Annual report 2015
2015 highlights
In 2014 Velan was recognized with an award for our
continuous improvement and our corporate health, safety
and environment culture. Also, our Canadian plants
received certification for OHSAS 18001 and ISO 14001.
Members of the Velan France executive team with Tom Velan standing in the Velan
S.A.S. manufacturing plant in Lyon, France, next to a 36" (900 mm) top-entry
cryogenic butterfly valve ready for shipping to an LNG facility.
2015 Engineers
Canada Gold Medal
Award.
A.K. Velan, Founder and Chairman Emeritus of Velan, won the
2014 Grand Prix d’excellence, the highest distinction awarded
by the Ordre des ingénieurs du Québec to its members and was
featured on the cover of the OIQ’s magazine.
In May 2015, A.K. received the Gold Medal Award from Engineers
Canada, their top distinction recognizing his 70 years of achieve-
ments as an engineer. This award is presented every year to an
outstanding engineer who has stood out for his contributions to
the profession.
A Velan pneumatically operated metal-seated ball valve used for
isolation in a hydrocracking unit in Asia.
2015 highlights
Sales
(in millions of U.S. dollars)
Net earnings(2)
(in millions of U.S. dollars)
560
520
480
440
400
360
320
280
240
200
160
120
80
40
0
2011
Consolidated
Consolidated
Overseas
Overseas
U.S.A.
U.S.A.
Canada
Canada
*5.6%
35
30
25
20
15
10
5
0
*6.0%
*4.1%
*1.8%
*1.2%
2012
2013
2014
2015
2011
2012
2013
2014
2015
* Net Earnings %
(in thousands of U.S. dollars, except per share amounts and number
of employees)
Years Ended
Income statement data
Sales
Gross profit
Gross profit %
Feb 2015
Feb 2014
Feb 2013
Feb 2012
Feb 2011
$ 455,750
118,283
26.0%
$ 489,257
131,146
26.8%
$ 500,574
113,899
22.8%
$ 437,135
87,262
20.0%
$ 380,706
101,426
26.6%
Administration costs
Income before income taxes
Adjusted net operating results (1)
Adjusted net operating results (1) %
Adjusted net operating results (1) per share
Net earnings (2)
Net earnings (2) %
Net earnings (2) per share (3)
88,391
28,965
18,580
4.1%
0.85
18,580
4.1%
0.85
87,143
42,762
29,409
6.0%
1.34
29,400
6.0%
1.34
90,985
12,018
15,681
3.1%
0.72
6,169
1.2%
0.28
83,620
6,097
5,630
1.3%
0.25
7,892
1.8%
0.36
73,597
28,424
21,224
5.6%
0.96
21,224
5.6%
0.96
Statement of financial position data
Net cash (1)
Working capital
Property, plant, and equipment
Total assets
Total debt
Equity
Number of employees
Canada
United States
Europe
Asia
Total
$ 75,612
227,793
91,285
558,628
14,827
345,093
$ 67,761
235,318
96,605
624,154
22,087
359,119
$ 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
917
181
528
441
2,067
917
188
526
429
2,060
923
182
535
390
2,030
926
178
519
358
1,981
923
178
372
295
1,768
(1) This term is a measure of performance and/or financial condition that is not defined under International Financial Reporting Standards and is therefore
unlikely to be comparable to similar measures presented by other companies. Such measures are used by management in assessing the operating results and
financial condition of the Company. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its
results and financial condition, and increase transparency and clarity into the operating results of its core business. Refer to the “Reconciliations of Non-IFRS
Measures” section in the Company’s Management Discussion and Analysis included in this Annual Report for a detailed calculation of this measure.
(2) Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
(3) See note 21 in the Notes to the Consolidated Financial Statements.
1
Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated.)
Highlights
• Sales of $455.7 million
• Net earnings(1) of $18.6 million
• Order backlog of $437.8 million
• Order bookings of $471.4 million
• Net cash(2) of $75.6 million
This year was a challenging year as the price of oil plunged and
the U.S. dollar soared against the euro and Canadian dollar.
Although our results were not as strong as last year, we recorded
solid net earnings(1) of $18.6 million, which were 4.1% of our
sales of $455.7 million.
Sales, order bookings, and backlog
Our sales of $455.7 million declined 6.9% compared to last
year. The strength of the U.S. dollar as well as the uncertainty
in oil and gas markets resulting from the decline in the price
of oil negatively impacted our sales. In addition, project delays
on several large projects reduced sales. Sales in Canada were
particularly hard hit, falling 49.5% from the record sales in the
previous year. China continued to be our largest overseas market
with sales of $63.7 million, which was down 3.8% from the
previous year. Our sales were diversified by customer, market,
and geography as 59.1% of our sales were made outside of North
America to more than 65 countries.
Order bookings of $471.4 million were 13.2% higher than last
year. Our bookings were higher than sales but our backlog of
orders declined by 7.2% to $437.8 million mainly due to the fall in
the euro of 18.6% compared to the U.S. dollar considering period
end rates resulting in a $50.7 million reduction of our backlog.
The bookings number was calculated using average rates and
the euro only weakened 2.9% on average. Every year, our sales
revenues consist of longer term project orders, made-to-order
sales, and book and bill business of commodity valves stocked
in our distribution centers. From the backlog of $437.8 million,
$326.7 million is scheduled for delivery during our current
fiscal year.
Tom Velan, Chairman of the Board and CEO (left), with Velan’s
President, Yves Leduc (right).
Subsequent to our year end, in March our French subsidiary
booked $27.6 million of orders including $18.2 million of orders
for valves for nuclear power plants in China. These orders follow
the $16.2 million of bookings for the China nuclear market in
our fourth quarter. These orders are for the ACPR1000, Hualong
One, and C-HTR technology, which are new third- and fourth-
generation nuclear plants fully designed and developed in China.
We are proud to be chosen to supply advanced safety-related
valves for this new generation of advanced nuclear reactors. Our
nuclear valves have now been selected for 49 of China’s nuclear
power plants and we continue to be a leader in the supply of
nuclear valves to the Chinese nuclear industry, which is starting
to recover from the negative impact of the Japanese Fukushima
accident.
Net earnings(1)
Our net earnings(1) of $18.6 million or 4.1% of sales are down from
$29.4 million last year. Our net earnings(1) declined mainly due to
the lower sales volume and the weakness of the euro compared
to the U.S. dollar, as we consolidated less earnings from our
profitable European subsidiaries. Our gross profit percentage
remained relatively flat, declining slightly from 26.8% of sales
1) Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
2) This term is a measure of performance and/or financial condition that is not defined under International Financial Reporting Standards and is therefore unlikely
to be comparable to similar measures presented by other companies. Such measures are used by management in assessing the operating results and financial
condition of the Company. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its results and
financial condition, and increase transparency and clarity into the operating results of its core business. Refer to the “Reconciliations of Non-IFRS Measures”
section in the Company’s Management Discussion and Analysis included in this Annual Report for a detailed calculation of this measure.
2
Message to our shareholders and employees
to 26% due to a decline in volume partially offset by a higher
margin product mix. Our costs related to asbestos lawsuits were
$6.1 million which is 11.2% higher than last year but 30.6%
lower than the previous year. The fluctuations in asbestos-related
costs are due more to the timing of settlement payments than to
changes in long-term trends.
Yves Leduc speaks to Velan employees in Williston, Vermont.
New leadership
During the year, Yves Leduc was hired and appointed as the new
President of Velan Inc. (the “Company”). This was an important
milestone for the Company as Yves became the first President
of the Company who is not a Velan family member. A.K. Velan,
who has served the Company with passion and devotion for 65
years since founding the Company in 1950, has been given the
honorary title of Founder and Chairman Emeritus after stepping
down as Executive Chairman of the board at the age of 97. The
Board of Directors appointed Tom Velan as the new Chairman of
the Board. At the same time, Bill Sheffield was appointed Lead
Director to strengthen the independence of the board.
Financial Strength
Our balance sheet remains strong as net cash(2) reached $75.6
million or $3.45 per share while equity was $345.1 million or
$15.73 per share. Our net cash(2) was positively impacted by $49.9
million in cash generated by our operations, which was partially
offset by $13.7 million of negative currency impacts due to the
strength of the U.S. dollar. Our consolidated inventory decreased
by $20.6 million or 9.2% over the course of the year.
Outlook
These are challenging times in the global energy sector. The
dramatic fall in the price of oil and the strengthening of the
U.S. dollar against the euro and Canadian dollar has created
uncertainty in energy markets, and oil companies have delayed
or cancelled some large capital expenditures. The Canadian oil
industry has been particularly hard hit due to the relatively high
cost of production in the oil sands and steam-assisted gravity
drainage (“SAGD”) industries.
In general terms, the weakening of the Canadian dollar against
the U.S. dollar is positive for us as we have a lot of expenses
denominated in Canadian dollars in our Canadian manufacturing
plants and head office. On the other hand, the fall in the value
of the euro means that we are consolidating less sales and net
earnings(1) from our European subsidiaries when converted to
our U.S. dollar reporting. Our European subsidiaries represent
a majority of our net earnings(1) and net cash(2) as well as having
52.5% of our consolidated backlog, so the large drop in the value
of the euro may have an important negative impact on our future
sales, earnings, and balance sheet.
The full impact of the low price of oil is not easy to determine.
Our bookings and sales in Canada are and may continue to be
negatively impacted. In general, upstream exploration is the
part of the market that is most quickly and seriously affected by
the lower price of oil and this has a direct effect on our Italian
subsidiary, Velan ABV S.p.A. Otherwise we are primarily in
Fugitive emissions testing of a 4" (100 mm) Class 600 cast steel
gate valve.
3
Message to our shareholders and employees
Partial view of production in Velan’s plant in India.
the downstream part of the market, which is much less impacted
since crack spreads actually increased due to the lower cost of
oil. Also, our petrochemical and chemical industry customers
generally benefit from the lower feedstock prices and that has
been driving new investments, especially in the U.S. We also
sell in other non-oil-related markets such as power and military
shipbuilding.
Our plant in China has successfully added production of cast
pressure seal valves enabling us to expand our product offering
to the Chinese market. Our Indian plant has also extended its
product scope to include cast steel gate valves up to 24" as well
as bellow seal and cryogenic valves. We expect these relatively
small plants to manufacture a growing part of our global valve
supply over the coming years as they strengthen our local
presence in these growth markets.
Under the leadership of our new President, we are driving an
operational excellence plan in our North American operations,
focused on improving our global supply chain performance,
project execution and lead times, and cost competitiveness.
These initiatives, combined with our superior product portfolio
and track record in quality, will strengthen our position in
This 54" (1350 mm) Class 300 cast gate valve is one of the
largest valves Velan has produced to date, measuring over
34' (10.36 m) in height and 7' 6" (2.29 m) in width. It weighs
48,000 lbs (21,772 kg) with its actuator. Standing in front of the
valve is Stephen Cherlet, Velan’s Chief Operations Officer.
serving each of our markets worldwide. As we proved last year,
the company is resilient, able to withstand unexpected swings in
demand, owing in large part to the knowhow of our people and
to being diversified both geographically and by end user markets.
We have a solid order backlog of $437.8 million, as we go after
sales opportunities in a very competitive and challenging global
market.
T. C. Velan
Chairman of the Board and
Chief Executive Officer
Yves Leduc
President
4
Management’s discussion and analysis
May 19, 2015
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, 2015. 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, 2015 and 2014. 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 are 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, which generally contain words like “should”, “believe”, “anticipate”, “plan”,
“may”, “will”, “expect”, “intend”, “continue” or “estimate” or the negatives of these terms or variations of them or similar
expressions, 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 are included in this report (see Certain Risks That Could Affect Our Business
section). While these statements are based on management’s assumptions regarding historical trends, current conditions and
expected future developments, as well as other factors that it believes are reasonable and appropriate in the circumstances, no
forward-looking statement can be guaranteed and actual future results may differ materially from those expressed herein. The
Company disclaims any intention or obligation to update or revise any forward-looking statements contained herein whether as a
result of new information, future events or otherwise, except as required by the applicable securities laws. The forward-looking
statements contained in this report are expressly qualified by this cautionary statement.
