fines for violations and mandate cessation of operations in certain circumstances, the installation of costly
pollution control equipment, or the undertaking of costly site remediation activities. Furthermore, new laws and regulations, or
stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new
clean up requirements could require the Company to incur additional costs which could be significant.
Controls over disclosures and financial reporting
In accordance with National Instrument 52-109, the CEO and the CFO of the Company are responsible for designing, maintaining,
and evaluating the effectiveness of disclosure controls and procedures. The CEO and the CFO are also responsible for the effective
design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with IFRS. A system of controls is subject to certain inherent limitations
and is partially based on the possibility or probability of future events. Accordingly, a system of internal controls can provide only
reasonable, and not absolute, assurance of reaching the desired objectives.
Control of the company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.5% of the voting interests in the Company. Voting control enables the Controlling Shareholder to determine all
matters requiring shareholder approval. The Controlling Shareholder has advised the Company that the disposition of the shares
requires the consent of certain Velan family members and controlled entities.
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company. The sale of a
significant number of Subordinate Voting Shares by the Controlling Shareholder pursuant to the exercise of the conversion right
attached to the Multiple Voting Shares may impact upon the market price and liquidity thereof.
Income and other tax risks
The Company operates in a number of different tax jurisdictions and has a significant amount of cross-border purchase and sale
transactions. The tax rules and regulations in various countries are becoming more complex. There is a risk that one or more tax
authorities could disagree with the tax treatment adopted by the Company, resulting in defense costs and possible tax assessments.
Compliance with international laws
Due to the international nature of its operations, the Company is subject to differing systems of laws and regulations which are often
complex and differ from one country to the next. Such laws and regulations include but are not limited to anti-bribery legislation,
export and customs controls, foreign currency exchange controls, transfer pricing regulations and economic sanctions imposed by
governmental authorities. Failure to comply with such laws could negatively impact earnings and may result in criminal, civil and
administrative legal sanctions. The Company has implemented policies and procedures to effect compliance with these laws by its
employees and representatives.
Special purpose entities and non-controlling interest
The Company’s operations in China, Taiwan and Italy, and certain of its operations in France and Korea are undertaken with
partners that are classified as special purpose entities or non-controlling interest. The success of these operations depends on the
satisfactory performance of such partners in their obligations. The failure of such partners to perform their obligations could impose
additional financial and performance obligations on the Company that could negatively impact its earnings and financial condition.
Business acquisitions
The success of a business acquisition depends in part upon the integration of the acquired business through such tasks as the
realization of synergies, elimination of cost duplication, information systems integration, and establishment of controls and
procedures. The inability to adequately integrate an acquired business in a timely manner might result in lost business opportunities,
higher than expected integration costs and departures of key personnel, all of which could have a negative impact on earnings.
28
Management’s discussion and analysis
RECONCILIATIONS AND NON-IFRS MEASURES
In this MD&A, the Company presented measures of performance or financial condition which are not defined under IFRS (“non-
IFRS measures”) and are therefore unlikely to be comparable to similar measures presented by other companies. These measures are
used by management in assessing the operating results and financial condition of the Company and are reconciled with the
performance measures defined under IFRS. Reconciliations of these amounts can be found below.
Net cash
(millions)
Cash and cash equivalents
Short-term investments
Bank indebtedness
Short-term bank loans
Current portion of long-term bank borrowings
Fiscal
year
ended
Fiscal
year
ended
Feb. 28,
2013
Feb. 29,
2012
77.2
0.4
65.4
5.0
(48.6)
(32.4)
(2.3)
(6.9)
(0.9)
(1.7)
19.8
35.4
Adjusted net operating results
(millions)
Net income (loss) attributable to Subordinate Voting Shares and
Multiple Voting Shares
Adjustments for:
ABV net loss
Goodwill impairment loss
Purchase price accounting and interest accretion adjustments
Fair value adjustment for ABV proceeds payable
Currency impact
Fiscal
year
ended
Fiscal
year
ended
Feb. 28,
2013
Feb. 29,
2012
Quarter
ended
Feb. 28,
2013
Quarter
ended
Feb. 29,
2012
6.2
7.9
(3.6)
5.9
1.2
11.7
1.6
(2.4)
0.9
4.9
-
2.9
(2.2)
(1.0)
-
11.7
-
(2.2)
0.4
-
-
-
(2.2)
(1.2)
Adjusted net operating results
19.2
12.5
6.3
2.5
For the calculation of the adjusted net operating results for the quarter, the net loss of ABV, as well as the purchase price accounting
and interest accretion adjustments were not included as adjustments because both comparable periods included such items for the
entire applicable period. The Company included these adjustments in the calculation of adjusted net operating results for the full
fiscal year since the acquisition of ABV occurred part way through the 2012 fiscal year. As such, both periods would not be
comparable since fiscal year 2012 includes 10 months of activity for ABV while fiscal year 2013 includes 12 months of activity.
29
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
30
May 28, 2013
Independent Auditor’s Report
To the Shareholders of
Velan Inc.
We have audited the accompanying consolidated financial statements of Velan Inc. and its subsidiaries,
which comprise the consolidated statements of financial position as at February 28, 2013 and February 29,
2012 and the consolidated statements of income, consolidated statements of comprehensive income (loss),
consolidated statements of changes in equity and consolidated statements of cash flows for the years then
ended, and the related notes, which comprise a summary of significant accounting policies and other
explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4
T: +1 514 205 5000, F: +1 514 876 1502
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
31
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Velan Inc. and its subsidiaries as at February 28, 2013 and February 29, 2012 and their
financial performance and their cash flows for the years then ended in accordance with International
Financial Reporting Standards.
1 CPA auditor, CA, public accountancy permit No. A119714
32
Velan Inc.
Consolidated Statements of Financial Position
(in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Income taxes recoverable
Inventories (note 6)
Deposits and prepaid expenses
Derivative assets
Non-current assets
Property, plant and equipment (notes 7 and 12)
Intangible assets and goodwill (note 8)
Deferred income taxes (note 21)
Other assets
Total assets
Liabilities
Current liabilities
Bank indebtedness (note 10)
Short-term bank loans
Accounts payable and accrued liabilities (note 9)
Income tax payable
Dividend payable
Customer deposits
Provisions (note 11)
Accrual for performance guarantees
Derivative liabilities
Current portion of long-term debt (note 12)
Current portion of other liabilities (note 4)
Non-current liabilities
Long-term debt (note 12)
Deferred income taxes (note 21)
Other liabilities (note 4)
Total liabilities
Equity
Equity attributable to Subordinate and Multiple Voting shareholders
Share capital (note 13)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Non-controlling interest
Total equity
Total liabilities and equity
Commitments and contingencies (note 23)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
As at
February 28,
2013
$
As at
February 29,
2012
$
77,172
398
134,374
7,672
246,983
6,048
340
472,987
90,630
43,194
11,226
1,737
146,787
619,774
48,580
2,284
78,431
2,831
1,701
76,682
6,345
28,525
1,380
10,463
1,951
259,173
16,387
8,035
8,006
32,428
65,414
4,954
111,856
9,682
258,684
6,209
1,737
458,536
72,961
58,845
10,152
1,476
143,434
601,970
32,438
858
82,088
2,484
1,791
86,544
5,149
21,679
534
1,696
5,753
241,014
7,891
8,270
9,218
25,379
291,601
266,393
76,314
1,746
250,129
(8,676)
319,513
78,764
1,871
250,951
(4,217)
327,369
8,660
8,208
328,173
619,774
335,577
601,970
________________________________ A. K. Velan, Director
________________________________ T.C. Velan, Director
33
Velan Inc.
Consolidated Statements of Income
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 25)
Cost of sales (notes 6, 14, 15 and 20)
Gross profit
Administration costs (notes 16 and 20)
Goodwill impairment loss (notes 5 and 8)
Other income (note 4)
Operating profit
Finance income (note 18)
Finance costs (note 18)
Finance costs – net
Income before income taxes
Income taxes (note 21)
Net income for the year
Net income attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
Earnings per share (note 22)
Basic
Diluted
2013
$
2012
$
500,574
437,135
386,675
349,873
113,899
87,262
90,985
11,700
(3,364)
14,578
631
3,191
83,620
-
(3,806)
7,448
318
1,669
(2,560)
(1,351)
12,018
5,284
6,734
6,169
565
6,734
0.28
0.28
6,097
348
5,749
7,892
(2,143)
5,749
0.36
0.36
Dividends declared per Subordinate and Multiple Voting Share
0.32 (CA$0.32)
0.32 (CA$0.32)
The accompanying notes are an integral part of these consolidated financial statements.
34
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars)
Comprehensive income (loss)
Net income for the year
Other comprehensive loss
Foreign currency translation adjustment on foreign operations whose functional currency is other
than the U.S. dollar
Comprehensive income (loss)
Comprehensive income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
The accompanying notes are an integral part of these consolidated financial statements.
2013
$
2012
$
6,734
5,749
(4,531)
(7,461)
2,203
(1,712)
1,710
493
2,203
1,400
(3,112)
(1,712)
35
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars)
Equity attributable to Subordinate and Multiple Voting shareholders
Accumulated
other
comprehensive
income (loss)
Contributed
surplus
Retained
earnings
Total
Share capital
Non-controlling
interest
Total equity
Balance - March 1, 2011
79,271
1,898
2,275
250,254
333,698
4,025
337,723
Net income (loss) for the year
Other comprehensive loss
-
-
-
-
-
(6,492)
7,892
-
7,892
(6,492)
(2,143)
(969)
5,749
(7,461)
79,271
1,898
(4,217)
258,146
335,098
913
336,011
Effect of share-based compensation (note 13 (d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Share repurchase (note 13 (c))
Non-controlling interest arising on acquisition
-
-
-
-
(507)
-
71
-
-
-
(98)
-
-
-
-
-
-
-
-
71
-
(5,022)
(2,173)
-
-
-
(5,022)
(2,173)
-
(605)
-
-
-
(948)
-
8,243
71
(5,022)
(2,173)
(948)
(605)
8,243
Balance - February 29, 2012
78,764
1,871
(4,217)
250,951
327,369
8,208
335,577
Balance - March 1, 2012
78,764
1,871
(4,217)
250,951
327,369
8,208
335,577
Net income for the year
Other comprehensive loss
-
-
-
-
-
(4,459)
6,169
-
6,169
(4,459)
565
(72)
6,734
(4,531)
78,764
1,871
(8,676)
257,120
329,079
8,701
337,780
Effect of share-based compensation (note 13 (d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Share repurchase (note 13 (c))
-
-
-
-
(2,450)
58
-
-
-
(183)
-
-
-
-
-
-
(4,988)
(2,003)
-
-
58
(4,988)
(2,003)
-
(2,633)
-
-
-
(41)
-
58
(4,988)
(2,003)
(41)
(2,633)
Balance - February 28, 2013
76,314
1,746
(8,676)
250,129
319,513
8,660
328,173
The accompanying notes are an integral part of these consolidated financial statements.
