Annual report 2016
2016 highlights
Employees of Velan Valves India PVT. Ltd. together with Velan’s top executives.
Cover photo:
12″ Class 1500 Velan parallel slide,
stop check, and 1″ y-pattern bonnetless
globe valves installed in a power plant
in Western Canada.
Velan was featured as the cover story in the May 2016 issue of
Velan was featured as the cover story in the May 2016 issue of
Valve World magazine.
Hydrotesting of large high-pressure valves in one of Velan’s
Montreal plants. This is one of four 36″ Class 900 parallel slide
valves for SAGD service in Western Canada.
2016 highlights
Sales
(in millions of U.S. dollars)
Net earnings(2) and Adjusted net earnings(1)
(in millions of U.S. dollars)
560
520
480
440
400
360
320
280
240
200
160
120
80
40
0
2012
Consolidated
Consolidated
Overseas
Overseas
U.S.A.
Canada
35
30
25
20
15
10
5
0
2013
2014
2015
2016
2012
2013
Net earnings(2)
2014
2015
Adjusted net earnings(1)
2016
(in thousands of U.S. dollars, except per share amounts and number
of employees)
Years Ended
Income statement data
Sales
Gross profit
Gross profit %
Administration costs
Income before income taxes
Adjusted net earnings (1)
Adjusted net earnings (1) %
Adjusted net earnings (1) per share
Net earnings (2)
Net earnings (2) %
Net earnings (2) per share (3)
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
Feb 2016
Feb 2015
Feb 2014
Feb 2013
Feb 2012
$ 426,895
104,283
24.4%
$ 455,750
118,283
26.0%
$ 489,257
131,146
26.8%
$ 500,574
113,899
22.8%
$ 437,135
87,262
20.0%
77,974
12,587
17,276
4.1%
0.79
3,641
0.8%
0.17
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
$ 82,049
229,959
95,257
515,627
22,449
333,119
$ 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
787
165
520
430
1,902
917
181
528
441
2,067
917
188
526
429
2,060
923
182
535
390
2,030
926
178
519
358
1,981
(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 22 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 $426.9 million
• Adjusted net earnings(1) of $17.3 million
• Order backlog of $331.2 million
• Order bookings of $329.5 million
• Net cash(1) of $82.0 million
This was a year of transition and change for our company as
we dealt with the impact from tough energy market conditions
resulting from low oil prices, cutbacks in spending by our end-
user customers, and fierce competition as valve companies fight
for their share of the contracted market.
In view of our declining sales, bookings, and backlog, we took
necessary measures to restructure and reduce our cost structure.
Our adjusted net earnings(1) of $17.3 million are after excluding
the restructuring costs and a non-cash goodwill impairment
writedown on our Italian subsidiary, which sells mainly to the
upstream oil and gas market.
Sales, order bookings, and backlog
Our sales of $426.9 million declined 6.3% from last year. The
main reasons for the lower sales were the weak demand in energy
markets as well as the strength of the U.S. dollar. Without the
currency change, our consolidated sales would have been equal
to the previous year. This year, India became our largest overseas
market, surpassing China. India and China taken together
accounted for 27.8% of our total sales.
Velan’s President, Yves Leduc (left) with Tom Velan, Chairman of the
Board and Chief Executive Officer.
Earnings
Our adjusted net earnings(1) were $17.3 million or 4.1% of
sales compared to $18.6 million or 4.1% of sales last year. Our
net earnings(2) were adjusted by excluding the non-recurring
restructuring costs of $2.8 million and the non-cash goodwill
impairment writedown of $11.5 million related to our acquisition
of ABV Energy in Italy in 2011. This subsidiary is mainly in
the upstream oil and gas industry, which has been the hardest
hit segment of the energy industry. Our gross profit percentage
declined by 160 basis points to 24.4%, mainly due to higher
material cost percentage as both material prices and our selling
prices declined. Our costs related to asbestos lawsuits were
$5.6 million, which is 8.2% lower than last year. The fluctuations
in asbestos-related costs are due more to the timing of settlement
payments than to changes in long-term trends.
Leadership transition, restructuring, and new initiatives
Order bookings declined 30.1% to $329.5 million including
an order cancellation of $23.6 million. The order cancellation
relates to an order from a Russian boiler manufacturer for a
power plant in India. The Russian contractor ran into financial
and performance problems so the Indian end-user cancelled the
order. Order bookings were lower than sales so our order backlog
declined by 24.3% to $331.2 million.
In 2015, Yves Leduc became the first non-Velan-family President
of the company. He was welcomed into the industry by a tough
market downturn that has caused our backlog to decrease quite
substantially, as end-users have been cancelling or postponing
large projects, particularly in the oil and gas sector. This caused
more aggressive competitive behaviors, driving downward
pressure on pricing, which in turn is affecting our margins.
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.
2
Message to our shareholders and employees
Our response to those difficult conditions has been swift
and multi-tiered: we have reduced our cost structure, carried
out a restructuring plan, announced our intention to transfer
production out of two plants that we are closing this year,
resolved a union conflict through a short-lived lock-out,
launched several operational improvement initiatives, and, in
line with our new strategic direction, made some changes to our
executive management team. With these actions, we were able to
significantly mitigate the impact of the industry downturn while
setting the wheels in motion towards improving our business
performance. Unfortunately, as part of the restructuring, we
had to eliminate about 160 full-time positions and we regret the
impact on these people and their families.
As a result of these actions, we believe Velan is better equipped
to withstand a very slow market recovery and our organization
is now leaner and more resilient. Thanks to our geographical
breadth, we are well positioned to seize discrete opportunities
in the energy and chemical markets in all regions of the globe.
Last but not least, we have a clean and unleveraged balance
sheet and we were able to increase cash despite the challenging
environment.
Two 48″ Class 300 top-entry subsea ball valves manufactured in Italy
by Velan ABV for a refinery and petrochemical plant in Vietnam. The
valves weighed 40 tons each.
Financial Strength
Outlook
Our balance sheet remains strong as net cash(1) reached
$82.0 million or $3.77 per share while equity was $333.1 million
or $15.32 per share. Our net cash(1) was positively impacted by
$28.9 million in cash generated by our operations, which was
partially offset by negative currency impacts due to the strength
of the U.S. dollar. Our consolidated inventory decreased by
$40.8 million or 20% over the course of the year.
For this upcoming fiscal year, our outlook is for further reduced
sales, as the oil and gas industry is showing no sign of recovering
soon. Accordingly, our short-term challenge is to grow margins
through operational improvements. Meanwhile, we are also
actively preparing for the future. Our strategic plan, approved
and launched in the first quarter and named Velocity 2020, has
set a four-year vision and objectives, resting on three key pillars:
Customer-driven operational excellence and margin
improvements
Here, the key goal is making Velan leaner and more agile,
not only in our manufacturing operations, but in the way we
handle customer requests and project manufacturing in general.
We firmly believe that Velan market strategies will become
significantly more effective when we successfully combine speed
and agility with our distinctive strengths, namely our global
reputation for outstanding products and knowhow.
One example is the deployment of a new Valve Project
Management process, which aims at streamlining all aspects
of the order-to-delivery cycle, in order to strengthen our on-
time-delivery performance in the short term and decrease lead
times in the longer term. The ultimate goal is to improve the
competitiveness of Velan’s project manufacturing business.
Doing so will not only drive operational efficiencies, it will also
enable us to compete more effectively.
Velan SAS won 1st place for Quality in the 2016 EDF DPN (Électricité
de France, Division Production Nucléaire) challenge. Jean-Luc Mazel,
Managing Director, Velan SAS (far right) accepted the award.
3
Message to our shareholders and employees
In addition, we have launched a number of breakthrough initiatives
aimed at reducing material costs, increasing productivity, and
driving waste out of our global supply chain.
Prepare for growth through increased focus on key target
markets where Velan has distinctive competitive advantages
Despite the slow-down in the oil and gas sector, there remain
pockets of opportunities in the global energy markets that Velan
is uniquely positioned to capture. We are already developing plans
targeting those opportunities, with the intention of rebounding
once the economy improves. We can look at these from both a
geographical and a sectorial perspective.
Geographically, Velan benefi ts from the signifi cant advantage of
being fi rmly established with sales in all key regions and with
plants in North America, Europe, and Asia. We continue to
expand our product lines in India and China, bringing us the dual
benefi t of local market presence and more effi cient lower cost
manufacturing. Consequently, we expect our business units in
India, Korea and China to produce a growing share of our global
valve supply in the coming years. From a sales perspective, we
are already putting more focus on these markets by investing in
our front line.
From a sectorial point of view, we see growing or maintained
capital spending in sectors not directly related to oil and gas,
such as the power and chemical industries, where we intend to
grow our market share by leveraging our reputation for superior
product quality, product coverage, and agile design capabilities.
We will be attacking those markets with an integrated approach,
namely by intensifying our sales focus, streamlining our supply
A 14″ and 24″ forged pressure seal valve for an Ultra Super Critical
power plant in China.
4
Velan Ltd.,new Plant 1 in Ansan City, South Korea. This new plant is
larger than the old Plant 1 and is higher for the production of larger
size valves.
chain for reduced lead times and effi ciency gains, and aligning
our product and applications development resources to bolster
our ability to quickly meet our customers’ needs. We see
opportunities to grow in those sectors in all geographic regions,
including North America.
Improved systems and processes
In our fi nancial planning for the next years, and thanks to our
cost reduction and improvement initiatives, we have set aside
adequate funding to carry out a number of key investments
aimed at upgrading our systems and driving process effi ciencies.
In developing our information technology plan, priority was
given to projects that will enhance our capabilities to meet our
customers’ most critical needs, namely in terms of delivery
performance and design agility.
In summary, we were successful last year in limiting the
impact of a severe drop in bookings by responding quickly and
decisively. In that regard, management is extremely grateful for
the dedication and resilience of our employees. We believe they
should get the most recognition for these efforts.
Going
forward, confronted with a challenging market
environment, our priority is to control expenses and grow
margins through operational improvements. Meanwhile we
have defi ned a path for growth and business improvement, and
we have begun mobilizing our entire organization towards our
new Velocity 2020 vision. As a goal, our strategy is to come out
stronger than ever once the sector recovers.
T. C. Velan
Chairman of the Board and
Chief Executive Offi cer
Yves Leduc
Yves Leduc
President
President
Management’s discussion and analysis
May 19, 2016
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 29, 2016. 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 29, 2016 and February 28,
2015. 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 15 manufacturing plants
worldwide with 1,902 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, customer-driven operational excellence and margin improvements,
accelerated growth through increased focus on key target markets where the Company has distinctive competitive advantages and
continuously improving and modernizing its systems and processes.
