Annual report 2018
Highlights
Velan SAS manufactured these cryogenic bellows seal globe control
valves for liquid helium application installed in a nuclear fusion
reactor in Japan. Photo credit: P.AvavianCEA.
Developed and manufactured by Velan ABV in Italy, these new
generation Key-C rotary control ball valves–when combined with our
unique, patent protected cable drive actuator–represent a major step
forward in control valve technology.
Velan’s marketing strategy focused on two main
product campaigns this year–the R-series cast
metal-seated ball valve and pressure seal valve.
The initiative showcased successful teamwork
across all departments involved.
Cover photo:
30” Velan Securaseal isolation ball valve
installed in a refinery in South America.
Velan Securaseal C-series valves installed at one of the most severe slurry pipelines
in Chile. Velan valves are exceeding the performance requirements in one of the
toughest slurry pipelines in the world.
2018 Financial highlights
Sales
(in millions of U.S. dollars)
Consolidated
Consolidated
Overseas
Overseas
U.S.A.
Canada
520
480
440
400
360
320
280
240
200
160
120
80
40
0
70
60
50
40
30
20
10
-
(10)
(20)
(30)
Net earnings(1) and EBITDA(2)
(in millions of U.S. dollars)
2014
2015
2016
2017
2018
2018
2014
2015
2016
2017
2018
Net earnings (loss)(1)
EBITDA(2)
(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 (loss) before income taxes
EBITDA (2)
EBITDA (2) %
EBITDA (2) per share
Net earnings (loss) (1)
Net earnings (loss) (1) %
Net earnings (loss) (1) per share (3)
Statement of financial position data
Net cash (2)
Working capital
Property, plant and equipment
Total assets
Total debt
Equity
Number of employees
Canada
United States
Europe
Asia
Total
Feb 2018
Feb 2017
Feb 2016
Feb 2015
Feb 2014
$ 337,963
68,585
20.3%
$ 331,777
88,528
26.7%
$ 426,895
104,283
24.4%
$ 455,750
118,283
26.0%
$ 489,257
131,146
26.8%
85,437
(18,512)
(4,376)
(1.3)%
(0.20)
(17,811)
(5.3)%
(0.82)
$ 61,048
215,639
89,864
540,193
22,129
321,617
732
146
489
463
1,830
75,868
12,994
26,201
7.9%
1.21
7,737
2.3%
0.36
77,974
12,587
38,563
9.1%
1.76
3,641
0.8%
0.17
88,391
28,965
45,066
9.9%
2.05
18,580
4.1%
0.85
87,143
42,762
57,435
11.7%
2.62
29,400
6.0%
1.34
$ 72,481
233,262
91,535
519,297
22,433
331,911
$ 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
763
157
482
474
1,876
787
165
520
430
1,902
917
181
528
441
2,067
917
188
526
429
2,060
(1) Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
(2) This term is a measure of performance and/or financial condition that is not defined under International Financial Reporting Standards and is therefore
unlikely to be comparable to similar measures presented by other companies. Such measures are used by management in assessing the operating results and
financial condition of the Company. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its
results and financial condition, and increase transparency and clarity into the operating results of its core business. Refer to the “Reconciliations of Non-IFRS
Measures” section in the Company’s Management Discussion and Analysis included in this Annual Report for a detailed calculation of this measure.
(3) See note 21 in the Notes to the Consolidated Financial Statements.
1
Dear Fellow Shareholders,
As Chairman of the Board and member of the majority shareholder
family, I share all our shareholders’ disappointment with the poor
results in fiscal 2018. This has been a very tough and challenging
year for our company as our sales declined and we made a loss,
our first operating loss since 2004. The company’s Equity declined
to US$321.6 million which is C$19.05 per share.
This was a year of transition for both the company and the Velan
family. In September 2017, AK Velan, my father who was the
founder and the longtime leader of the company, passed away
less than 6 months from his 100th birthday. Although he was no
longer involved in the company, everyone who knew him was
affected by the loss. Many of our employees felt that he was like
a second father to them. He was a legend in the valve industry, a
philanthropist, and a loving family man. He will be greatly missed.
On March 1st, 2017, I retired from my role as CEO and Yves
Leduc became the first non-Velan family CEO of the company
after serving two years as President. Yves and his executive team
are devoting all their efforts to reverse the downward trend and
improve the results.
From a corporate governance standpoint, we have established a
board renewal succession plan and implemented the first step with
the nomination of James Mannebach to replace Ken MacKinnon
who is retiring after 13 years of service. James Mannebach is
the first independent director who has extensive experience in
the valve industry. We are planning to make another director
succession next year. We need to balance the need for continuing
board renewal with the need to have experienced directors with
knowledge about our complex global business.
On behalf of the Board of Directors, I want to thank all
shareholders for your continuing support and the confidence
you have placed in our company.
Tom Velan
Chairman of the Board
Valve World magazine paid tribute to A.K. Velan in a
cover story published in the March issue.
A.K. and Tom Velan standing in front of a large valve in
2006 when A.K. was 88 years old.
2
Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated.)
Highlights
• Sales of $338.0 million
• Net loss(1) of $17.8 million
• Order Backlog of $464.5 million
• Order Bookings of $320.9 million
• Net Cash(2) of $61.0 million
Yves Leduc, Velan Inc’s President and Chief Executive Officer.
Fiscal year 2018 was my first year as CEO of Velan Inc. (the
“Company”) and it was by far the most challenging since I joined
the Company three years ago. Our results are deeply disappointing
as we suffered a loss on slightly increasing revenues.
So what is happening? The poor bookings experienced by North
American operations in fiscal year 2017 was not followed with
the expected recovery this year. The usual strong performance
of our French operations, coupled with Italy’s impressive sales
recovery, could not offset our performance in North America.
Meanwhile, the complexity of our project manufacturing business
keeps increasing at a pace faster than our improvements. This,
combined with sharply contracting margins in project valves,
contributed to a notable margin decline, again mostly in our
North American operations.
Let’s have a closer look at our results.
Sales, order bookings, and backlog
Sales increased by $6.2 million or 1.9% from the prior year. Sales
were positively impacted by an increase in shipments from the
Company’s Italian subsidiary, which was offset by decreased
shipments from the Company’s North American operations due
to various customer-related, supply chain and internal operational
issues. Sales were also negatively impacted by lower shipments
of non-project commodity valves, particularly in North America.
At first, the weakness in this segment, which mainly sells
into the oil and gas sector, was perceived to be temporary and
largely related to market conditions. However, as competition
has intensified and competitors have gained market share, it is
now apparent that the decline is more permanent. As such, it has
become imperative for the Company to shift its focus and target
discrete market segments where its engineering know-how and
agile design capabilities can be a leverage for future growth.
Bookings decreased by $127.3 million or 28.4% from the prior
year. The decrease for the year is due primarily to lower project
orders booked by the Company’s French, German and Italian
subsidiaries, all of which had recorded significant large project
orders in the prior year comparative period. While the Company’s
North American operations recorded higher bookings for the year,
such amount remains low when compared to previous fiscal years.
The current highly competitive environment in its various markets
continues to put downward pressure on pricing and lead times.
As a result of sales outpacing bookings in the current fiscal year,
the Company’s book-to-bill ratio was 0.95 for the year. Despite
this low ratio, the total backlog increased by $26.3 million or
6.0% since the beginning of the fiscal year. This improvement
in the backlog was achieved as a result of the positive impact of
the strengthening of the euro spot rate against the U.S. dollar at
the end of the current year when compared to the spot rate at the
beginning of the year.
(1) Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
(2) This term is a measure of performance and/or financial condition that is not defined under International Financial Reporting Standards and is therefore unlikely to
be comparable to similar measures presented by other companies. Such measures are used by management in assessing the operating results and financial condition
of the Company. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its results and financial
condition, and increase transparency and clarity into the operating results of its core business. Refer to the “Reconciliations of Non-IFRS Measures” section in the
Company’s Management Discussion and Analysis included in this Annual Report for a detailed calculation of this measure.
3
Message to our shareholders and employees
from Asia was received. The issues created by the deployment
of the new ERP system were addressed by the end of the current
year, but these shipping delays resulted in increased provisions
for late-delivery penalties as well as increased inventory ageing
provisions which were a further drag on the Company’s gross
profit percentage.
Progress overshadowed by business performance…
Our strategic plan, Velocity 2020, launched last fiscal year,
rests on a few key building blocks and aims at delivering the
consistent returns that would be expected of a high performing
company. We are far from that goal, but our business results
overshadowed the fact that we are making progress on many
fronts in transforming our Company:
• We are on track to deliver the commitment that I made last
July to reduce our cost base by a cumulative $20 million
over three years. To date, we have identified $5.2 million of
cost savings under this initiative. We have achieved material
savings through shifting sourcing to low cost countries and
tightening up our procurement practices. We are only at the
beginning of reaping the benefits of a new corporate function
established at the end of fiscal year 2017 and expect material
efficiencies to ramp up this year. The fact is however, as noted
above, these savings are in large part being transferred to our
customers because of the severe price competition currently
affecting our current project business.
• The deployment of a new Velan Project Management process
(“VPM”), kicked off in fiscal year 2017, is gaining traction,
but as project manufacturing becomes increasingly complex
and promised lead times increasingly shorter, we are not yet at
point where victory can be claimed.
• The number of successfully closed breakthrough initiatives
in our manufacturing operations has increased steadily,
signaling a step forward in building a culture of continuous
improvement.
Cast steel valves for NTPC Telangana supercritical power plant manu-
factured and ready for shipment from our Velan Valves India location.
4
A 20” Class 600 Torqseal triple-offset valve qualification setup for
API 641 and ISO-18848-1. Velan is an industry leader in developing
better technologies for low fugitive emissions valves that are also
operator friendly in the field.