36
Velan Inc.
Cononsolidated Statements of Cash Flows
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars)
Cash flows from
Operating activities
Net income for the year
Adjustments to reconcile net income to cash provided by operating activities (note 28)
Changes in non-cash working capital items (note 29)
Cash provide d (use d) by ope rating activitie s
Investing activities
Short-term investments
Additions to property, plant and equipment
Additions to intangible assets
Proceeds on disposal of property, plant and equipment, and intangible assets
Net change in other assets
Business acquisition – net of cash acquired (note 4)
Cash provide d (use d) by inve sting activitie s
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders
Dividends paid to non-controlling interest
Repurchase of shares (note 13(c))
Payment of proceeds payable (note 4)
Short-term bank loans
Increase in long-term debt
Repayment of long-term debt
Cash provide d (use d) by financing activitie s
Effect of exchange rate differences on cash
Net change in cash during the year
Net cash – Beginning of the year
Net cash – End of the year
Net cash is composed of:
Cash and cash equivalents
Bank indebtedness
S upplementary information
Interest received (paid)
Income taxes reimbursed (paid)
The accompanying notes are an integral part of these consolidated financial statements.
37
2013
$
2012
$
6,734
23,389
(15,711)
14,412
4,556
(28,452)
(684)
905
(270)
-
(23,945)
(7,081)
(41)
(2,633)
(3,465)
1,426
21,057
(4,478)
4,785
5,749
10,376
(28,893)
(12,768)
(4,867)
(12,710)
(1,840)
100
(87)
(37,281)
(56,685)
(7,234)
(948)
(605)
-
(4,831)
5,221
(3,002)
(11,399)
364
(534)
(4,384)
32,976
(81,386)
114,362
28,592
32,976
77,172
(48,580)
28,592
65,414
(32,438)
32,976
(1,895)
(2,042)
(555)
(6,742)
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
1 General information and basis of preparation
These consolidated financial statements represent the consolidation of the accounts of Velan Inc. (the
“Company”) and the entities over which it has control, its subsidiary companies and special-purpose entities
(“SPEs”). The Company is an international manufacturer of industrial valves.
The Company is a public company listed on the Toronto Stock Exchange under the symbol “VLN”. It was
incorporated under the name Velan Engineering Ltd. on December 12, 1952 and continued under the Canada
Business Corporations Act on February 11, 1977. It changed its name to Velan Inc. on February 20, 1981.
Velan Inc. maintains its registered head office at 7007 Côte de Liesse, Montréal, Quebec, Canada, H4T 1G2.
The Company’s ultimate parent company is Velan Holdings Co. Ltd.
The Company’s consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were approved by the Company’s Board of Directors on May 28, 2013.
2 Summary of significant accounting policies
Functional and presentation currency
Functional currency is defined as the currency of the primary economic environment in which an entity
operates. Indicators for determining an entity’s functional currency are broken down into primary and secondary
indicators.
Primary indicators include:
•
•
•
the currency of sales and cash inflows;
the currency of the country having primary influence over sales prices; and
the currency of expenses and cash outflows.
Primary indicators receive more weight than secondary indicators. If a functional currency can be determined
based on the primary indicators, the secondary indicators are not considered.
The functional and presentation currency of the Company is the U.S. dollar.
38
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Consolidation
These financial statements represent the consolidation of the accounts of the Company and the entities over
which it has control, its subsidiary companies and SPEs. Control exists when the Company has the power to
govern the financial and operating policies of an entity in a manner generally associated with a shareholding of
more than one half of the voting rights. Potential voting rights currently exercisable or convertible are
considered when assessing control over an entity. Subsidiary companies and SPEs are fully consolidated from
the date control has been transferred to the Company and deconsolidated from the date control ceases. The
Company’s principal operating subsidiaries and SPEs are:
• Velan Valve Corp.
• Velan Ltd.
•
Juwon Special Steel Co. Ltd.
• Velan Valvulas Industrias, Lda.
• Velan Valves Limited
• Velan S.A.S.
• Segault S.A.S.
• Velan GmbH
• Velan ABV S.p.A.
• Velan Valvac Manufacturing Co. Ltd.
• Velan Valve (Suzhou) Co. Ltd.
All subsidiary companies and SPEs prepare their financial statements at the same reporting date as the Company
except for Velan Valvac Manufacturing Co. Ltd., which has a December 31 fiscal year-end. Consolidated
earnings include the Company’s share of the results of its operations to that date. Intercompany transactions,
balances and unrealized gains or losses on transactions between companies are eliminated.
Foreign currency transactions and balances
The Company and its subsidiary companies and SPEs translate foreign currency transactions and balances into
their functional currency. Foreign currency is defined as any currency that is different from an individual
entity’s functional currency.
Monetary assets and liabilities in foreign currencies are translated at year-end exchange rates. Non-monetary
assets are translated at rates prevailing at the transaction dates. Revenue and expenses in foreign currencies are
translated at weekly rates throughout the year. Gains and losses arising on translation are included in the
consolidated statement of income for the year.
Translation of accounts of foreign subsidiary companies and SPEs
The financial statements of the Company’s foreign subsidiary companies and SPEs whose functional currency is
not the U.S. dollar are translated into U.S. dollars for reporting purposes. All assets and liabilities are translated
at year-end rates, and revenue and expenses at the average rate for the period. Resulting gains and losses are
included in other comprehensive income (loss) for the period.
39
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity. The Company’s financial assets comprise mainly cash and cash equivalents,
short-term investments, accounts receivable and derivative assets. The Company’s financial liabilities comprise
mainly bank indebtedness, short-term bank loans, accounts payable and accrued liabilities, customer deposits,
dividend payable, accrual for performance guarantees, long-term debt and derivative liabilities.
The Company recognizes a financial instrument on its consolidated statement of financial position when the
Company becomes party to the contractual provisions of the financial instrument or non-financial derivative
contract (see Embedded derivatives). Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or been transferred and the Company has transferred substantially all risks and
rewards of ownership. All financial instruments are initially recognized at fair value and are classified into one
of these five categories: held for trading, available-for-sale assets, held-to-maturity investments, loans and
receivables and other financial liabilities. The classification depends on the purpose for which the financial
instruments were acquired and their characteristics. Except in very limited circumstances, the classification is
not changed subsequent to initial recognition.
Held for trading
Financial instruments classified as held for trading are carried at fair value at each statement of financial
position date with the changes in fair value recorded in the consolidated statement of income in the period in
which these changes arise. The Company has classified its derivative financial instruments as held for trading.
Loans and receivables, held-to-maturity investments and other financial liabilities
Financial instruments classified as loans and receivables, held-to-maturity investments and other financial
liabilities are carried at amortized cost using the effective interest rate method. The interest income or expense is
included in the consolidated statement of income over the expected life of the instrument. Cash and cash
equivalents, short-term investments and accounts receivable are classified as loans and receivables. Bank
indebtedness, short-term bank loans, accounts payable and accrued liabilities, customer deposits, dividend
payable, accrual for performance guarantees and long-term debt, including interest payable, are classified as
other financial liabilities, all of which are measured at amortized cost.
Embedded derivatives
Derivatives may be embedded in other financial instruments (the “host instrument”). Embedded derivatives are
treated as separate derivatives if their economic characteristics and risks are not closely related to those of the
host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the
combined contract is not held for trading or designated at fair value through profit or loss. These embedded
derivatives are classified as held for trading.
40
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The Company and its subsidiary companies and SPEs enter into certain contracts for the purchase and sale of
non-financial items that are denominated in currencies other than their respective functional currencies. In cases
where the foreign exchange component is not leveraged and does not contain an option feature, the contract is
denominated in the functional currency of the counterparty or the non-financial item is routinely denominated in
the currency of the contract or the currency of the contract is commonly used in the economic environment in
which the transaction takes place, the embedded derivative is considered to be closely related and is not
accounted for separately.
The fair value of the embedded derivatives related to sales contracts is recorded in sales; purchase contracts are
recorded in cost of sales. On the consolidated statement of financial position, gains are recorded as derivative
assets and losses are recorded as derivative liabilities.
Transaction costs are expensed when incurred.
Fair value
Estimated fair values for financial instruments are designed to approximate amounts at which the instruments
could be exchanged in a current arm’s-length transaction between knowledgeable willing parties. The fair value
of derivative instruments is determined using valuation techniques.
The Company has evaluated the fair values of its financial instruments based on the current interest rate
environment, related market values and current pricing of financial instruments with comparable terms.
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services
in the ordinary course of the Company’s activities. Revenue is shown net of sales and value-added taxes,
returns, rebates and discounts.
Revenue is recognized when the amount of revenue and associated costs can be reliably measured, it is probable
that future economic benefits will flow to the Company and when specific criteria have been met for each of the
Company’s activities as described below.
Sales of goods
Sales of goods are recognized when the Company has delivered products to the customer and there is no
unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery of the products does
not occur until the products have been shipped to a specified location in accordance with the agreed-upon
shipping terms, the risk of obsolescence and loss have been transferred to the customer, and either the customer
has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the
Company has objective evidence that all criteria for acceptance have been satisfied. Customers have a right to
return faulty products, and some products are sold with volume discounts. Sales are recorded based on the price
specified in the sales contract, net of the estimated volume discounts and returns at the time of sale.
Accumulated experience is used to estimate and provide for the discounts and returns. The volume discounts are
assessed based on anticipated annual purchases.