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 %
Adjusted net earnings2
Adjusted net earnings2 %
Adjusted net earnings2 per share – basic and diluted
Net earnings3
Net earnings3 %
Net earnings3 per share – basic and 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 29,
2016
Fiscal year
ended
February 28,
2015
Increase
(decrease)
%
Increase
(decrease)
$426.9
104.3
24.4%
17.3
4.1%
0.79
3.6
0.8%
0.17
21.9
28.9
(23.9)
(2.1)
329.5
331.2
$455.7
118.3
26.0%
18.6
4.1%
0.85
18.6
4.1%
0.85
21.9
49.9
(13.1)
(14.0)
471.4
437.8
$(28.8)
(14.0)
(6.3)%
(11.8)%
(1.3)
(7.0)%
(0.06)
(15.0)
(7.1)%
(80.6)%
(0.68)
(80.0)%
(21.0)
(10.8)
11.9
(141.9)
(106.6)
(42.1)%
(82.4)%
85.0%
(30.1)%
(24.3)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 Non-IFRS measures – see reconciliations at the end of this report.
3 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
6
Management’s discussion and analysis
Highlights of fiscal 2016 as well as factors that may impact fiscal 2017
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net earnings1 amounted to $3.6 million or $0.17 per share compared to $18.6 million or $0.85 per share last year. Net
earnings1 for the current year were significantly impacted by an $11.5 million non-cash goodwill impairment charge related
to the Company’s wholly-owned Italian subsidiary, Velan ABV S.p.A. (“ABV”). Excluding this charge, as well as the after-
tax impact of the restructuring costs incurred during the year, the Company’s adjusted net earnings2 would have been $17.3
million or $0.79 per share this year compared to $18.6 million or $0.85 per share last year. The $1.3 million decrease in
adjusted net earnings2 is primarily attributable to a lower gross profit percentage partially offset by decreased administration
and net finance costs.
Net new orders received (“bookings”) amounted to $329.5 million, a decrease of $141.9 million or 30.1% compared to last
year. Excluding the effect of an order cancellation of $23.6 million in the first quarter of the current fiscal year, bookings
would have decreased by $118.3 million or 25.1% in the year. This decrease is mainly attributable to an economic downturn
in some of the Company’s important markets, particularly the oil and gas industry and energy sector.
Sales amounted to $426.9 million, a decrease of $28.8 million or 6.3% from the prior year. Sales were negatively impacted
by the decrease in bookings, a production slowdown caused by labour unrest and a lockout at the Company’s Canadian
facilities during the first half of the current fiscal year, and a stronger U.S. dollar, particularly against the euro.
As a result of sales outpacing bookings in the year, the Company ended the year with a backlog of $331.2 million, a decrease
of $106.6 million or 24.3% since the beginning of the current fiscal year. In addition to lower bookings, the backlog was
negatively impacted by the weakening of the euro against the U.S. dollar over the course of the year.
Gross profit percentage decreased by 160 basis points from 26.0% to 24.4%. This decrease is mainly attributable to an
increase in material costs as a percentage of sales and unfavourable inventory movements and provisions which were partially
offset by decreased labour costs resulting from the restructuring initiatives undertaken in the year (see Results of operations
– Restructuring costs section).
Administration costs amounted to $78.0 million, a decrease of $10.4 million or 11.8%. This decrease is primarily attributable
to a decrease in compensation-related costs, which was mainly due to the restructuring initiatives mentioned above, and
favourable currency swings resulting from a stronger U.S. dollar, particularly against the euro and Canadian dollar.
The Company generated net cash2 from operations of $28.9 million. This source of net cash2 is primarily attributable to
positive cash net earnings1 and favourable working capital movements, particularly a decrease in inventories. As a result, the
Company ended the year with net cash2 of $82.0 million, an increase of $6.4 million or 8.5% since the beginning of the
current fiscal year.
Foreign currency impacts:
o Based on average exchange rates, the euro weakened 14.9% 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 13.8% 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 on the Company’s net earnings1.
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
Fiscal 2016 was a turbulent year for the Company. The continued weakness of the price of oil has persisted longer than previously
anticipated, resulting in a significant drop in large capital projects in some of the Company’s key target markets. As a result,
competition in these markets has intensified, leading to increased pressure on pricing and margins, resulting in a drop in bookings,
particularly in the Company’s North American and Italian operations. Bookings were also negatively impacted by a large order
cancellation in the first quarter of the year in the Company’s German operations. This bookings lag, coupled with a production
slowdown caused by labour unrest and a lockout at the Company’s Canadian facilities during the first half of the current fiscal year,
resulted in lower sales volume. As a result of this new economic reality and the current highly competitive environment, the Company
commenced several initiatives to align and adapt its operations and cost structure. One of those initiatives was a major restructuring
operation which took place mainly at its North American and U.K. facilities and resulted in the elimination of approximately 160 full-
time positions (see Results of operations – Restructuring costs section for more details). The purpose of these restructuring initiatives
were to implement a leaner cost structure and to develop a more efficient global manufacturing footprint. The Company also
commenced other strategic initiatives in order to improve operational performance, in particular its on-time-delivery of project orders
as well as a reduction of the lead and cycle times it quotes on future orders. One such initiative is the Valve Project Management
(“VPM”) process. The goal of VPM is to streamline all aspects of the order-to-delivery 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 is now deploying VPM and will pursue on continuously improving the process in years
to come.
On an annual basis, the Company is required to perform an impairment test on goodwill acquired in a business combination. As a
result of this analysis, the Company determined that the carrying amount of the goodwill associated with ABV exceeded its recoverable
amount and, accordingly, the Company recorded a non-cash goodwill impairment loss of $11.5 million in the fourth quarter of the
current fiscal year. Despite the fact that ABV continued to report positive earnings for a third consecutive year, this impairment charge
was the result of revised projected future earnings, which were lowered to reflect a slowdown in order intake, particularly over the
second half of the current fiscal year. The continued weakness of the price of oil has had a significant negative impact on ABV’s key
target market, namely the upstream oil and gas industry, creating an increasingly competitive landscape. As a result, ABV has been
quoting more competitive prices to win orders, which may negatively impact future margins. Despite these challenges, the Company
remains confident about the long term prospects of ABV and its product range and anticipates positive continuing cash flows despite
the drop in crude oil prices.
The Company’s wholly-owned French operations continued to perform well in the current fiscal year, due in large part to a resurgence
in the nuclear power markets in France and China. While sales remained relatively flat, its gross profit improved by 2.8% as it sold a
greater proportion of higher margin spare parts. While its bookings were relatively constant, its book-to-bill ratio was above the prior
year, resulting in a slightly improved backlog at the end of the current fiscal year.
Other factors that may impact fiscal year 2017
Due to its diversification in both geography and type of industry, the Company is well positioned to meet the many challenges it
currently faces. Despite the decline in bookings in the current year, 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. Through its various strategic initiatives, the
Company is also working to be a more agile player in the global valve market in order to better take advantage of market swings and
changes in customer demands and preferences. While the current weakness in the euro is a drag on net earnings in the current year, it
should allow the Company’s European subsidiaries to be more competitive when bidding on U.S. dollar-denominated projects.
Furthermore, while the weakness in the price of oil has negatively impacted bookings and sales of valves destined for upstream oil
and gas projects, particularly in offshore drilling and the Canadian oil sands, the Company should be able to take advantage of
opportunities in the downstream oil and gas business, namely in refining and petrochemical projects in the Middle East, since the
lower oil price generally leads to more projects in these industries. 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.
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 29, 2016
Fiscal year ended
February 28, 2015
Fiscal year ended
February 28, 2014
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
$455,750
18,580
0.85
0.85
558,628
12,720
0.36
0.36
$489,257
29,400
1.34
1.34
624,154
19,992
0.31
0.31
$426,895
3,641
0.17
0.17
515,627
23,516
0.31
0.31
15,566,567
6,170,568
Sales for fiscal year 2016 decreased by 6.3% compared to fiscal year 2015. Sales were negatively impacted by a decrease in bookings,
a production slowdown caused by labour unrest and a lockout at the Company’s Canadian facilities during the first half of fiscal year
2016, and a stronger U.S. dollar, particularly against the euro. 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.
Gross profit for fiscal year 2016 amounted to $104.3 million, a decrease of $14.0 million from fiscal year 2015. Gross profit percentage
for fiscal year 2016 also decreased from the 26.0% reported in fiscal year 2015 to 24.4%. The decrease in gross profit percentage
reported for fiscal year 2016 is mainly attributable to an increase in material costs as a percentage of sales and unfavourable inventory
movements and provisions which were partially offset by decreased labour costs resulting from the restructuring initiatives undertaken
in the year. 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 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.
Administration costs for fiscal year 2016 decreased by $10.4 million when compared to fiscal year 2015. This decrease is primarily
attributable to a decrease in compensation-related costs, which was mainly due to the restructuring initiatives undertaken in the year,
and favourable currency swings resulting from a stronger U.S. dollar, particularly against the euro and Canadian dollar. 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).
The fiscal year 2016 net earnings1 were also negatively impacted by an $11.5 million non-cash goodwill impairment loss related to
the ABV cash-generating unit and restructuring costs of $2.8 million related primarily to the Company’s North American and U.K.
facilities.
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 29, 2016 compared to the year ended February 28, 2015
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 29,
2016
Year ended
February 28,
2015
(millions)
Sales
$426.9
$455.7
Sales decreased by $28.8 million or 6.3% from the prior year. Sales had remained relatively stable in the first half of the current fiscal
year despite a production slowdown at the Company’s North American operations caused by labour unrest and a lockout at its
Montreal-area plants which started near the end of its first quarter and ended near the beginning of its second quarter. However, the
decrease in bookings over the last five quarters began to have a negative impact on the Company’s shipments and billings in the second
half of the current fiscal year. Furthermore, the stronger U.S. dollar, particularly against the euro, caused the sales from the Company’s
European subsidiaries to be reported as lower U.S. dollar amounts in the current year.
Net bookings and backlog
(millions)
Year ended
February 29,
2016
Year ended
February 28,
2015
Net bookings
$329.5
$471.4
Net bookings decreased by $141.9 million or 30.1% from the prior year. The drop in bookings is principally attributable to the falling
price of oil which has caused an economic downturn in some of the Company’s key target markets, particularly the oil and gas industry
and energy sector. Many large capital projects in those industries have been put on hold or cancelled resulting in decreased
opportunities to bid on project orders. As a result, competition for the available project orders has intensified, resulting in pricing and
lead time pressures. Bookings were also negatively impacted by the cancellation of a $23.6 million large project order to supply valves
for a power generation plant under construction in India. A Russian contractor had one of the contracts to supply a boiler for the facility
by an Indian government power corporation and subcontracted the supply of valves for the boiler to the Company’s German subsidiary.
The Russian contractor ran into financial difficulties and temporarily halted work on the project. The Indian government power
corporation, therefore, cancelled the order with the Russian contractor, and started awarding the work to other contractors in the first
quarter of the year. As a result, the Company cancelled its contract with the Russian contractor and removed it from its backlog in the
year. The Company is currently working to book orders with the replacement contractors for this project.
(millions)
Backlog
February
2016
February
2015
February
2014
$331.2
$437.8
$471.7
For delivery within the subsequent fiscal year
$256.2
$326.7
$386.7
For delivery beyond the subsequent fiscal year
$75.0
$111.1
$85.0
Percentage – beyond the subsequent fiscal year
22.7%
25.4%
18.0%
As a result of the decrease in bookings, the Company’s book-to-bill ratio was 0.77 for the current fiscal year. The total backlog
decreased by $106.6 million or 24.3% since the beginning of the fiscal year, settling at $331.2 million.