Net earnings (loss)(1) and EBITDA(2)
Net loss(1) amounted to $17.8 million or $0.82 per share compared
to net earnings(1) of $7.7 million or $0.36 per share last year.
EBITDA(2) amounted to a negative balance of $4.4 million or
$0.20 per share compared to a positive balance of $26.2 million
or $1.21 per share last year. Despite an increase in sales, the
$25.5 million decrease in net earnings(1) is primarily attributable
to significantly weaker margins, increased administration costs
and the negative effects of the U.S. tax reform legislation passed
during the fourth quarter of the current fiscal year, which resulted
in a one-time tax expense inclusion of $4.3 million.
the Company’s supply chain
Gross profit decreased by $19.9 million for the fiscal year, while
the gross profit percentage decreased by 640 basis points from
26.7% to 20.3%. The decrease for the year is due primarily to the
Company’s North American operations, which shipped a product
mix with a greater proportion of projects with lower margins,
coupled with pricing pressure brought on by fierce competition
and continued weakness in certain markets. This loss of margin
was only partially offset by the material cost savings achieved
by
initiatives.
Furthermore, the Company’s North American operations were
impacted by a backlog of project valves which it had difficulty
delivering due to various customer-related issues. In addition, the
upgrade of the Company’s enterprise resource planning (“ERP”)
system, which was completed successfully and on time at the
beginning of the current year, created normally expected learning
pains and compounded those delivery challenges, resulting in
the disruption of the critical path of several projects within the
Company’s North American operations. This turbulence reached
a peak in the third quarter, at a time where a significant order
improvement
Message to our shareholders and employees
• We have successfully restructured our global sales force along
vertical, rather than geographic market lines in order to focus
resources on higher-margin segments where fewer competitors
can match our product capabilities and potential to meet the
toughest application requirements.
• This move is accompanied by a greater emphasis on a
disciplined commercialization of our innovations and, as such,
last year saw a number of new designs and product platforms
introduced to the market.
• Our greater focus on the installed base is paying off as spare
parts billings in percentage of sales reached a record level a
second year in a row in our North American operations In
France, we have seen service revenues grow also to record
levels, a reflection of the exceptional after-market organization
built up to service the installed base and delivering customer
satisfaction. This is a business model we intend to expand to
our North American operations, as we increase synergies and
cooperation across our global organization.
• Most of our subs are doing well, with our French operations
performing extremely well in the nuclear business and our
Italian operations having turned their business around after a
very difficult fiscal year 2017.
Unfortunately, the combined effect of these successes is not
showing in the bottom line. Why? I must admit we underestimated
the impact of a shifting business environment on our ability to
drive quickly enough the business transformation foreseen under
our strategic plan.
Yves Leduc, President and CEO, Velan Inc., with Frédéric Segault,
President, Segault SAS and Velan SAS, during their visit to CERN.
Velan has 2,500 bellows seal valves controlling the flow of 700,000
liters of liquid helium to cool down and optimize the performance
of 1,700 magnets to -271°C installed in the LHC (Large Hadron
Collider), the world’s most powerful particle accelerator.
5
Velan’s first Global Engineering Team Meeting was held in Montreal
March 5 – 9, 2018 which included employees from Canada, India,
France, and Italy.
For example, our North American plants have had a very difficult
time adapting to both the upgrade of our ERP, which created
normally expected turbulence, and to the low backlog, which
creates turbulence and hinders their ability to level production
planning. We expect to see significant improvements in operations
this year, thanks to the new systems and the deployment of
modernized practices in capacity planning.
Also, we recognized last year the aggressive pricing behavior
from our competitors, fighting for share in a slow-recovering
global project manufacturing business. In fact, we have witnessed
a surge of new competitors seeking to expand their reach in some
of the Company’s traditional markets. This year, these price wars
affected our margins to a degree not seen before. Our response to
this challenge is two-fold: an aggressive materials management
strategy, mentioned earlier, and a much more focused sales
organization, aiming to inject momentum into our product
portfolio by doubling down on higher margin growth segments.
However, the benefits of this sales approach, because it depends
on new capabilities in front-loaded business development, are
not immediate and will materialize over time, as we are planting
the seeds in promising segments where we have not traditionally
been focused before.
…but laying the base for decisive action
Last year I stated that, “because the Company is financially
healthy, we are careful not to rush”, recognizing the multi-fronted
change challenge we are facing. This year I am saying, in reaction
to the business performance, but with our financial health still
strong, we have become far less patient. The good news is that the
progresses made in fiscal year 2018 on the many fronts described
above prepare us to move faster. The other good news is that
employees tell me they are not accepting the results and are eager
to contribute to the Company’s return to financial success.
Message to our shareholders and employees
Part of Velan’s product strategy included launching product campaigns such as the Securaseal R Series cast valve and the latest in pressure seal
valve hardfacing technology which were introduced to our customer’s at the Distributor conference held in Quebec City in September.
As an example of this winning attitude, the unions and
management quickly agreed in March 2018, to postpone the
renewal of the collective agreement by one year, to avoid the
distraction of the negotiations and keep everybody focused on one
common goal: fixing our results. I am grateful to our unionized
employees who accepted this exceptional arrangement, as well
as to all of our employees, worldwide, who are working tirelessly
with great engagement at pulling our Company through these
difficult times.
In short, the rapidly changing business environment and the slow
recovery in bookings for our North American operations require
that we accelerate our transformation. Given the disappointing
results, we are currently re-assessing our Velocity 2020 strategic
plan to determine how it can be adapted to include ways to
simplify our business and rapidly broaden our cost reduction
initiatives. Simply put, we will need to make important changes
to improve our operating results.
Other companies have undergone tough tests. I told Tom Velan
that I believe, even more than when I joined, that the Company
has what it takes to grow profitably in the valve world: one of
the most reputed brand names in the industry, customers who
root for us, incredibly knowledgeable and passionate employees,
a global supply chain that is well established in western, as well
as low-cost economies, and a strong balance sheet.
This is all we need to have strong confidence in our ability to
rebound. Today we realize that more is needed to haul the
Company out of its current position and we will respond. As far
as our long-term perspective goes, the goal line may have moved
away from us, but we are not losing sight of it. Stay tuned.
Velan 16” Class 2500 forged gate valves for high pressure and high
temperature Hydrogen service installed on an AXENS-HYVAHL
process at IRPC Rayong facility in Thailand.
Yves Leduc
President and Chief Executive Officer
6
Management’s discussion and analysis
May 24, 2018
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 28, 2018. This Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2018 and 2017. 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 14 manufacturing plants
worldwide with 1,830 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 three manufacturing plants
and one distribution facility in Canada, as well as one manufacturing plant and two distribution facilities in the U.S. Significant
overseas operations include manufacturing plants in France, Italy, Portugal, Korea, Taiwan, India, and China. The Company’s
operations also include a distribution facility in Germany and a 50%-owned Korean foundry.
7
Management’s discussion and analysis
CONSOLIDATED HIGHLIGHTS1
(millions, excluding per share amounts)
Consolidated statements of earnings
Sales
Gross profit
Gross profit %
EBITDA2
EBITDA2 %
EBITDA2 per share – basic and diluted
Net earnings (loss)3
Net earnings (loss)3 %
Net earnings (loss)3 per share – basic and diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided by (used in) operating activities
Cash used in investing activities
Cash used by financing activities
Demand data
Net new orders received
Period ending backlog of orders
Fiscal year
ended
February 28,
2018
Fiscal year
ended
February 28,
2017
Increase
(decrease)
%
Increase
(decrease)
$338.0
68.6
20.3%
(4.4)
(1.3)%
(0.20)
(17.8)
(5.3)%
(0.82)
21.6
(1.9)
(6.7)
(11.1)
320.9
464.5
$331.8
88.5
26.7%
26.2
7.9%
1.21
7.7
2.3%
0.36
21.7
7.1
(5.5)
(8.1)
448.2
438.2
$6.2
(19.9)
1.9%
(22.5)%
(30.6)
(116.8)%
(1.41)
(25.5)
(116.5)%
(331.2)%
(1.18)
(327.8)%
(9.0)
(1.2)
(3.0)
(126.8)%
(21.8)%
(37.0)%
(127.3)
(28.4)%
26.3
6.0%
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 or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
8
Management’s discussion and analysis
Highlights of fiscal 2018 as well as factors that may impact fiscal 2019
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
EBITDA1 amounted to a negative balance of $4.4 million or $0.20 per share compared to a positive balance of $26.2 million
or $1.21 per share last year. Despite an increase in sales, the $30.6 million decrease in EBITDA1 is primarily attributable to
significantly weaker margins and increased administration costs.
Net loss2 amounted to $17.8 million or $0.82 per share compared to net earnings2 of $7.7 million or $0.36 per share last year.
The $25.5 million decrease in net earnings2 is primarily attributable to a lower EBITDA1 and the negative effects of the U.S.
tax reform legislation passed during the fourth quarter of the current fiscal year, which resulted in a one-time tax expense
inclusion of $4.3 million.
Sales amounted to $338.0 million, an increase of $6.2 million or 1.9% compared to last year. Sales were positively impacted
by an increase in shipments from the Company’s Italian subsidiary, which were offset by decreased shipments from the
Company’s North American operations. Delays in shipments of certain large project orders caused by various customer-
related, supply chain and internal operational issues, and lower shipments of non-project commodity valves negatively
impacted the Company’s North American operations.
Net new orders received (“bookings”) amounted to $320.9 million, a decrease of $127.3 million or 28.4% compared to last
year. This decrease is due primarily to lower project orders booked by the Company’s French, German and Italian
subsidiaries, all of which had recorded significant large project orders in the prior year period. This decrease was partially
offset by improved bookings in the Company’s North American operations.