41
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Sales of services
Sales of services are recognized when the Company renders services.
Interest income
Interest income is recognized using the effective interest rate method.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash in banks, other short-term highly liquid investments with
original maturities of three months or less, and bank indebtedness. Bank indebtedness is shown in current
liabilities on the consolidated statement of financial position. Interest is earned on cash and cash equivalents at
rates ranging from 0% to 3.5%. Interest is paid on bank indebtedness at rates ranging from 0.4% to 5.0%.
Short-term investments
Short-term investments include all highly liquid investments with original maturities greater than three months
but less than one year. Interest is earned on short-term investments at rates ranging from 2.0% to 8.0%.
Inventories
Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less applicable variable selling expenses. Cost of inventories is
determined as follows:
a)
raw materials principally using the weighted average method except for items that are not ordinarily
interchangeable, in which case specific identification of their individual costs is used; and
b) work in process, finished parts and finished goods using the raw material cost described in (a) plus
applicable direct labour and manufacturing overhead.
The value of obsolete or unmarketable inventory is based on the Company’s assessment of market conditions
for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of
loss on specifically identified inventory. The writedown may be reversed if the circumstances which caused it
no longer exist.
42
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Property, plant and equipment
Property, plant and equipment are valued at acquisition or manufacturing costs less any related government
assistance, accumulated depreciation and any accumulated impairment losses. Acquisition costs include any
expenditure that is directly related to the acquisition of the item. Manufacturing costs include direct material and
labour costs plus applicable manufacturing overheads. Borrowing costs directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial period of time to be ready for their
intended use are added to the cost of those assets, until such time as those assets are ready for their intended use.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the item will flow to the Company and
the cost of the item can be reliably measured. The carrying amount of the replaced part is derecognized. All
other repairs and maintenance are charged to the consolidated statement of income during the period in which
they are incurred.
Depreciation of assets commences when the assets are ready for their intended use. The assets’ residual values
and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Changes in
expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset
are accounted for by changing the depreciation period or method, as appropriate, and treated on a prospective
basis as a change in estimate.
Land is not depreciated. Depreciation on the other property, plant and equipment is determined principally using
the following methods and annual rates or terms:
Buildings
Machinery and equipment and
furniture and fixtures
Data processing equipment
Rolling stock
Leasehold improvements
Goodwill
Method
Declining balance
Declining balance
Straight-line
Declining balance
Straight-line
Rate/Term
4% to 5%
10% to 31%
3 years
30%
Over lease terms
Goodwill represents the excess of the purchase price over the fair value of the Company’s share of the net
identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is carried at cost less
accumulated impairment losses.
Intangible assets
Purchased intangible assets relate primarily to production and technology rights and computer software.
Internally generated intangible assets relate to development costs. Research and development costs are expensed
as incurred unless the development costs meet the criteria for deferral. As at February 28, 2013 and February 29,
2012, the Company had not capitalized any development costs.
43
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Amortization expense is recognized in the consolidated statement of income in the expense category consistent
with the function of the intangible asset. The assets’ useful lives are reviewed, and adjusted if appropriate, at the
end of each reporting period. Changes in expected useful life or the expected pattern of consumption of future
economic benefits embodied in the asset are accounted for by changing the amortization period or method, as
appropriate, and treated on a prospective basis as a change in estimate. Amortization is determined principally
using the following methods and terms:
Patents, products and designs
Customer lists
Non-compete agreements
Purchased backlog
Computer software
Government assistance
Method
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Term
15 years
10 years
5 years
1 to 2 years
1 to 3 years
The Company receives assistance in the form of investment tax credits (“ITCs”). ITCs are accounted for using
the cost reduction method. Under this method, assistance relating to eligible expenditures is deducted from the
cost of the related assets or related expenses in the period in which the expenditures are incurred, provided there
is reasonable assurance of realization.
Asset impairment
Assets that have an indefinite life (e.g. goodwill) are not subject to amortization and are tested annually for
impairment, or more frequently if events or circumstances indicate there may be impairment.
All other non-current and non-financial assets must be reviewed at the end of each reporting period in order to
determine whether there is an indication of possible impairment.
For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately
identifiable cash flows. A cash-generating unit (“CGU”) is the smallest group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. If an indication of
impairment exists, the recoverable amount of the CGU is estimated in order to determine the extent of the
impairment loss, if any. An impairment loss is recognized for the amount by which the asset’s carrying amount
exceeds its recoverable amount. If the recoverable amount of the CGU is less than the carrying amount, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then
to the other assets of the CGU on a pro rata basis of the carrying amount of each asset in the CGU. The
recoverable amount is the greater of an asset’s fair value less costs to sell and its value in use. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset.
Goodwill is allocated to CGUs for the purpose of impairment testing based on the level at which it is monitored
by management. The allocation is made to those CGUs that are expected to benefit from the business
combination in which the goodwill arose.
Non-current and non-financial assets, other than goodwill, that have previously suffered an impairment loss are
reviewed for possible reversal of the impairment at each reporting date.
44
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Income taxes
The provision for income taxes for the year comprises current and deferred taxes. Tax is recognized in the
consolidated statement of income, except to the extent that it relates to items recognized in other comprehensive
income or directly in equity, in which case the tax is recognized in other comprehensive income or equity,
respectively.
Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the
statement of financial position date in the countries where the Company generates taxable income. When an
asset is transferred between entities within the consolidated group, the difference between the tax rates of the
two entities is recognized as a tax expense in the period in which the transfer occurs. Current tax payable is
recognized for any taxes payable in the current period. Current tax liabilities are recognized for current tax to
the extent that it remains unpaid for current and prior periods.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable
tax regulation is subject to interpretation and establishes provisions where appropriate. Uncertain income tax
provisions are recorded when probable and are recorded at the Company’s best estimate of the amount.
Deferred income tax
Deferred income tax is recognized using the liability method on temporary differences arising between the tax
bases of assets and liabilities and their carrying amount in the consolidated financial statements. However, the
deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor
taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or
substantively enacted by the statement of financial position date and are expected to apply when the related
deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets
are recognized only to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be used. Deferred income tax assets are reviewed at each statement of financial
position date and amended to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred income tax is provided on temporary differences arising on investments in subsidiary companies and
SPEs, except where the timing of the reversal of the temporary difference is controlled by the Company and it is
probable that the temporary difference will not reverse in the foreseeable future.
45
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Current income tax assets and liabilities are offset when the Company has a legally enforceable right to offset
the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously. Normally, the Company would only have a legally enforceable right to set off a current tax
asset against a current tax liability when they relate to income taxes levied by the same taxation authority and
the taxation authority permits the Company to make or receive a single net payment. Deferred income tax assets
and liabilities are offset when the Company has a legally enforceable right to set off current income tax assets
against current income tax liabilities and deferred tax assets and liabilities related to income taxes levied by the
same taxation authority on either: (1) the same taxable entity; or (2) different taxable entities which intend either
to settle current tax liabilities and assets on a net basis, or to realize assets and settle the liabilities
simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past
event, it is probable that an outflow of resources will be required to settle the obligation, and the amount has
been reliably estimated. Provisions are not recognized for costs that need to be incurred to operate in the future
or expected future operating losses.
Provisions are measured at the present value of the expenditures required to settle the obligation using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the
obligation.
Leases
Leases are classified as either finance or operating leases. Leases that transfer substantially all of the risks and
rewards of ownership of the asset to the Company are accounted for as finance leases. Finance leases are
capitalized at the commencement of the lease at the lower of the fair value of the leased asset and the present
value of the minimum lease payments. Assets acquired under a finance lease are depreciated over the shorter of
the period of expected use on the same basis as other similar assets and the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are
classified as operating leases. Rental payments under operating leases are expensed in the consolidated
statement of income on a straight-line basis over the term of the lease.
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Share-based compensation plans
Grants under the Company’s share-based compensation plans are accounted for in accordance with the fair
value based method of accounting. The Company operates a share-based compensation plan under which it
receives services from employees as consideration for share options. The fair value of the employee services
received in exchange for the grant of the options is amortized over the vesting period as compensation expense,
with a corresponding increase to contributed surplus. The total amount to be expensed is determined by
multiplying the number of options expected to vest with the fair value of one option as of the grant date as
determined by the Black-Scholes option pricing model. Remaining an employee of the Company for a specified
period of time is the only condition for vesting. Vesting typically occurs one-third per year over three years
from the grant date. This non-market performance condition is factored into the estimate of the number of
options expected to vest. If it becomes obvious that the number of options expected to vest differs from that
originally expected, the expense is adjusted accordingly.
When options are exercised, the Company issues new shares. The proceeds received, together with the amount
recorded in contributed surplus, net of any directly attributable transaction costs, are recorded in share capital.
Critical accounting estimates and judgments
The Company’s significant accounting policies as described above are essential to understanding the
Company’s results of operations, financial positions and cash flows. Certain of these accounting policies require
critical accounting estimates that involve complex and subjective judgments and the use of assumptions, some
of which may be for matters that are inherently uncertain and susceptible to change. The assumptions and
estimates used are based on parameters which are derived from the knowledge at the time of preparing the
financial statements and believed to be reasonable under the circumstances. In particular, the circumstances
prevailing at this time and assumptions as to the expected future development of the global and industry-specific
environment were used to estimate the Company’s future business performance. Where these conditions
develop differently than assumed and beyond the control of the Company, the actual results may differ from
those anticipated. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is changed. There were no significant
changes made to critical accounting estimates during the past two fiscal years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next fiscal year are addressed below.
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management
judgment and requires the Company to perform continuous evaluations of their collectability and to record an
allowance for doubtful accounts when required. In performing its evaluation, the Company analyzes the ageing
of accounts receivable, concentration of receivables by customer, customer creditworthiness and current
economic trends. Any change in the assumptions used could impact the carrying value of the accounts
receivable on the consolidated statement of financial position with a corresponding impact made to
administration costs on the consolidated statement of income.