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 17 manufacturing plants
worldwide with 2,067 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 distribution facility in Germany and a 50%-owned Korean foundry.
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 per share – basic
– diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided by operating activities
Cash used in investing activities
Cash used by financing activities
Demand data
Net new orders received
Period ending backlog of orders
Fiscal year
ended
February 28,
2015
Fiscal year
ended
February 28,
2014
Increase
(decrease)
%
Increase
(decrease)
$455.7
118.3
26.0%
18.6
4.1%
0.85
0.85
21.9
49.9
(13.1)
(14.0)
471.4
437.8
$489.3
131.1
26.8%
29.4
6.0%
1.34
1.34
22.0
75.5
(17.8)
(15.6)
416.6
471.7
$(33.6)
(12.8)
(6.9)%
(9.8)%
(10.8)
(36.7)%
(0.49)
(0.49)
(36.6)%
(36.6)%
(25.6)
(33.9)%
4.7
1.6
54.8
(33.9)
26.4%
10.3%
13.2%
(7.2)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
6
Management’s discussion and analysis
Highlights of fiscal 2015 as well as factors that may impact fiscal 2016
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net earnings1 amounted to $18.6 million or $0.85 per share compared to $29.4 million or $1.34 per share last year. The
$10.8 million decrease in net earnings1 is primarily attributable to lower sales volume and higher administration costs, in
particular an increase in costs recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies
section) as well as increased research and development costs in one of the Company’s French subsidiaries related to new
product qualifications.
Sales amounted to $455.7 million, a decrease of $33.6 million or 6.9% from the prior year. The Company’s shipments of
certain large project orders were lower for the current year compared to the prior year, despite the improved execution in
the second half of the year.
Net new orders received (“bookings”), which were calculated based on actual orders received converted at average
exchange rates, amounted to $471.4 million, an increase of $54.8 million or 13.2% compared to last year. This increase is
primarily attributable to increased bookings in the Company’s French and German subsidiaries.
Although bookings outpaced sales in the year, the Company ended the current fiscal year with a backlog of $437.8 million,
a decrease of $33.9 million or 7.2% from the end of the prior year. This decrease is mainly attributable to the weakening of
the Euro against the U.S. dollar over the course of the year, which had a $50.7 million negative impact on the Company’s
backlog in the year.
Gross profit percentage remained relatively stable, marginally decreasing by 0.8 percentage points from 26.8% to 26.0%.
While the Company had a greater proportion of higher margin product sales, particularly spare parts and valves without
third party actuators, in the first half of the year, this trend was reversed in the second half of the year as the Company
shipped a greater proportion of project orders, which generally entail lower gross margins.
The Company generated net cash2 from operations of $49.9 million. This source of net cash2 is primarily attributable to
positive cash net earnings1 and favourable working capital movements.
The Company ended the year with net cash2 of $75.6 million, an increase of $7.9 million or 11.7% since the beginning of
the current fiscal year. The Company’s cash balance was negatively impacted by the 18.6% drop in the Euro spot rate
against the U.S. dollar since the beginning of the current fiscal year, which resulted in a $14.4 million reduction in the
Company’s net cash2.
Foreign currency impacts:
o Based on average exchange rates, the Euro weakened 2.9% 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 fiscal year.
o Based on average exchange rates, the Canadian dollar weakened 7.1% against the U.S. dollar when compared to
the same period last year. This weakening resulted in the Company’s Canadian dollar expenses being reported as
lower U.S. dollar amounts in the current fiscal year.
o The unfavourable impact of the Euro decrease was generally offset by the favourable impact of the Canadian
dollar decrease.
1 Net earnings refers to net income 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
The Company’s margins and operational profitability remained relatively stable over the course of the current year, as the drop in
net earnings1 was due principally to a drop in sales and a slight increase in non-operational administration costs. The drop in sales is
primarily attributable to delays in shipments of certain large project orders from the Company’s North American and German
operations. There were many factors which led to these delays. The German operations were negatively impacted by delays in
shipments to a large Asian project that encountered contractual issues. For the North American operations, some delays were caused
by supply chain issues as some of our suppliers were late in delivering raw materials. Other delays were due to customer-related and
internal operational issues such as change orders and requests to delay shipments. The Company commenced several initiatives near
the end of the fiscal year, namely the Valve Project Management (“VPM”) process. The goal of VPM is to streamline all aspects of
the manufacturing cycle, thus improving delivery performance in the short term and decreasing lead times in the longer term. The
ultimate goal is to improve the competitiveness of the Company’s project manufacturing business.
The Company’s French operations continued to perform well in the current fiscal year. Despite a 4% drop in its sales, its net
earnings1 improved by 16.6% as it sold a greater proportion of high margin spare parts and cryogenic valves to compensate for the
reduction of projects in the nuclear valve business. After two years of weakness in nuclear valve bookings following the Fukushima
accident, the Company anticipates an increase in global demand for nuclear power plants, particularly in Asia.
The Company’s Italian operations continued to report positive earnings for a second consecutive year. While its sales remained
relatively stable, its net earnings1 improved by 15.9%, reflecting the improvements the Company has made in the management and
operations of its Italian subsidiary, Velan ABV S.p.A. (“ABV”), since its acquisition in 2011. The Company continues to view this
acquisition as a good opportunity to grow its sales and earnings over the coming years, despite the short-term challenges it faces
regarding the recent drop in crude oil prices, which may have an impact on bookings for its valves destined for upstream oil and gas
projects.
Other factors that may impact fiscal year 2016
Despite the increase in bookings during fiscal year 2015, the Company’s backlog declined by 7.2% as the 18.6% drop in the Euro
spot rate against the U.S. dollar had a $50.7 million negative impact on the Company’s backlog in the year. The decline in the Euro
presents the Company with both opportunities and challenges. On the one hand, the decline in the Euro will allow the Company’s
European subsidiaries to be more competitive when bidding on U.S. dollar-denominated projects, particularly in Asia and the
Middle East. However, it will also negatively impact the Company’s consolidated net earnings1 and other comprehensive income as
the results of operations and financial position of these European subsidiaries will be reported as lower U.S. dollar amounts on
consolidation. It may also reduce the competitiveness of the Company’s North American subsidiaries when bidding on contracts
against European competitors.
The 46.8% drop in Brent crude oil prices since the beginning of fiscal year 2015 also presents the Company with both challenges
and opportunities. As mentioned above, the drop in oil prices may have a negative impact on valves destined for upstream oil and
gas projects, particularly in offshore drilling and the Canadian oil sands. However, there are opportunities in the downstream oil and
gas business, namely in refining and petrochemical projects, since refining crack spreads actually increased due to the lower oil price
which may lead to more projects in these industries. The Company is currently pursuing many leads related to these projects,
particularly in the Middle East.
Due to its diversification in both geography and type of industry, the Company is well positioned to meet the many challenges it
currently faces. It continues to believe that the global demand for its products is strong and is working to increase bookings in future
years by continuously improving its operational excellence through lean manufacturing initiatives, global sourcing, working capital
management and cost controls. However, there can be no assurance that outside economic and geopolitical factors will not
materially adversely affect the Company’s results of operations or financial condition.
1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
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, 2015
Fiscal year ended
February 28, 2014
Fiscal year ended
February 28, 2013
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
$489,257
29,400
1.34
1.34
624,154
19,992
0.31
0.31
$500,574
6,169
0.28
0.28
619,774
24,393
0.32
0.32
$455,750
18,580
0.85
0.85
558,628
12,720
0.36
0.36
15,566,567
6,372,601
Sales for fiscal year 2015 decreased by 6.9% compared to fiscal year 2014. Despite the improved execution in the second half of the
year, the Company’s shipments of certain large project orders were lower for fiscal year 2015 compared to fiscal year 2014. Sales
for fiscal year 2014 decreased by $11.3 million or 2.3%, compared to the record level for fiscal year 2013. This decrease is primarily
attributable to a decrease in nuclear sales following the Fukushima crisis which was partially offset by an increase in sales in Canada
to the Alberta oil and gas industry.
Gross profit for fiscal year 2015 amounted to $118.3 million, a decrease of $12.8 million from fiscal year 2014. Gross profit
percentage for fiscal year 2015 marginally decreased from the 26.8% reported in fiscal year 2014 to 26.0%. While the Company had
a greater proportion of higher margin product sales, particularly spare parts and valves without third party actuators, in the first half
of fiscal year 2015, this trend was reversed in the second half of that year as the Company shipped a greater proportion of project
orders, which generally entail lower gross margins. Gross profit for fiscal year 2014 amounted to $131.1 million, an increase of
$17.2 million from fiscal year 2013. Gross profit percentage for fiscal year 2014 also increased from the 22.8% reported in fiscal
year 2013 to 26.8%. The increase in gross profit percentage reported for fiscal year 2014 is mainly attributable to a higher margin
product mix, particularly spare part sales, and improved efficiencies.
Administration costs for fiscal year 2015 increased by $1.3 million when compared to fiscal year 2014. Such increase was
principally due to an increase in research and development costs in one of the Company’s French subsidiaries related to new product
qualifications, and an increase in costs associated with the Company’s ongoing asbestos litigation (see Contingencies section).
Administration costs for fiscal year 2014 decreased by $3.9 million when compared to fiscal year 2013. This decrease was mainly
attributable to decreases in sales commissions and costs associated with the Company’s ongoing asbestos litigation (see
Contingencies section). The fluctuation in asbestos costs is due more to the timing of settlement payments than to changes in long-
term trends.
The fiscal year 2013 net earnings1 were also negatively impacted by an $11.7 million non-cash goodwill impairment loss related to
the ABV cash-generating unit.
1 Net earnings refers to net income 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, 2015 compared to the year ended February 28, 2014
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2015
Year ended
February 28,
2014
(millions)
Sales
$455.7
$489.3
Sales decreased by $33.6 million or 6.9% from the prior year. The decrease in sales is primarily attributable to delays in shipments
of certain large project orders from the Company’s North American and German operations. The German operations were negatively
impacted by delays in shipments to a large Asian project that encountered contractual issues. For the North American operations, the
delays were caused by various supply chain, customer-related and internal operational issues, as discussed above.
Net bookings and backlog
(millions)
Year ended
February 28,
2015
Year ended
February 28,
2014
Net bookings
$471.4
$416.6
Net bookings, which were calculated based on actual orders received converted at average exchange rates, increased by $54.8
million or 13.2% for the fiscal year. This increase is primarily attributable to increased bookings in the Company’s French and
German subsidiaries. After two years of weakness with respect to its nuclear business following the Fukushima accident, the
Company’s French subsidiaries secured significant orders for its nuclear valves destined primarily to customers based in Asia. The
Company’s German subsidiary secured a number of orders for valves destined for refining and petrochemical projects.
(millions)
Backlog
February
2015
February
2014
February
2013
$437.8
$471.7
$531.0
For delivery within the subsequent fiscal year
$326.7
$386.7
$398.2
For delivery beyond the subsequent fiscal year
$111.1
$85.0
$132.8
Percentage – beyond the subsequent fiscal year
25.4%
18.0%
25.0%
The Company’s book-to-bill ratio was 1.03 which normally would have resulted in a $15.7 million increase in the backlog.
However, due to currency fluctuations, primarily related to the drop in the Euro against the U.S. dollar, the total backlog decreased
by $33.9 million or 7.2% since the beginning of the fiscal year, settling at $437.8 million.