Gross profit
(millions)
Year ended
February 29,
2016
Year ended
February 28,
2015
Gross profit
$104.3
$118.3
Gross profit percentage
24.4%
26.0%
10
Management’s discussion and analysis
Gross profit decreased by $14.0 million for the fiscal year, while the gross profit percentage decreased by 160 basis points from 26.0%
to 24.4%. This decrease is mainly attributable to an increase in material costs as a percentage of sales, which reflects the current highly
competitive bidding environment in certain of the Company’s key target markets. Gross profit was also impacted by unfavourable
inventory movements and an increase in the inventory ageing provisions, primarily related to the cancelled large project order,
discussed in the Net bookings and backlog section above. The Company was able to partially offset these negative impacts on its gross
profit by decreased labour costs resulting from the restructuring initiatives undertaken in the year (see Restructuring costs section
below).
Administration costs
(millions)
Administration costs*
As a percentage of sales
Year ended
February 29,
2016
Year ended
February 28,
2015
$78.0
18.3%
$88.4
19.4%
$6.1
*Includes asbestos-related costs of:
$5.6
Administration costs decreased by $10.4 million or 11.8% for the fiscal year. This decrease is primarily attributable to a decrease in
compensation-related costs, which was mainly due to the restructuring initiatives undertaken in the year (see Restructuring costs
section below), and favourable currency swings resulting from a stronger U.S. dollar, particularly against the euro and Canadian dollar.
There was also a decrease in costs associated with the Company’s ongoing asbestos litigation (see Contingencies section). Like many
other U.S. valve manufacturers, two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending
lawsuits brought on behalf of individuals seeking to recover damages for their alleged asbestos exposure. These lawsuits are related
to products manufactured and sold in the past. Management believes that any asbestos was incorporated entirely within the product in
such a way that it would not allow for any ambient asbestos during normal operation, inspection or repairs. Management strongly
believes its products, which were supplied in accordance with valve industry practice and customer mandated specifications, did not
contribute to any asbestos-related illness. The Company will continue to vigorously defend against these claims but given the ongoing
course of asbestos litigation in the U.S. and the unpredictability of jury trials, it is not possible to make an estimate of any settlement
costs and legal fees.
Goodwill impairment loss
(millions)
Year ended
February 29,
2016
Year ended
February 28,
2015
Goodwill impairment loss
$11.5
-
As a result of the annual goodwill impairment test required under IFRS, the Company recorded an impairment charge of $11.5 million
in the current fiscal year related to its ABV cash-generating unit. See Highlights section above for more details.
Restructuring costs
(millions)
Year ended
February 29,
2016
Year ended
February 28,
2015
Restructuring costs
$2.8
-
The economic downturn in the oil and gas industry and the energy sector has had a significant negative impact on the Company’s
current bookings and backlog. Since management believes that this downturn is not temporary, the Company re-evaluated its current
operations in order to better align its cost structure with this new reality. As a result of this evaluation, the Company implemented
various restructuring initiatives in the current fiscal year.
11
Management’s discussion and analysis
The most significant initiative occurred in the Company’s North American operations where, during the third quarter of the year, it
announced plans to reduce its workforce and to consolidate production activities from two of its North American plants into one. The
purpose of this restructuring initiative was to reduce the Company’s North American manufacturing footprint and to improve
operational efficiencies. The workforce reduction and plant consolidation commenced during the third quarter and are scheduled to be
completed over the course of the ensuing twelve months. Restructuring costs, which consisted primarily of cash severance, employee
benefits and training costs paid or to be paid to former employees, amounted to $2.2 million, of which $1.8 million related to the
workforce reduction and $0.4 million relates to the plant consolidation. These costs were accrued in the third quarter of the current
fiscal year. In addition to these restructuring costs, the Company anticipated incurring an additional $0.4 million in moving and
relocation costs related to the plant consolidation over the 12 months following the announcement. As at February 29, 2016, the
Company had incurred $0.2 million in moving and relocation costs, which are included in cost of sales. Once these initiatives are
implemented, the Company expects annual pre-tax payroll cost savings of approximately $6 million. Furthermore, it is estimated that
the plant consolidation will yield an additional $0.4 million in annual pre-tax overhead cost savings once implemented, excluding
proceeds from the eventual sale of the old plant.
The remaining portion of the restructuring costs, totalling $0.6 million, were incurred in the Company’s overseas operations, most
notably the costs related to the closure of the Company’s U.K. facility. After a lengthy period of consideration of various alternatives
following successive years of losses, the Company concluded that the production of its main steam trap line should be moved from its
U.K. facility to its Indian facility. As a result of this move, the Company expects to benefit from synergies in its supply chain resources,
as well as its engineering and manufacturing capabilities. The move commenced during the fourth quarter of the current fiscal year
and should be completed over the course of the ensuing twelve months. In addition to these restructuring costs, the Company incurred
$0.2 million in costs related to terminating the lease of the U.K. facility.
Net finance income (costs)
(millions)
Year ended
February 29,
2016
Year ended
February 28,
2015
Net finance income (costs)
$0.2
($0.6)
Net finance income increased by $0.8 million for the fiscal year. Despite the increase in long-term debt in the Company’s French,
Italian and Korean subsidiaries, the Company reduced its overall debt load over the current fiscal year, particularly its bank
indebtedness in its North American operations, resulting in a significant decrease in its finance costs (see Liquidity and Capital
Resources section).
Income taxes
(in thousands, excluding percentages)
Year ended
February 29,
2016
%
$
Year ended
February 28,
2015
%
$
Income before income taxes
12,587
100.0
28,965
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
4,346
34.5
9,416
32.5
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Benefit attributable to a financing structure
Prior year adjustments and assessments
Non-deductible goodwill impairment loss
Other
Provision for income taxes
629
633
(1,185)
795
3,096
(12)
5.0
5.1
(9.4)
6.3
24.6
(0.1)
539
874
(1,342)
209
-
77
1.8
3.0
(4.6)
0.7
-
0.3
8,302
66.0
9,773
33.7
12
Management’s discussion and analysis
Net earnings1
(millions)
Net earnings1
As a percentage of sales
Adjusted net earnings2
As a percentage of sales
Year ended
February 29,
2016
Year ended
February 28,
2015
$3.6
0.8%
$17.3
4.1%
$18.6
4.1%
$18.6
4.1%
Net earnings1 amounted to $3.6 million or $0.17 per share compared to $18.6 million or $0.85 per share last year. Net earnings1 for
the current year were significantly impacted by an $11.5 million non-cash goodwill impairment charge related to its ABV cash-
generating unit. Excluding this charge, as well as the after-tax impact of the restructuring costs incurred during the year, the Company’s
adjusted net earnings2 would have been $17.3 million or $0.79 per share this year compared to $18.6 million or $0.85 per share last
year. The $1.3 million decrease in adjusted net earnings2 is primarily attributable to a lower gross profit percentage partially offset by
decreased administration and net finance costs.
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)
Sales
Net Earnings (loss)1
Net earnings (loss)1 per share
- Basic
- Diluted
February
2016
$108,156
(7,823)
November
2015
$104,002
3,608
August
2015
$111,558
4,749
May
2015
$103,179
3,107
February
2015
$114,507
4,718
November
2014
$127,290
4,759
QUARTERS ENDED
May
August
2014
2014
$103,065
$110,888
4,005
5,098
(0.35)
(0.35)
0.16
0.16
0.22
0.22
0.14
0.14
0.22
0.22
0.22
0.22
0.23
0.23
0.18
0.18
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 quarters
ended in November 2014 and February 2015 due to increased shipments of such orders, while the lower sales amounts for the quarters
ended in May 2014, May 2015 and November 2015 were due to delayed execution on the shipments of such orders. Net earnings1 for
the quarters ended in August 2014, November 2014, February 2015, and August 2015 were higher due to a more efficient product
mix. A net loss1 was recorded in the quarter ended February 2016 due to a non-cash goodwill impairment loss, while the net earnings1
for the quarter ended in November 2015 were negatively impacted by restructuring costs.
RESULTS OF OPERATIONS – quarter ended February 29, 2016 compared to the quarter ended February 28, 2015
(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 29,
2016
Three-month
period ended
February 28,
2015
Sales
$108.2
$114.5
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
13
Management’s discussion and analysis
Sales decreased by $6.3 million or 5.5% for the quarter. Sales were negatively impacted by the decrease in bookings over the last year,
particularly in the Company’s Italian subsidiary. Furthermore, the stronger U.S. dollar, particularly against the euro, caused the sales
from the Company’s European subsidiaries to be reported as lower U.S. dollar amounts in the current quarter.
Net bookings
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
(millions)
Net bookings
$86.7
$101.1
Net bookings decreased by $14.4 million or 14.2% for the quarter. The decrease in bookings is principally attributable to the economic
downturn in some of the Company’s key target markets, particularly the oil and gas industry and energy sector, where many large
capital projects have been put on hold or cancelled resulting in decreased opportunities to bid on project orders. As a result, competition
for the available project orders has intensified, resulting in pricing and lead time pressures.
Gross profit
(millions)
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Gross profit
$28.1
$29.1
Gross profit percentage
26.0%
25.4%
Gross profit decreased by $1.0 million for the quarter, but the gross profit percentage increased by 60 basis points from the prior year
quarter. Despite the lower sales volume, the increase in the gross profit percentage was primarily attributable to the labour savings
stemming from the restructuring initiatives implemented in the second half of the year (see Results of operations – Restructuring costs
section above).
Administration costs
(millions)
Administration costs*
As a percentage of sales
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
$20.3
18.8%
$20.4
17.8%
$1.2
*Includes asbestos-related costs of:
$2.0
Administration costs for the quarter remained relatively stable. Labour savings stemming from the restructuring initiatives
implemented in the second half of the year (see Results of operations – Restructuring costs section above) and favourable currency
swings resulting from the strong U.S. dollar were largely offset by the increase 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.
14
Management’s discussion and analysis
Net finance income (costs)
(millions)
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Net finance income (costs)
$0.2
($0.1)
Net finance income increased by $0.3 million for the quarter. Despite the increase in long-term debt in the Company’s Korean
subsidiaries in the quarter, the Company benefited from net finance income generated from its cash balances in its French subsidiaries.