Despite the fact that sales outpaced bookings in the year, the Company ended the year with a backlog of $464.5 million, an
increase of $26.3 million or 6.0% since the beginning of the current fiscal year. This increase in backlog was substantially
due to the positive impact of the strengthening of the euro spot rate against the U.S. dollar over the course of the year.
Gross profit percentage decreased by 640 basis points from 26.7% to 20.3%. This decrease is due primarily to the Company’s
North American operations, which shipped a product mix with a greater proportion of projects with lower margins, coupled
with pricing pressure brought on by fierce competition and continued weakness in certain markets; this loss of margin was
only partially offset by the material cost savings achieved by the Company’s supply chain improvement initiatives.
Furthermore, the Company’s North American operations were impacted by a significant backlog of project valves which it
was not able to deliver due to various customer-related issues and internal operational issues.
Administration costs amounted to $85.4 million, an increase of $9.5 million or 12.5%. This increase is primarily attributable
to an increase in sales commissions and freight charges resulting from the higher sales volume, an increase in technology
license fees paid on the sale of certain highly-engineered cryogenic valves by the Company’s French operations, and an
increase in costs recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies section). The
fluctuation in asbestos costs for the year is due more to the timing of settlement payments in these two years rather than to
changes in long-term trends.
The Company ended the year with net cash1 of $61.0 million, a decrease of $11.5 million or 15.9% since the beginning of
the year. This decrease is primarily attributable to cash used in operations, investments in property, plant and equipment,
long-term debt repayments as well as distributions to shareholders via dividends and share repurchases.
Foreign currency impacts:
o Based on average exchange rates, the euro strengthened 4.9% against the U.S. dollar when compared to the same
period last year. This strengthening resulted in the Company’s net profits and bookings from its European
subsidiaries being reported as higher U.S. dollar amounts in the current year.
o Based on average exchange rates, the Canadian dollar strengthened 1.8% against the U.S. dollar when compared to
the same period last year. This strengthening resulted in the Company’s Canadian dollar expenses being reported as
higher U.S. dollar amounts in the current year.
o Based on spot exchange rates, the euro strengthened 15.3% against the U.S. dollar when compared to the rate at the
end of the last fiscal year. This strengthening resulted in losses of $1.8 million incurred on foreign exchange forward
contracts used by the Company to hedge the net monetary position of its European subsidiaries. This strengthening
1 Non-IFRS measures – see reconciliations at the end of this report.
2 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
9
Management’s discussion and analysis
also resulted in a positive cumulative translation adjustment of $15.9 million which was recorded directly in equity
through other comprehensive income (loss).
o The net impact of the above currency swings was generally unfavourable on the Company’s net loss1, although it
was generally favourable on the Company’s equity.
Fiscal year 2018 was another challenging year for the Company. The year’s disappointing financial results were largely driven by the
Company’s North American operations, which, over the last two years, have been struggling to increase their low order backlog as
they continue to face intense competition in their key target markets, leading to increased pressure on pricing and lead times. This
trend is now starting to show in the Company’s results as its gross profit percentage was adversely impacted by these pricing pressures
despite a slight increase in sales. While the Company has been implementing several improvement initiatives at its North American
operations under its strategic plan entitled “Velocity 2020”, it is clear that the pace of its transformation from a largely commodity
valve operation to a more project manufacturing-based business will have to be accelerated. The Company is currently conducting a
detailed review of its strategic plan and will be rolling out an accelerated version over the next fiscal year. In the meantime, the
Company implemented several improvement initiatives this year, namely the continued rollout of its Valve Project Management
process (“VPM”), the successful completion of a number of continuous improvement breakthrough initiatives in the Company’s
manufacturing operations, the restructuring of the Company’s global sales force along vertical market lines rather than geographic
lines, the disciplined commercialization of new designs and product platforms introduced to the market, and an increase of spare parts
billings as percentage of sales for a second year in a row in the Company’s North American operations.
While the Company’s North American operations continued to struggle, its wholly-owned French operations continued to outperform
the rest of the Company as they maintained their strong sales and margins of the previous year. The Company also realized a turnaround
at its Italian subsidiary which saw a return to profitability on significantly improved sales.
Other factors that may impact fiscal year 2019
Due to its diversification in both geography and type of industry, the Company is well positioned to meet the many challenges it
currently faces. While its financial position is healthy with a debt-to-equity ratio of only 13.7%, the Company will not be able to
sustain results similar to those of the current year for consecutive years into the future. As such, the Company will accelerate its
transformation plan, while continuing to pursue its global cost reduction and efficiency initiative, which was announced in the first
quarter of the current fiscal year. The goal of this plan is to reduce annual supply chain, production and overhead costs by
approximately $20 million by the end of the fiscal year ending February 29, 2020. Approximately $5.2 million in annual cost savings
have been identified under this initiative to date. Through its various strategic initiatives, the Company is 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.
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. Such factors include, but are not limited to foreign currency fluctuations, in particular the
Canadian dollar and the euro against the U.S. dollar, commodity price fluctuations from both a procurement (price of steel) and sales
(price of oil) perspective, and the potential imposition of protectionist trade measures and sanctions. See Certain Risks That Could
Affect Our Business section below for more details.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
10
Management’s discussion and analysis
SUMMARY OF RESULTS
Summary financial data derived from the Company’s financial statements prepared in accordance with IFRS for the three most recently
completed reporting periods are as follows:
For the reporting periods ended on the following dates
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fiscal year ended
February 28, 2018
Fiscal year ended
February 28, 2017
Fiscal year ended
February 29, 2016
Operating Data
Sales
Net Earnings (loss)1
Earnings (loss) 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
$331,777
7,737
0.36
0.36
519,297
22,532
0.31
0.31
$426,895
3,641
0.17
0.17
515,627
23,516
0.31
0.31
$337,963
(17,811)
(0.82)
(0.82)
540,193
22,200
0.31
0.31
15,566,567
6,055,368
Sales for fiscal year 2018 increased by 1.9% compared to fiscal year 2017. This increase was primarily attributable to an increase in shipments
from the Company’s Italian subsidiary, which were offset by decreased shipments from the Company’s North American operations. Delays
in shipments of certain large project orders caused by various customer-related, supply chain and internal operational issues, and lower
shipments of non-project commodity valves negatively impacted the Company’s North American operations. Sales for fiscal year 2017
decreased by 22.3% compared to fiscal year 2016. This decrease was primarily attributable to the lower level of bookings recorded over the
course of fiscal year 2016 due in turn to softer demand in our core markets, which negatively impacted the sales volume in fiscal year 2017.
Gross profit for fiscal year 2018 amounted to $68.6 million, a decrease of $19.9 million from fiscal year 2017, while the gross profit percentage
decreased from the 26.7% reported in fiscal year 2017 to 20.3% in fiscal year 2018. This decrease was due primarily to the Company’s North
American operations, which shipped a product mix with a greater proportion of projects with lower margins, coupled with pricing pressure
brought on by fierce competition and continued weakness in certain markets, which was only partially offset by the material cost savings.
Gross profit for fiscal year 2017 amounted to $88.5 million, a decrease of $15.8 million from fiscal year 2016. However, gross profit
percentage for fiscal year 2017 increased from the 24.4% reported in fiscal year 2016 to 26.7%. While the lower sales volume negatively
impacted total gross profit in the year, the increase in the gross profit percentage was mainly attributable to a product mix with a greater
proportion of higher margin product sales, material cost savings, as well as labour and overhead savings stemming from the restructuring
initiatives implemented in the prior fiscal year.
Administration costs for fiscal year 2018 increased by $9.5 million when compared to fiscal year 2017. This increase was primarily
attributable to an increase in sales commissions and freight charges due to the increased sales volume, an increase in technology license fees
paid on the sale of certain highly-engineered cryogenic valves, and an increase in costs recognized in connection with the Company’s ongoing
asbestos litigation (see Contingencies section). Administration costs for fiscal year 2017 decreased by $2.1 million when compared to fiscal
year 2016. This decrease was achieved despite a $1.2 million increase in costs recognized in connection with the Company’s ongoing asbestos
litigation (see Contingencies section).
The fiscal year 2018 net loss1 was also negatively impacted by a $4.3 million one-time income tax charge due to the U.S. tax reform legislation
passed in December 2017. The fiscal year 2016 net earnings1 were negatively impacted by an $11.5 million non-cash goodwill impairment
loss related to the Velan ABV S.r.l. (“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 or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Multiple Voting Shares (five votes per share) are convertible into Subordinate Voting Shares on a 1 to 1 basis.
11
Management’s discussion and analysis
RESULTS OF OPERATIONS – for the year ended February 28, 2018 compared to the year ended February 28, 2017
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2018
Year ended
February 28,
2017
(millions)
Sales
$338.0
$331.8
Sales increased by $6.2 million or 1.9% from the prior year. Sales were positively impacted by an increase in shipments from the
Company’s Italian subsidiary, which was offset by decreased shipments from the Company’s North American operations. One reason
for such decreased shipments was due to delays in shipments of certain large project orders caused by various customer-related, supply
chain and internal operational issues. One particular project order, destined to an oil and gas project in Mexico, totalling approximately
$11 million, has been ready to ship since the first quarter of the prior fiscal year but was delayed due to the customer having put the
order on hold. While the customer has maintained its commitment to eventually take possession of these goods, it is currently unclear
as to the timing of their shipment. Sales were also negatively impacted by lower shipments of non-project commodity valves,
particularly in North America. At first, the weakness in this segment, which mainly sells into the oil and gas sector, was perceived to
be temporary and largely related to market conditions. However, as competition has intensified and competitors have gained market
share, it is now apparent that the decline is more permanent. As such, it has become imperative for the Company to shift its focus and
target discrete market segments where its engineering know-how and agile design capabilities can be a leverage for future growth.