Gross profit
(millions)
Year ended
February 28,
2015
Year ended
February 28,
2014
Gross profit
$118.3
$131.1
Gross profit percentage
26.0%
26.8%
Gross profit decreased by $12.8 million for the fiscal year due primarily to the decrease in sales over the course of the year. Despite
this drop in sales, the gross profit percentage remained relatively stable, marginally decreasing by 0.8 percentage points from the
prior year. While the Company had a greater proportion of higher margin product sales, particularly spare parts and valves without
third party actuators, in the first half of the year, this trend was reversed in the second half of the year as the Company shipped a
greater proportion of project orders, which generally entail lower gross margins.
10
Management’s discussion and analysis
Administration costs
(millions)
Year ended
February 28,
2015
Year ended
February 28,
2014
Administration costs
$88.4
$87.1
As a percentage of sales
19.4%
17.8%
Administration costs increased by $1.3 million or 1.5% for the fiscal year. The increase is mainly a result of increases in research
and development costs in one of the Company’s French subsidiaries related to new product qualifications and 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.
Net finance costs
(millions)
Year ended
February 28,
2015
Year ended
February 28,
2014
Net finance costs
$0.6
$1.5
Net finance costs decreased by $0.9 million for the fiscal year as the Company continued to pay down its current and long-term bank
borrowings without undertaking any new debt issuances (see Liquidity and Capital Resources section).
Income taxes
(in thousands, excluding percentages)
Year ended
February 28,
2015
%
$
Year ended
February 28,
2014
%
$
Income before income taxes
28,965
100.0
42,762
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
9,416
32.5
12,528
29.3
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Benefit attributable to a financing structure
Other
Provision for income taxes
539
874
(1,342)
286
1.8
3.0
(4.6)
1.0
(4)
369
(1,308)
175
0.0
0.9
(3.1)
0.4
9,773
33.7
11,759
27.5
11
Management’s discussion and analysis
Net earnings1
(millions)
Net earnings1
Year ended
February 28,
2015
Year ended
February 28,
2014
$18.6
$29.4
6.0%
As a percentage of sales
4.1%
Net earnings1 for the year amounted to $18.6 million or $0.85 per share compared to $29.4 million or $1.34 per share last year. The
$10.8 million decrease in net earnings1 is primarily attributable to lower sales volume and higher non-operational administration
costs, in particular an increase in costs recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies
section) as well as increased research and development costs in one of the Company’s French subsidiaries related to new product
qualifications.
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 ended May, August, November and February
(in thousands of U.S. dollars, excluding per share amounts)
February
2015
$114,507
4,718
November
2014
$127,290
4,759
August
2014
$110,888
5,098
May
2014
$103,065
4,005
February
2014
$120,716
10,392
November
2013
$115,611
8,319
QUARTERS ENDED
May
2013
$132,168
5,800
August
2013
$120,762
4,889
0.22
0.22
0.22
0.22
0.23
0.23
0.18
0.18
0.47
0.47
0.38
0.38
0.23
0.23
0.26
0.26
Sales
Net Earnings1
Net earnings1 per share
- Basic
- Diluted
Sales can vary from one quarter to the next due to the timing of the shipment of large project orders. Sales were higher in the quarter
ended in May 2013 and November 2014 due to increased shipments of such orders, while the lower sales amounts for the quarters
ended in August 2014 and May 2014 were due to delayed execution on the shipments of such orders. Net earnings1 for the quarters
ended November 2013 and February 2014 were higher due to a more efficient product mix and lower administration costs.
RESULTS OF OPERATIONS – quarter ended February 28, 2015 compared to the quarter ended February 28, 2014
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the prior fiscal year)
Sales
(millions)
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Sales
$114.5
$120.7
Sales decreased by $6.2 million or 5.1% for the quarter. Despite the strong push in the quarter to execute shipments of certain large
project orders, the Company was not able to match the level of execution achieved in the same quarter of the prior year, particularly
in its North American operations.
1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
12
Management’s discussion and analysis
Net bookings and backlog
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
(millions)
Net bookings
$101.1
$139.6
Net bookings, which were calculated based on actual orders received converted at average exchange rates, decreased by $38.5
million or 27.6% for the quarter. The decrease in net bookings is primarily attributable to the fact that the prior year quarter had over
$40 million worth of orders that were booked with two large Indian energy customers, which did not repeat in the current quarter.
Gross profit
(millions)
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Gross profit
$29.1
$36.6
Gross profit percentage
25.4%
30.3%
Gross profit decreased by $7.5 million for the quarter, resulting in a decrease of 4.9 percentage points in the gross profit percentage
from the prior year. This decrease was primarily attributable to a product mix with a greater proportion of sales of lower margin
products, such as complex and custom manufactured project valves, as opposed to higher margin products, such as spare parts.
Administration costs
(millions)
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Administration costs
$20.4
$22.1
As a percentage of sales
17.8%
18.3%
Administration costs for the quarter decreased by $1.7 million or 7.7%. The decrease is mainly a result of lower freight costs, the
securing of a research and development grant attributable to the Company’s Italian operations and a decrease in costs associated
with the Company’s ongoing asbestos litigation (see Contingencies section). The fluctuation in asbestos costs is due more to the
timing of settlement payments than to changes in long-term trends.
Finance costs
(millions)
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Net finance costs
$0.1
$0.4
Net finance costs decreased by $0.3 million for the quarter as the Company continued to pay down its current and long-term bank
borrowings without undertaking any new debt issuances (see Liquidity and Capital Resources section).
13
Management’s discussion and analysis
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 28, 2015
%
$
Three-month period ended
February 28, 2014
%
$
Income (Loss) before income taxes
8,219
100.0
15,387
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
3,017
36.7
4,918
32.0
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Benefit attributable to a financing structure
Other
Provision for income taxes
293
452
(346)
256
3.6
5.5
(4.2)
3.1
(83)
-
(329)
227
(0.5)
-
(2.1)
1.4
3,672
44.7
4,733
30.8
Net earnings1
(millions)
Net earnings1
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
$4.7
$10.4
8.6%
As a percentage of sales
4.1%
Net earnings1 for the quarter amounted to $4.7 million or $0.22 per share compared to $10.4 million or $0.47 per share last year. The
$5.7 million decrease in net earnings1 is primarily attributable to a lower gross profit percentage partially offset by decreased
administration costs, in particular lower freight costs, the securing of a research and development grant attributable to the
Company’s Italian operations in the quarter and a decrease in costs associated with the Company’s ongoing asbestos litigation (see
Contingencies section).
1 Net earnings refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
14
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 tables present the Company’s financial liabilities identified by type and future contractual dates of payment as at:
(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
$
14,827
70,997
44,111
30,012
17,750
5,362
Less than
1 year
$
10,644
70,997
44,111
30,012
17,750
5,362
As at February 28, 2015
4 to 5
Years
$
After
5 years
$
610
1,600
-
-
-
-
-
-
-
-
-
-
1 to 3
Years
$
1,973
-
-
-
-
-
On February 28, 2015, the Company’s order backlog was $437.8 million and its net cash1 plus unused credit facilities amounted to
$176.6 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 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.
15
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
2015
November
2014
February
2014
November
2013
February
2013
$75.6
$66.7
$67.7
$59.2
$19.8
The Company’s net cash1 increased by $8.9 million during the quarter and $7.9 million since the beginning of the year. For both
periods, net cash1 was positively impacted by positive cash net earnings2 and non-cash working capital movements.
Cash provided by operating activities
(millions)
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Cash provided by operating activities
$49.9
$75.5
$25.2
$13.4
Cash provided by operating activities for the current fiscal year decreased by $25.6 million when compared to last year. This
decrease was principally related to lower net earnings2 and non-cash working capital movements. Cash provided by operating
activities for the quarter increased by $11.8 million when compared to the prior year period. This increase was principally related to
non-cash working capital movements, specifically a decrease in accounts receivable.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Accounts receivable decrease (increase)
$23.6
$5.4
$18.1
$(2.0)
Accounts receivable balances are a function of the timing of sales and cash collections. For both the current quarter and fiscal year,
the accounts receivable balance decreased due to a combination of lower sales output in the respective periods coupled with
increased collections of prior year accounts.
Inventories
(millions)
Inventories decrease
Customer deposits decrease
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
$20.6
$22.8
$23.0
$9.8
$5.2
$1.9
$0.5
$7.0
Inventories typically increase in times of rising backlog and order bookings and decrease when the opposite occurs. Inventories are
also a function of timing between receipts and shipments. For the current quarter and fiscal year, inventories decreased as a result of
the timing of purchases of raw materials for certain new orders. In order to help finance its investment in inventories, the Company,
where possible, obtains customer deposits for large orders. Customer deposits decreased for the current quarter and fiscal year due to
the increased proportion of shipments of certain large export project orders.
1 Non-IFRS measures – see reconciliations at the end of this report.
2 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
16
Management’s discussion and analysis
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Accounts payable and accrued liabilities (decrease) increase
$(5.6)
$(1.8)
$(5.7)
$4.1
For all of the indicated periods, the fluctuations in accounts payable and accrued liabilities were primarily related to timing,
particularly related to inventory.
Additions to property, plant and equipment
(millions)
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Additions to property, plant and equipment
$12.8
$18.0
$2.6
$3.3
The additions to property, plant and equipment relate mainly to the Company’s North American and Asian operations where it
continues to invest in machinery and equipment in order to improve its manufacturing infrastructure and operational efficiency. The
decrease in additions for the current quarter when compared to the prior year is due to the timing of the receipts of certain
equipment. The decrease in additions for the fiscal year is due to a lower total spend for productive machinery and equipment, which
comes after several years of relatively high capital expenditures.
Dividends
(millions)
Dividends paid
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
$7.5
$6.8
$1.9
$1.7
The dividends paid in the first quarter of the current fiscal year were the last payouts under the Company’s prior dividend policy,
namely CA$0.08 per share per quarter. The quarterly dividend payments that were made in subsequent quarters were under the
Company’s current dividend policy, namely CA$0.10 per share per quarter.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
$ -
$6.3
$2.7
$8.4
$ -
$1.5
$ -
$1.8
During the current quarter and fiscal year, the Company continued to pay down its long-term debt without undertaking any new debt
issuances.
17
Management’s discussion and analysis
Other Liabilities
(millions)
Fiscal Year
ended
February 28,
2015
Fiscal Year
ended
February 28,
2014
Three-month
period ended
February 28,
2015
Three-month
period ended
February 28,
2014
Payment of proceeds payable
$ -
$2.0
$ -
$ -
In accordance with the provisions of the purchase and sale agreement for ABV, the Company paid $2.0 million to the former owners
of ABV over the course of the first quarter of the prior year, which represented the final payment of the proceeds payable at the time
of the acquisition.
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 subsidiaries. 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
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.
18
Management’s discussion and analysis
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, 2015 and February 28, 2014 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2015
February 28,
2014
February 28,
2015
$
February 28,
2014
$
February 28,
2015
February 28,
2014
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
Buy US$ for € – 0 to 12 months
Sell US$ for ₤ – 0 to 12 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 € – 0 to 12 months
1.09-1.26
1.14-1.40
1.12-1.27
-
-
1.10-1.14
1.55-1.62
0.74-0.79
1.04-1.12
1.29-1.36
1.34-1.36
1.52
1,070-1,075
1.31-1.37
1.61-1.68
-
(3,047)
(2,236)
30
-
-
(6)
(37)
78
(1,275) US$49,565
US$19,573
US$1,119
-
-
€5,907
£599
£1,982
192
(14)
130
94
(133)
3
-
US$43,057
US$8,498
US$483
US$1,315
US$1,348
€9,026
£2,746
-
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. Unrealized
gains are recorded as derivative assets and unrealized losses as derivative liabilities on the consolidated statement of financial
position.