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Inventory
Inventories must be valued at the lower of cost and net realizable value. A writedown of inventory will occur
when its estimated market value less applicable variable selling expenses is below its carrying amount. This
involves significant management judgment and is based on the Company’s assessment of market conditions for
its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss
on specifically identified inventory. Any change in the assumptions used in assessing this valuation or selling
costs could impact the carrying amount of the inventory on the consolidated statement of financial position with
a corresponding impact made to cost of sales on the consolidated statement of income.
Provisions
Provisions must be established for possible product warranty expenses. The Company estimates its warranty
exposure by taking into account past experience as well as any known technical problems and estimates of costs
to resolve these issues. The Company estimates its exposure under these obligations based on an analysis of all
identified or expected claims. Any change in the assumptions used could impact the value of the provision on
the consolidated statement of financial position with a corresponding impact made to cost of sales on the
consolidated statement of income.
Asset impairment test
Assets that have an indefinite life, such as goodwill, are tested annually by the Company for impairment, or
more frequently if events or circumstances indicate there may be impairment. All other assets must be reviewed
by the Company at the end of each reporting period in order to determine whether there is an indication of
possible impairment. For the purposes of impairment testing, assets are grouped at the lowest levels for which
there are separately identifiable cash flows. A cash-generating unit (“CGU”) is the smallest group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. If
an indication of impairment exists, the Company estimates the recoverable amount of the CGU in order to
determine the extent of the impairment loss, if any. An impairment loss is recognized for the amount by which
the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the greater of an asset’s
fair value less costs to sell and its value in use. In assessing value in use, the Company estimates future cash
flows which are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Any change in the assumptions used
could impact the carrying amount first of any goodwill allocated to the CGU and then to the other assets of the
CGU on a pro rata basis of the carrying amount of each asset in the CGU on the consolidated statement of
financial position with a corresponding impact made to the consolidated statement of income.
Income taxes
The Company must estimate its income taxes in each jurisdiction in which it operates. This involves assessing
the probability of using net operating losses against future taxable income as well as evaluating positions taken
in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. In the
event these assessments are changed, there would be an adjustment to income tax expense with a corresponding
adjustment to income tax balances on the consolidated statement of financial position.
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
3 Accounting standards and amendments issued but not yet adopted
Unless otherwise noted, the following revised standards and amendments are effective for annual periods
beginning on or after January 1, 2013, with earlier application permitted. Based on a preliminary assessment, the
Company does not expect any significant impact on the consolidated financial statements upon adoption of
these standards and amendments. The Company has also determined that it will not early adopt these standards
and amendments.
(i)
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS 39,
Financial Instruments: Recognition and Measurement, for debt instruments with a new mixed
measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS
9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair
value through profit or loss or at fair value through other comprehensive income. Where equity
instruments are measured at fair value through other comprehensive income, dividends are recognized in
profit or loss to the extent that they do not clearly represent a return of investment; however, other gains
and losses (including impairments) associated with such instruments remain in accumulated
comprehensive income indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried
forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities
designated at fair value through profit or loss are generally recorded in other comprehensive income.
The above revisions are effective for annual periods beginning on or after January 1, 2015, with earlier
application permitted.
(ii)
(iii)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has
power over the investee, is exposed or has rights to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee. Under existing IFRS,
consolidation is required when an entity has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities. IFRS 10 replaces SIC–12, Consolidation—Special
Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint
venture or joint operation. Joint ventures will be accounted for using the equity method of accounting
whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and
expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately
consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint
Ventures, and SIC–13, Jointly Controlled Entities—Non-monetary Contributions by Venturers.
(iv)
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other
entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The
standard carries forward existing disclosures and also introduces significant additional disclosure that
address the nature of, and risks associated with, an entity’s interests in other entities.
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
(v)
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure
for use across all IFRS standards. The new standard clarifies that fair value is the price that would be
received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants,
at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurements and does not always reflect a
clear measurement basis or consistent disclosures.
(vi) There have been amendments to existing standards, including IAS 27, Separate Financial Statements, and
IAS 28, Investments in Associates and Joint Ventures. IAS 27 addresses accounting for subsidiaries, jointly
controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to
include joint ventures in its scope and to address the changes in IFRS 10 to 13.
(vii)
IAS 19, Employee Benefits, has been amended to make significant changes to the recognition and
measurement of defined benefit pension expense and termination benefits and to enhance the disclosure of
all employee benefits. The amended standard requires immediate recognition of actuarial gains and losses
in other comprehensive income as they arise, without subsequent recycling to net income. Past service cost
(which will now include curtailment gains and losses) will no longer be recognized over a service period
but instead will be recognized immediately in the period of a plan amendment. Pension benefit cost will be
split between (i) the cost of benefits accrued in the current period (service cost) and benefit changes (past-
service cost, settlements and curtailments); and (ii) finance expense or income. The finance expense or
income component will be calculated based on the net defined benefit asset or liability. A number of other
amendments have been made to recognition, measurement and classification, including redefining short-
term and other long-term benefits, guidance on the treatment taxes related to benefit plans, guidance on
risk/cost-sharing features, and expanded disclosures.
(viii)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in other comprehensive income into two groups, based on whether or not items may be recycled
in the future. Entities that choose to present other comprehensive income items before tax will be required
to show the amount of tax related to the two groups separately. The amendment is effective for annual
periods beginning on or after July 1, 2012 with earlier application permitted.
4 Business acquisition
On April 29, 2011, the Company acquired a 70% voting interest in ABV Energy S.p.A., now Velan ABV S.p.A.
(“ABV”), an Italian manufacturer of engineered valves, actuators and control systems supplied to energy
markets. The former shareholders retained a 30% interest. ABV’s product line is entirely complementary to the
Company’s valve range, allowing it to significantly broaden the scope of its offerings to energy markets.
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
ABV was acquired for a maximum consideration of $50,833 (€34,300). The Company, using its own cash
resources, paid $38,384 (€25,900) on closing. Another $4,298 (€2,900) was required (“Holdback”) to be paid on
July 29, 2012. The $8,151 (€5,500) balance was to be paid to the extent of $2,223 (€1,500) on July 29, 2012 in
the event that ABV has satisfied certain non-financial criteria, and the remaining $5,928 (€4,000) was to be
payable in two tranches based on ABV meeting certain earnings before interest, taxes, depreciation and
amortization (“EBITDA”) targets for the period from May 1, 2011 through February 28, 2014. The future
Holdback payment was discounted to its net present value using a discount rate of 2%. The future contingent
payments were recorded at their fair value, which was determined by discounting the amounts to their net
present value using a discount rate of 18%. The total transaction costs related to this acquisition amounted to
$384, of which $231 was expensed in the fiscal year 2012 and $153 in fiscal year 2011.
Purchase consideration
Cash paid on closing
Net present value of Holdback
Net present value of contingent payment – non-financial criteria
Net present value of contingent payment – financial criteria
Total net present value of purchase consideration
$
38,384
4,191
1,807
3,772
48,154
In April 2012, the required disbursement date of the contingent payment to be paid in the event that ABV had
satisfied certain non-financial criteria of $2,223 (€1,500) was extended to March 15, 2013. In addition, the
requirement that ABV satisfy the non-financial criteria was removed. As a result of these changes, the
Company recorded a fair value adjustment with respect to the applicable contingent payment of $196 to other
income during the fiscal year ended February 28, 2013.
On an annual basis at each statement of financial position date, the Company evaluates the likelihood that the
financial and non-financial criteria related to the contingent payments would be satisfied, based on current
projections prepared by local management which factor in the delays in the return to profitability of the
operation after the acquisition. Based on these annual evaluations, the Company determined that it would be
more likely than not that the financial criteria for the two tranches of the contingent payment based on ABV
meeting certain EBITDA targets would not be satisfied. As a result, the Company recorded a fair value
adjustment with respect to the applicable contingent payment of $2,248 (2012 – $2,230) to other income.
The net present value of the Holdback and the fair value of the contingent payments have been recorded in other
liabilities. A foreign exchange gain of $407 (2012 – $978) was recognized in other income on the outstanding
Holdback and contingent payments.
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Acquisition date fair values:
The acquisition date fair values assigned to assets acquired and liabilities assumed are set out as follows:
Assets
Cash and cash equivalents
Accounts receivable (net of provision of $373)
Inventories
Deposits and prepaid expenses
Property, plant and equipment
Patents, products and designs
Backlog
Customer lists
Non-compete agreement
Computer software
Total assets
Liabilities
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Accrual for performance guarantees
Current portion of long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
Fair value of net assets
Non-controlling interest (30% of net assets)
Goodwill
Total purchase consideration
Cash and cash equivalents in subsidiary acquired
Net present value of future payments
Cash outflow on acquisition
$
1,103
8,995
15,598
463
5,379
14,820
2,371
8,003
889
51
57,672
3
4,866
11,934
535
2,150
321
2,505
9
7,871
30,194
27,478
(8,243)
28,919
48,154
1,103
9,770
37,281
The acquisition date fair value is completed, as of the date of issuance of these consolidated financial
statements, following an in-depth review of ABV’s books and records and the receipt of certain final valuations.
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The primary factor giving rise to the goodwill is the earnings capacity of ABV in excess of its net tangible and
net intangible assets. Such excess being attributable to:
economies of scale;
- ABV’s assembled workforce;
-
- ABV’s established operation and capabilities in the industry; and
- ABV’s geographical location.
The amount assigned to goodwill is not deductible for tax purposes.
Impact of the acquisition
The following supplemental information represents the impact of ABV on certain results of operations for fiscal
year 2012. Note that the sum of the last two columns corresponds to the full impact of ABV on the Company’s
consolidated results for the fiscal year February 29, 2012:
Purchase
price
adjustments
included in
consolidated
results
$
Contribution
of ABV to the
consolidated
results
$
Consolidated
results
$
Revenues
Gross profit (loss)
Net income (loss) for the period
Net income (loss) attributable to Subordinate and Multiple
Voting Shares
Net income (loss) per Subordinate and Multiple Voting Share
- Basic
- Fully diluted
437,135
87,262
5,749
-
(4,082)
(2,917)
21,560
(4,116)
(6,980)
7,892
(2,042)
(4,886)
0.36
0.36
(0.09) (0.22)
(0.09) (0.22)
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Pro forma disclosures
The following pro forma supplemental information represents certain results of operations for fiscal year 2012
as if the acquisition of ABV had been completed as at March 1, 2011:
As reported
$
437,135
87,262
5,749
7,892
Purchase
price
adjustments
$
-
(4,743)
(3,394)
(2,376)
0.36
0.36
(0.11)
(0.11)
Pro forma
$
443,682
87,779
4,452
6,984
0.31
0.31
Revenues
Gross profit
Net income for the period
Net income attributable to Subordinate and Multiple Voting
Shares
Net income (loss) per Subordinate and Multiple Voting Share
- Basic
- Fully diluted
5
Impairment of goodwill
In the context of its annual impairment testing at year-end, the Company completed its impairment analysis and
assessed the recoverability of the assets allocated to its various CGUs. The Company calculated the recoverable
amounts of its CGUs using valuation methods which were consistent with those used in prior years.