Bookings and backlog
(millions)
Year ended
February 28,
2018
Year ended
February 28,
2017
Bookings
$320.9
$448.2
Bookings decreased by $127.3 million or 28.4% from the prior year. The decrease for the year is due primarily to lower project orders
booked by the Company’s French, German and Italian subsidiaries, all of which had recorded significant large project orders in the
prior year, notably approximately $22 million in project orders won by the Company’s Italian operations to supply valves to the oil
and gas sector in the Middle East, approximately $91 million in project orders won by the Company’s French operations to supply
valves to the nuclear power market in China and the U.K., and approximately $21 million in project orders won by the Company’s
German operations to supply valves to the power market in Vietnam. Furthermore, bookings were negatively impacted by the
cancellation of a $6 million oil and gas sector order at the Company’s Italian subsidiary in the first quarter of the current year. While
the Company’s North American operations recorded higher bookings for the year, such amount remains low when compared to
previous fiscal years. The current highly competitive environment in its various markets continues to put downward pressure on pricing
and lead times. Given these trends, the Company has accelerated the assessment of its global manufacturing footprint, supply chain
and cost structure as per its Velocity 2020 strategic plan. Consequently, the Company is pursuing its global cost reduction and
efficiency initiative with the goal of reducing annual supply chain, production and overhead costs by approximately $20 million by
the end of the fiscal year ending February 29, 2020. Approximately $5.2 million in annual cost savings have been identified under this
initiative to date.
(millions)
Backlog
February
2018
February
2017
February
2016
$464.5
$438.2
$331.2
For delivery within the subsequent fiscal year
$286.7
$270.5
$256.2
For delivery beyond the subsequent fiscal year
$177.8
$167.7
$75.0
Percentage – beyond the subsequent fiscal year
38.3%
38.3%
22.7%
12
Management’s discussion and analysis
As a result of sales outpacing bookings in the current fiscal year, the Company’s book-to-bill ratio was 0.95 for the year. Despite this
low ratio, the total backlog increased by $26.3 million or 6.0% since the beginning of the fiscal year, settling at $464.5 million. This
improvement in the backlog was achieved as a result of the positive impact of the strengthening of the euro spot rate against the U.S.
dollar at the end of the current year when compared to the spot rate at the beginning of the year.
Gross profit
(millions)
Gross profit
Year ended
February 28,
2018
Year ended
February 28,
2017
$68.6
$88.5
Gross profit percentage
20.3%
26.7%
Gross profit decreased by $19.9 million for the fiscal year, while the gross profit percentage decreased by 640 basis points from 26.7%
to 20.3%. The decrease for the year is due primarily to the Company’s North American operations, which shipped a product mix with
a greater proportion of projects with lower margins. Pricing pressure brought on by fierce competition, continued weakness in certain
markets, and warranty provisions also had a negative impact on the gross profit percentage. This loss of margin was only partially
offset by the material cost savings achieved by the Company’s supply chain improvement initiatives. Furthermore, the Company’s
North American operations were impacted by a backlog of project valves which they had difficulty delivering due to various customer-
related issues. In addition, the upgrade of the Company’s enterprise resource planning (“ERP”) system, which was completed
successfully and on time at the beginning of the current year, created normally expected learning pains and compounded those delivery
challenges, resulting in the disruption of the critical path of several projects within the Company’s North American operations. This
turbulence reached a peak in the third quarter, at a time where a significant order from Asia was received. The issues created by the
deployment of the new ERP system were addressed by the end of the current year, but these shipping delays resulted in increased
provisions for inventory ageing which were a further drag on the Company’s gross profit percentage.
Administration costs
(millions)
Administration costs*
As a percentage of sales
Year ended
February 28,
2018
Year ended
February 28,
2017
$85.4
25.3%
$75.9
22.9%
$6.8
*Includes asbestos-related costs of:
$8.2
Administration costs increased by $9.5 million or 12.5% for the fiscal year. This increase was primarily attributable to an increase in
sales commissions and freight charges resulting from the higher sales volume, an increase in technology license fees paid on the sale
of certain highly-engineered cryogenic valves by the Company’s French operations, and an increase in costs recognized in connection
with the Company’s ongoing asbestos litigation (see Contingencies section). The fluctuation in asbestos costs for both years is due
more to the timing of settlement payments in these two periods rather than to changes in long-term trends.
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 create a hazard 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.
13
Management’s discussion and analysis
Other expense (income)
(millions)
Year ended
February 28,
2018
Year ended
February 28,
2017
Other expense (income)
$1.5
$(0.4)
Other expense increased by $1.9 million for the fiscal year. The increase for the year is primarily attributable to mark-to-market losses
of $1.8 million incurred on foreign exchange forward contracts used by the Company to hedge the net monetary position of its
European subsidiaries, which is denominated in euros. On similar instruments used in the prior year, the Company incurred mark-to-
market gains of $0.7 million. The euro spot rate appreciated 15.3% against the U.S. dollar since the beginning of the current fiscal
year, resulting in an increase to net loss1. This euro appreciation also had a positive impact on the Company’s statement of financial
position since it resulted in a positive cumulative translation adjustment of $15.9 million for the year, which was recorded directly in
equity through other comprehensive income (loss). As such, the net impact of the euro appreciation was generally positive on the
Company’s equity, even though the Company’s net loss1 was depressed as a result.
Net finance costs
(millions)
Year ended
February 28,
2018
Year ended
February 28,
2017
Net finance costs
$0.2
$0.1
Net finance costs increased by $0.1 million for the fiscal year. While long-term debt remained relatively stable when compared to the
prior fiscal year, the Company’s overall debt load increased over the course of the current fiscal year, particularly its bank indebtedness
in its North American and Italian operations, resulting in an increase in its finance costs (see Liquidity and Capital Resources section).
Income taxes
(in thousands, excluding percentages)
Year ended
February 28, 2018
%
$
Year ended
February 28, 2017
$
%
Income (loss) before income taxes
(18,512)
100.0
12,994
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective
countries
Tax effects of:
(3,562)
19.2
5,020
38.6
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Losses utilized not previously tax effected
Benefit attributable to a financing structure
Effect of U.S. Tax Reform
Other
Provision for income taxes
(303)
1,151
-
(917)
4,259
(267)
1.6
(6.2)
-
5.0
(23.1)
1.5
(344)
1,552
(444)
(927)
-
(177)
(2.6)
11.9
(3.4)
(7.1)
-
(1.4)
361
(2.0)
4,680
36.0
U.S. Tax Reform was substantially enacted on December 22, 2017 under its official name “An Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”. As a result of the enactment of this
legislation, the Company’s U.S. subsidiary recorded a one-time tax expense of $4.3 million, of which $2.3 million was due to the new
mandatory repatriation tax and $2.0 million was due to the effect of the tax rate reduction on its net deferred income tax assets.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
14
Management’s discussion and analysis
Net earnings (loss)1
(millions)
Year ended
February 28,
2018
Year ended
February 28,
2017
Net earnings (loss)1
$(17.8)
As a percentage of sales
(5.3)%
EBITDA2
As a percentage of sales
$(4.4)
(1.3)%
$7.7
2.3%
$26.2
7.9%
Net loss1 amounted to $17.8 million or $0.82 per share compared to net earnings1 of $7.7 million or $0.36 per share last year. EBITDA2
amounted to a negative balance of $4.4 million or $0.20 per share compared to a positive balance of $26.2 million or $1.21 per share
last year. Despite an increase in sales, the $25.5 million decrease in net earnings1 is primarily attributable to significantly weaker
margins, increased administration costs and the negative effects of the U.S. tax reform legislation passed during the fourth quarter of
the current fiscal year, which resulted in a one-time tax expense inclusion of $4.3 million.
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
2018
$102,607
(8,221)
November
2017
$87,738
305
August
2017
$76,531
(5,591)
May
2017
$71,087
(4,304)
February
2017
$102,835
3,707
November
2016
$80,396
1,501
QUARTERS ENDED
May
August
2016
2016
$77,409
$71,137
528
2,001
(0.38)
(0.38)
0.02
0.02
(0.26)
(0.26)
(0.20)
(0.20)
0.17
0.17
0.07
0.07
0.10
0.10
0.02
0.02
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 February 2017 and February 2018 due to increased shipments of such orders, while the lower sales amounts for the quarters
ended in May 2016, August 2016, November 2016, May 2017, August 2017 and November 2017 were due to delayed execution on
the shipments of such orders. Net earnings1 for the quarters ended in August 2016, November 2016 and February 2017 were higher
due to a more efficient product mix. A net loss1 was recorded in the quarters ended in May 2017 and August 2017 due to lower sales
volume and a less efficient product mix. Net earnings1 for the quarters ended May 2016 and November 2017 were lower due to a less
efficient product mix. The net loss1 for the quarter ended in February 2018 was due to a less efficient product mix, shipping delays
caused by internal operational issues and a $4.3 million one-time income tax charge resulting from the U.S. tax reform legislation
passed in December 2017.
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
RESULTS OF OPERATIONS – quarter ended February 28, 2018 compared to the quarter ended February 28, 2017
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the prior fiscal year)
Sales
(millions)
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Sales
$102.6
$102.8
Sales remained relatively stable for the quarter, decreasing by $0.2 million or 0.2%. While sales were lower in the current quarter
when compared to the comparative period in the prior year, they were stronger when compared to the previous three quarters of the
current fiscal year. Sales for the quarter were improved in the Company’s Italian subsidiary, while its North American operations
realized lower sales due to delays in shipments of certain large project orders caused by various customer-related, supply chain and
internal operational issues.