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 29, 2016
%
$
Three-month period ended
February 28, 2015
%
$
Income (Loss) before income taxes
(3,628)
100.0
8,219
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective
countries
Tax effects of:
(402)
11.1
3,017
36.7
354
453
(291)
795
3,096
277
(9.8)
(12.5)
8.0
(21.9)
(85.3)
(7.6)
293
452
(346)
209
-
47
3.6
5.5
(4.2)
2.5
-
0.6
4,282
(118.0)
3,672
44.7
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Benefit attributable to a financing structure
Prior year adjustments and assessments
Non-deductible goodwill impairment loss
Other
Provision for income taxes
Net earnings (loss)1
(millions)
Net earnings (loss)1
As a percentage of sales
Adjusted net earnings2
As a percentage of sales
Year ended
February 29,
2016
Year ended
February 28,
2015
($7.8)
(7.2)%
$4.2
3.9%
$4.7
4.1%
$4.7
4.1%
Net loss1 amounted to $7.8 million or $0.35 per share in the quarter compared to net earnings1 of $4.7 million or $0.22 per share last
year. The net loss1 for the current quarter was significantly impacted by an $11.5 million non-cash goodwill impairment charge related
to its ABV cash-generating unit. Excluding this charge, as well as the after-tax impact of the restructuring costs incurred during the
quarter, the Company’s adjusted net earnings2 would have been $4.2 million or $0.20 per share this quarter compared to $4.7 million
or $0.22 per share last year. The $0.5 million decrease in adjusted net earnings2 is primarily attributable to the lower sales volume in
the quarter.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
15
Management’s discussion and analysis
LIQUIDITY AND CAPITAL RESOURCES – a discussion of liquidity risk, credit facilities, cash flows and proposed
transactions (unless otherwise noted, all dollar amounts are denominated in U.S. dollars)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages
its liquidity risk by continually monitoring its future cash requirements. Cash flow forecasting is performed in the operating entities
and aggregated by the Company’s corporate finance team. The Company’s policy is to maintain sufficient cash and cash equivalents
and available credit facilities in order to meet its present and future operational needs.
The following 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
$
22,449
62,943
28,123
30,563
6,347
2,945
Less than
1 year
$
7,978
62,943
28,123
30,563
6,347
2,945
As at February 29, 2016
1 to 3
Years
$
6,468
-
-
-
-
-
4 to 5
Years
$
3,095
-
-
-
-
-
After
5 years
$
4,908
-
-
-
-
-
On February 29, 2016, the Company’s order backlog was $331.2 million and its net cash1 plus unused credit facilities amounted to
$182.2 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 price of oil and 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.
16
Management’s discussion and analysis
Cash flows (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to same period in the prior fiscal year)
Net cash1
(millions)
February
2016
November
2015
February
2015
November
2014
February
2014
Net cash1
$82.0
$69.5
$75.6
$66.7
$67.7
The Company’s net cash1 increased by $12.5 million during the quarter and $6.4 million since the beginning of the year. For both
periods, net cash1 was positively impacted by positive cash net earnings2, favourable non-cash working capital movements and new
debt issuances.
Cash provided by operating activities
(millions)
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Cash provided by operating activities
$28.9
$49.9
$16.3
$25.2
Cash provided by operating activities amounted to $28.9 million for the current year compared to $49.9 million in the prior year. The
current year’s positive variance consisted of positive cash net earnings2 of $21.4 million and positive non-cash working capital
movements of $7.5 million, which consisted primarily of a decrease in inventory, which was partially offset by an increase in accounts
receivable, a decrease in accounts payable and accrued liabilities and a decrease in customer deposits. Cash provided by operating
activities amounted to $16.3 million for the current quarter compared to $25.2 million in the prior year. The current quarter’s positive
cash flow consisted of positive cash net earnings2 of $0.8 million and positive non-cash working capital movements of $15.5 million,
which consisted primarily of a decrease in inventories.
Accounts receivable
(millions)
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Accounts receivable decrease (increase)
$(14.3)
$23.6
$(5.2)
$18.1
Accounts receivable balances are a function of the timing of sales and cash collections. The accounts receivable balance increased in
both the current quarter and fiscal year due to a greater proportion of the Company’s accounts receivable consisting of sales for large
project orders, which generally entail longer collection terms.
Inventories
(millions)
Inventories decrease
Customer deposits decrease
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
$40.8
$16.1
$20.6
$22.8
$16.1
$8.4
$5.2
$1.9
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 significantly
coinciding with the decline in the Company’s bookings and backlog. In order to help finance its investment in inventories, the
Company, where possible, obtains customer deposits for large orders. Customer deposits decreased for both the current quarter and
fiscal year due to lower customer deposits on certain large export project orders in the Company’s French and North American
operations.
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.
17
Management’s discussion and analysis
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Accounts payable and accrued liabilities (decrease) increase
$(8.1)
$(5.6)
$4.4
$(5.7)
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 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Additions to property, plant and equipment
$19.8
$12.8
$12.1
$2.6
The increase in additions to property, plant and equipment for both the quarter and fiscal year relate mainly to the Company’s Korean
operations. At its wholly-owned Korean subsidiary, the Company completed construction of a new manufacturing plant which will
allow for the production of valves up to 36” at a cost of approximately $2.1 million. At its 50%-owned Korean foundry, the Company
completed the purchase of land at a cost of approximately $9.2 million.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
$17.5
$9.1
$ -
$6.3
$10.4
$3.2
$ -
$1.5
During the current fiscal year, the Company continued to pay down its outstanding long-term debt. However, in order to take
advantage of historically low borrowing rates in Europe, two of the Company’s European subsidiaries entered into new long-term loan
arrangements. Its Italian subsidiary borrowed a total of $6.5 million (€5.9 million) through a series of 3 to 4 year loans from local
banks bearing interest at varying rates not to exceed 1.90%. In addition, one of the Company’s French subsidiaries borrowed $0.6
million (€0.5 million) with monthly repayment terms over five years, bearing interest at 0.89%. With regards to its Korean operations,
the Company entered into the following long-term loan agreements in order to fund the additions to property, plant and equipment
discussed above: a secured bank loan of $6.5 million (KW 8 billion) bearing interest at 2.21% with quarterly repayment terms over
ten years and a secured bank loan of $2.0 million (KW 2.5 billion) bearing interest at 2.65% repayable at maturity in 2018.
Dividends
(millions)
Dividends paid
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
$6.8
$7.5
$1.6
$1.9
The Company maintained its current dividend policy of CA$0.10 per share per quarter. The dividends paid in the prior year’s first
quarter were the last payouts under the Company’s prior dividend policy, namely CA$0.08 per share per quarter.
18
Management’s discussion and analysis
Share repurchases
(millions)
Fiscal Year
ended
February 29,
2016
Fiscal Year
ended
February 28,
2015
Three-month
period ended
February 29,
2016
Three-month
period ended
February 28,
2015
Share repurchases
$2.7
$0.3
$0.4
$ -
Pursuant to its Normal Course Issuer Bid, the Company repurchased for cancellation a total of 216,300 Subordinate Voting Shares for
a cash consideration of $2.7 million over the course of the current fiscal year. Of this amount, 36,700 Subordinate Voting Shares were
repurchased in the current quarter for a cash consideration of $0.4 million.
Other Liabilities
During the current fiscal year, the Company acquired a portion of the non-controlling interest related to its Taiwanese subsidiary. In
accordance with the terms of a succession plan with its minority partner, the Company acquired an additional 15% of the issued
common shares of Velan Valvac Manufacturing Co., Ltd. for cash consideration totaling $0.9 million. As a result of this transaction,
which closed in the second quarter of the current fiscal year, the Company increased its percentage ownership interest held in this
subsidiary from 75% to 90%.
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:
Financial instrument
Currency
Interest rate
Credit
Liquidity
Risks
Market
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
19
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Management’s discussion and analysis
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.
The amounts outstanding as at February 29, 2016 and February 28, 2015 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 29,
2016
February 28,
2015
February 29,
2016
$
February 28,
2015
$
February 29,
2016
February 28,
2015
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
1.25-1.46
1.32-1.34
Buy US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
1.08-1.39
Buy US$ for € – 0 to 12 months
1.08-1.28
Sell US$ for KW – 0 to 12 months 1,166-1,206
Sell € for US$ – 0 to 12 months
1.09-1.19
Buy € for US$ – 0 to 12 months
1.07
-
Buy £ for US$ – 0 to 12 months
Buy £ for € – 0 to 12 months
0.72-0.78
1.09-1.26
-
1.14-1.40
1.12-1.27
-
1.13-1.14
1.10
1.55-1.62
0.74-0.79
(1,212)
1,426
(1,602)
2
(16)
(22)
156
-
(79)
(3,047) US$84,104
US$75,000
US$8,481
US$187
US$426
€13,737
€11,000
-
£938
-
(2,236)
30
-
(55)
49
(37)
78
US$49,565
-
US$19,573
US$1,119
-
€5,907
€5,000
£599
£1,982
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 years ended February 29, 2016 and February
28, 2015:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
Other comprehensive
income (loss)
2016
$
112
447
2015
$
1,083
766
2016
$
-
-
2015
$
-
-
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact for both fiscal years.
20
Management’s discussion and analysis
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.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 29, 2016, six (February 28, 2015 –
four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 11.8%
(February 28, 2015 – 10.3%), and the Company’s ten largest customers accounted for 58.5% (February 28, 2015 – 54.7%). In addition,
one customer accounted for 13.4% of the Company’s sales (February 28, 2015 – 10.9%).
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 29,
2016
$
As at
February 28,
2015
$
73,655
12,780
13,377
16,205
116,017
1,653
114,364
5,205
64,387
17,930
12,360
4,804
99,481
899
98,582
6,735
119,569
105,317
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
21
Management’s discussion and analysis
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 – see discussion in liquidity and capital resources section
As at
February 29,
2016
$
As at
February 28,
2015
$
899
1,646
(198)
(623)
(71)
1,653
917
872
(665)
(172)
(53)
899
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. 1,034
claims were outstanding at the end of the reporting period (February 28, 2015 – 846). These claims were filed in the states of Arizona,
Arkansas, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland,
Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. During the current fiscal year, the Company resolved 354 claims
(February 28, 2015 – 439) and was the subject of 542 new claims (February 28, 2015 – 429). 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 $2,025 for the quarter (February 28, 2015 -
$1,217) and $5,568 for the year (February 28, 2015 - $6,085).
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.
22
Management’s discussion and analysis
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 10, 23 and 26 of the
Company’s audited consolidated financial statements. The types of transactions entered into, all of which are in the normal course of
business, are as follows:
Performance bond guarantees related to product warranty and on-time delivery
•
• Letters of credit issued to overseas suppliers
• Operating leases
RELATED PARTY TRANSACTIONS (in thousands of U.S. dollars)
The Company has entered into the following transactions with related parties, which are measured at their exchange value.
a)
PDK Machine Shop Ltd. (“PDK”) is a company owned by certain relatives of the controlling shareholder. PDK is a supplier
of machined material components for use in the Company’s plants.
Three months ended Twelve months ended
Feb. 28,
Feb. 29,
2015
2016
Feb. 28,
2015
Feb. 29,
2016
Purchases of material components
$187
$253
$988
$1,459
Sales of raw material
8
-
38
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.
b)
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. 29,
2015
2016
Feb. 28,
2015
Feb. 29,
2016
Rent
$9
$-
$37
$27
23
Management’s discussion and analysis
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a timely manner
so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuer’s
Annual and Interim Filings) as at February 29, 2016 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 29, 2016.