The following table provides a sensitivity analysis of the Company’s most significant foreign exchange exposures related to its net
position in the foreign currency financial instruments, which includes cash and cash equivalents, short-term investments bank
indebtedness, short-term bank loans, derivative financial instruments, accounts receivable, accounts payable and accrued liabilities,
customer deposits, accrual for performance guarantees and long-term debt, including interest payable. A hypothetical strengthening
of 5.0% of the following currencies would have had the following impact for the fiscal year ended February 28, 2015:
Net income (loss)
Other
comprehensive
income (loss)
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
1,083
766
-
-
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact.
For the purposes of the above analysis, foreign exchange exposure does not include the translation of subsidiaries into the
Company’s reporting currency. For those subsidiaries whose functional currency is other than the reporting currency (U.S. dollar) of
the Company, such exposure would impact other comprehensive income or loss.
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.
19
Management’s discussion and analysis
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, 2015, four (2014 – two)
customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 10.3% (2014 –
5.4%), and the Company’s ten largest customers accounted for 54.7% (2014 – 36.5%). In addition, one customer accounted for
10.9% of the Company’s sales (2014 – no customers accounted for more than 10% of sales).
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 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
Liquidity risk – see discussion in liquidity and capital resources section
20
February 28,
2015
$
February 28,
2014
$
64,387
17,930
12,360
4,804
99,481
899
98,582
6,735
93,053
13,251
9,375
9,039
124,718
917
123,801
5,177
105,317
128,978
February 28,
2015
$
February 28,
2014
$
917
872
(665)
(172)
(53)
899
1,525
767
(1,237)
(168)
30
917
Management’s discussion and analysis
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. 846 claims were outstanding at the end of the reporting period (February 28, 2014 – 856). These claims were filed in
the states of Arizona, Arkansas, California, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine,
Maryland, Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island,
Texas, Virginia, Washington and West Virginia. During the current fiscal year, the Company resolved 439 claims (February 28,
2014 – 368) and was the subject of 429 new claims (February 28, 2014 – 460). 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 $1,217 for the quarter (February 28, 2014 -
$1,813) and $6,085 for the year (February 28, 2014 - $5,472).
On December 3, 2014, San Diego Gas & Electric Company (“SDG”) filed a claim against Velan Valve Corp., a wholly- owned
subsidiary of the Company, in the Superior Court of the State of California, concerning high pressure valves supplied to SDG and
installed at its Palomar Energy Center (“Facility”). This lawsuit alleges damages to the Facility in excess of $9,000 related to
allegedly defective valves supplied by Velan Valve Corp. The claim is for alleged strict product liability and alleged negligence. It is
the Company’s position that this claim is without merit. The Company intends to vigorously defend its position and will undertake
all actions necessary to protect its reputation. While the Company cannot predict the final outcome of this claim, based on
information currently available, the Company believes the resolution of this claim will not have a material adverse effect on its
financial position, results of operations or liquidity. The Company has reported this claim to its insurance company and accrued the
$100 deductible.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 10, 22 and 25 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 the Company’s plants.
Purchases of material components
Sales of raw material
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2014
2015
$1,889
$253
104
-
Feb. 28,
2014
$434
32
Feb. 28,
2015
$1,459
67
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.
21
Management’s discussion and analysis
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 the Company’s
marketing department.
Software development and consulting services
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2014
2015
$4
$2
Feb. 28,
2015
$14
Feb. 28,
2014
$1
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. 28,
Feb. 28,
2014
2015
$25
$-
Feb. 28,
2014
$8
Feb. 28,
2015
$27
Rent
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, 2015 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 (2013)” 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,
2015.
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, 2015 that have materially affected, or are reasonably likely to have materially affected, the
Company’s internal control over financial reporting.
22
Management’s discussion and analysis
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:
Consolidation
The Company consolidates the accounts of Juwon Special Steel Co. Ltd. in these financial statements. It was determined that the
Company has substantive rights over this structured entity that are currently exercisable and for which there is no barrier, despite the
fact that its percentage ownership in this entity is only 50%. These substantive rights are obtained through the shareholders’
agreement signed between the Company and the non-controlling interest which gives the Company the ultimate decision right on
any decision taken for which both parties in the joint arrangement are not in agreement. As per the shareholders’ agreement, the
Board of Directors, representing the interests of shareholders, has responsibility to establish operating decisions (including budgets),
approve capital transactions and determine key management personnel remuneration. Consequently, the Company, through its rights
set out in the shareholders’ agreement, has substantive rights that give it the ability to direct the relevant activities of Juwon Special
Steel Co. Ltd. while being exposed to variable returns. As such, it was determined that this entity should be consolidated.
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.
Inventories
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.
Impairment of non-financial assets
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. 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
23
Management’s discussion and analysis
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.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
Unless otherwise noted, the following revised standards are effective for annual periods beginning on or after January 1, 2016 with
earlier application permitted. The Company has not yet assessed the impact of these standards or determined whether it will early
adopt them.
(i)
In July 2014, the IASB issued IFRS 9, Financial Instruments. The IASB has previously published versions of IFRS 9 that
introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in
2013). The July 2014 publication represents the final version of the Standard, replaces earlier versions of IFRS 9 and
substantially completes the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement.
This standard replaces the current multiple classification and measurement models for financial assets and liabilities with
a single model that has only three classification categories: amortized cost and fair value through other comprehensive
income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the
contractual cash flow characteristics of the financial asset or liability. The standard introduces a new, expected loss
impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard
requires entities to account for expected credit losses from when financial instruments are first recognised and it lowers
the threshold for recognition of full lifetime expected losses. The new standard also introduces a substantially-reformed
model for hedge accounting with enhanced disclosures about risk management activity and aligns hedge accounting more
closely with risk management. The new standard is effective for annual periods beginning on or after January 1, 2018
with early adoption permitted.
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specifies how and when revenue will be
recognized as well as requiring the provision of more informative and relevant disclosures. Its core principle is that an
entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is
delivered in a five-step model framework: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15
replaces IAS 11, Construction contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15,
Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue -
Barter Transactions Involving Advertising Services.
The IASB has decided to propose to defer the effective date of IFRS 15 from its current effective date of January 1, 2017
to annual periods beginning on or after January 1, 2018, 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, such as the current downturn in the oil and gas industry, will not have a significant
adverse effect on the Company’s sales.
24
Management’s discussion and analysis
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.
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.
25
Management’s discussion and analysis
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
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 92.4% 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.
26
Management’s discussion and analysis
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company, which may
negatively affect the price and liquidity of the Subordinated Voting Shares. 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
negatively 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.
Non-controlling interest
The Company’s operations in China and Taiwan, and certain of its operations in France and Korea are undertaken with partners that
are classified as 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.
27
Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2015 Annual Report, 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
(in thousands)
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
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Feb. 28,
2015
Feb. 28,
2014
Feb. 28,
2013
Feb. 29,
2012
Feb. 28,
2011
99,578
847
106,716
239
77,172
398
65,414
4,954
119,996
87
(15,616)
(31,876)
(48,580)
(32,438)
(5,634)
(2,134)
(7,063)
(916)
(6,402)
(2,284)
(6,919)
(858)
(1,696)
(822)
(603)
75,612
67,761
19,787
35,376
113,024
Adjusted net operating results
(in thousands)
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Feb. 28,
2015
Feb. 28,
2014
Feb. 28,
2013
Feb. 29,
2012
Feb. 28,
2011
Net income attributable to Subordinate Voting Shares and
Multiple Voting Shares
Adjustments for:
Goodwill impairment loss
Interest accretion on ABV proceeds payable
Fair value adjustment for ABV proceeds payable
Unrealized foreign exchange gain on ABV proceeds payable
18,580
29,400
6,169
7,892
21,224
-
-
-
-
9
-
-
-
11,700
663
(2,444)
(407)
-
946
(2,230)
(978)
-
-
-
-
18,580
29,409
15,681
5,630
21,224
28
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
29
May 19, 2015
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, 2015 and
February 28, 2014 and the consolidated statements of income, comprehensive income (loss), changes in
equity and 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, Québec, Canada H3B 2G4
T: +1 514 205 5000, F: +1 514 876 1502
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
30
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, 2015 and February 28, 2014 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. A123642
31
Velan Inc.
Velan Inc.
Consolidated Statements of Financial Position
Consolidated Statements of Financial Position
(in thousands of U.S. dollars)
(in thousands of U.S. dollars)
Assets
Assets
Current assets
Cash and cash equivalents
Current assets
Short-term investments
Cash and cash equivalents
Accounts receivable
Short-term investments
Income taxes recoverable
Accounts receivable
Inventories (note 5)
Income taxes recoverable
Deposits and prepaid expenses
Inventories (note 5)
Derivative assets
Deposits and prepaid expenses
Derivative assets
Non-current assets
Property, plant and equipment (notes 7 and 12)
Non-current assets
Intangible assets and goodwill (note 8)
Property, plant and equipment (notes 7 and 12)
Deferred income taxes (note 20)
Intangible assets and goodwill (note 8)
Other assets
Deferred income taxes (note 20)
Other assets
Total assets
Total assets
Liabilities
Liabilities
Current liabilities
Bank indebtedness (note 10)
Current liabilities
Short-term bank loans
Bank indebtedness (note 10)
Accounts payable and accrued liabilities (note 9)
Short-term bank loans
Income taxes payable
Accounts payable and accrued liabilities (note 9)
Dividend payable
Income taxes payable
Customer deposits
Dividend payable
Provisions (note 11)
Customer deposits
Accrual for performance guarantees
Provisions (note 11)
Derivative liabilities
Accrual for performance guarantees
Current portion of long-term debt (note 12)
Derivative liabilities
Current portion of long-term debt (note 12)
Non-current liabilities
Long-term debt (note 12)
Non-current liabilities
Deferred income taxes (note 20)
Long-term debt (note 12)
Other liabilities
Deferred income taxes (note 20)
Other liabilities
Total liabilities
Total liabilities
Equity
Equity
Equity attributable to Subordinate and Multiple Voting shareholders
Share capital (note 13)
Equity attributable to Subordinate and Multiple Voting shareholders
Contributed surplus
Share capital (note 13)
Retained earnings
Contributed surplus
Accumulated other comprehensive loss
Retained earnings
Accumulated other comprehensive loss
Non-controlling interest (note 6)
Non-controlling interest (note 6)
Total equity
Total equity
Total liabilities and equity
Total liabilities and equity
Commitments and contingencies (note 22)
Commitments and contingencies (note 22)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
T.C. Velan, Director
32
As at
February 28,
As at
2015
February 28,
$
2015
$
As at
February 28,
As at
2014
February 28,
$
2014
$
99,578
847
99,578
105,335
847
5,472
105,335
203,557
5,472
5,326
203,557
144
5,326
420,259
144
420,259
91,285
33,576
91,285
12,392
33,576
1,116
12,392
1,116
138,369
138,369
558,628
558,628
15,616
2,134
15,616
70,997
2,134
3,961
70,997
1,755
3,961
44,111
1,755
7,874
44,111
30,012
7,874
5,362
30,012
10,644
5,362
192,466
10,644
192,466
4,183
8,349
4,183
8,537
8,349
8,537
21,069
21,069
213,535
213,535
76,475
6,064
76,475
283,724
6,064
(27,652)
283,724
338,611
(27,652)
338,611
6,482
6,482
345,093
345,093
558,628
558,628
106,716
239
106,716
128,978
239
5,465
128,978
224,149
5,465
5,046
224,149
498
5,046
471,091
498
471,091
96,605
43,359
96,605
11,406
43,359
1,693
11,406
1,693
153,063
153,063
624,154
624,154
31,876
916
31,876
76,590
916
4,158
76,590
1,586
4,158
66,842
1,586
8,060
66,842
33,842
8,060
1,501
33,842
10,402
1,501
235,773
10,402
235,773
11,685
9,270
11,685
8,307
9,270
8,307
29,262
29,262
265,035
265,035
76,688
6,099
76,688
272,867
6,099
(3,589)
272,867
352,065
(3,589)
352,065
7,054
7,054
359,119
359,119
624,154
624,154
Velan Inc.