Bookings
(millions)
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Bookings
$72.9
$125.9
Bookings decreased by $53.0 million or 42.1% for the quarter. The decrease in bookings is primarily attributable to the Company’s
French operations which had won $55 million in large project orders in the prior year comparable quarter to supply valves towards
the construction of a nuclear power plant in the U.K. While bookings remained relatively flat if these orders are not taken into account,
the Company’s North American operations continue to struggle as the current highly competitive environment in many of its markets
continues to put downward pressure on pricing and lead times, despite the fact that the outlook in most of these markets are beginning
to show signs of improvement.
Gross profit
(millions)
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Gross profit
$17.3
$28.9
Gross profit percentage
16.9%
28.1%
Gross profit decreased by $11.6 million for the quarter, while the gross profit percentage decreased by 1,120 basis points from the
prior year quarter. Despite the fact that sales remained relatively stable and that the Company maintained control over its labour and
overhead costs, both the gross profit and the gross profit percentage decreased significantly due primarily to shipping a product mix
with a greater proportion of projects with lower margins, a decrease in production which reduced the amount of current period direct
labour and production overhead costs that could be capitalized, and warranty provisions. In addition, shipping delays due to customer-
related and internal operational issues resulted in an increase in provisions for inventory ageing, which had a direct negative impact
on the Company’s margins. The lingering pricing pressure and the Company’s inherent fixed overhead costs due to its large global
manufacturing footprint continue to have a negative impact on its gross profit percentage, particularly in its North American operations
which saw a 320 basis point increase in its material cost as a percentage of sales in the quarter. The Company aims to address these
latter issues through its strategic initiatives, namely materials management, targeting higher margin segments and overhead reduction.
16
Management’s discussion and analysis
Administration costs
(millions)
Administration costs*
As a percentage of sales
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
$22.7
22.1%
$19.0
18.5%
$1.2
*Includes asbestos-related costs of:
$2.0
Administration costs for the quarter increased by $3.7 million or 19.5% for the quarter. The increase is primarily attributable to an
increase in sales commissions and freight charges as well as an 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.
Net finance costs
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
(millions)
Net finance costs
$0.1
$0.3
Net finance costs decreased by $0.2 million for the quarter. The Company did not incur any new long-term debt borrowings over the
course of the quarter.
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 28, 2018
%
$
Three-month period ended
February 28, 2017
$
%
Income (loss) before income taxes
(5,333)
100.0
9,067
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective
countries
Tax effects of:
(605)
11.3
4,241
46.8
Non-deductible (taxable) foreign exchange loss (gain)
Losses not tax effected
Losses utilized not previously tax effected
Benefit attributable to a financing structure
Effect of U.S. Tax Reform
Other
Provision for income taxes
(92)
645
-
(230)
4,259
(292)
1.7
(12.1)
-
4.3
(79.8)
5.5
(181)
1,514
(158)
(220)
-
(215)
(2.0)
16.7
(1.8)
(2.4)
-
(2.4)
3,685
(69.1)
4,981
54.9
U.S. Tax Reform was substantially enacted on December 22, 2017 under its official name “An Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”. As a result of the enactment of this
legislation, the Company’s U.S. subsidiary recorded a one-time tax expense of $4.3 million, of which $2.3 million was due to the new
mandatory repatriation tax and $2.0 million was due to the effect of the tax rate reduction on its net deferred income tax assets.
17
Management’s discussion and analysis
Net earnings (loss)1
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
$(8.2)
(8.0)%
$(1.2)
(1.2)%
$3.7
3.6%
$12.6
12.3%
(millions)
Net earnings (loss)1
As a percentage of sales
EBITDA2
As a percentage of sales
Net loss1 amounted to $8.2 million or $0.38 per share compared to net earnings1 of $3.7 million or $0.17 per share last year. EBITDA2
amounted to a negative balance of $1.2 million or $0.05 per share compared to a positive balance of $12.6 million or $0.58 per share
last year. Despite relatively stable sales in the quarter, the $11.9 million decrease in net earnings1 is primarily attributable to
significantly weaker margins, increased administration costs and the negative effects of the U.S. tax reform legislation passed during
the current quarter, which resulted in a one-time tax expense inclusion of $4.3 million.
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.
18
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:
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term bank loans
Derivative liabilities
Total
$
22,129
63,411
48,963
32,655
21,922
1,615
Less than
1 year
$
8,151
63,411
48,963
32,655
21,922
1,615
As at February 28, 2018
4 to 5
Years
$
After
5 years
$
3,548
-
-
-
-
-
5,059
-
-
-
-
-
1 to 3
Years
$
5,371
-
-
-
-
-
On February 28, 2018, the Company’s order backlog was $464.5 million and its net cash1 plus unused credit facilities amounted to
$144.0 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, as
well as recent trade protectionist measures and economic sanctions. 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.
19
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
2018
November
2017
February
2017
November
2016
February
2016
Net cash1
$61.0
$73.2
$72.5
$72.6
$82.0
The Company’s net cash1 decreased by $12.2 million or 16.7% over the course of the quarter and by $11.5 million or 15.9% since the
beginning of the current fiscal year. This decrease is primarily attributable to cash used in operating activities, investments in property,
plant and equipment, long-term debt repayments, as well as distributions to shareholders via dividends and share repurchases.
Cash provided by (used in) operating activities
(millions)
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Cash provided by (used in) operating activities
$(1.9)
$7.1
$(8.9)
$0.3
Cash used in operating activities amounted to $8.9 million for the current quarter compared to cash provided by operating activities
of $0.3 million in the prior year. The current quarter’s negative variance consisted of negative cash net losses2 of $13.5 million and
positive non-cash working capital movements of $4.6 million. Cash used in operating activities amounted to $1.9 million for the
current year compared to cash provided by operating activities of $7.1 million in the prior year. The current year’s negative variance
consisted of negative cash net losses2 of $12.5 million and positive non-cash working capital movements of $10.6 million.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Accounts receivable increase
$10.3
$5.9
$23.9
$21.9
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 primarily to a greater proportion of the Company’s accounts receivable, which consist
primarily of sales for large project orders that generally entail longer collection terms, being recorded closer to the end of the current
quarter.
Inventories
(millions)
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Inventories decrease (increase)
Customer deposits increase
$2.6
$5.7
$(10.6)
$15.8
$12.8
$2.8
$6.0
$5.8
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 since the
Company had large shipments closer to the end of the quarter without replenishing its stock. In order to help finance its investment in
inventories, the Company, where possible, obtains customer deposits for large orders. Customer deposits increased for both the current
quarter and fiscal year due to higher customer deposits on certain large export project orders in the Company’s North American and
German operations.
1 Non-IFRS measures – see reconciliations at the end of this report.
2 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
20
Management’s discussion and analysis
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Accounts payable and accrued liabilities (decrease) increase
$3.2
$(2.3)
$(0.8)
$1.7
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 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
Additions to property, plant and equipment
$6.2
$7.7
$1.8
$1.7
The fluctuations in additions to property, plant and equipment for any period when compared to the prior year comparable period is
due to the timing of the receipts of certain equipment.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
$ -
$3.2
$5.1
$5.9
$ -
$0.9
$5.1
$0.6
During the current quarter and fiscal year, the Company continued to pay down its outstanding long-term debt without undertaking
any new debt issuances.
Dividends paid and repurchase of shares
(millions)
Dividends paid
Repurchase of shares
Fiscal Year
ended
February 28,
2018
Fiscal Year
ended
February 28,
2017
Three-month
period ended
February 28,
2018
Three-month
period ended
February 28,
2017
$6.7
$0.6
$6.6
$0.9
$1.7
$ -
$1.6
$0.6
While, the Company maintained its current dividend policy of CA$0.10 per share per quarter in the current fiscal year, it adjusted it
down to CA$0.03 per share per quarter, beginning in June 2018. Furthermore, pursuant to its Normal Course Issuer Bid, the Company
repurchased for cancellation a total of 45,300 Subordinate Voting Shares for a cash consideration of $0.6 million over the course of
the current fiscal year. None of these repurchases occurred in the current quarter.
21
Management’s discussion and analysis
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and
fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk management program focuses on
mitigating unpredictable financial market risks and their potential adverse effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies approved by the
Board of Directors. The identification, evaluation and hedging of the financial risks are the responsibility of the corporate finance team
in conjunction with the finance teams of the Company’s subsidiaries. The Company uses derivative financial instruments to hedge
certain risk exposures. Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be
entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are
to be entered into for risk management purposes only).
Risk overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following table:
Risks
Market
Financial instrument
Currency
Interest rate
Credit
Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Dividend payable
Accrual for performance guarantees
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will fluctuate because
of changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk arising from
various currency exposures. Currency risk arises when future commercial transactions and recognized assets and liabilities are
denominated in a currency other than a company’s functional currency. The Company has operations with different functional
currencies, each of which will be exposed to currency risk based on its specific functional currency.
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.
22
Management’s discussion and analysis
The amounts outstanding as at February 28, 2018 and 2017 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2018
February 28,
2017
February 28,
2018
$
February 28,
2017
$
February 28,
2018
February 28,
2017
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Buy US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
Buy US$ for € – 0 to 12 months
Sell US$ for KW – 0 to 12 months
Sell € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for € – 0 to 12 months
1.26-1.28
1.25
1.18-1.19
1.18-1.24
-
1.24-1.28
1.18
0.89
1.32
1.30-1.31
1.09-1.16
1.06-1.28
1,193-1,200
1.06-1.08
1.06-1.08
0.84-0.85
(1,558)
433
(2)
92
-
(39)
64
(1)
(615) US$92,000
US$92,000
337
US$2,190
(20)
US$4,785
249
-
99
€16,297
(155)
€15,390
509
£281
(1)
US$40,000
US$40,000
US$336
US$4,295
US$1,668
€16,122
€33,600
£144
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 28, 2018 and 2017:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
2018
$
(524)
396
2017
$
(121)
496
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 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.