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 29, 2016 that have materially affected, or are reasonably likely to have materially affected, the
Company’s internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements are prepared in accordance with IFRS as issued by the IASB. The Company’s significant
accounting policies as described in note 2 of the Company’s audited consolidated financial statements are essential to understanding
the Company’s financial positions, results of operations and cash flows. Certain of these accounting policies require critical accounting
estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters that are
inherently uncertain and susceptible to change. The assumptions and estimates used are based on parameters which are derived from
the knowledge at the time of preparing the financial statements and believed to be reasonable under the circumstances. In particular,
the circumstances prevailing at this time and assumptions as to the expected future development of the global and industry-specific
environment were used to estimate the Company’s future business performance. Where these conditions develop differently than
assumed and beyond the control of the Company, the actual results may differ from those anticipated (see Forward-looking information
section above). These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimate is changed. Other than the changes made to the underlying assumptions in determining
the carrying amount of the goodwill associated with ABV at February 29, 2016, as described in note 4 of the Company’s audited
consolidated financial statements, 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
24
Management’s discussion and analysis
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 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.
25
Management’s discussion and analysis
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
The Company has not yet assessed the impact of the following new and revised 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 earlier
adoption permitted.
(ii)
(iii)
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 new standard is effective for annual periods beginning on or after
January 1, 2018 with earlier adoption permitted.
In January 2016, the IASB issued IFRS 16, Leases, which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract. It eliminates the classification of leases as either operating
leases or finance leases and introduces a single lessee accounting model. It also substantially carries forward the lessor
accounting requirements. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to
account for those two types of leases differently. IFRS 16 replaces IAS 17, Leases, IFRIC 4, Determining whether an
Arrangement contains a Lease, SIC-15, Operating Leases – Incentives, and SIC-27, Evaluating the Substance of
Transactions Involving the Legal Form of a Lease. The new standard is effective for annual periods beginning on or after
January 1, 2019 with earlier adoption permitted only if IFRS 15 is early adopted.
(iv) On January 29, 2016, the IASB published amendments to IAS 7, Statement of Cash Flows. The amendments are intended
to clarify IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. The
revised standard is effective for annual periods beginning on or after January 1, 2017 with earlier adoption permitted.
26
Management’s discussion and analysis
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.
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 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.
27
Management’s discussion and analysis
Project undertakings
In competing for the sales of valves, the Company may enter into contracts that provide for the production of valves at specified prices
and in accordance with time schedules. These contracts may involve greater risks as a result of unforeseen increases in the prices of
raw materials and other costs due to more stringent terms and conditions. Although contract terms may vary from customer to
customer, production delays and other performance issues may call for liquidated damages or other penalties in case of non-
performance or warranty issues due to the more stringent terms and conditions of such contracts.
Political and economic risks associated with international sales and operations
Since the Company sells and manufactures its products worldwide, the business is subject to risks associated with doing business
internationally. The Company’s business and operating results could be impacted by trade protection measures, changes in tax laws,
possibility of expropriation and embargo, foreign exchange restrictions and political, military and/or terrorist disruptions or changes
in regulatory environments.
Force majeure events
Force majeure events are unforeseeable events or circumstances that occur beyond the control of the Company. Such events include
but are not limited to political unrest, war, terrorism, strikes, riots, and crime, as well as seismic or severe weather related events such
as earthquakes, hurricanes, tsunamis, tornadoes, ice storms, flooding and volcanic eruptions. The risk of occurrence of a force majeure
event is unpredictable and may result in delays or cancellations of orders and deliveries to customers, delays in the receipt of materials
from suppliers, damage to facilities or equipment, personal injury or fatality, and possible legal liability.
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defense related to certain products that may have contained an internal component containing asbestos.
Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail. Unfavorable rulings,
judgments or settlement terms could have a material adverse impact on the Company’s business, financial condition, results of
operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased significantly
during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability insurance coverage
will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be followed
to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a 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.
28
Management’s discussion and analysis
Control of the Company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.7% of the voting interests in the Company. Voting control enables the Controlling Shareholder to determine all
matters requiring shareholder approval. The Controlling Shareholder has advised the Company that the disposition of the shares
requires the consent of certain Velan family members and controlled entities.
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company, 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.
Cybersecurity
The Company’s information technology networks are critical to the day to day operation of its business, and include information about
its finances, employees, products, customers and suppliers. Cybersecurity risks are becoming increasingly sophisticated, varied and
numerous. The potential consequences of a material cybersecurity breach could include loss of key information, reputational damage
and disruption of operations, with consequential material negative financial consequences. While the Company devotes substantial
resources to maintaining and securing its information technology networks, there can be no assurance that it will be able to prevent,
detect or respond to a potential breach of its information technology networks because of, among other things, the evolving nature of
cybersecurity threats, the difficulty in anticipating such threats and the difficulty in immediately detecting all such threats.
29
Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2016 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. 29,
2016
Feb. 28,
2015
Feb. 28,
2014
Feb. 28,
2013
Feb. 29,
2012
89,368
3,225
(5,028)
(1,319)
(4,197)
99,578
847
106,716
239
77,172
398
65,414
4,954
(15,616)
(31,876)
(48,580)
(32,438)
(2,134)
(7,063)
(916)
(6,402)
(2,284)
(6,919)
(858)
(1,696)
82,049
75,612
67,761
19,787
35,376
Adjusted net earnings - Fiscal Year
(in thousands)
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Fiscal year
ended
Feb. 29,
2016
Feb. 28,
2015
Feb. 28,
2014
Feb. 28,
2013
Feb. 29,
2012
Net income attributable to Subordinate Voting Shares and
Multiple Voting Shares
3,641
18,580
29,400
6,169
7,892
Adjustments for:
Goodwill impairment loss
Restructuring costs
Tax effect of restructuring costs
Interest accretion on ABV proceeds payable
Fair value adjustment for ABV proceeds payable
Unrealized foreign exchange gain on ABV proceeds payable
11,510
2,759
(634)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
11,700
-
-
663
(2,444)
(407)
-
-
-
946
(2,230)
(978)
17,276
18,580
29,409
15,681
5,630
Adjusted net earnings - Quarter
(in thousands)
Quarter
ended
Feb. 29,
2016
Quarter
ended
Feb. 28,
2015
Net income (loss) attributable to Subordinate Voting Shares
and Multiple Voting Shares
(7,823)
4,718
Adjustments for:
Goodwill impairment loss
Restructuring costs
Tax effect of restructuring costs
11,510
609
(56)
-
-
-
4,240
4,718
30
Velan Inc.
Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
31
May 19, 2016
Independent Auditor’s Report
To the Shareholders of
Velan Inc.
We have audited the accompanying consolidated financial statements of Velan Inc., which comprise the
consolidated statements of financial position as at February 29, 2016 and February 28, 2015 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 2500, Montréal, Quebec, Canada H3B 4Y1
T: +1 514 205 5000, F: +1 514 875 1502
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
32
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. as at February 29, 2016 and February 28, 2015 and its financial performance and its
cash flows for the years then ended in accordance with International Financial Reporting Standards.
1
Yours very truly,
1 CPA auditor, CA, public accountancy permit No. A123642
2
33
Velan Inc.
Consolidated Statements of Financial Position
(in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Income taxes rec overable
Inventories (note 5)
Deposits and prepaid expenses
Derivative assets
Non-current assets
Property, plant and equipment (notes 7 and 12)
Intangible assets and goodwill (notes 4 and 8)
Deferred income taxes (note 21)
Other assets
Total assets
Liabilities
Current liabilities
Bank indebtedness (note 10)
Short-term bank loans
Accounts payable and accrued liabilities (note 9)
Income taxes payable
Dividend payable
Customer deposits
Provisions (note 11)
Accrual for performance guarantees
Derivative liabilities
Current portion of long-term debt (note 12)
Non-current liabilities
Long-term debt (note 12)
Deferred income taxes (note 21)
Other liabilities
Total liabilities
Equity
Equity attributable to Subordinate and Multiple Voting shareholders
Share capital (note 13)
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Non-controlling interest (note 6)
Total equity
Total liabilities and equity
Commitments and contingencies (note 23)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
T.C. Velan, Director
34
As at
February 29,
2016
$
As at
February 28,
2015
$
89,368
3,225
119,569
5,674
162,523
3,586
1,598
385,543
95,257
20,352
13,537
938
130,084
515,627
5,028
1,319
62,943
5,746
1,606
28,123
9,333
30,563
2,945
7,978
155,584
14,471
3,408
9,045
26,924
99,578
847
105,335
5,472
203,557
5,326
144
420,259
91,285
33,576
12,392
1,116
138,369
558,628
15,616
2,134
70,997
3,961
1,755
44,111
7,874
30,012
5,362
10,644
192,466
4,183
8,349
8,537
21,069
182,508
213,535
74,345
5,941
280,380
(33,089)
327,577
76,475
6,064
283,724
(27,652)
338,611
5,542
6,482
333,119
345,093
515,627
558,628
Velan Inc.
Consolidated Statements of Income
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 25)
Cost of sales (notes 5, 14, 15 and 19)
Gross profit
Administration costs (notes 16 and 19)
Goodwill impairment loss (note 4)
Restructuring costs (note 20)
Other costs (income)
Operating profit
Finance income
Finance costs
Finance income (costs) – net
Income before income taxes
Income taxes (note 21)
Net income for the year
Net income attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
Earnings per share (note 22)
Basic
Diluted
2016
$
2015
$
426,895
455,750
322,612
337,467
104,283
118,283
77,974
11,510
2,759
(348)
12,388
1,296
1,097
199
12,587
8,302
4,285
3,641
644
4,285
0.17
0.17
88,391
-
-
337
29,555
1,067
1,657
(590)
28,965
9,773
19,192
18,580
612
19,192
0.85
0.85
Dividends declared per Subordinate and Multiple Voting Share
0.31 (CA$0.40)
0.36 (CA$0.40)
The accompanying notes are an integral part of these consolidated financial statements.
35
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars)
Comprehensive income (loss)
Net income for the year
2016
$
2015
$
4,285
19,192
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other
than the reporting currency (U.S. dollar)
(5,992)
(24,850)
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
(1,707)
(5,022)
(1,796)
89
(1,707)
(5,483)
461
(5,022)
Other comprehensive income (loss) is composed solely of items that will not be reclassified subsequently to the consolidated statement of
income.
The accompanying notes are an integral part of these consolidated financial statements.
36
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 29, 2016 and February 28, 2015
(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, 2014
76,688
6,099
(3,589)
272,867
352,065
7,054
359,119
Net income for the year
Other comprehensive income
-
-
-
-
-
(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
Net income for the year
Other comprehensive loss
-
-
-
-
-
(5,437)
3,641
-
3,641
(5,437)
644
(555)
4,285
(5,992)
76,475
6,064
(33,089)
287,365
336,815
6,571
343,386
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
Share repurchase (note 13(c))
Acquisition of non-controlling interest (note 6)
-
227
-
-
-
(2,357)
-
104
(227)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4,801)
(1,803)
-
(381)
-
104
-
(4,801)
(1,803)
-
(2,738)
-
-
-
-
-
(139)
-
(890)
104
-
(4,801)
(1,803)
(139)
(2,738)
(890)
Balance - February 29, 2016
74,345
5,941
(33,089)
280,380
327,577
5,542
333,119
The accompanying notes are an integral part of these consolidated financial statements.