Consolidated Statements of Income
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 24)
Cost of sales (notes 5, 14, 15 and 19)
Gross profit
Administration costs (notes 16 and 19)
Other costs (income)
Operating profit
Finance income
Finance costs
Finance costs – net
Income before income taxes
Income taxes (note 20)
Net income for the year
Net income attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
Earnings per share (note 21)
Basic
Diluted
2015
$
2014
$
455,750
489,257
337,467
358,111
118,283
131,146
88,391
337
29,555
1,067
1,657
87,143
(269)
44,272
859
2,369
(590)
(1,510)
28,965
9,773
19,192
18,580
612
19,192
0.85
0.85
42,762
11,759
31,003
29,400
1,603
31,003
1.34
1.34
Dividends declared per Subordinate and Multiple Voting Share
0.36 (CA$0.40)
0.31 (CA$0.32)
The accompanying notes are an integral part of these consolidated financial statements.
33
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars)
Comprehensive income (loss)
Net income for the year
2015
$
2014
$
19,192
31,003
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other
than the reporting currency (U.S. dollar)
(24,850)
6,311
Foreign currency translation adjustment realized on the liquidation of a subsidiary whose functional
currency is other than the reporting currency (U.S. dollar)
Comprehensive income (loss)
Comprehensive income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
636
-
(5,022)
37,314
(5,483)
461
(5,022)
35,624
1,690
37,314
The accompanying notes are an integral part of these consolidated financial statements.
34
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2015 and 2014
(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 - February 28, 2013
76,314
1,746
(8,676)
250,129
319,513
8,660
328,173
Net income for the year
Other comprehensive income
-
-
-
-
-
6,224
29,400
-
29,400
6,224
1,603
87
31,003
6,311
Effect of share-based compensation (note 13(d))
Shares issued under Share Option Plan (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Acquisition of non-controlling interest (note 6(d))
Balance - February 28, 2014
Net income for the year
Other comprehensive loss
76,314
1,746
(2,452)
279,529
355,137
10,350
365,487
-
374
-
-
-
-
76,688
-
-
23
-
-
-
-
4,330
6,099
-
-
-
-
-
-
-
(1,137)
-
-
(4,760)
(1,902)
-
-
23
374
(4,760)
(1,902)
-
3,193
-
-
-
-
(103)
(3,193)
23
374
(4,760)
(1,902)
(103)
-
(3,589)
272,867
352,065
7,054
359,119
-
(24,063)
18,580
-
18,580
(24,063)
612
(151)
19,192
(24,214)
76,688
6,099
(27,652)
291,447
346,582
7,515
354,097
Effect of share-based compensation (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Share repurchase (note 13(c))
-
-
-
-
(213)
15
-
-
-
(50)
-
-
-
-
-
-
15
-
(5,447)
(2,233)
-
(43)
(5,447)
(2,233)
-
(306)
-
-
(1,033)
-
15
(5,447)
(2,233)
(1,033)
(306)
Balance - February 28, 2015
76,475
6,064
(27,652)
283,724
338,611
6,482
345,093
The accompanying notes are an integral part of these consolidated financial statements.
35
Velan Inc.
Consolidated Statements of Cash Flow
For the years ended February 28, 2015 and 2014
(in thousands of dollars)
Cash flows from
Operating activities
Net income for the year
Adjustments to reconcile net income to cash provided by operating activities (note 27)
Changes in non-cash working capital items (note 28)
Cash provide 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
Cash use d in inve sting activitie s
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders
Dividends paid to non-controlling interest
Shares issued under Share Option Plan (note 13(d))
Repurchase of shares (note 13(c))
Payment of proceeds payable
Short-term bank loans
Increase in long-term debt
Repayment of long-term debt
Cash 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 paid
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
36
2015
$
2014
$
19,192
19,445
11,279
49,916
(608)
(12,822)
(400)
160
576
(13,094)
(7,511)
(1,033)
-
(306)
-
1,218
-
(6,326)
(13,958)
31,003
15,890
28,566
75,459
159
(17,953)
(397)
396
44
(17,751)
(6,777)
(103)
374
-
(1,960)
(1,368)
2,654
(8,430)
(15,610)
(13,742)
4,150
9,122
74,840
46,248
28,592
83,962
74,840
99,578
(15,616)
83,962
106,716
(31,876)
74,840
(117)
(9,357)
(1,062)
(3,946)
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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 its subsidiaries. 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 19, 2015.
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.
Consolidation
These financial statements represent the consolidation of the accounts of the Company and its subsidiaries. Control
exists when the Company is exposed to, or has rights to, variable returns from its involvement with an investee,
including a structured entity, and has the ability to affect those returns through its power to direct the activities of an
investee. Subsidiaries are fully consolidated from the date control has been transferred to the Company and
deconsolidated from the date control ceases.
All subsidiaries 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 subsidiaries 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.
37
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 average 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 subsidiaries
The financial statements of the Company’s foreign subsidiaries 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.
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.
38
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
The Company and its subsidiaries 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
39
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
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% on an annual basis. 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.
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.
40
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 a replaced part is expensed as the parts are used. 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.
Depreciation on the 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 patents, products, designs, customer lists, non-compete agreements 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, 2014
and February 28, 2013, the Company had not capitalized any development costs.
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 or more frequently if events or circumstances occur that would indicate a change in useful life.
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
Computer software
Method
Straight-line
Straight-line
Straight-line
Straight-line
Term
15 years
10 years
5 years
1 to 3 years
41
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Government assistance
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.
Impairment of non-financial assets
Assets that have an indefinite life (e.g. goodwill or indefinite life intangible assets) 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 long-lived 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 or
CGU’s fair value less costs of disposal 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.
Income taxes
The provision for income taxes for the year comprises current and deferred taxes. Taxes are 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 taxes are recognized in other comprehensive income or equity,
respectively.
Current income taxes
The current income taxes 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 taxes payable is recognized for any
42
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
taxes payable in the current period. Current tax liabilities are recognized for current taxes to the extent that they
remain 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 taxes
Deferred income taxes are 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 taxes are not accounted for if they arise 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 taxes are 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 taxes are provided on temporary differences arising on investments in subsidiaries, 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.
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 income 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 income 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.
43
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Accrual for performance guarantees
Accrual for performance guarantees arise for possible late delivery and other contractual non-compliance penalties or
liquidated damages. It is recognized when the Company has a present legal or constructive obligation as a result of a
past event, and the amount has been reliably estimated. Accrual for performance guarantees is not recognized for
costs that need to be incurred to operate in the future or expected future operating losses.
Accrual for performance guarantees is 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.
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 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 judgment
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
44
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
Consolidation
The Company consolidates the accounts of Juwon Special Steel Co. Ltd. in these financial statements. It was
determined that the Company has substantive rights over this structured entity that are currently exercisable and for
which there is no barrier, despite the fact that its percentage ownership in this entity is only 50%. These substantive
rights are obtained through the shareholders’ agreement signed between the Company and the non-controlling interest
which gives the Company the ultimate decision right on any decision taken for which both parties in the joint
arrangement are not in agreement. As per the shareholders’ agreement, the Board of Directors, representing the
interests of shareholders, has responsibility to establish operating decisions (including budgets), approve capital
transactions and determine key management personnel remuneration. Consequently, the Company, through its rights
set out in the shareholders’ agreement, has substantive rights that give it the ability to direct the relevant activities of
Juwon Special Steel Co. Ltd. while being exposed to variable returns. As such, it was determined that this entity
should be consolidated.
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.
Inventories
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
45
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
statement of financial position with a corresponding impact made to cost of sales on the consolidated statement of
income.
Impairment of non-financial assets
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. 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.
3 Accounting standards and amendments issued but not yet adopted
Unless otherwise noted, the following revised standards are effective for annual periods beginning on or after January
1, 2016 with earlier application permitted. The Company has not yet assessed the impact of these standards or
determined whether it will early adopt them.
(i)
In July 2014, the IASB issued IFRS 9, Financial Instruments. The IASB has previously published versions of
IFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge
accounting model (in 2013). The July 2014 publication represents the final version of the Standard, replaces
earlier versions of IFRS 9 and substantially completes the IASB’s project to replace IAS 39, Financial
Instruments: Recognition and Measurement.
This standard replaces the current multiple classification and measurement models for financial assets and
liabilities with a single model that has only three classification categories: amortized cost and fair value through
other comprehensive income and fair value through profit or loss. The basis of classification depends on the
entity’s business model and the contractual cash flow characteristics of the financial asset or liability. The
standard introduces a new, expected loss impairment model that will require more timely recognition of
expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from
when financial instruments are first recognised and it lowers the threshold for recognition of full lifetime
expected losses. The new standard also introduces a substantially-reformed model for hedge accounting with
enhanced disclosures about risk management activity and aligns hedge accounting more closely with risk
management. The new standard is effective for annual periods beginning on or after January 1, 2018 with early
adoption permitted.
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specifies how and when
revenue will be recognized as well as requiring the provision of more informative and relevant disclosures. Its
core principle is that an entity will recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. This core principle is delivered in a five-step model framework: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v)
recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15 replaces IAS 11,
Construction contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for
the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue - Barter
Transactions Involving Advertising Services.
The IASB has decided to propose to defer the effective date of IFRS 15 from its current effective date of
January 1, 2017 to annual periods beginning on or after January 1, 2018, with earlier application permitted.
4 Goodwill impairment analysis
Impairment test at July 16, 2013
On July 16, 2013, the Company acquired the remaining 30% of its then 70%-owned Italian subsidiary, Velan ABV
S.p.A. (“ABV”) (see note 6(d)), which management considered to be a triggering event to test the carrying value of
the ABV assets for impairment.
The recoverable amount was determined based on the fair value less costs of disposal 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 earnings before interest, taxes, depreciation and amortization as a percentage of sales for the CGU of
8.3% 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 19% and a terminal growth rate of 2%.
Although the business process integration was still underway, management did not believe that the long-term outlook
for the business had changed at the time of this impairment test. As a result, and following the impairment test
performed at that date where the recoverable amount exceeded the carrying amount of $13,991 by $1,313, no
impairment was recorded at July 16, 2013 with respect to the carrying amount of the goodwill associated with the
CGU related to the Company’s ABV subsidiary.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the goodwill associated
with the CGU related to its ABV subsidiary for the period 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.
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Increase in expected EBITDA as a percentage of sales
Increase in discount rate
Increase in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
(4,519)
2,755
(1,594)
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 recoverable amount of the goodwill
associated with the CGU related to its ABV subsidiary:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
4,833
(3,114)
1,417
Summarized below is the amount by which each key assumption must change, after incorporating consequential
effects of the change on the other variables used to measure the recoverable amount, in order for the CGU’s
recoverable amount to be equal to its carrying amount:
- Decrease of 0.3% in the expected EBITDA as a percentage of sales for the CGU for each referenced year.
-
Increase in working capital cash absorption ratio for the CGU from 19% to 22.5% of annual incremental sales
increases.
Increase in expected discount rate from 19% to 19.5%.
-
- Decrease of expected terminal growth rate from 2% to 1.1%.
Impairment test at February 28, 2014
Despite the above impairment test triggered on July 16, 2013, the Company continued to carry out its annual
impairment testing at its year-end date. 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 recoverable amount exceeded the carrying
amount of the goodwill associated with the CGU related to its ABV subsidiary of $14,602 by $1,274 and,
accordingly, no goodwill impairment loss was recorded at February 28, 2014.
The recoverable amount was determined based on the fair value less costs of disposal 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:
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 7% in 2015, 11.8% in 2016, 19.6% in 2017, 19.3%
in 2018 and 19.2% in 2019.
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 2015, 2016 and 2017, 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%.