As a result of the impairment analysis, the Company determined that the carrying amount of the goodwill
associated with the CGU related to its subsidiary in Italy, ABV, exceeded its recoverable amount and,
accordingly, the Company recorded a goodwill impairment loss of $11,700.
The recoverable amount was determined based on the fair value less costs to sell approach using a discounted
cash flow model. The significant key assumptions included forecasted cash flows based on updated financial
plans prepared by management covering a five-year period taking into consideration the following assumptions
and trends:
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 7.3% in 2014, 11.8% in 2015, 14.4% in 2016,
16% in 2017 and 19% in 2018.
Expected working capital cash absorption ratio for the CGU of 19% of annual incremental sales increases.
Expected annual capital expenditure needs for the CGU of $500 in 2014, 2015 and 2016, and $1,000
thereafter.
The discounted cash flow model was established using a discount rate of 18.5% and a terminal growth rate of
2%.
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
This impairment charge was the result of actual results of the CGU coming in below the expectations at the time
of the acquisition. The reasons for these lower achieved results are due to a variety of factors, including a
business process integration that proved to be more difficult than planned, as well as profitability issues related
to the complexity of the manufactured products. In addition, the increasingly competitive landscape of the last
two years, particularly amongst upstream oil and gas flow control manufacturers in Italy, negatively impacted
margins.
Management based its selection of assumptions upon its assessment of the ability of the restructured CGU to
return to is pre-acquisition levels of growth and profitability, as well as its evaluation of the longer term
potential of its key end-user markets, particularly upstream oil and gas flow control. The margin assumptions
used are also generally comparable to those currently obtained in our other similar European project
manufacturing operations.
The following table provides a sensitivity analysis of the Company’s current year goodwill impairment loss
assuming a one percentage point increase of the selected variables below. Note that this sensitivity analysis
assumes that all other assumptions and trends remain constant for each independent variable.
Increase in expected EBITDA as a percentage of sales
Increase in discount rate
Increase in terminal growth rate
Increase
(Decrease) in
impairment
loss
$
(2,866)
2,722
(1,951)
A one percentage point decrease of the selected variables below, assuming all other assumptions and trends
remain constant for each independent variable, would have the following impact on the goodwill impairment
loss:
Increase
(Decrease) in
impairment
loss
$
2,934
(3,132)
1,690
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
6
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2013
$
As at
February 29,
2012
$
54,093
141,027
51,862
56,463
157,533
44,688
246,982
258,684
As a result of variations in the ageing of its inventories, the Company recognized an inventory provision for the
year of $2,382 (2012 – $4,592), net of reversals of $5,963 (2012 – $6,483).
The net book value of inventories pledged as security under the Company’s credit facilities amounted to $3,514
(2012 – $2,911).
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
7 Property, plant and equipment
At February 28, 2011
Cost
Accumulated depreciation
Year ended February 29, 2012
At M arch 1, 2011
Additions
Disposals
Depreciation
Business acquisitions
Exchange differences
At February 29, 2012
At February 29, 2012
Cost
Accumulated depreciation
Year ended February 28, 2013
At M arch 1, 2012
Additions
Disposals
Depreciation
Internal transfers
Exchange differences
At February 28, 2013
At February 28, 2013
Cost
Accumulated depreciation
Land
Buildings
M achinery &
equipment
Furniture &
fixtures
Data
processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
$
$
Total
$
10,245
42,767
108,653
-
(18,827)
(80,854)
10,245
23,940
27,799
5,151
(4,485)
666
3,348
(2,144)
1,204
1,800
(1,097)
703
194
(129)
65
172,158
(107,536)
64,622
10,245
1,547
-
-
237
(549)
23,940
2,633
-
(1,388)
-
(951)
11,480
24,234
27,799
6,512
(19)
(6,035)
2,795
1,149
32,201
666
555
(111)
(310)
866
(143)
1,523
1,204
589
111
(706)
81
(120)
1,159
703
488
(37)
(292)
-
15
877
65
386
(30)
(116)
1,400
(218)
1,487
64,622
12,710
(86)
(8,847)
5,379
(817)
72,961
11,480
44,468
123,735
-
(20,234)
(91,534)
11,480
24,234
32,201
6,827
(5,304)
1,523
4,234
(3,075)
1,159
2,021
(1,144)
877
2,438
195,203
(951)
(122,242)
1,487
72,961
11,480
171
(28)
-
-
284
11,907
24,234
4,211
-
(1,472)
3,164
(330)
29,807
32,201
21,771
(567)
(6,268)
(3,773)
(916)
42,448
1,523
1,159
837
-
(344)
580
(25)
761
-
(688)
-
(15)
2,571
1,217
877
360
(5)
(518)
29
248
991
1,487
341
-
(282)
-
143
72,961
28,452
(600)
(9,572)
-
(611)
1,689
90,630
11,907
50,964
136,462
-
(21,157)
(94,014)
11,907
29,807
42,448
7,960
(5,389)
2,571
4,875
(3,658)
1,217
2,584
(1,593)
991
2,897
217,649
(1,208)
(127,019)
1,689
90,630
Property, plant and equipment include assets under finance lease obligations with a cost of $155 (2012 – $666)
and accumulated depreciation of $82 (2012 – $497).
Depreciation expense of $9,572 (2012 – $8,847) is included in the consolidated statement of income: $8,345
(2012– $7,605) in ‘cost of sales’ and $1,227 (2012 – $1,242) in ‘administration costs’.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
At March 1, 2011
Cost
Accumulated amortization
Year ended February 29, 2012
At M arch 1, 2011
Additions
Disposals
Amortization
Business acquisitions
Exchange differences
At February 29, 2012
At February 29, 2012
Cost
Accumulated amortization
Year ended February 28, 2013
At M arch 1, 2012
Additions
Disposals
Amortization
Impairment loss
Exchange differences
At February 28, 2013
At February 28, 2013
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Non-compete
agreements
Purchased
backlog
Other
Total
10,720
-
10,720
10,720
84
-
-
28,919
(2,991)
36,732
36,732
-
36,732
4,980
(4,043)
937
937
1,519
-
(939)
51
(38)
1,530
6,664
(5,134)
1,530
-
-
-
-
-
-
(773)
14,820
(1,364)
12,683
14,085
(1,402)
12,683
-
-
-
-
-
-
(625)
8,003
(730)
6,648
7,254
(606)
6,648
36,732
1,530
12,683
6,648
-
-
-
(11,700)
(952)
24,080
659
(6)
(859)
-
(32)
-
-
(860)
-
(341)
1,292
11,482
-
-
(696)
-
(182)
5,770
24,080
-
24,080
6,953
(5,661)
1,292
13,720
(2,238)
11,482
7,067
(1,297)
5,770
-
-
-
-
-
-
(139)
889
(79)
671
806
(135)
671
671
-
-
(155)
-
(20)
496
784
(288)
496
-
-
-
-
-
-
(1,853)
2,371
(166)
352
2,149
(1,797)
352
352
-
-
(338)
-
(14)
-
2,093
(2,093)
-
-
-
-
-
237
-
-
(1)
(7)
229
230
(1)
229
229
25
(165)
(7)
-
(8)
74
15,700
(4,043)
11,657
11,657
1,840
-
(4,330)
55,053
(5,375)
58,845
67,920
(9,075)
58,845
58,845
684
(171)
(2,915)
(11,700)
(1,549)
43,194
82
(8)
74
54,779
(11,585)
43,194
Amortization expense of $2,915 (2012 – $4,330) is included in the consolidated statement of income: $2,220 (2012 –
$3,225) in ‘cost of sales’ and $695 (2012 – $1,105) in ‘administration costs’.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
9 Accounts payable and accrued liabilities
Trade accounts payable
Accrued liabilities
Other
10 Credit facilities
As at
February 28,
2013
$
As at
February 29,
2012
$
35,530
39,094
3,807
78,431
43,215
36,548
2,325
82,088
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities
available as at February 28, 2013:
Unsecured
Credit facilities available
Borrowing rates
$105.412 (CA$85,000 and US$23,000) (2012 – $108,901
(CA$85,000 and US$23,000)) (note 26)
$4,848 (CA$5,000) (2012 – $5,053 (CA$5,000)) to
purchase readily convertible foreign exchange
forward contracts (note 26)
Prime to prime + 0.75%
Prime rate
The above unsecured facilities are available by way of demand operating lines of credit, bank loans, letters
of credit, bankers’ acceptances, LIBOR loans, letters of guarantee and bank overdrafts. These facilities are
subject to annual renewal.
As at February 28, 2013, an amount of $31,567 (2012 – $17,756) was drawn against these unsecured credit
facilities.
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Foreign subsidiaries and SPEs have the following credit facilities available as at February 28, 2013:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$70,846 (€44,550; £4,875; KW4,725,500;
CNY5,127) (2012 – $63,671 (€39,750;
£2,875; KW5,434,750; CNY5,400)) (note 26)
Borrowing rates
0.57% to 6.25%
(2012 – 0.87% to 10.7%)
Foreign SPEs
$7,837 (KW8,500,000)
(2012 – $5,689 (KW6,356,248)) (note 26)
3.59% to 4.21%
(2012 – 3.92% to 6.35%)
The above credit facilities are available by way of bank loans, guarantees, letters of credit and foreign exchange
forward contracts. The majority of these credit facilities have variable borrowing rates based on LIBOR,
EONIA or prime rate. The borrowing rates listed above are the rates in effect as at February 28, 2013 and
February 29, 2012. The terms of the above facilities range from annual renewal to an indefinite term. The
aggregate net book value of the assets pledged under the above credit facilities amounted to $21,689 (2012 –
$24,884).