23
Management’s discussion and analysis
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2018, four (2017 – four)
customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 9.6% (2017 –
8.5%), and the Company’s ten largest customers accounted for 57.3% (2017 – 52.4%). In addition, one customer accounted for 9.86%
of the Company’s sales (2017 – 13.3%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific
evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts receivable,
historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established for each
customer and reviewed periodically. An allowance for doubtful accounts is recorded when, based on management’s evaluation, the
collection of an account receivable is not reasonably certain.
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash equivalents and short-term
investments, which it manages by dealing with highly rated financial institutions.
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on derivative assets.
The table below summarizes the ageing of trade accounts receivable as at:
As at
February 28,
2018
$
As at
February 28,
2017
$
91,534
12,421
8,546
18,714
131,215
1,088
130,127
7,255
77,262
19,330
7,625
16,508
120,725
1,239
119,486
6,026
137,382
125,512
As at
February 28,
2018
$
As at
February 28,
2017
$
1,239
212
(444)
(122)
203
1,088
1,653
414
(598)
(214)
(16)
1,239
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
The table below summarizes the movements in the allowance for doubtful accounts:
Balance – Beginning of year
Bad debt expense
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
24
Management’s discussion and analysis
CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defence related to certain products that may have contained an internal asbestos containing component. 1,190
claims were outstanding at the end of the reporting period (February 28, 2017 – 1,146). These claims were filed in the states of
Arkansas, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts,
Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas,
Virginia, Washington, West Virginia and Wisconsin. During the current fiscal year, the Company resolved 457 claims (February 28,
2017 – 376) and was the subject of 501 new claims (February 28, 2017 – 488). Because of the many uncertainties inherent in predicting
the outcome of these proceedings, as well as the course of asbestos litigation in the United States, management believes that it is not
possible to make an estimate of the Company’s asbestos liability. Accordingly, no provision has been set up in the accounts. Settlement
costs and legal fees related to these asbestos claims amounted to $1,960 for the quarter (February 28, 2017 - $1,186) and $8,213 for
the year (February 28, 2017 - $6,839).
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 is vigorously defending its position and is undertaking 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 10, 22 and 25 of the
Company’s audited consolidated financial statements. The types of transactions entered into, all of which are in the normal course of
business, are as follows:
Performance bond guarantees related to product warranty and on-time delivery
•
• Letters of credit issued to overseas suppliers
• Operating leases
RELATED PARTY TRANSACTIONS (in thousands of U.S. dollars)
The Company has entered into the following transactions with related parties, which are measured at their exchange value.
a)
PDK Machine Shop Ltd. (“PDK”) is a company owned by certain relatives of the controlling shareholder. PDK is a supplier
of machined material components for use in the Company’s plants.
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2017
2018
Feb. 28,
2017
Feb. 28,
2018
Purchases of material components
$900
$150
$1,230
$955
Sales of raw material
$-
$-
$-
$8
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.
25
Management’s discussion and analysis
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. Note that this lease
agreement was terminated over the course of the current fiscal year.
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2017
2018
Feb. 28,
2017
Feb. 28,
2018
Rent
$-
$9
$12
$27
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a timely manner
so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuer’s
Annual and Interim Filings) as at February 28, 2018 and have concluded that such disclosure controls and procedures were designed
and operating effectively.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS.
Management has evaluated the design and effectiveness of its internal controls and procedures over financial reporting (as defined in
National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings). The evaluation was based on the
“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). This evaluation was performed by the CEO and the CFO of the Company with the assistance of other Company
Management and staff to the extent deemed necessary. Based on this evaluation, the CEO and the CFO concluded that the internal
controls and procedures over financial reporting were appropriately designed and operating effectively as at February 28, 2018.
In spite of its evaluation, Management does recognize that any controls and procedures no matter how well designed and operated,
can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen event
that lapses in the disclosure of internal controls and procedures occur and/or mistakes happen of a material nature, the Company
intends to take the steps necessary to minimize the consequences thereof.
Changes in internal control over financial reporting
The Company did not make any material changes to the design of internal control over financial reporting during the year and three-
month period ended February 28, 2018 that have materially affected, or are reasonably likely to have materially affected, the
Company’s internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES & ASSUMPTIONS
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
26
Management’s discussion and analysis
ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is changed. There were no
significant changes made to critical accounting estimates during the past two fiscal years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next fiscal year are addressed below:
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management judgment and requires the
Company to perform continuous evaluations of their collectability and to record an allowance for doubtful accounts when required.
In performing its evaluation, the Company analyzes the ageing of accounts receivable, concentration of receivables by customer,
customer creditworthiness and current economic trends. Any change in the assumptions used could impact the carrying value of the
accounts receivable on the consolidated statement of financial position with a corresponding impact made to administration costs on
the consolidated statement of income.
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.
CRITICAL JUDGEMENTS IN APPLYING THE COMPANY’S ACCOUNTING POLICIES
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.
27
Management’s discussion and analysis
ACCOUNTING STANDARDS AND AMENDMENTS ADOPTED IN THE YEAR
The Company has applied the following standards and amendments for the first time in the fiscal year, starting on March 1st, 2017.
(i) Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12; and
(ii) Disclosure initiative – amendments to IAS 7.
The adoption of these amendments did not have a significant impact on the amounts recognized in prior periods. The amendments
also do not affect the current or future periods significantly. The amendments to IAS 7 require disclosure of changes in liabilities
arising from financing activities, which is presented in note 29.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
(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. The Company is in the final stages of analyzing the impact of the adoption of this new standard. The
impact is not expected to be material.
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specifies how and when revenue will be
recognized as well as requiring the provision of more informative and relevant disclosures. Its core principle is that an
entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is
delivered in a five-step model framework: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15
replaces IAS 11, Construction contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15,
Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue -
Barter Transactions Involving Advertising Services.
The new standard is effective for annual periods beginning on or after January 1, 2018 with earlier adoption permitted. For
the Company, the standard comes into effect on March 1, 2018. As a result, IFRS 15 will be adopted in the first quarter of
the fiscal year ending February 28, 2019. At that time, the Company plans to use the retrospective transition alternative
whereby it will restate its comparative results for the current year, with an opening adjustment to retained earnings as at
March 1, 2017, if applicable.
The Company has determined that late delivery penalties, which are currently recorded as an expense in cost of sales, will
be recorded as a reduction of sales when this standard comes into effect. The preliminary assessment of the effect of this
change on the current year’s results is a $1,452 decrease in consolidated sales and a corresponding decrease in consolidated
cost of sales.
The new standard will not have a significant impact on the timing of the Company’s revenues from the sale of goods as
most of such revenues will continue to be recognized upon the delivery of the said goods as per the agreed-upon shipping
terms. However, if certain criteria are met, the Company has determined that separate elements in a sale of goods contract
28
Management’s discussion and analysis
may be classified as separate performance obligations. These could include, but are not limited to the delivery of drawings
and documentation, the provision of services (commissioning, inspection, shipping and testing), and warranties. The
preferred method of allocating revenue to multiple elements in a sale of goods contract where separate performance
obligations have been identified will be the adjusted market assessment approach. While the above changes may have an
impact on revenues in future fiscal years, the Company has determined that they will not have a material impact on the
current and prior years’ consolidated revenues.
(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 has been adopted. While the Company is currently assessing
the impact of this new standard, it has determined that it will not early adopt it. The operating leases, as disclosed in the
commitment note of the Company’s annual financial statements (note 22 (c)) are within the scope of IFRS 16.
(iv)
In November 2016, the IFRS Interpretations Committee (“IFRIC”) issued IFRIC 22, Foreign Currency Transactions and
Advance Consideration. This interpretation addresses the exchange rate to use when reporting transactions that are
denominated in a foreign currency in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, in the
circumstance in which a customer paid for goods or services in advance. The interpretation is effective for annual periods
beginning on or after January 1, 2018 with earlier adoption permitted. For the Company, the interpretation comes into
effect on March 1, 2018. As a result, IFRIC 22 will be adopted in the first quarter of the fiscal year ending February 28,
2019.
(v)
In June 2017, IFRIC issued IFRIC 23, Uncertainty over Income Tax Treatments. This interpretation clarifies how the
recognition and measurement requirements of IAS 12, Income Taxes, are applied where there is uncertainty over income
tax treatments that have yet to be accepted by tax authorities. The interpretation is effective for annual periods beginning
on or after January 1, 2019 with earlier adoption permitted. While the Company is currently assessing the impact of this
new standard, it has determined that it will not early adopt it.
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.
29
Management’s discussion and analysis
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 become, from time to time, in short supply for periods of time. Typically, these shortages do not last
long and the Company is usually able to ensure that its needs are met. However, there can be no assurances that its sources of supply
will be adequate to supply all of its needs on a timely basis.
Labour relations
A substantial portion of the Company’s workforce is covered by union agreements. Although the Company has been successful in the
past in negotiating renewals, there can be no assurance that this will continue. Failure to renegotiate these agreements could lead to
work disruptions or higher labour costs, which could negatively impact results.
Reliance on key suppliers
The Company has several key suppliers with whom it has invested in forging dies and casting patterns. While the Company has
alternate sources for most material purchases, the loss of a key supplier could impact negatively on the Company.
Reliance on distributors and sales agents
The Company is directly affected by the ability of independent third party distributors and sales agents retained by the Company to
sell its products in their respective markets. The Company’s continued success is thus dependent on its ability to attract and retain the
distributors and sales agents it requires to support its existing business and to continue to grow.