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 acquisition of the non-controlling interest and
the hiring of key senior management personnel were also factored into its assessments of the ABV subsidiary. The
margin assumptions used were also generally comparable to those obtained in its other similar European project
manufacturing operations.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the goodwill associated
with the CGU related to its ABV subsidiary for the period 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
Decrease
(Increase) in
recoverable
amount
$
(4,224)
2,678
(1,864)
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 recoverable amount of the goodwill
associated with the CGU related to its ABV subsidiary:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
4,339
(3,036)
1,651
Summarized below is the amount by which each key assumption must change, after incorporating consequential
effects of the change on the other variables used to measure the recoverable amount, in order for the CGU’s
recoverable amount to be equal to its carrying amount:
- Decrease of 0.3% in the expected EBITDA as a percentage of sales for the CGU for each referenced year.
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
-
Increase in working capital cash absorption ratio for the CGU from 19% to 23% of annual incremental sales
increases.
Increase in expected discount rate from 18.5% to 19%.
-
- Decrease of expected terminal growth rate from 2% to 1.2%.
The Company also tested for impairment the carrying amount of the goodwill associated with the CGU related to its
French subsidiary, Velan S.A.S., and determined that the recoverable amount significantly exceeded the carrying
amount of $10,736 by $39,408. Accordingly, no goodwill impairment loss was recorded for this CGU at February
28, 2014.
The recoverable amount was determined based on the fair value less costs of disposal 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 three-year period taking into consideration the following assumptions and
trends:
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 14.6% in 2015, 12.5% in 2016 and 13.1% in 2017.
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 $2,600 in 2015, 2016 and 2017.
The discounted cash flow model was established using a discount rate of 15.0% and a terminal growth rate of 2%.
Management based its selection of assumptions upon its assessment of the ability of the CGU to deliver on its past
levels of growth and profitability based on its current backlog of orders, as well as its evaluation of the longer term
potential of its key end-user markets, particularly nuclear power and cryogenics. The margin assumptions used were
in line with actual margins generated by the CGU in prior years.
Impairment test at February 28, 2015
In the context of its annual impairment testing, 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 recoverable amount exceeded the carrying
amount of the goodwill associated with the CGU related to its ABV subsidiary of $11,882 by $1,720 and,
accordingly, no goodwill impairment loss was recorded at February 28, 2015.
The recoverable amount was determined based on the fair value less costs of disposal 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 11.2% in 2016, 11.4% in 2017, 18.4% in 2018,
18.2% in 2019 and 18.2% in 2020.
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 $562 in 2016, 2017 and 2018, and $1,124 thereafter.
The discounted cash flow model was established using a discount rate of 18.5% and a terminal growth rate of 2%.
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
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
end-user markets, particularly upstream oil and gas flow control. The margin assumptions used were also generally
comparable to those obtained in its other similar European project manufacturing operations.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the goodwill associated
with the CGU related to its ABV subsidiary for the period 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
Decrease
(Increase) in
recoverable
amount
$
(3,693)
2,094
(1,456)
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 recoverable amount of the goodwill
associated with the CGU related to its ABV subsidiary:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
3,623
(2,373)
1,290
Summarized below is the amount by which each key assumption must change, after incorporating consequential
effects of the change on the other variables used to measure the recoverable amount, in order for the CGU’s
recoverable amount to be equal to its carrying amount:
- Decrease of 0.5% in the expected EBITDA as a percentage of sales for the CGU for each referenced year.
-
Increase in working capital cash absorption ratio for the CGU from 19% to 21.8% of annual incremental sales
increases.
-
Increase in expected discount rate from 18.5% to 19.3%.
- Decrease of expected terminal growth rate from 2% to 0.6%.
The Company also tested for impairment the carrying amount of the goodwill associated with the CGU related to its
French subsidiary, Velan S.A.S., and determined that the recoverable amount significantly exceeded the carrying
amount of $8,736 by $44,908. Accordingly, no goodwill impairment loss was recorded for this CGU at February 28,
2015.
The recoverable amount was determined based on the fair value less costs of disposal approach using a discounted
cash flow model. The significant key assumptions included forecasted cash flows based on updated financial plans
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
prepared by management covering a three-year period taking into consideration the following assumptions and
trends:
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 15% in 2016, 2017 and 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 $2,248 in 2016, 2017 and 2018.
The discounted cash flow model was established using a discount rate of 15.0% and a terminal growth rate of 2%.
Management based its selection of assumptions upon its assessment of the ability of the CGU to deliver on its past
levels of growth and profitability based on its current backlog of orders, as well as its evaluation of the longer term
potential of its key end-user markets, particularly nuclear power and cryogenics. The margin assumptions used were
in line with actual margins generated by the CGU in prior years.
5
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2015
$
As at
February 28,
2014
$
54,910
103,805
44,842
45,130
123,848
55,171
203,557
224,149
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $727 (2014 – $3,245), including reversals of $7,894 (2014 – $5,892).
The net book value of inventories pledged as security under the Company’s credit facilities amounted to $1,837
(2014 – $5,382).
6 Subsidiaries and transactions with non-controlling interests
a)
Interest in subsidiaries
Set out below are the Company’s principal subsidiaries at February 28, 2015. Unless otherwise stated, the
subsidiaries have share capital consisting solely of ordinary shares, which are held directly by the Company, and
the proportion of ownership interests held equals the voting rights held by the Company. The country of
incorporation or registration is also their principal place of business.
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Name of entity
Functional
Currency
Country of
incorporation
Velan Valve Corp.
U.S. Dollar
U.S.A.
Velan Ltd.
U.S. Dollar
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.
Korean
Won
Euro
British
Pound
Euro
Euro
Euro
Euro
Korea
Korea
Portugal
U.K.
France
France
Germany
Italy
U.S. Dollar
Taiwan
% of ownership
interest held by
the Company
2015
2014
% of ownership
interest held by
the non-
controlling
interests
2014
2015
Principal
Activities
100
100
50
100
100
100
75
100
100
75
85
100
100
50
100
100
100
75
100
100
75
85
-
-
-
-
Valve
Manufacture
Valve
Manufacture
50
50
Foundry
-
-
-
-
-
-
25
25
-
-
25
15
-
-
-
25
15
-
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Valve
Distribution
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Velan Valve (Suzhou) Co. Ltd. U.S. Dollar
China
Velan Valves India Private
Limited
Indian
Rupee
India
100
100
b) Significant restrictions
Cash and short-term investments held in certain Asian countries are subject to local exchange control
regulations. These regulations provide for restrictions on exporting capital from those countries, other than
through normal dividends. However, such restrictions do not have a significant impact on the Company’s
operations and treasury management as less than 2% of the Company’s cash and short-term investments are
subject to such restrictions. The total amount of cash and short-term investments subject to such restrictions was
$1,678 (2014 – $1,454).
c) Non-controlling interests
Set out below is summarized financial information for each subsidiary company and structured entity that has
non-controlling interests that are material to the Company and for which the non-controlling interest is
recognized as equity rather than as a liability (see note 12(j)). The amounts disclosed for each subsidiary are
before intercompany eliminations.
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statement of
financial position
As at February 28,
Current assets
Current liabilities
Current net assets
Non-current assets
Non-current liabilities
Non-current net assets
Juwon Special Steel Co. Ltd.
2014
$
2015
$
10,149
4,203
5,946
4,929
1,585
3,344
10,745
2,810
7,935
4,693
2,511
2,182
Velan Valvac
Manufacturing Co. Ltd.
2015
$
4,775
1,200
3,575
1,874
170
1,704
2014
$
4,796
1,481
3,315
1,923
173
1,750
Net assets
9,290
10,117
5,279
5,065
Accumulated non-
controlling interest
4,935
5,531
1,547
1,523
Velan ABV S.p.A.
2015
$
2014
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Summarized statement of comprehensive income
Juwon Special Steel
Co. Ltd.
Velan Valvac
Manufacturing Co.
Ltd.
2015
$
2014
$
2015
$
2014
$
Velan ABV S.p.A.
2015
$
2014
$
Sales
21,734
20,079
7,757
10,008
Net income (loss) for the year
1,368
1,234
559
552
Other comprehensive income (loss)
(302)
172
-
-
Total comprehensive income (loss) for the year
1,066
1,406
Net income (loss) allocated to non-controlling interest
Dividends paid to non-controlling interest
684
947
617
-
559
140
86
552
138
103
-
-
-
-
-
-
16,247
108
-
108
33
-
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statement of cash flows
Juwon Special Steel
Co. Ltd.
Velan Valvac
Manufacturing Co.
Ltd.
Velan ABV S.p.A.
2015
$
2014
$
2015
$
2014
$
2015
$
Cash flows from operating activities
1,995
1,615
1,373
485
Cash flows from investing activities
(848)
(224)
(46)
(37)
Cash flows from financing activities
(1,895)
973
(349)
(409)
Net increase (decrease) in cash and cash equivalents
(748)
2,364
978
39
-
-
-
-
2014
$
2,810
(438)
(57)
2,315
The summarized statements of comprehensive income and cash flows above include the results of Velan ABV
S.p.A. for the 2014 fiscal year only for the period beginning March 1, 2013 and ending July 16, 2013, the date at
which the Company acquired this subsidiary company’s non-controlling interest (see note 6(d)). It is for this
reason that the summarized statement of financial position above excludes the financial information for Velan
ABV S.p.A. for the 2015 and 2014 fiscal years.
d) Transactions with non-controlling interests
As a result of losses sustained in prior periods, the Company’s Italian subsidiary, ABV, was required to
recapitalize its share structure. Through the recapitalization, the existing share capital of ABV was cancelled.
New shares were issued solely to the Company through the conversion of existing shareholder loans from the
Company to ABV. In addition, the existing shareholder loans payable to the non-controlling interest of ABV
amounting to $1,403 (€1,071) were repaid through the recapitalization process. As a result of the
recapitalization, the Company acquired the remaining 30% of ABV to become its 100% shareholder as of July
16, 2013.
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
7 Property, plant and equipment
At February 28, 2013
Cost
Accumulated depreciation
Year ended February 28, 2014
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2014
Cost
Accumulated depreciation
Year ended February 28, 2015
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2015
Cost
Accumulated depreciation
Land
Buildings
M achinery &
equipment
Furniture &
fixtures
Data
processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
$
$
Total
$
11,907
-
11,907
11,907
271
-
-
(17)
12,161
12,161
-
12,161
12,161
3
-
-
(490)
11,674
11,674
-
11,674
50,964
(21,157)
29,807
136,462
(94,014)
42,448
29,807
1,878
(2)
(1,720)
(453)
29,510
42,448
12,855
153
(8,416)
(263)
46,777
7,960
(5,389)
2,571
2,571
903
(116)
(665)
594
3,287
52,486
(22,976)
29,510
145,907
(99,130)
46,777
10,622
(7,334)
3,288
29,510
1,251
-
(1,761)
(958)
28,042
46,777
9,496
(264)
(9,907)
(1,191)
44,911
51,139
(23,097)
28,042
146,247
(101,336)
44,911
3,288
469
(15)
(578)
(926)
2,238
8,388
(6,150)
2,238
4,875
(3,658)
1,217
1,217
1,043
(3)
(750)
5
1,512
5,879
(4,367)
1,512
1,512
1,118
-
(815)
(63)
1,752
6,740
(4,988)
1,752
2,584
(1,593)
991
2,897
(1,208)
1,689
217,649
(127,019)
90,630
991
389
(52)
(400)
18
946
1,689
614
(52)
(290)
451
2,412
90,630
17,953
(72)
(12,241)
335
96,605
2,922
(1,976)
946
4,356
(1,945)
2,411
234,333
(137,728)
96,605
946
363
(16)
(386)
(59)
848
2,411
122
-
(302)
(411)
1,820
96,605
12,822
(295)
(13,749)
(4,098)
91,285
2,866
(2,018)
848
3,694
(1,874)
1,820
230,748
(139,463)
91,285
Depreciation expense of $13,749 (2014 – $12,241) is included in the consolidated statement of income: $12,196 (2014 –
$10,865) in ‘cost of sales’ and $1,553 (2014 – $1,376) in ‘administration costs’.