37
Velan Inc.
Consolidated Statements of Cash Flow
For the years ended February 29, 2016 and February 28, 2015
(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 28)
Changes in non-cash working capital items (note 29)
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
Acquisition of non-controlling interest (note 6)
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
Repurchase of shares (note 13(c))
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 received (paid)
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
38
2016
$
2015
$
4,285
17,080
7,519
28,884
(2,378)
(19,791)
(1,329)
272
(890)
177
(23,939)
(6,753)
(139)
(2,738)
(815)
17,499
(9,122)
(2,068)
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)
(2,499)
(13,742)
378
83,962
9,122
74,840
84,340
83,962
89,368
(5,028)
84,340
99,578
(15,616)
83,962
532
(10,742)
(117)
(9,357)
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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, 2016.
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 (note 6).
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.
39
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Foreign currency transactions and balances
The Company and its subsidiaries translate foreign currency transactions and balances into their functional
currencies. Foreign currency is defined as any currency that is different from an individual entity’s functional
currency.
Monetary assets and liabilities in foreign currencies are translated at year-end exchange rates. Non-monetary assets
are translated at rates prevailing at the transaction dates. Revenue and expenses in foreign currencies are translated at
weekly 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
40
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
guarantees and long-term debt, including interest payable, are classified as other financial liabilities, all of which are
measured at amortized cost.
Embedded derivatives
Derivatives may be embedded in other financial instruments (the “host instrument”). Embedded derivatives are
treated as separate derivatives if their economic characteristics and risks are not closely related to those of the host
instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined
contract is not held for trading or designated at fair value through profit or loss. These embedded derivatives are
classified as held for trading.
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
41
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
products are sold with volume discounts. Sales are recorded based on the price specified in the sales contract, net of
the estimated volume discounts and returns at the time of sale. Accumulated experience is used to estimate and
provide for the discounts and returns. The volume discounts are assessed based on anticipated annual purchases.
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 4.9% on an annual basis. Interest is paid on bank indebtedness at rates ranging from 1.2% to 2.7%.
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 0.2% to 8.8%.
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.
42
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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.
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
5 to 15 years
10 years
5 years
1 to 3 years
43
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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
44
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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.
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
45
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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-quarter per year over four 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
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. Other than the changes made to the underlying assumptions in determining the
carrying amount of the goodwill associated with ABV at February 29, 2016 (note 4), there were no significant
changes made to critical accounting estimates during the past two fiscal years.
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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
The Company has not yet assessed the impact of the following new and revised 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 earlier
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
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 new standard is effective for annual periods beginning on or
after January 1, 2018 with earlier adoption permitted.
(iii)
In January 2016, the IASB issued IFRS 16, Leases, which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract. It eliminates the classification
of leases as either operating leases or finance leases and introduces a single lessee accounting model. It also
substantially carries forward the lessor accounting requirements. Accordingly, a lessor continues to classify its
leases as operating leases or finance leases, and to account for those two types of leases differently. IFRS 16
replaces IAS 17, Leases, IFRIC 4, Determining whether an Arrangement contains a Lease, SIC-15, Operating
Leases – Incentives, and SIC-27, Evaluating the Substance of Transactions Involving the Legal Form of a
Lease. The new standard is effective for annual periods beginning on or after January 1, 2019 with earlier
adoption permitted only if IFRS 15 is early adopted.
(iv) On January 29, 2016, the IASB published amendments to IAS 7, Statement of Cash Flows. The amendments are
intended to clarify IAS 7 to improve information provided to users of financial statements about an entity’s
financing activities. The revised standard is effective for annual periods beginning on or after January 1, 2017
with earlier adoption permitted.
4 Goodwill impairment analysis
Impairment test at February 29, 2016
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 carrying amount of the goodwill associated
with the CGU related to its ABV subsidiary exceeded its recoverable amount and, accordingly, the Company
recorded a goodwill impairment loss of $11,510 at February 29, 2016. As a result of this loss, the carrying amount of
the goodwill associated with this CGU has been reduced to nil.
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 5.8% in 2017, 8.0% in 2018, 9.4% in 2019, 10.7% in
2020 and 11.7% in 2021.
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 $544 in 2017, 2018 and 2019, and $1,089 thereafter.
The discounted cash flow model was established using a discount rate of 18.0% and a terminal growth rate of 2%.
In prior years, management had based its selection of assumptions upon its assessment of the ability of the CGU to
return to is pre-acquisition levels of growth and profitability, as well as its evaluation of the longer term potential of
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
its key end-user markets, particularly upstream oil and gas flow control. While ABV had achieved positive EBITDA
growth over the last two fiscal years which were in line with previous expectations, the current year’s EBITDA was
below expectations. Despite the fact that ABV continued to report positive earnings for a third consecutive year,
management revised projected future earnings, which were lowered to reflect a slowdown in order intake, particularly
over the second half of the current fiscal year. The continued weakness of the price of crude oil has had a significant
negative impact on ABV’s key target market, namely the upstream oil and gas industry, creating an increasingly
competitive landscape. As a result, ABV has been quoting more competitive prices to win orders, which negatively
impacted expected EBITDA as a percentage of sales. Therefore, the impairment charge was the result of
management’s revised assumptions related to sales and the expected EBITDA as a percentage of sales taking into
account the current economic environment.
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 $8,463 by $56,899. Accordingly, no goodwill impairment loss was recorded for this CGU at February 29,
2016.
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 20.7% in 2017, 2018 and 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 $2,178 in 2017, 2018 and 2019.
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 wholly-owned Italian subsidiary, Velan ABV S.p.A.
(“ABV”), 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 earnings before interest, taxes, depreciation and amortization (“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.
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 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
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
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 29,
2016
$
As at
February 28,
2015
$
37,899
86,000
38,624
39,020
103,805
60,732
162,523
203,557
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $5,444 (2015 – $727), including reversals of $5,625 (2015 – $7,894).
The net book value of inventories pledged as security under the Company’s credit facilities amounted to $1,427
(2015 – $1,837).
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
6 Subsidiaries and transactions with non-controlling interests
a)
Interest in subsidiaries
Set out below are the Company’s principal subsidiaries at February 29, 2016. 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.
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
2016
2015
% of ownership
interest held by
the non-
controlling
interests
2015
2016
Principal
Activities
100
100
50
100
100
100
75
100
100
90
85
100
100
50
100
100
100
75
100
100
75
85
-
-
-
-
Valve
Manufacture
Valve
Manufacture
50
50
Foundry
-
-
-
-
-
-
25
25
-
-
10
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
$2,142 (2015 – $1,678).
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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(p)). The amounts disclosed for each subsidiary are
before intercompany eliminations.
Summarized statement of financial position
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
Current assets
Current liabilities
Current net assets
Non-current assets
Non-current liabilities
Non-current net assets
Net assets
As at
February 29,
2016
$
As at
February 28,
2015
$
As at
February 29,
2016
$
As at
February 28,
2015
$
8,954
3,983
4,971
12,510
8,121
4,389
10,149
4,203
5,946
4,929
1,585
3,344
5,061
1,591
3,470
1,860
117
1,743
4,775
1,200
3,575
1,874
170
1,704
9,360
9,290
5,213
5,279
Accumulated non-controlling interest
4,936
4,935
606
1,547
Summarized statement of comprehensive income
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
2016
$
2015
$
2016
$
2015
$
Sales
23,301
21,734
7,416
7,757
Net income (loss) for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
Net income (loss) allocated to non-controlling interest
Dividends paid to non-controlling interest
1,181
1,368
(1,109)
(302)
72
590
-
1,066
684
947
503
-
503
82
139
559
-
559
140
86
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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.
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
2016
$
2015
$
2,578
1,995
(9,403)
(848)
5,738
(1,895)
Net increase (decrease) in cash and cash equivalents
(1,087)
(748)
2016
$
368
(60)
(566)
(258)
2015
$
1,373
(46)
(349)
978
d) Transactions with non-controlling interests
On June 29, 2015, the Company acquired an additional 15% of the issued common shares of Velan Valvac
Manufacturing Co., Ltd., its Taiwanese subsidiary, for cash consideration totaling $890. As a result of this
transaction, the Company increased its percentage ownership interest held in this subsidiary from 75% to 90%.
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
7 Property, plant and equipment
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
Year ended February 29, 2016
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 29, 2016
Cost
Accumulated depreciation
Land
Buildings
M achinery &
equipment
Furniture &
fixtures
Data
processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
$
$
Total
$
12,161
-
12,161
12,161
3
-
-
(490)
11,674
11,674
-
11,674
11,674
9,196
(3)
-
(1,001)
19,866
19,866
-
19,866
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
28,042
3,352
(302)
(1,845)
(517)
28,730
44,911
6,593
(113)
(9,404)
(615)
41,372
53,175
(24,445)
28,730
148,597
(107,225)
41,372
3,288
469
(15)
(578)
(926)
2,238
8,388
(6,150)
2,238
2,238
-
204
(569)
(83)
1,790
7,984
(6,194)
1,790
5,879
(4,367)
1,512
1,512
1,118
-
(815)
(63)
1,752
6,740
(4,988)
1,752
1,752
213
1
(862)
(10)
1,094
6,737
(5,643)
1,094
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
848
424
(5)
(357)
(23)
887
1,820
13
-
(264)
(51)
1,518
91,285
19,791
(218)
(13,301)
(2,300)
95,257
3,128
(2,241)
887
3,581
(2,063)
1,518
243,068
(147,811)
95,257
Depreciation expense of $13,301 (2015 – $13,749) is included in the consolidated statement of income: $11,880 (2015 –
$12,196) in ‘cost of sales’ and $1,421(2015 – $1,553) in ‘administration costs’.
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
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
Year ended February 29, 2016
Beginning balance
Additions
Amortization
Impairment loss
Exchange differences
At February 29, 2016
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Non-compete
agreements
Other
Total
25,422
-
25,422
7,611
(6,586)
1,025
14,485
(3,283)
11,202
7,461
(2,115)
5,346
25,422
1,025
11,202
5,346
-
-
-
(4,736)
20,686
20,686
-
20,686
20,686
-
-
(11,510)
(647)
8,529
384
(19)
(650)
(130)
610
13
-
(866)
(1,975)
8,374
7,343
(6,733)
610
11,805
(3,431)
8,374
610
306
(438)
-
(15)
463
8,374
1,023
(837)
-
(258)
8,302
-
-
(699)
(903)
3,744
6,072
(2,328)
3,744
3,744
-
(596)
-
(111)
3,037
8,529
-
8,529
7,552
(7,089)
463
12,461
(4,159)
8,302
5,881
(2,844)
3,037
829
(470)
359
359
-
-
(155)
(46)
158
675
(517)
158
158
-
(133)
-
(4)
21
653
(632)
21
1,091
(1,086)
5
5
3
-
-
(4)
4
890
(886)
4
4
(4)
-
-
-
-
873
(873)
-
56,899
(13,540)
43,359
43,359
400
(19)
(2,374)
(7,790)
33,576
47,471
(13,895)
33,576
33,576
1,329
(2,008)
(11,510)
(1,035)
20,352
35,949
(15,597)
20,352
Amortization expense of $2,008 (2015 – $2,374) is included in the consolidated statement of income: $1,589 (2015 –
$1,890) in ‘cost of sales’ and $419 (2015 – $484) in ‘administration costs’.