As at February 28, 2013, an amount of $17,837 (2012 – $15,540) was drawn against the secured credit facilities.
11 Provisions
Balance – Beginning of year
Additional provisions
Used during the year
Exchange differences
Balance – End of year
As at
February 28,
2013
$
As at
February 29,
2012
$
5,149
2,845
(1,546)
(103)
6,345
4,288
1,654
(650)
(143)
5,149
The Company’s provisions consist entirely of warranties. The Company offers various warranties to the
purchasers of its valves. Management estimates the related provision for future warranty claims based on
historical warranty claim information, as well as recent trends that might suggest that past cost information may
differ from future claims. Factors that could impact the estimated claim information include the success of the
Company’s productivity and quality initiatives, as well as parts and labour costs.
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
12 Long-term debt
The Company
Unsecured bank loan (note 12(a))
French subsidiary
Unsecured bank loan (€246; 2012 – €324) (note 12(b))
Secured bank loan (€199; 2012 – €262) (note 12(c))
Secured bank loan (€1,018; 2012 – €1,679) (note 12(d))
Italian subsidiary
Unsecured bank loan (€850; 2012 – €941) (note 12(e))
Unsecured bank loan (€782; 2012 – €800) (note 12(f))
Unsecured state bank loan (€472; 2012 – nil) (note 12(g))
Secured finance lease obligations (€9; 2012 – €47) (note
12(h))
Korean SPE
Secured bank loan (KW336,500; 2012 – KW424,000)
(note 12(i))
Other (note 12(j))
Less: Current portion
a) Unsecured bank loan
As at
February 28,
2013
$
As at
February 29,
2012
$
17,333
322
260
1,332
1,112
1,023
618
12
338
4,500
26,850
10,463
16,387
-
435
352
2,255
1,264
1,075
-
63
379
3,764
9,587
1,696
7,891
The unsecured bank loan of $17,333 bears interest at 2.74% and is repayable in monthly instalments of
$444 over a 48-month period, expiring in 2016.
b) Unsecured bank loan
The unsecured bank loan of $322 (€246) bears interest at 2.6% and is repayable in quarterly instalments of
$29 over a 60-month period, expiring in 2016
c) Secured bank loan
The secured bank loan of $260 (€199) bears interest at 2.7% and is repayable in monthly instalments of $8
over a 60-month period, expiring in 2016. Certain machinery and equipment are pledged as collateral for
this loan.
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
d) Unsecured bank loan
The unsecured bank loan of $1,332 (€1,018) bears interest at EURIBOR plus 1.35% and is repayable in
quarterly instalments of $253 over a 36-month period, expiring in 2014.
e) Unsecured bank loan
The unsecured bank loan of $1,112 (€850) bears interest at 2.91% and is repayable in monthly instalments
over a 120-month period, expiring in 2021.
f) Unsecured bank loan
The unsecured bank loan of $1,023 (€782) bears interest at 4.90% and is repayable in monthly instalments
over a 108-month period, expiring in 2021.
g) Unsecured state bank loan
The unsecured state bank loan of $618 (€472) is non-interest bearing and is repayable in semi-annual
instalments over an 84-month period, expiring in 2020.
h) Secured finance lease obligations
The secured finance lease obligations are repayable in fiscal 2013 and bear interest predominately at
EURIBOR plus 0.714%.
i) Secured Bank Loan
The secured bank loan of $338 (KW336,500) bears interest at 2.25% and is repayable in 2015. Certain
land, a building, and certain machinery and equipment are pledged as collateral for this loan.
j)
Included in Other is an amount of $3,608 (€2,758) (2012 – $3,100 (€2,308)) related to an unconditional put
option held by a minority shareholder in one of the Company’s subsidiary companies. This is recognized as
a liability instead of non-controlling interest. The liability is initially recognized as the non-controlling
interest’s share of the net identifiable assets of the subsidiary or SPE. Subsequently, the liability is carried
at the amount of the present value of estimated future cash flows discounted at the original effective rate.
Adjustments to the carrying value are recorded as interest expense in the consolidated statement of income.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
k) The following is a schedule of future debt payments:
February 28, 2014
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
Subsequent years
$
10,463
6,356
5,860
1,669
344
2,158
26,850
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted
to $6,911 (2012 – $4,001). The aggregate net book value of the assets pledged as collateral under finance
lease obligations amounted to $73 (2012 – $169).
l) The carrying value of long-term debt approximates its fair value.
13 Share capital
a) Authorized – in unlimited number
Preferred Shares, issuable in series
Subordinate Voting Shares
Multiple Voting Shares (five votes per share), convertible into Subordinate Voting Shares
b)
Issued
6,357,201 Subordinate Voting Shares (February 29,
2012 – 6,582,401) (note 13(c))
15,566,567 Multiple Voting Shares
As at
February 28,
2013
$
As at
February 29,
2012
$
69,188
7,126
76,314
71,638
7,126
78,764
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a
maximum of 5% of the issued Subordinate Voting Shares outstanding as at October 12, 2012 during the
ensuing 12-month period ending October 21, 2013. During the year ended February 28, 2013, 225,200
(2012 –46,600) Subordinate Voting Shares were purchased for a cash consideration of $2,633 (2012 –
$605) and cancelled. The amount by which the repurchase amount is above the stated capital of the shares
has been debited to contributed surplus.
d) The Company established a fixed share option plan (the “Share Option Plan”) in 1996, amended in fiscal
2007, to allow for the purchase of Subordinate Voting Shares by certain of its full-time employees,
directors, officers and consultants.
The subscription price for Subordinate Voting Shares granted under options is the greater of (i) the
weighted average trading price for such Subordinate Voting Shares for the five days preceding the date of
grant during which the Subordinate Voting Shares were traded on the Toronto Stock Exchange (“TSX”) or
(ii) the trading price for the Subordinate Voting Shares on the last day the Subordinate Voting Shares were
traded on the TSX immediately preceding the date of grant.
Under the Share Option Plan, the maximum number of Subordinate Voting Shares issuable from time to
time is a fixed maximum percentage of 5% of the aggregate of the Multiple Voting Shares and the
Subordinate Voting Shares issued and outstanding from time to time.
The granting of options is at the discretion of the Board of Directors which, at the date of grant, establishes
the term and vesting period. Vesting of options generally commences 12 months after the date of grant and
accrues annually over the vesting period provided there is continuous employment. The maximum term
permissible is 10 years.
A compensation cost of $58 (2012 – $71) was recorded in the consolidated statement of income and
credited to contributed surplus.
The table below summarizes the status of the Share Option Plan.
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Number
of shares
Weighted average exercise price
Weighted
average
contractual
life in
months
Outstanding – March 1, 2011
Granted
Expired/forfeited
Outstanding – February 29, 2012
Exercisable – February 29, 2012
Outstanding – March 1, 2012
Expired/forfeited
Outstanding – February 28, 2013
Exercisable – February 28, 2013
190,000
50,000
(45,000)
195,000
145,000
195,000
(15,000)
180,000
146,667
$11.62 (CA$11.29)
$14.30 (CA$14.15)
$12.34 (CA$12.21)
$11.94 (CA$11.81)
$11.12 (CA$11.00)
$11.94 (CA$11.81)
$10.67 (CA$11.00)
$11.51 (CA$11.88)
$11.01 (CA$11.36)
27.4
53.0
-
28.1
28.1
-
16.8
14 Foreign exchange
Foreign exchange gains (losses) realized on the translation of foreign currency balances, transactions and the
fair value of foreign currency financial derivatives and embedded derivatives during the period are included in
sales and cost of sales and amounted to:
Sales
Cost of sales
2013
$
1,219
(1,566)
2012
$
1,121
2,561
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
15 Cost of sales
Change in inventories of finished goods and work in progress
Raw materials and consumables used
Employee benefit expense (note 17)
Depreciation and amortization (note 20)
Movement in inventory provision – net (note 6)
Foreign exchange (note 14)
Other production overhead costs
16 Administration costs
Employee benefit expense (note 17)
Commissions
Freight to customers
Professional fees
Scientific research investment tax credit (note 19)
Movement in bad debt provision
Depreciation and amortization (note 20)
Other
2013
$
9,304
216,897
99,864
10,565
2,382
1,566
46,097
386,675
2013
$
44,288
10,821
7,109
14,186
(3,684)
393
1,922
15,950
90,985
2012*
$
(29,318)
233,271
92,370
10,830
4,592
(2,561)
40,689
349,873
2012*
$
42,236
7,321
6,266
11,799
(3,603)
(842)
2,347
18,096
83,620
* Certain comparative figures have been reclassified to conform to the current year’s basis of presentation.
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
17 Employee benefit expense
Wages and salaries
Social security costs
Scientific research investment tax credit (note 19)
Share-based compensation (note 13(d))
Other
18 Finance income and costs
Finance costs
Interest expense
Finance income
Investment income
Finance costs – net
19 Research expenses
2013
$
103,049
34,652
(3,684)
58
6,393
2012*
$
95,527
32,485
(3,603)
71
6,522
140,468
131,002
2013
$
2012
$
3,191
1,669
631
2,560
318
1,351
Research expenses are included in cost of sales and administration costs and consist of the following:
Research expenditures
Less: Scientific research investment tax credit
2013
$
9,238
3,684
5,554
2012
$
8,468
3,603
4,865
* Certain comparative figures have been reclassified to conform to the current year’s basis of presentation.