Project undertakings
In competing for the sales of valves, the Company may enter into contracts that provide for the production of valves at specified prices
and in accordance with time schedules. These contracts may involve greater risks as a result of unforeseen increases in the prices of
raw materials and other costs due to more stringent terms and conditions. Although contract terms may vary from customer to
customer, production delays and other performance issues may call for liquidated damages or other penalties in case of non-
performance or warranty issues due to the more stringent terms and conditions of such contracts.
Political and economic risks associated with international sales and operations
Since the Company sells and manufactures its products worldwide, the business is subject to risks associated with doing business
internationally. There are uncertainties with regards to the outcome of trilateral negotiations regarding the North American Free Trade
Agreement (“NAFTA”) as well as of Brexit negotiations, and such processes could derail at any time. The Company’s business and
operating results could be adversely impacted by trade protection measures resulting from breakdowns in NAFTA and Brexit
negotiations, as well as from changes in tax laws, possibility of expropriation and embargo, foreign exchange restrictions and political,
military and/or terrorist disruptions or changes in regulatory environments.
NAFTA negotiations may potentially impact the price and demand of steel as well as the potential for the imposition of quotas or of a
tax on the importation of goods into the United States.
Canada and ten other countries recently concluded discussions and agreed on the draft text of the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (“CPTPP”), which is intended to allow for preferential market access among the countries
that are parties to the CPTPP. The text of CPTPP has not been finalized or published and the agreement remains subject to ratification
by the governments of the countries that are parties to the CPTPP. It is uncertain what effect CPTPP will have on the Company, its
customers, its suppliers and the industrial products industry.
30
Management’s discussion and analysis
Force majeure events
Force majeure events are unforeseeable events or circumstances that occur beyond the control of the Company. Such events include
but are not limited to political unrest, war, terrorism, strikes, riots, and crime, as well as seismic or severe weather related events such
as earthquakes, hurricanes, tsunamis, tornadoes, ice storms, flooding and volcanic eruptions. The risk of occurrence of a force majeure
event is unpredictable and may result in delays or cancellations of orders and deliveries to customers, delays in the receipt of materials
from suppliers, damage to facilities or equipment, personal injury or fatality, and possible legal liability.
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defense related to certain products that may have contained an internal component containing asbestos.
Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail. Unfavorable rulings,
judgments or settlement terms could have a material adverse impact on the Company’s business, financial condition, results of
operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased significantly
during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability insurance coverage
will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be followed
to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a lack of a
strong health and safety program may expose it to lost production time, penalties and lawsuits, and may impact future orders as
customers may take into account the Company’s health and safety record when awarding sales contracts.
Environmental compliance matters
The Company’s operations and properties are subject to increasingly stringent laws and regulations relating to environmental
protection, including air and water discharges, waste management and disposal and employee safety. Such laws and regulations both
impose substantial fines for violations and mandate cessation of operations in certain circumstances, the installation of costly pollution
control equipment, or the undertaking of costly site remediation activities. Furthermore, new laws and regulations, or stricter
enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean up
requirements could require the Company to incur additional costs which could be significant.
Controls over disclosures and financial reporting
In accordance with National Instrument 52-109, the CEO and the CFO of the Company are responsible for designing, maintaining,
and evaluating the effectiveness of disclosure controls and procedures. The CEO and the CFO are also responsible for the effective
design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements in accordance with IFRS. A system of controls is subject to certain inherent limitations and is
partially based on the possibility or probability of future events. Accordingly, a system of internal controls can provide only
reasonable, and not absolute, assurance of reaching the desired objectives.
Control of the Company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.8% 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 of the Subordinate Voting Shares.
31
Management’s discussion and analysis
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.
32
Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2018 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)
As at
Feb. 28,
2018
As at
Nov. 30,
2017
As at
Feb. 28,
2017
As at
Nov. 30,
2016
As at
Feb. 29,
2016
As at
Feb. 28,
2015
As at
Feb. 28,
2014
Cash and cash equivalents
Short-term investments
Bank indebtedness
Short-term bank loans
Current portion of long-term bank borrowings
85,391
647
88,241
1,461
(20,848)
(12,220)
(1,074)
(3,068)
(1,086)
(3,148)
84,019
974
(7,792)
(1,650)
(3,070)
81,303
149
(4,960)
(1,313)
(2,558)
89,368
3,225
(5,028)
(1,319)
(4,197)
99,578
847
106,716
239
(15,616)
(31,876)
(2,134)
(7,063)
(916)
(6,402)
61,048
73,248
72,481
72,621
82,049
75,612
67,761
Net earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA")
(in thousands)
For the fiscal year ended:
Feb. 28,
2018
Feb. 28,
2017
Feb. 29,
2016
Feb. 28,
2015
Feb. 28,
2014
Net income (loss) attributable to Subordinate Voting Shares
and Multiple Voting Shares
(17,811)
7,737
3,641
18,580
29,400
Adjustments for:
Goodwill impairment loss
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs (income) - net
Income taxes
-
11,035
1,842
197
361
-
11,943
1,767
74
4,680
11,510
13,301
2,008
(199)
8,302
-
13,749
2,374
590
9,773
-
12,241
2,525
1,510
11,759
(4,376)
26,201
38,563
45,066
57,435
For the quarter ended:
Feb. 28,
2018
Feb. 28,
2017
Net income (loss) attributable to Subordinate Voting Shares
and Multiple Voting Shares
(8,221)
3,707
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs (income) - net
Income taxes
2,792
545
64
3,685
3,156
467
295
4,981
(1,135)
12,606
33
34
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
35
36
May 24, 2018
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 28, 2018 and 2017 and the consolidated
statements of income (loss), 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.
37
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 28, 2018 and 2017 and its financial performance and its cash flows
for the years then ended in accordance with International Financial Reporting Standards.
1
1 CPA auditor, CA, public accountancy permit No. A123642
38
Velan Inc.
Consolidated Statements of Financial Position
As at February 28, 2018 and 2017
(in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Income taxes recoverable
Inventories (not e 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 20)
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)
Income taxes payable
Deferred income taxes (note 20)
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 interests (note 6)
Total equity
Total liabilities and equity
Commitments and contingencies (note 22)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
February 28,
2018
$
February 28,
2017
$
85,391
647
137,382
8,012
170,790
4,222
604
407,048
89,864
20,210
22,034
1,037
133,145
540,193
20,848
1,074
63,441
2,186
1,678
48,963
10,798
32,655
1,615
8,151
191,409
13,978
2,078
2,889
8,222
27,167
84,019
974
125,512
7,145
173,089
3,391
1,202
395,332
91,535
19,023
12,951
456
123,965
519,297
7,792
1,650
60,641
946
1,631
43,953
10,600
26,943
799
7,115
162,070
15,318
-
2,784
7,214
25,316
218,576
187,386
73,090
6,057
256,668
(19,790)
316,025
73,584
6,017
281,343
(35,550)
325,394
5,592
6,517
321,617
331,911
540,193
519,297
T.C. Velan, Director
Yves Leduc, Director
39
Velan Inc.
Consolidated Statements of Income (Loss)
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 24)
Cost of sales (notes 5, 14, 15 and 19)
Gross profit
Administration costs (notes 16 and 19)
Other expense (income)
Operating profit (loss)
Finance income
Finance costs
Finance costs – net
Income (loss) before income taxes
Income taxes (note 20)
Net income (loss) for the year
Net income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
Earnings (loss) per share (note 21)
Basic
Diluted
2018
$
2017
$
337,963
331,777
269,378
243,249
68,585
85,437
1,463
88,528
75,868
(408)
(18,315)
13,068
1,102
(1,299)
(197)
992
(1,066)
(74)
(18,512)
12,994
361
(18,873)
(17,811)
(1,062)
(18,873)
(0.82)
(0.82)
4,680
8,314
7,737
577
8,314
0.36
0.36
Dividends declared per Subordinate and Multiple Voting Share
0.31 (CA$0.40)
0.31 (CA$0.40)
The accompanying notes are an integral part of these consolidated financial statements.
40
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars)
Comprehensive income (loss)
Net income (loss) for the year
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations 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 interests
2018
$
2017
$
(18,873)
8,314
15,938
(2,935)
(2,051)
(884)
(2,935)
(2,014)
6,300
5,276
1,024
6,300
Other comprehensive income (loss) is composed solely of items that may be reclassified subsequently to the consolidated statement of income.
The accompanying notes are an integral part of these consolidated financial statements.
41
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2018 and 2017
(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
interests
Total equity
Balance - February 29, 2016
74,345
5,941
(33,089)
280,380
327,577
5,542
333,119
Net income for the year
Other comprehensive income (loss)
-
-
-
-
-
(2,461)
7,737
-
7,737
(2,461)
577
447
8,314
(2,014)
74,345
5,941
(35,550)
288,117
332,853
6,566
339,419
Effect of share-based compensation (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interests
Share repurchase (note 13(c))
-
-
-
-
(761)
76
-
-
-
-
-
-
-
-
-
-
(4,745)
(1,864)
-
(165)
76
(4,745)
(1,864)
-
(926)
-
-
-
(49)
-
76
(4,745)
(1,864)
(49)
(926)
Balance - February 28, 2017
73,584
6,017
(35,550)
281,343
325,394
6,517
331,911
Net loss for the year
Other comprehensive income
-
-
-
-
-
15,760
(17,811)
-
(17,811)
15,760
(1,062)
178
(18,873)
15,938
73,584
6,017
(19,790)
263,532
323,343
5,633
328,976
Effect of share-based compensation (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interests
Share repurchase (note 13(c))
-
-
-
-
(494)
40
-
-
-
-
-
-
-
-
-
-
(4,824)
(1,904)
-
(136)
40
(4,824)
(1,904)
-
(630)
-
-
-
(41)
-
40
(4,824)
(1,904)
(41)
(630)
Balance - February 28, 2018
73,090
6,057
(19,790)
256,668
316,025
5,592
321,617
The accompanying notes are an integral part of these consolidated financial statements.