As at February 29, 2016, the Company capitalized $1,023 (2015 – nil) of development costs, net of research and
development tax credits, as patents, products and designs.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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 29,
2016
$
As at
February 28,
2015
$
20,661
38,823
3,459
62,943
26,868
41,018
3,111
70,997
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities available
as at February 29, 2016:
Unsecured
Credit facilities available
Borrowing rates
$62,815 (CA$85,000) (2015 – $67,983 (CA$85,000)) (note 26)
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 29, 2016, an amount of nil (2015 – $9,435) was drawn against these unsecured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $10,061 (2015 – $12,377) 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 29, 2016, $12,391 (2015 –
$9,476) was drawn against this facility.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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 29, 2016:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$51,208 (€38,572; £2,000; KW4,873,100;
INR170,000) (2015 – $60,749 (€45,172;
£2,000; KW4,018,400; INR200,000)) (note 26)
Borrowing rates
0.30% to 10.00%
(2015 – 0.54% to 10.50%)
Foreign structured entities
$5,026 (KW6,228,000)
(2015 – $5,070 (KW5,590,000)) (note 26)
1.50% to 2.74%
(2015 – 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 29, 2016 and February 28, 2015. 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
$5,824 (2015 – $8,233).
As at February 29, 2016, an amount of $5,028 (2015 – $6,181) was drawn against these secured credit facilities in the
form of demand operating lines of credit and bank overdrafts. An additional $3,859 (2015 – $4,867) 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 29,
2016
$
As at
February 28,
2015
$
7,874
4,071
(2,358)
(254)
9,333
8,060
3,618
(2,211)
(1,593)
7,874
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 29, 2016 and February 28, 2015
(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 (€16; February 28, 2015 – €68) (note 12(b))
Secured bank loan (nil; February 28, 2015 – €84)
Unsecured bank loan (€426; February 28, 2015 – nil) (note 12(c))
Italian subsidiary
Unsecured bank loan (€564; February 28, 2015 – €662) (note 12(d))
Unsecured bank loan (€548; February 28, 2015 – €629) (note 12(e))
Unsecured state bank loan (€304; February 28, 2015 – €371) (note 12(f))
Unsecured bank loan (€351; February 28, 2015 – nil) (note 12(g))
Unsecured bank loan (€909; February 28, 2015 – nil) (note 12(h))
Unsecured bank loan (€933; February 28, 2015 – nil) (note 12(i))
Unsecured bank loan (€836; February 28, 2015 – nil) (note 12(j))
Unsecured bank loan (€1,313; February 28, 2015 – nil) (note 12(k))
Unsecured bank loan (€864; February 28, 2015 – nil) (note 12(l))
Korean structured entity
Secured bank loan (KW18,000; February 28, 2015 – KW22,800) (note 12(m))
Secured bank loan (nil; February 28, 2015 – KW900,000)
Unsecured bank loan (nil; February 28, 2015 – KW500,000)
Secured bank loan (KW8,000,000; February 28, 2015 – nil) (note 12(n))
Secured bank loan (KW2,500,000; February 28, 2015 – nil) (note 12(o))
Other (note 12(p))
Less: Current portion
As at
February 29,
2016
$
As at
February 28,
2015
$
1,333
6,667
18
-
464
614
596
331
383
990
1,016
910
1,429
940
15
-
-
6,456
2,018
4,936
22,449
7,978
14,471
76
94
-
744
707
417
-
-
-
-
-
-
21
816
454
-
-
4,831
14,827
10,644
4,183
a) The unsecured bank loan of $1,333 bears interest at 2.74% and is repayable in monthly instalments of
$444, expiring in 2016.
b) The unsecured bank loan of $18 (€16) bears interest at 2.60% and is repayable in quarterly instalments of
$29, expiring in 2016
c) The unsecured bank loan of $464 (€426) bears interest at 0.89% and is repayable in monthly instalments of
$10, expiring in 2020.
d) The unsecured bank loan of $614 (€564) 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 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
e) The unsecured bank loan of $596 (€548) bears interest at 4.90% and is repayable in monthly instalments,
expiring in 2021.
f) The unsecured state bank loan of $331 (€304) is non-interest bearing and is repayable in semi-annual
instalments, expiring in 2020.
g) The unsecured bank loan of $383 (€351) bears interest at the 3-month Euribor rate plus 1.7% and is
repayable in quarterly instalments of $29, expiring in 2019.
h) The unsecured bank loan of $990 (€909) bears interest at the 3-month Euribor rate plus 1.6% and is
repayable in quarterly instalments of $96, expiring in 2018.
i) The unsecured bank loan of $1,016 (€933) bears interest at the 3-month Euribor rate plus 1.8% and is
repayable in quarterly instalments of $75, expiring in 2019.
j) The unsecured bank loan of $910 (€836) bears interest at the 6-month Euribor rate plus 1.25% and is
repayable in quarterly instalments of $102, expiring in 2018.
k) The unsecured bank loan of $1,429 (€1,313) bears interest the 3-month Euribor rate plus 1.6% and is
repayable in quarterly instalments of $105, expiring in 2019.
l) The unsecured bank loan of $940 (€864) bears interest at 1.37% and is repayable in monthly instalments of
$30, expiring in 2018.
m) The secured bank loan of $15 (KW18,000) 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.
n) The secured bank loan of $6,456 (KW8,000,000) bears interest at 2.21% and is repayable in quarterly
instalments of $231, expiring in 2025
o) The secured bank loan of $2,018 (KW2,500,000) bears interest at 2.65% and is repayable at maturity in
2018
p)
Included in Other is an amount of $3,781 (€3,473) (February 28, 2015 – $3,580 (€3,185)) 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.
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
q) The following is a schedule of future debt payments:
February 28, 2017
February 28, 2018
February 28, 2019
February 29, 2020
February 28, 2021
Subsequent years
$
7,978
1,930
4,538
1,734
1,361
4,908
22,449
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted to
$11,416 (2015 – $2,742).
r) The carrying value of long-term debt approximates its fair value.
13 Share capital
a) Authorized – in unlimited number
Preferred Shares, issuable in series
Subordinate Voting Shares
Multiple Voting Shares (five votes per share), convertible into Subordinate Voting Shares
b)
Issued
6,170,568 Subordinate Voting Shares (February 28, 2015 –
6,372,601) (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 29,
2016
$
As at
February 28,
2015
$
67,219
7,126
74,345
69,349
7,126
76,475
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a maximum of
314,878 of the issued Subordinate Voting Shares of the Company, representing approximately 5% of the issued
shares of such class as at October 14, 2015, during the ensuing 12-month period ending October 21, 2016.
During the year ended February 29, 2016, 216,300 (2015 – 19,600) Subordinate Voting Shares were purchased
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
for a cash consideration of $2,738 (2015 – $306) and cancelled. 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.
A compensation cost of $104 (2015 – $15) was recorded in the consolidated statement of income and credited to
contributed surplus.
During the fiscal year ended February 29, 2016, 50,000 options were exercised using the cashless exercise
option, resulting in the issuance of 14,267 Subordinate Voting Shares of the Company for nil proceeds with a
stated capital of $227, which was debited to contributed surplus. No options were exercised in the prior fiscal
year.
The table below summarizes the status of the Share Option Plan.
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Number
of shares Weighted average exercise price
Weighted
average
contractual
life in
months
Outstanding – February 28, 2014
Issued
Outstanding – February 28, 2015
Exercisable – February 28, 2015
Outstanding – February 28, 2015
Issued
Exercised
Outstanding – February 29, 2016
Exercisable – February 29, 2016
50,000
100,000
150,000
50,000
150,000
40,000
(50,000)
140,000
25,000
$12.78 (CA$14.15)
$16.43 (CA$20.88)
$14.91 (CA$18.64)
$11.32 (CA$14.15)
$14.91 (CA$18.64)
$11.25 (CA$15.22)
$10.46 (CA$14.15)
$14.24 (CA$19.26)
$15.43 (CA$20.88)
29.0
60.0
45.0
45.0
60.0
-
50.4
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
2016
$
(1,070)
(1,214)
2015
$
2,074
(8,937)
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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 (notes 7, 8 and 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 26)
Depreciation and amortization (notes 7, 8 and 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
65
2016
$
2015
$
36,813
146,707
79,724
13,469
5,444
1,214
39,241
18,850
163,407
93,713
14,086
727
8,937
37,747
322,612
337,467
2016
$
2015
$
39,629
(3,119)
6,281
4,784
10,330
825
1,840
17,404
77,974
2016
$
85,673
27,256
(3,119)
104
6,320
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
116,234
134,473
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(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
2016
$
8,014
(3,119)
4,895
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 Restructuring costs
2016
$
13,301
2,008
15,309
2015
$
9,231
(3,815)
5,416
2015
$
13,749
2,374
16,123
During the current fiscal year, the Company incurred restructuring costs of $2,759 (2015 – nil), which consisted
primarily of cash severance, employee benefits and training costs paid or to be paid to former employees.
The portion of these restructuring costs related to the Company’s North American operations amounted to $2,150
(2015 – nil) of which $1,800 related to workforce reduction and $350 related to plant consolidation. On September
15, 2015, the Company announced plans to reduce its workforce at its North American facilities and to consolidate
production activities from two of its North American plants. The purpose of these restructuring initiatives was to
reduce the Company’s North American manufacturing footprint and to improve operational efficiencies. The
workforce reduction and plant consolidation commenced during the third quarter of the current fiscal year and should
be completed over the course of the ensuing twelve months.
The remaining portion of the restructuring costs, totalling $609 (2015 – nil), were incurred in the Company’s
overseas operations, most notably the costs related to the closure of the Company’s U.K. facility. After a lengthy
period of consideration of various alternatives following successive years of losses, the Company concluded that the
production of its main steam trap line should be moved from its U.K. facility to its Indian facility. As a result of this
move, the Company expects to benefit from synergies in its supply chain resources, as well as its engineering and
manufacturing capabilities. The move commenced during the fourth quarter of the current fiscal year and should be
completed over the course of the ensuing twelve months.