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
At February 28, 2013
Cost
Accumulated amortization
Year ended February 28, 2014
Beginning balance
Additions
Disposals and transfers
Amortization
Exchange differences
At February 28, 2014
Cost
Accumulated amortization
Year ended February 28, 2015
Beginning balance
Additions
Disposals and transfers
Amortization
Exchange differences
At February 28, 2015
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Non-compete
agreements
Other
Total
24,080
-
24,080
24,080
-
-
-
1,342
25,422
25,422
-
25,422
6,953
(5,661)
1,292
13,720
(2,238)
11,482
7,067
(1,297)
5,770
1,292
390
44
(753)
52
1,025
7,611
(6,586)
1,025
11,482
5,770
-
3
(889)
606
11,202
14,485
(3,283)
11,202
-
-
(720)
296
5,346
7,461
(2,115)
5,346
25,422
1,025
11,202
5,346
-
-
-
(4,736)
20,686
20,686
-
20,686
384
(19)
(650)
(130)
610
13
-
(866)
(1,975)
8,374
-
-
(699)
(903)
3,744
7,343
(6,733)
610
11,805
(3,431)
8,374
6,072
(2,328)
3,744
784
(288)
496
496
-
-
(160)
23
359
829
(470)
359
359
-
-
(155)
(46)
158
675
(517)
158
2,175
(2,101)
74
54,779
(11,585)
43,194
74
7
(73)
(3)
-
5
1,091
(1,086)
5
5
3
-
-
(4)
4
43,194
397
(26)
(2,525)
2,319
43,359
56,899
(13,540)
43,359
43,359
400
(19)
(2,374)
(7,790)
33,576
890
(886)
4
47,471
(13,895)
33,576
Amortization expense of $2,374 (2014 – $2,525) is included in the consolidated statement of income: $1,890 (2014 –
$1,992) in ‘cost of sales’ and $484 (2014 – $533) in ‘administration costs’.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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,
2015
$
As at
February 28,
2014
$
26,868
41,018
3,111
70,997
31,410
41,712
3,468
76,590
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities available
as at February 28, 2015:
Unsecured
Credit facilities available
Borrowing rates
$87,983 (CA$85,000 and US$20,000) (2014 – $96,756
(CA$85,000 and US$20,000)) (note 25)
Prime to prime + 0.75%
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, 2015, an amount of $9,435 (2014 – $21,699) was drawn against these unsecured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $12,377 (2014 –
$7,881) was drawn against these unsecured credit facilities in the form of letters of credit and letters of
guarantee.
In addition to the unsecured credit facilities above, the Company maintains a facility with Export Development
Canada of $40,000 for letters of credit and letters of guarantee. As at February 28, 2015, $9,476 (2014 –
$8,862) was drawn against this facility.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Foreign subsidiaries and structured entities have the following credit facilities available as at February 28, 2015:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$60,749 (€45,172; £2,000; KW4,018,400;
INR200,000) (2014 – $66,489 (€40,822;
£2,000; KW4,691,250; CNY5,633;
INR90,000)) (note 25)
Borrowing rates
0.54% to 10.50%
(2014 – 0.75% to 7.65%)
Foreign structured entities
$5,070 (KW5,590,000)
(2014 – $6,184 (KW6,600,000)) (note 25)
3.11% to 5.00%
(2014 – 3.11% to 5.00%)
The above credit facilities are available by way of demand operating lines of credit, bank loans, guarantees, letters of
credit and foreign exchange forward contracts. The majority of these credit facilities have variable borrowing rates
based on LIBOR, EURIBOR, KORIBOR, EONIA or prime rate. The borrowing rates listed above are the rates in
effect as at February 28, 2015 and February 28, 2014. 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
$8,233 (2014 – $21,602).
As at February 28, 2015, an amount of $6,181 (2014 – $11,092) was drawn against these secured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $4,867 (2014 – $1,473) was drawn
against these secured credit facilities in the form of letters of credit and letters of guarantee.
11 Provisions
Balance – Beginning of year
Additional provisions
Used during the year
Exchange differences
Balance – End of year
As at
February 28,
2015
$
As at
February 28,
2014
$
8,060
3,618
(2,211)
(1,593)
7,874
6,345
2,969
(1,628)
374
8,060
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.
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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 (€68; 2014 – €166) (note 12(b))
Secured bank loan (€84; 2014 – €134) (note 12(c))
Secured bank loan (nil; 2014 – €342)
Italian subsidiary
Unsecured bank loan (€662; 2014 – €757) (note 12(d))
Unsecured bank loan (€629; 2014 – €707) (note 12(e))
Unsecured state bank loan (€371; 2014 – €439) (note 12(f))
Korean structured entity
Secured bank loan (KW22,800; 2014 – KW24,000) (note 12(g))
Secured bank loan (KW900,000; 2014 – 900,000) (note 12(h))
Unsecured bank loan (KW500,000; 2014 – 500,000) (note 12(i))
Other (note 12(j))
Less: Current portion
a) Unsecured bank loan
As at
February 28,
2015
$
As at
February 28,
2014
$
6,667
12,000
76
94
-
744
707
417
21
816
454
4,831
14,827
10,644
230
185
472
1,046
977
605
22
843
469
5,241
22,087
10,402
4,183
11,685
The unsecured bank loan of $6,667 bears interest at 2.74% and is repayable in monthly instalments of $444,
expiring in 2016.
b) Unsecured bank loan
The unsecured bank loan of $76 (€68) bears interest at 2.6% and is repayable in quarterly instalments of $29,
expiring in 2016
c) Secured bank loan
The secured bank loan of $94 (€84) bears interest at 2.7% and is repayable in monthly instalments of $8,
expiring in 2016. Certain machinery and equipment are pledged as collateral for this loan.
d) Unsecured bank loan
The unsecured bank loan of $744 (€662) bears interest at 2.91% and is repayable in monthly instalments,
expiring in 2021.
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
e) Unsecured bank loan
The unsecured bank loan of $707 (€629) bears interest at 4.90% and is repayable in monthly instalments,
expiring in 2021.
f) Unsecured state bank loan
The unsecured state bank loan of $417 (€371) is non-interest bearing and is repayable in semi-annual
instalments, expiring in 2020.
g) Secured Bank Loan
The secured bank loan of $21 (KW22,800) bears interest at 1.50% and is repayable in 2020. Certain land, a
building, and certain machinery and equipment are pledged as collateral for this loan.
h) Secured Bank Loan
The secured bank loan of $816 (KW900,000) bears interest at 3.10% and is repayable in 2015. Certain land, a
building, and certain machinery and equipment are pledged as collateral for this loan.
i) Unsecured Bank Loan
The unsecured bank loan of $454 (KW500,000) bears interest at 3.39% and is repayable in 2015.
j)
Included in Other is an amount of $3,580 (€3,185) (2014 – $4,049 (€2,931)) 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 structured entity. 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.
k) The following is a schedule of future debt payments:
February 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
February 28, 2020
Subsequent years
$
10,644
1,675
298
303
307
1,600
14,827
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted to
$2,742 (2014 – $3,217).
l) The carrying value of long-term debt approximates its fair value.
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
6,372,601 Subordinate Voting Shares (February 28, 2014 –
6,392,201) (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 28,
2015
$
As at
February 28,
2014
$
69,349
7,126
76,475
69,562
7,126
76,688
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a maximum of
100,000 of the issued Subordinate Voting Shares of the Company, representing approximately 1.57% of the
issued shares of such class as at October 9, 2014, during the ensuing 12-month period ending October 21, 2015.
During the year ended February 28, 2015, 19,600 Subordinate Voting Shares were purchased for a cash
consideration of $306 and cancelled. During the year ended February 28, 2014, no Subordinate Voting Shares
were repurchased. The amount by which the repurchase amount is above the stated capital of the shares has been
debited to contributed surplus and retained earnings.
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.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
A compensation cost of $15 (2014 – $23) was recorded in the consolidated statement of income and credited to
contributed surplus.
During the fiscal year ended February 28, 2014, 35,000 options were exercised resulting in the issuance of
35,000 Subordinate Voting Shares of the Company for proceeds of $374 which were credited to share capital.
No options were exercised in the current fiscal year.
The table below summarizes the status of the Share Option Plan.
Number
of shares Weighted average exercise price
Weighted
average
contractual
life in
months
Outstanding – February 28, 2013
Exercised
Expired/forfeited
Outstanding – February 28, 2014
Exercisable – February 28, 2014
Outstanding – February 28, 2014
Issued
Outstanding – February 28, 2015
Exercisable – February 28, 2015
180,000
(35,000)
(95,000)
50,000
33,334
50,000
100,000
150,000
50,000
$11.51 (CA$11.88)
16.8
$10.70 (CA$11.00)
$10.70 (CA$11.00)
-
-
$12,78 (CA$14.15)
29.0
$12.78 (CA$14.15)
$12.78 (CA$14.15)
$16.43 (CA$20.88)
$14.91 (CA$18.64)
$11.32 (CA$14.15)
29.0
60.0
45.0
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 fiscal year are included in sales
and cost of sales and amounted to:
Sales
Cost of sales
2015
$
2,074
(8,937)
2014
$
(250)
(907)
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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 expenses, excluding scientific research investment tax credits
(note 17)
Depreciation and amortization (note 19)
Movement in inventory provision – net (note 5)
Foreign exchange loss (note 14)
Other production overhead costs
16 Administration costs
Employee expenses, excluding scientific research investment tax credits
(note 17)
Scientific research investment tax credits (notes 17 and 18)
Commissions
Freight to customers
Professional fees
Movement in allowance for doubtful accounts (note 25)
Depreciation and amortization (note 19)
Other
17 Employee expenses
Wages and salaries
Social security costs
Scientific research investment tax credits (note 18)
Share-based compensation (note 13(d))
Other
2015
$
2014
$
18,850
163,407
93,713
14,086
727
8,937
37,747
15,364
190,382
96,608
12,857
3,245
907
38,748
337,467
358,111
2015
$
2014
$
44,575
(3,815)
7,921
4,635
10,958
35
2,037
22,045
88,391
2015
$
99,173
32,460
(3,815)
15
6,640
43,310
(4,028)
7,095
6,411
11,929
(638)
1,909
21,155
87,143
2014
$
99,518
33,936
(4,028)
23
6,441
134,473
135,890
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
18 Research and development expenses
Research and development expenses are included in cost of sales and administration costs and consist of the
following:
Research and development expenditures
Less: Scientific research and development investment tax credits
2015
$
9,231
(3,815)
5,416
19 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
20 Income taxes
Current taxes:
Current tax on profits for the year
Adjustments in respect of prior years
Deferred taxes:
Origination and reversal of temporary differences
Income tax expense
2015
$
13,749
2,374
16,123
2015
$
11,470
209
11,679
(1,906)
9,773
2014
$
8,844
(4,028)
4,816
2014
$
12,241
2,525
14,766
2014
$
10,289
349
10,638
1,121
11,759
The taxes on the Company’s income before taxes differ from the amount that would arise using the statutory tax rates
applicable to income of the consolidated entities as follows:
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Income before tax at statutory rate of 26.90% (2014 – 26.90%)
7,792
11,503
2015
$
2014
$
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
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 (Provision) to consolidated statement of income
Exchange differences
Balance – End of year
1,624
539
874
(1,342)
286
1,025
(4)
369
(1,309)
175
9,773
11,759
2015
$
7,502
4,890
(8,199)
(150)
4,043
2015
$
2,136
1,906
1
4,043
2014
$
6,465
4,941
(7,772)
(1,498)
2,136
2014
$
3,191
(1,121)
66
2,136
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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
2015
$
(4,858)
(3,798)
5,675
(930)
6,378
2,479
(903)
4,043
2014
$
(3,832)
(5,254)
3,491
(909)
4,324
2,399
1,917
2,136
The Company did not recognize deferred income tax assets of $1,664 (2014 – $606) in respect of non-capital losses
amounting to $5,707 (2014 – $1,782) that can be carried forward to reduce taxable income in future years. These
losses expire between 2021 and indefinitely.