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2012 and February 28, 2011
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
20 Depreciation and amortization costs
Depreciation and amortization costs are included in cost of sales and administration costs and consist of the
following:
Depreciation of property, plant and equipment
Amortization of intangible assets
21 Income tax
Current tax:
Current tax on profits for the year
Adjustments in respect of prior years
Deferred tax:
Origination and reversal of timing differences
Income tax expense
2013
$
9,572
2,915
2012
$
8,847
4,330
12,487
13,177
2013
$
6,960
(351)
6,609
2012
$
3,121
156
3,277
(1,325)
(2,929)
5,284
348
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The tax on the Company’s income before tax differs from the amount that would arise using the weighted
average tax rate applicable to income of the consolidated entities as follows:
2013
$
2012
$
Income before tax at statutory rate of 26.90% (2012 – 28.15%)
3,233
1,716
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-deductible interest accretion of proceeds payable
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other
Income tax expense
The analysis of deferred tax assets and deferred tax liabilities is as follows:
Deferred income tax assets:
To be realized after more than 12 months
To be realized within 12 months
Deferred income tax liabilities:
To be realized after more than 12 months
To be realized within 12 months
Net deferred income tax asset
The movement of the net deferred income tax asset account is as follows:
Balance – Beginning of year
Recovery to consolidated statement of income
Deferred tax liability arising on business acquisition (note 4)
Exchange differences
Balance – End of year
1,044
(314)
3,147
178
(657)
(1,178)
(169)
5,284
2013
$
6,100
5,126
(7,742)
(293)
3,191
2013
$
1,882
1,325
-
(16)
3,191
943
(401)
-
266
(628)
(1,105)
(443)
348
2012
$
4,895
5,257
(7,922)
(348)
1,882
2012
$
6,187
2,929
(7,871)
637
1,882
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The significant components of the net deferred income tax asset are as follows:
Property, plant and equipment
Intangible assets
Non-deductible provisions and reserves
Investment tax credits
Inventories
Non-capital loss carryforwards
Other
2013
$
(3,830)
(5,512)
5,202
(394)
5,672
2,283
(230)
3,191
2012
$
(2,809)
(6,322)
3,603
(366)
4,429
2,832
515
1,882
The Company did not recognize deferred income tax assets of $276 (2012 – $276) in respect of capital losses
amounting to $2,051 (2012 – $2,051) that can be carried forward indefinitely against future taxable capital
gains.
Deferred tax liabilities of $6,412 (2012 – $5,673) have not been recognized for the withholding tax and other
taxes that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are not expected to
reverse in the foreseeable future. Unremitted earnings as at February 28, 2013 totalled $268,515 (2012 –
$253,520)
22 Earnings per share
a) Basic
Basic earnings per share is calculated by dividing the net income attributable to the Subordinate and
Multiple Voting shareholders by the weighted average number of Subordinate and Multiple Voting Shares
outstanding during the year.
Net income attributable to Subordinate and Multiple Voting
shareholders
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings per share
2013
2012
$6,169
$7,892
22,019,568
22,177,423
$0.28
$0.36
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of Subordinate and
Multiple Voting Shares outstanding to assume conversion of all dilutive potential Subordinate and Multiple
Voting Shares. The Company has one category of dilutive potential Subordinate and Multiple Voting
Shares: stock options. For the stock options, a calculation is done to determine the number of Subordinate
and Multiple Voting Shares that could have been acquired at fair value (determined as the average market
share price of the Company’s outstanding Subordinate and Multiple Voting Shares for the period), based
on the exercise prices attached to the stock options. The number of Subordinate and Multiple Voting Shares
calculated above is compared with the number of Subordinate and Multiple Voting Shares that would have
been issued assuming exercise of the stock options.
Net income attributable to Subordinate and Multiple Voting
shareholders
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Adjustments for stock options
Weighted average number of Subordinate and Multiple Voting Shares
for diluted earnings per share
Diluted earnings per share
2013
2012
$6,169
$7,892
22,019,568
11,995
22,177,423
25,492
22,031,563
22,202,915
$0.28
$0.36
23 Commitments and contingencies
a)
In the normal course of business, the Company issues performance bond guarantees related to product
warranty and on-time delivery as well as advance payment guarantees and bid bonds. As at February 28,
2013, the aggregate maximum value of these guarantees, if exercised, amounted to $84,762 (2012 –
$73,322). The guarantees expire as follows:
February 28, 2014
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
Subsequent years
$
35,797
15,253
6,347
9,824
9,403
8,138
84,762
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year,
amounting to $7,899 (2012 – $5,654), which are covered by letters of credit.
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) Future minimum payments under operating leases (related mainly to premises and machinery) are
as follows:
February 28, 2014
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
Subsequent years
$
1,053
933
786
738
743
1,606
5,859
d) Two of the Company’s U.S. subsidiaries have been named as defendants in a number of asbestos-related
legal proceedings pertaining to products they formerly sold. Management believes it has a strong defence,
and the subsidiaries have previously been dismissed from a number of similar cases. Because of the many
uncertainties inherent in predicting the outcome of these proceedings, as well as the course of asbestos
litigation in the United States, management believes that it is not possible to make an estimate of the
subsidiaries’ asbestos liability. Accordingly, no provision has been set up in the accounts.
During the year ended February 28, 2013, legal and related costs for these matters amounted to $8,763
(2012 – $6,920).
e) Lawsuits and proceedings or claims arising from the normal course of operations are pending or threatened
against the Company. Although at this time it is not possible to determine the outcome based on the facts
currently known, the Company does not believe that the ultimate outcome will have a material adverse
effect on its financial position, results of operations or liquidity. No provision has been set up in the
accounts.
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Related party transactions
Transactions and balances with related parties occur in the ordinary course of business. Related party
transactions and balances not otherwise disclosed separately in these consolidated financial statements are as
follows:
Affiliated company owned by certain relatives of controlling
shareholder
Purchases – Material components
Sales – Material components
Amounts charged by an affiliated company in which
a relative of the controlling shareholder
owns a 50% interest
Computer consulting
Amount charged by the controlling shareholder to one of the
Company’s subsidiaries and certain of its executives
Rent based on weekly usage
Accounts receivable
Affiliated companies
Amount charged by minority shareholders of the Company’s Italian
subsidiary
Rent for manufacturing facilities
Accounts payable and accrued liabilities
Affiliated companies
Controlling shareholder
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation
CA$435 Non-interest-bearing short-term advance2
CA$500 Long-term advance2, bearing interest at prescribed rate,
repayable in 2016 as a balloon payment
Short-term loans payable to minority shareholders of the Company’s
Italian subsidiary
€1,071 Short term loans, bearing interest at 5%, repayable
in May 2013
Accrued interest expense on short-term loans
2013
$
1,909
168
17
25
9
680
296
4
3,581
58
-
-
1,401
65
2012
$
2,030
131
29
29
-
288
104
4
3,855
71
440
505
-
-
1 Key management includes directors (executive and non-executive) and certain senior management.
2 Certain assets are pledged as collateral.
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Segment reporting
Geographic distribution of sales and assets:
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 28, 2013
Consolidation
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
54,284
96,099
103,085
124,631
-
31,492
49,013
71,597
143
Total
253,468
156,123
120,753
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
41,628
116
263,309
6,514
-
34,638
11,841
11,307
161,205
48
42,557
1,239
43,844
5,270
31,720
35,571
13,979
48,366
61,591
(197,550)
241,955
258,619
-
123,936
(197,550)
500,574
25,397
51
107,401
(20)
-
(116,174)
90,630
43,194
485,950
Total identifiable assets
305,053
41,152
184,353
72,561
132,849
(116,194)
619,774
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 29, 2012
Consolidation
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
39,406
80,469
88,878
121,516
-
20,198
55,741
74,727
1,029
Total
208,753
141,714
131,497
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
34,697
312
234,989
3,909
-
65,373
10,546
11,831
164,203
3,304
17,491
765
21,560
4,998
46,679
41,505
13,743
30,738
45,866
90,347
18,842
23
66,886
233,710
203,425
-
(156,736)
(156,736)
437,135
(31)
-
(102,792)
72,961
58,845
470,164
Total identifiable assets
269,998
69,282
186,580
93,182
85,751
(102,823)
601,970
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
26 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial
risk management program focuses on mitigating unpredictable financial market risks and their potential adverse
effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on
policies approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are
the responsibility of the corporate finance team in conjunction with the finance teams of the Company’s
subsidiary companies and SPEs. The Company uses derivative financial instruments to hedge certain risk
exposures. Use of derivative financial instruments is subject to a policy which requires that no derivative
transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary
being that all derivative transactions are to be entered into for risk management purposes only).
Overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the
following table:
Risks
Market
Financial instrument
Currency
Interest rate
Credit
Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Dividend payable
Accrual for performance guarantees
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates. The Company operates internationally and is
exposed to foreign exchange risk arising from various currency exposures. Currency risk arises when future
commercial transactions and recognized assets and liabilities are denominated in a currency other than a
company’s functional currency. The Company has operations with different functional currencies, each of
which will be exposed to currency risk based on its specific functional currency.
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same
currency. The remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the
Company uses foreign currency derivatives, primarily foreign exchange forward contracts. These derivatives are
not designated as hedges for accounting purposes.
The amounts outstanding as at February 28, 2013 and February 29, 2012 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2013
February 29,
2012
February 28,
2013
$
February 29,
2012
$
February 28,
2013
February 29,
2012
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 13 months
Buy US$ for € – 0 to 12 months
Buy ₤ for € – 0 to 12 months
Sell US$ for ₤ – 0 to 21 months
Sell US$ for KW – 0 to 12 months
Sell € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for US$ – 0 to 12 months
0.97-1.04
1.28-1.43
1.28-1.41
-
1.52
-
1.25-1.35
1.26
1.51-1.61
0.97-1.04
1.28-1.42
1.28-1.41
0.80-0.89
-
1,197-1,202
1.30-1.42
-
1.56-1.62
(951)
(192)
1
-
(6)
-
103
67
(62)
(13) US$43,245
US$8,664
51
US$33
(9)
30
-
US$1,485
-
-
19
€30,693
1,095
€1,420
£889
30
US$42,000
US$13,921
US$1,437
£1,564
-
US$333
€25,617
-
£1,919
Foreign exchange forward contracts are contracts whereby the Company has the obligation to sell or buy the
currencies at the strike price. The fair value of the foreign currency instruments is recorded in the consolidated
statement of income and reflects the estimated amounts the Company would have paid or received to settle these
contracts as at the financial position date. Gains are recorded as derivative assets and losses as derivative
liabilities on the consolidated statement of financial position.