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
21 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
Adjustments in respect of prior years
Income tax expense
2016
$
9,170
5,529
14,699
(1,663)
(4,734)
2015
$
11,470
209
11,679
(1,906)
-
(6,397)
(1,906)
8,302
9,773
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:
2016
$
2015
$
Income before tax at statutory rate of 26.90% (2015 – 26.90%)
3,386
7,792
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible goodwill impairment loss
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Benefit attributable to a financing structure
Adjustments in respect of prior years
Other
960
3,096
629
633
(1,185)
795
(12)
1,624
-
539
874
(1,342)
209
77
Income tax expense
8,302
9,773
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The analysis of deferred tax assets and deferred tax liabilities is as follows:
Deferred income tax assets:
To be realized after more than 12 months
To be realized within 12 months
Deferred income tax liabilities:
To be realized after more than 12 months
To be realized within 12 months
Net deferred income tax asset
The movement of the net deferred income tax asset account is as follows:
Balance – Beginning of year
Recovery to consolidated statement of income
Exchange differences
Balance – End of year
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
2016
$
8,858
4,679
(2,435)
(973)
10,129
2016
$
4,043
6,397
311
10,129
2016
$
(5,051)
(3,508)
8,513
(969)
8,278
2,999
(133)
10,129
2015
$
7,502
4,890
(8,199)
(150)
4,043
2015
$
2,136
1,906
1
4,043
2015
$
(4,858)
(3,798)
5,675
(930)
6,378
2,479
(903)
4,043
The Company did not recognize deferred income tax assets of $2,234 (2015 – $1,664 in respect of non-capital losses
amounting to $8,718 (2015 – $5,707) that can be carried forward to reduce taxable income in future years. These
losses expire between 2021 and indefinitely.
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The Company did not recognize deferred income tax assets of $369 (2015 – $276) in respect of capital losses
amounting to $2,745 (2015 – $2,051) that can be carried forward indefinitely against future taxable capital gains.
Deferred tax liabilities of $6,987 (2015 – $6,967) 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 29, 2016 totalled $312,810 (2015 – $304,098).
22 Earnings per share
a) Basic
Basic earnings per share is calculated by dividing the net income attributable to the Subordinate and Multiple
Voting shareholders by the weighted average number of Subordinate and Multiple Voting Shares outstanding
during the year.
2016
2015
Net income attributable to Subordinate and Multiple Voting shareholders
$3,641
$18,580
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings per share
b) Diluted
21,861,230
21,947,725
$0.17
$0.85
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.
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
2016
2015
Net income attributable to Subordinate and Multiple Voting shareholders
$3,641
$18,580
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
21,861,230
7,412
21,947,725
14,892
21,868,642
21,962,617
$0.17
$0.85
23 Commitments and contingencies
a)
In the normal course of business, the Company issues performance bond guarantees related to product warranty
and on-time delivery as well as advance payment guarantees and bid bonds. As at February 29, 2016, the
aggregate maximum value of these guarantees, if exercised, amounted to $79,787 (2015 –$65,873). The
guarantees expire as follows:
February 28, 2017
February 28, 2018
February 28, 2019
February 29, 2020
February 28, 2021
Subsequent years
$
36,381
17,847
16,125
7,767
1,506
161
79,787
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$5,950 (2015 – $8,722), which are covered by letters of credit.
c) Future minimum payments under operating leases (related mainly to premises and machinery) are as follows:
$
1,459
1,551
1,432
1,196
525
200
6,363
February 28, 2017
February 28, 2018
February 28, 2019
February 29, 2020
February 28, 2021
Subsequent years
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 29, 2016, legal and related costs for these matters amounted to $5,568 (2015 –
$6,085).
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.
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Related party transactions
Transactions and balances with related parties occur in the 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
Accounts payable and accrued liabilities
Affiliated companies
Controlling shareholder
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation
2016
$
988
38
-
37
9
85
6
2015
$
1,459
67
14
27
-
82
35
4,186
104
4,405
15
1 Key management includes directors (executive and non-executive) and certain members of senior management.
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2016 and February 28, 2015
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Segment reporting
The Company reflects its results under a single reportable operating segment. The geographic distribution of its sales
and assets is as follows:
Sales
Customers -
Domestic
Export
Intercompany (export)
Total
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 29, 2016
Consolidation
Adjustment Consolidated
$
$
19,182
116,570
62,901
198,653
38,331
954
221,481
260,766
127,482
-
24,418
151,900
7,702
-
28,570
36,272
50,779
36,846
37
87,662
11,350
8,846
134,850
155,046
1,389
29,927
3,538
34,854
3,257
10,520
37,695
51,472
19,228
25,491
62,716
(153,610)
218,060
208,834
-
107,435
(153,610)
426,895
34,617
32
103,205
-
-
(125,782)
95,257
20,352
400,018
137,854
(125,782)
515,627
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
26 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk
management program focuses on mitigating unpredictable financial market risks and their potential adverse effects on
the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies
approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are the
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)
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.
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 amounts outstanding as at February 29, 2016 and February 28, 2015 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 29,
2016
February 28,
2015
February 29,
2016
$
February 28,
2015
$
February 29,
2016
February 28,
2015
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
1.25-1.46
Buy US$ for CA$ – 0 to 12 months
1.32-1.34
Sell US$ for € – 0 to 12 months
1.08-1.39
Buy US$ for € – 0 to 12 months
1.08-1.28
Sell US$ for KW – 0 to 12 months 1,166-1,206
Sell € for US$ – 0 to 12 months
1.09-1.19
Buy € for US$ – 0 to 12 months
1.07
Buy £ for US$ – 0 to 12 months
-
Buy £ for € – 0 to 12 months
0.72-0.78
1.09-1.26
-
1.14-1.40
1.12-1.27
-
1.13-1.14
1.10
1.55-1.62
0.74-0.79
(1,212)
1,426
(1,602)
2
(16)
(22)
156
-
(79)
(3,047) US$84,104
US$75,000
US$8,481
US$187
US$426
€13,737
€11,000
-
£938
-
(2,236)
30
-
(55)
49
(37)
78
US$49,565
-
US$19,573
US$1,119
-
€5,907
€5,000
£599
£1,982
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 years ended February 29, 2016 and February 28, 2015:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
Other comprehensive
income (loss)
2016
$
112
447
2015
$
1,083
766
2016
$
-
-
2015
$
-
-
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact for both fiscal years.
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
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)
bear interest, and its cash and cash equivalents earn interest at variable rates. An assumed 0.5% change in interest
rates would have no significant impact on the Company’s net income or cash flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 29, 2016, six (2015
– four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 11.8% (2015 – 10.3%), and the Company’s ten largest customers accounted for 58.5% (2015 – 54.7%).
In addition, one customer accounted for 13.4% of the Company’s sales (2015 – 10.9%).
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 29,
2016
$
As at
February 28,
2015
$
73,655
12,780
13,377
16,205
116,017
1,653
114,364
5,205
64,387
17,930
12,360
4,804
99,481
899
98,582
6,735
119,569
105,317
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
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)
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 29,
2016
$
As at
February 28,
2015
$
899
1,646
(198)
(623)
(71)
1,653
917
872
(665)
(172)
(53)
899
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
$
7,978
62,943
28,123
30,563
6,347
2,945
Less than
1 year
$
10,644
70,997
44,111
30,012
17,750
5,362
As at February 29, 2016
4 to 5
Years
$
3,095
-
-
-
-
-
After
5 years
$
4,908
-
-
-
-
-
As at February 28, 2015
4 to 5
Years
$
After
5 years
$
610
-
-
-
-
-
1,600
-
-
-
-
-
1 to 3
Years
$
6,468
-
-
-
-
-
1 to 3
Years
$
1,973
-
-
-
-
-
Total
$
22,449
62,943
28,123
30,563
6,347
2,945
Total
$
14,827
70,997
44,111
30,012
17,750
5,362
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)
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 29, 2016
Level 1
$
Level 2
$
Level 3
$
-
-
1,598
2,945
-
-
As at February 28, 2015
Level 1
$
Level 2
$
Level 3
$
-
-
144
5,362
-
-
Total
$
1,598
2,945
Total
$
144
5,362
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.
78
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 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 29,
2016
$
As at
February 28,
2015
$
5,028
1,319
7,978
14,471
28,796
15,616
2,134
10,644
4,183
32,577
333,119
345,093
8.6%
9.4%
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.
79
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)
28 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
Goodwill impairment loss (note 4)
Realized foreign exchange loss on liquidation of subsidiary
Net change in derivative assets and liabilities
Net change in other liabilities
29 Changes in non-cash working capital items
Accounts receivable
Inventories
Income taxes recoverable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Provisions
Accrual for performance guarantees
2016
$
13,301
2,008
(6,397)
104
(54)
11,510
-
(3,897)
505
2015
$
13,749
2,374
(1,906)
15
139
-
636
4,208
230
17,080
19,445
2016
$
2015
$
(14,330)
40,758
(203)
1,728
(8,108)
1,773
(16,095)
1,449
547
23,602
20,557
(7)
(280)
(5,603)
(197)
(22,770)
(186)
(3,837)
7,519
11,279
80
Directors and officers
Corporate directors
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
M. Allen
W. Maar
J. Ball
Chief Executive Officer
President
Special Advisor to the President
Executive Vice-President, Manufacturing Operations and Global Supply Chain
Executive Vice-President, Global Sales and Overseas Operations
Chief Financial 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, Sales - Canada
Vice-President, Sales - United States (North East)
Vice-President, Engineering
Vice-President, Sales - United States (South West)
G. Sabourin
Vice-President, Treasurer and Financial Systems
A. Smith
Vice-President, Procurement
R. Sossoyan
Vice-President, Global Financial Reporting
D. Velan
R. Velan
Vice-President, Marketing and Product Strategy
Vice-President, Customer Service and Distribution
81
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 29, 2016
6,170,568 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High CA $22.50
CA $13.57
Low
Closing on February 29, 2016: CA $17.05
Annual meeting
The Annual Meeting of Shareholders will be held July 12, 2016,
at 3:00 p.m. in the Salon St-Denis of the:
Saint James Club
1145 Union Avenue
Montreal, Quebec, Canada H3B 3C2
82
Velan worldwide
Head Office
An extensive global network
Montreal, QC, Canada
Velan Inc.
• 14 production facilities
• 4 plants in North America
• 5 plants in Europe
• 5 plants in Asia
• 4 stocking and distribution centers
• Hundreds of distributors worldwide
• Over 60 service shops worldwide
Manufacturing
- Canada
Manufacturing
- Europe
Manufacturing
- Asia
Distribution centers
Plant 1 and 5
Plant
Plant 1
Stocking and distribution
Montreal, QC, Canada
Velan Inc.
Lyon, France
Velan SAS
Ansan City, South Korea
Velan Ltd.
Willich, Germany
Velan GmbH
Plant 2 and 7
Plant
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
Stocking and distribution
Granby, QC, Canada
Velan Inc.
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Taichung, Taiwan
Velan-Valvac
Benicia, CA, U.S.A.
VelCAL
Manufacturing
- U.S.A.
Plant 3
Plant 1
Plant
Stocking and distribution
Lucca, Italy
Velan ABV S.r.l.
Suzhou, China
Velan Valve (Suzhou) Co., Ltd.
Houston, TX, U.S.A.
VelTEX
Williston, VT, USA
Velan Valve Corp.
Plant 2
Plant
Lucca, Italy
Velan ABV S.r.l.
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