The Company did not recognize deferred income tax assets of $276 (2014 – $276) in respect of capital losses
amounting to $2,051 (2014 – $2,051) that can be carried forward indefinitely against future taxable capital gains.
Deferred tax liabilities of $6,967 (2014 – $7,009) 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, 2015 totalled $304,098 (2014 – $292,798).
21 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.
2015
2014
Net income attributable to Subordinate and Multiple Voting shareholders
$18,580
$29,400
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings per share
21,947,725
21,936,714
$0.85
$1.34
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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.
2015
2014
Net income attributable to Subordinate and Multiple Voting shareholders
$18,580
$29,400
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
21,947,725
14,892
21,936,714
-
21,962,617
21,936,714
$0.85
$1.34
22 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, 2015, the
aggregate maximum value of these guarantees, if exercised, amounted to $65,873 (2014 –$73,934). The
guarantees expire as follows:
February 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
February 29, 2020
Subsequent years
$
26,742
16,110
10,655
11,807
393
166
65,873
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$8,722 (2014 – $4,452), which are covered by letters of credit.
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
February 29, 2020
Subsequent years
$
1,066
890
840
775
688
690
4,949
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, 2015, legal and related costs for these matters amounted to $6,085 (2014 –
$5,472).
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.
On December 3, 2014, San Diego Gas & Electric Company (“SDG”) filed a claim against Velan Valve Corp., a
wholly-owned subsidiary of the Company, in the Superior Court of the State of California, concerning high
pressure valves supplied to SDG and installed at its Palomar Energy Center (“Facility”).
This lawsuit alleges damages to the Facility in excess of $9,000 related to allegedly defective valves supplied by
Velan Valve Corp. The claim is for alleged strict product liability and alleged negligence. It is the Company’s
position that this claim is without merit.
The Company intends to vigorously defend its position and will undertake all actions necessary to protect its
reputation. While the Company cannot predict the final outcome of this claim, based on information currently
available, the Company believes the resolution of this claim will not have a material adverse effect on its
financial position, results of operations or liquidity. The Company has reported this claim to its insurance
company and accrued the $100 deductible.
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
23 Related party transactions
Transactions and balances with related parties occur in the normal 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 (up to the acquisition of the remaining 30% - note 6d))
Rent for manufacturing facilities
Interest expense on shareholder loans payable
Accounts payable and accrued liabilities
Affiliated companies
Controlling shareholder
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation
2015
$
1,459
67
14
27
-
-
-
82
35
2014
$
1,889
104
4
25
32
271
33
174
21
4,405
15
3,841
23
1 Key management includes directors (executive and non-executive) and certain members of senior management.
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Segment reporting
The Company reflects its results under a single reportable operating segment. The geographic distribution of its sales
and assets is as follows:
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 28, 2015
Consolidation
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
37,258
91,517
83,279
142,930
-
17,230
54,190
49,434
144
Total
212,054
160,160
103,768
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
41,588
78
245,375
287,041
7,926
-
30,633
38,559
10,496
9,229
132,780
152,505
553
34,935
3,156
38,644
3,854
24,215
39,964
68,033
22,237
22,696
56,022
(159,831)
257,168
198,582
-
100,955
(159,831)
455,750
27,421
54
110,638
-
-
(125,623)
91,285
33,576
433,767
138,113
(125,623)
558,628
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 28, 2014
Consolidation
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
Total
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
71,899
108,673
91,160
271,732
42,365
169
261,928
304,462
116,343
-
33,383
58,630
48,538
895
149,726
108,063
8,693
-
34,886
43,579
13,612
11,522
165,934
191,068
1,011
36,834
839
38,684
5,279
31,597
30,499
67,375
12,779
34,550
55,764
(182,041)
260,662
228,595
-
103,093
(182,041)
489,257
26,663
71
108,026
(7)
-
(117,083)
96,605
43,359
484,190
134,760
(117,090)
624,154
25 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
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
responsibility of the corporate finance team in conjunction with the finance teams of the Company’s subsidiaries. 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.
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.
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The amounts outstanding as at February 28, 2015 and February 28, 2014 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2015
February 28,
2014
February 28,
2015
$
February 28,
2014
$
February 28,
2015
February 28,
2014
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
Buy US$ for € – 0 to 12 months
Sell US$ for ₤ – 0 to 12 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 € – 0 to 12 months
1.09-1.26
1.14-1.40
1.12-1.27
-
-
1.10-1.14
1.55-1.62
0.74-0.79
1.04-1.12
1.29-1.36
1.34-1.36
1.52
1,070-1,075
1.31-1.37
1.61-1.68
-
(3,047)
(2,236)
30
-
-
(6)
(37)
78
(1,275) US$49,565
US$19,573
US$1,119
-
-
€5,907
£599
£1,982
192
(14)
130
94
(133)
3
-
US$43,057
US$8,498
US$483
US$1,315
US$1,348
€9,026
£2,746
-
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. Unrealized gains are recorded as derivative assets and unrealized losses as
derivative liabilities on the consolidated statement of financial position.
The following table provides a sensitivity analysis of the Company’s most significant foreign exchange exposures
related to its net position in the foreign currency financial instruments, which includes cash and cash equivalents,
short-term investments bank indebtedness, short-term bank loans, derivative financial instruments, accounts
receivable, accounts payable and accrued liabilities, customer deposits, accrual for performance guarantees and long-
term debt, including interest payable. A hypothetical strengthening of 5.0% of the following currencies would have
had the following impact for the fiscal year ended February 28, 2015:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income
(loss)
1,083
766
Other
comprehensive
income (loss)
-
-
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact.
For the purposes of the above analysis, foreign exchange exposure does not include the translation of subsidiaries into
the Company’s reporting currency. For those subsidiaries whose functional currency is other than the reporting
currency (U.S. dollar) of the Company, such exposure would impact other comprehensive income or loss.
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.
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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, 2015, four
(2014 – two) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 10.3% (2014 – 5.4%), and the Company’s ten largest customers accounted for 54.7% (2014 – 36.5%).
In addition, one customer accounted for 10.9% of the Company’s sales (2014 – no customers accounted for more
than 10% of sales).
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:
As at
February 28,
2015
$
As at
February 28,
2014
$
64,387
17,930
12,360
4,804
99,481
899
98,582
6,735
93,053
13,251
9,375
9,039
124,718
917
123,801
5,177
105,317
128,978
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
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(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,
2015
$
As at
February 28,
2014
$
917
872
(665)
(172)
(53)
899
1,525
767
(1,237)
(168)
30
917
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:
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term bank loans
Derivative liabilities
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term bank loans
Derivative liabilities
Less than
1 year
$
10,644
70,997
44,111
30,012
17,750
5,362
Less than
1 year
$
10,402
76,590
66,842
33,842
32,792
1,501
As at February 28, 2015
4 to 5
Years
$
After
5 years
$
610
-
-
-
-
-
1,600
-
-
-
-
-
As at February 28, 2014
4 to 5
Years
$
After
5 years
$
739
-
-
-
-
-
1,959
-
-
-
-
-
1 to 3
Years
$
1,973
-
-
-
-
-
1 to 3
Years
$
8,987
-
-
-
-
-
Total
$
14,827
70,997
44,111
30,012
17,750
5,362
Total
$
22,087
76,590
66,842
33,842
32,792
1,501
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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:
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
As at February 28, 2015
Level 1
$
Level 2
$
Level 3
$
-
-
144
5,362
-
-
As at February 28, 2014
Level 1
$
Level 2
$
Level 3
$
-
-
498
1,501
-
-
Total
$
144
5,362
Total
$
498
1,501
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.
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
26 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.
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,
2015
$
As at
February 28,
2014
$
15,616
2,134
10,644
4,183
32,577
31,876
916
10,402
11,685
54,879
345,093
359,119
9.4%
15.3%
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.
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2015 and 2014
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
27 Adjustments to reconcile net income to cash provided from operating activities
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred income taxes
Share-based compensation expense
Loss (Gain) on disposal of property, plant and equipment
Interest accretion on proceeds payable
Realized foreign exchange loss on liquidation of subsidiary
Net change in derivative assets and liabilities
Net change in other liabilities
28 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
2015
$
13,749
2,374
(1,906)
15
139
-
636
4,208
230
2014
$
12,241
2,525
1,121
23
(296)
9
-
(37)
304
19,445
15,890
2015
$
23,602
20,557
(7)
(280)
(5,603)
(197)
(22,770)
(186)
(3,837)
2014
$
5,443
23,033
2,226
1,011
(1,825)
1,339
(9,754)
1,730
5,363
11,279
28,566
78
Directors and officers
Corporate directors
A. K. Velan
Founder and Chairman Emeritus
T. Velan
Chairman of the Board
W. Sheffield
Lead Director
P. Velan
R. Velan
C. Hooper
Director
Director
Director
J. Latendresse
Director
K. MacKinnon
Director
Corporate officers
T. Velan
Y. Leduc
I. Velan
W. Maar
J. Ball
Chief Executive Officer
President
Executive Vice-President
Executive Vice-President, International Sales and Overseas Operations
Chief Financial Officer
S. Cherlet
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
D. Velan
R. Velan
Vice-President, Materials and Process Technologies
Vice-President, Marketing
Vice-President, Sales Administration (North America)
G. Zarifah
Vice-President, Global Capital Investments and Production Technology
79
Shareholder information
Head office
7007 Cote de Liesse
Montreal, Quebec, Canada H4T 1G2
Website
www.velan.com
Investor relations
John D. Ball
Chief Financial Officer
7007 Cote de Liesse, Montreal, Quebec, Canada H4T 1G2
Tel.: (514) 748-7743, Ext. 5537
Fax: (514) 908-0180
Auditors
PricewaterhouseCoopers LLP
Transfer agent
CST Trust Company
Shares outstanding as at February 28, 2015
6,372,601 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High CA $21.94
CA $15.17
Low
Closing on February 28, 2015: CA $19.00
Annual meeting
The Annual Meeting of Shareholders will be held July 9, 2015,
at 3:00 p.m. in the Grand Salon of the:
Saint James Club
1145 Union Avenue
Montreal, Quebec, Canada H3B 3C2
80
Velan worldwide
Head Office
An extensive global network
Montreal, QC, Canada
Velan Inc.
Manufacturing
- North America
Plant 1
• 17 production facilities
• 5 plants in North America
• 6 plants in Europe
• 6 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, QC, 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, QC, Canada
Velan Inc.
Mennecy, France
Segault SA
Ansan City, South Korea
Velan Ltd.
Granby, QC, Canada
VelCAN
Plant 4 and 6
Plant
Plant 3
Stocking and distribution
Granby, QC, Canada
Velan Inc.
Leicester, United Kingdom
Velan Valves Ltd.
Ansan City, South Korea
Velan Ltd.
Benicia, CA, U.S.A.
VelCAL
Plant 5
Plant
Plant
Stocking and distribution
Montreal, QC, Canada
Velan Inc.
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Taichung, Taiwan
Velan-Valvac
Marietta, GA, U.S.A.
VelEAST
Plant 3
Plant 1
Plant
Stocking and distribution
Williston, VT, USA
Velan Valve Corp.
Lucca, Italy
Velan ABV S.p.A
Plant 2
Suzhou, China
Velan Valve (Suzhou) Co., Ltd.
Houston, TX, U.S.A.
VelTEX
Plant
Lucca, Italy
Velan ABV S.p.A
Coimbatore, India
Velan Valves India Private Ltd.
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