Cash flow and fair value interest rate risk
The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash
and cash equivalents. Items at variable rates expose the Company to cash flow interest rate risk, and items at
fixed rates expose the Company to fair value interest rate risk. The Company’s long-term debt and credit
facilities predominantly bear interest, and its cash and cash equivalents earn interest at variable rates. An
assumed 0.5% change in interest rates would have no significant impact on the Company’s net income or cash
flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet
its contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2013,
three (2012 – six) customers accounted for more than 5% each of its trade accounts receivable, of which one
customer accounted for 6.2% (2012 – 10.9%), and the Company’s ten largest customers accounted for 43.1%
(2012 – 62.8%).
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and
performs specific evaluation procedures on all its new customers. In performing its evaluation, the Company
analyzes the ageing of accounts receivable, historical payment patterns, customer creditworthiness and current
economic trends. A specific credit limit is established for each customer and reviewed periodically. An
allowance for doubtful accounts is recorded when, based on management’s evaluation, the collection of an
account receivable is not reasonably certain.
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash
equivalents and short-term investments, which it manages by dealing with highly rated financial institutions.
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on
derivative assets.
The table below summarizes the ageing of trade accounts receivable as at:
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
As at
February 28,
2013
$
As at
February 29,
2012
$
97,741
10,351
8,702
10,793
127,587
1,525
126,062
8,312
78,838
13,221
5,054
10,482
107,595
1,144
106,451
5,405
134,374
111,856
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The table below summarizes the movements in the allowance for doubtful accounts:
Balance – Beginning of year
Bad debt expenses
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
Liquidity risk
As at
February 28,
2013
$
As at
February 29,
2012
$
1,144
916
(472)
(50)
(13)
1,525
1,661
331
(720)
(453)
325
1,144
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due.
The Company manages its liquidity risk by continually monitoring its future cash requirements. Cash flow
forecasting is performed in the operating entities and aggregated by the Company’s corporate finance team. The
Company’s policy is to maintain sufficient cash and cash equivalents and available credit facilities in order to
meet its present and future operational needs.
The following tables present the Company’s financial liabilities identified by type and future contractual dates
of payment as at:
As at February 28, 2013
Total
$
Less than
1 year
$
1 to 3
Years
$
4 to 5
Years
$
After
5 years
$
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
26,850
10,463
12,216
2,013
2,158
78,431
76,682
28,525
50,864
1,380
78,431
76,682
28,525
50,864
1,380
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
78
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
As at February 29, 2012
Total
$
Less than
1 year
$
1 to 3
Years
$
4 to 5
Years
$
After
5 years
$
9,587
1,696
5,349
694
1,848
82,088
86,544
21,679
33,296
534
82,088
86,544
21,679
33,296
534
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
Fair value of financial instruments
The fair value hierarchy has the following levels:
• Level 1 – quoted market prices in active markets for identical assets or liabilities;
• Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset
or liability, either directly (as prices) or indirectly (derived from prices); and
• Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable
market data. The level in the fair value hierarchy within which the fair value measurement is
categorized in its entirety is determined on the basis of the lowest level input that is
significant to the fair value measurement in its entirety.
The fair value of financial assets and financial liabilities measured on the consolidated statements of financial
position are as follows:
As at February 28, 2013
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
340
1,380
-
-
340
1,380
-
-
79
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
As at February 29, 2012
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
1,737
534
-
-
1,737
534
-
-
Fair value measurements of the Company’s derivative assets and liabilities are classified under Level 2 because
such measurements are determined using published market prices or estimates based on observable inputs such
as interest rates, yield curves, and spot and future exchange rates. The carrying value of the Company’s
financial instruments is considered to approximate fair value, unless otherwise indicated.
27 Capital management
The Company’s capital management strategy is designed to maintain strong liquidity in order to pursue its
organic growth strategy, undertake selective acquisitions and provide an appropriate investment return to its
shareholders while taking a conservative approach to financial leveraging.
The Company’s financial strategy is designed to meet the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital
structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid
to shareholders or undertake any other activities it considers appropriate under the circumstances.
The Company monitors capital on the basis of its total debt-to-equity ratio. Total debt consists of all interest-
bearing debt, and equity is defined as total equity.
80
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The total debt-to-equity ratio was as follows:
Bank indebtedness
Short-term bank loans
Current portion of long-term debt
Long-term debt
Total debt
Equity
Total debt-to-equity ratio
As at
February 28,
2013
$
As at
February 29,
2012
$
48,580
2,284
10,463
16,387
77,714
32,438
858
1,696
7,891
42,883
328,173
335,577
23.7%
12.8%
The Company’s objective is to conservatively manage the total debt-to-equity ratio and to maintain funding
capacity for potential opportunities.
The Company’s financial objectives and strategy as described above have remained unchanged since the last
reporting period. These objectives and strategies are reviewed annually or more frequently if the need arises.
The Company is in compliance with all covenants related to its debt and credit facilities, and is not subject to
any capital requirements imposed by a regulator.
28 Adjustments to reconcile net income to cash provided from operating activities
2013
$
9,572
2,915
(1,325)
11,700
58
(134)
663
(2,444)
(407)
2,169
622
2012
$
8,847
4,330
(2,929)
-
71
(14)
946
(2,230)
(978)
1,649
684
23,389
10,376
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred income taxes
Goodwill impairment loss (note 5)
Share-based compensation expense
Gain on disposal of property, plant and equipment
Interest accretion on proceeds payable (note 4)
Income from fair value adjustment of proceeds payable (note 4)
Unrealized foreign exchange gain on proceeds payable (note 4)
Net change in derivative assets and liabilities
Net change in other liabilities
81
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
29 Changes in non-cash working capital items
Accounts receivable
Inventories
Income taxes recoverable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Provisions
Accrual for performance guarantees
2013
$
2012
$
(23,266)
11,313
1,943
156
(3,778)
335
(10,189)
1,156
6,619
(8,515)
(38,421)
(4,758)
(1,903)
4,741
115
11,139
846
7,863
(15,711)
(28,893)
82
Directors and officers
Corporate directors
A. K. Velan
Founder and Executive Chairman of the Board
I. C. Velan
T. C. Velan
G. Jellinek
Director
Director
Director
K. MacKinnon
Director
A. Martini
W. Sheffield
P. Velan
Director
Director
Director
Corporate officers
A. K. Velan
Founder and Executive Chairman of the Board
T. C. Velan
President and Chief Executive Officer
I. C. Velan
Executive Vice-President
W. Maar
J. D. Ball
S. Cherlet
Executive Vice-President, International Sales and Overseas Operations
Chief Financial Officer
Chief Operations Officer
V. Apostolescu
Vice-President, Quality Assurance
S. Bruckert
Vice-President, Human Resources and General Counsel, Corporate Secretary
J. del Buey
Vice-President, Severe Service Applications
P. Dion
P. Lee
G. Perez
C. Pogue
Vice-President, Canadian Sales
Vice-President, Sales - United States (Eastern Division)
Vice-President, Engineering
Vice-President, Sales - United States (Western Division)
G. Sabourin
Vice-President, Treasurer and Financial Systems
A. Smith
Vice-President, Procurement and Overseas Manufacturing
R. Sossoyan
Vice-President, Global Financial Reporting
N. Tarfa
Vice-President, Materials and Process Technologies
G. Zarifah
Vice-President, Global Capital Investments and Production Technology
83
Shareholder Information
Head office
7007 Côte-de-Liesse
Montreal, Quebec Canada H4T 1G2
Website
www.velan.com
Investor relations
John D. Ball
Chief Financial Officer
7007 Côte-de-Liesse, Montreal, Quebec Canada H4T 1G2
Tel.: (514) 748-7743, Ext. 5537
Fax: (514) 908-0180
Auditors
PricewaterhouseCoopers LLP
Transfer agent
Canadian Stock Transfer Company Inc. (“CST”) as administrative agent for CIBC Mellon Trust Company
Shares outstanding as at February 28, 2013
6,357,201 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High
Low
$12.70
$10.96
Closing on February 28, 2013: $12.05
Annual meeting
The Annual Meeting of Shareholders will be held July 11, 2013,
at 11:00 a.m. in the Grand Salon of the:
St. James Club
1145 Union Avenue
Montreal, Quebec
84
Velan worldwide
Head Office
An extensive global network
Montreal, Canada
Velan Inc.
Manufacturing
- North America
Plant 1
• 16 production facilities
• 5 plants in North America
• 6 plants in Europe
• 5 plants in Asia
• 5 stocking and distribution centers
• Hundreds of distributors worldwide
• Over 60 service shops worldwide
Manufacturing
- Europe
Plant
Manufacturing
- Asia
Plant 1
Distribution centers
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 2 and 7
Lyon, France
Velan SAS
Plant
Ansan City, South Korea
Velan Ltd.
Willich, Germany
Velan GmbH
Plant 2
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 4 and 6
Mennecy, France
Segault SA
Plant
Ansan City, South Korea
Velan Ltd.
Granby, Canada
VelCAN
Plant
Stocking and distribution
Granby, Canada
Velan Inc.
Plant 5
Leicester, UK
Velan Valves Ltd.
Plant
Taichung, Taiwan
Velan-Valvac
Plant
Benicia, CA, USA
VelCAL
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 3
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Suzhou, China
Velan Valve (Suzhou) Co., Ltd.
Marietta, GA, U.S.A.
VelEAST
Plant 1
Plant
Stocking and distribution
Williston, VT, USA
Velan Valve Corp.
Lucca, Italy
Velan ABV S.p.A
Plant 2
Coimbatore, India
Velan Valves India Private Ltd.
Houston, TX, U.S.A.
VelTEX
Lucca, Italy
Velan ABV S.p.A
A world leader in industrial valve
design and manufacturing
supplying to:
• Fossil, nuclear, and
cogeneration power
• Oil and gas
• Refining and petrochemicals
• Chemicals
• Pulp and paper
• Subsea
• LNG and cryogenics
• Marine
• Mining
• HVAC
• Water and wastewater
Pour une version française de ce rapport
annuel adressez-vous à:
Velan inc.
7007, chemin de la Côte-de-Liesse,
Montréal (Québec) H4T 1G2 Canada
Tél. : +1 514-748-7743
Téléc. : +1 514-748-8635
www.velan.com