42
Velan Inc.
Consolidated Statements of Cash Flows
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars)
Cash flows from
Operating activities
Net income (loss) for the year
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities (note 27)
Changes in non-cash working capital items (note 28)
Cash provide d by (use d in) ope rating activitie s
Investing activities
Short-term investments
Additions to property, plant and equipment
Additions to intangible assets
Proceeds on disposal of property, plant and equipment, and intangible assets
Net change in other assets
Cash use d in inve sting activitie s
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders
Dividends paid to non-controlling interests
Repurchase of shares (note 13(c))
Short-term bank loans (note 29)
Increase in long-term debt (note 29)
Repayment of long-term debt (note 29)
Cash use d in 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
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
2018
$
2017
$
(18,873)
6,994
9,986
(1,893)
327
(6,202)
(437)
141
(507)
(6,678)
(6,681)
(41)
(630)
(576)
-
(3,206)
(11,134)
8,314
10,267
(11,434)
7,147
2,251
(7,721)
(910)
399
482
(5,499)
(6,584)
(49)
(926)
331
5,079
(5,904)
(8,053)
8,021
(1,708)
(11,684)
76,227
(8,113)
84,340
64,543
76,227
85,391
(20,848)
64,543
84,019
(7,792)
76,227
532
(3,752)
641
(7,722)
43
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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, Montreal, 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 24, 2018.
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.
44
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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 (loss) 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 (loss) 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 (loss) 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
45
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
that all criteria for acceptance have been satisfied. Customers have a right to return faulty products, and some
products are sold with volume discounts. Sales are recorded based on the price specified in the sales contract, net of
the estimated volume discounts and returns at the time of sale. Accumulated experience is used to estimate and
provide for the discounts and returns. The volume discounts are assessed based on anticipated annual purchases.
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 4.3% on an annual basis. Interest is paid on bank indebtedness at rates ranging from 1.2% to 3.5%.
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 1.0% 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.
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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 (loss) 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 (loss) 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
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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 (loss), except to the extent that it relates to items recognized in other
comprehensive income (loss) or directly in equity, in which case the taxes are recognized in other comprehensive
income (loss) 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
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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 (loss)
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, performance share units (“PSUs”) and deferred share
units (“DSUs”).
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.
PSUs and DSUs
PSUs and DSUs may be granted to certain of its independent directors and full-time employees as part of their long-
term compensation package entitling them to receive payout in cash based on the Company’s share price at the
relevant time. A liability for PSUs and DSUs is measured at fair value on the grant date and is subsequently adjusted
at each balance sheet date for changes in fair value according to the estimation made by management of the number
of PSUs and DSUs that will eventually vest. The liability is recognized to accounts payable and accrued liabilities
over the vesting period, with a corresponding charge to compensation expense.
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Critical accounting estimates and assumptions
The Company’s significant accounting policies as described above are essential to understanding the Company’s
results of operations, financial positions and cash flows. Certain of these accounting policies require critical
accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may
be for matters that are inherently uncertain and susceptible to change. The assumptions and estimates used are based
on parameters which are derived from the knowledge at the time of preparing the financial statements and believed to
be reasonable under the circumstances. In particular, the circumstances prevailing at this time and assumptions as to
the expected future development of the global and industry-specific environment were used to estimate the
Company’s future business performance. Where these conditions develop differently than assumed and beyond the
control of the Company, the actual results may differ from those anticipated. These estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is changed. There were no significant changes made to critical accounting estimates during the
past two fiscal years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next fiscal year are addressed below.
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management judgment
and requires the Company to perform continuous evaluations of their collectability and to record an allowance for
doubtful accounts when required. In performing its evaluation, the Company analyzes the ageing of accounts
receivable, concentration of receivables by customer, customer creditworthiness and current economic trends. Any
change in the assumptions used could impact the carrying value of the accounts receivable on the consolidated
statement of financial position with a corresponding impact made to administration costs on the consolidated
statement of income.
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
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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.
Critical judgements in applying the Company’s accounting policies
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.
3 New accounting standards and amendments
New accounting standards and amendments adopted in the year
The Company has applied the following standards and amendments for the first time in the fiscal year, starting on
March 1st, 2017.
(i) Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12; and
(ii) Disclosure initiative – amendments to IAS 7.
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The adoption of these amendments did not have a significant impact on the amounts recognized in prior periods. The
amendments also do not affect the current or future periods significantly. The amendments to IAS 7 require
disclosure of changes in liabilities arising from financing activities, which is presented in note 29.
New accounting standards and amendments issued but not yet adopted
(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. The Company is in the final stages of analyzing the impact of the adoption of this new standard. The
impact is not expected to be material.
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specifies how and when
revenue will be recognized as well as requiring the provision of more informative and relevant disclosures. Its
core principle is that an entity will recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. This core principle is delivered in a five-step model framework: (i) identify the
contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15 replaces IAS 11,
Construction contracts, IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreements for
the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue - Barter
Transactions Involving Advertising Services.
The new standard is effective for annual periods beginning on or after January 1, 2018 with earlier adoption
permitted. For the Company, the standard comes into effect on March 1, 2018. As a result, IFRS 15 will be
adopted in the first quarter of the fiscal year ending February 28, 2019. At that time, the Company plans to use
the retrospective transition alternative whereby it will restate its comparative results for the current year, with an
opening adjustment to retained earnings as at March 1, 2017, if applicable.
The Company has determined that late delivery penalties, which are currently recorded as an expense in cost of
sales, will be recorded as a reduction of sales when this standard comes into effect. The preliminary assessment
of the effect of this change on the current year’s results is a $1,452 decrease in consolidated sales and a
corresponding decrease in consolidated cost of sales.
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The new standard will not have a significant impact on the timing of the Company’s revenues from the sale of
goods as most of such revenues will continue to be recognized upon the delivery of the said goods as per the
agreed-upon shipping terms. However, if certain criteria are met, the Company has determined that separate
elements in a sale of goods contract may be classified as separate performance obligations. These could include,
but are not limited to the delivery of drawings and documentation, the provision of services (commissioning,
inspection, shipping and testing), and warranties. The preferred method of allocating revenue to multiple
elements in a sale of goods contract where separate performance obligations have been identified will be the
adjusted market assessment approach. While the above changes may have an impact on revenues in future fiscal
years, the Company has determined that they will not have a material impact on the current and prior years’
consolidated revenues.
(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 has been adopted. While the Company is currently assessing the impact of this new
standard, it has determined that it will not early adopt it. The operating leases, as disclosed in the commitment
note (note 22 (c)) are within the scope of IFRS 16.
(iv)
In November 2016, the IFRS Interpretations Committee (“IFRIC”) issued IFRIC 22, Foreign Currency
Transactions and Advance Consideration. This interpretation addresses the exchange rate to use when reporting
transactions that are denominated in a foreign currency in accordance with IAS 21, The Effects of Changes in
Foreign Exchange Rates, in the circumstance in which a customer paid for goods or services in advance.
The interpretation is effective for annual periods beginning on or after January 1, 2018 with earlier adoption
permitted. For the Company, the interpretation comes into effect on March 1, 2018. As a result, IFRIC 22 will
be adopted in the first quarter of the fiscal year ending February 28, 2019.
(v)
In June 2017, IFRIC issued IFRIC 23, Uncertainty over Income Tax Treatments. This interpretation clarifies
how the recognition and measurement requirements of IAS 12, Income Taxes, are applied where there is
uncertainty over income tax treatments that have yet to be accepted by tax authorities.
The interpretation is effective for annual periods beginning on or after January 1, 2019 with earlier adoption
permitted. While the Company is currently assessing the impact of this new standard, it has determined that it
will not early adopt it.
4
Intangible asset and goodwill impairment analysis
Intangible asset impairment test at February 28, 2017
As a result of losses incurred by the Company’s Italian subsidiary, ABV, the Company determined that there was an
indication that the amortizable intangible assets associated with this CGU may be impaired at February 28, 2017. As
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
such, the Company tested for impairment the carrying amount of such intangible assets, which consists primarily of
patents, products and designs, as well as customer lists. Based on this test, the Company determined that the
recoverable amount of such assets exceeded the carrying amount of $15,578 by $4,898. Accordingly, no intangible
asset impairment loss was recorded for this CGU at February 28, 2017.
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 four-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 6.8% in 2018, 7.9% in 2019, 10.1% in 2020, and 14.7% 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 $530 in 2018, 2019 and 2020, and $1,060 for 2021.
The discounted cash flow model was established using a discount rate of 18.0% and a terminal growth rate of 2%.
After three successive years of positive earnings, ABV incurred a significant loss in the current fiscal year. This loss
was primarily due to a large project order, which was expected to ship in 2017, but is now expected to ship in 2018.
As a result, management revised its assumptions related to sales and expected EBITDA that were used in the prior
year to test the goodwill related to this CGU in order to account for this delay. All other assumptions remained
relatively consistent with the prior year.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the intangible assets
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
$
(2,577)
1,354
(1,106)
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 intangible
assets associated with the CGU related to its ABV subsidiary:
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
2,550
(1,541)
976
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 1.25% 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 24.3% of annual incremental sales
increases.
Increase in expected discount rate from 18.0% to 22.4%.
Decrease of expected terminal growth rate from 2% to -4.7%.
-
-
Goodwill impairment test at February 28, 2018
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.
The Company 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 $9,493 by $69,309. Accordingly, no goodwill impairment loss was recorded for this CGU at February 28,
2018.
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 21.8% in 2019, 20.7% in 2020, and 18.9% 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 $1,880 in 2019, 2020 and 2021.
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.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Goodwill impairment test at February 28, 2017
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.
The Company 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 $8,236 by $52,039. Accordingly, no goodwill impairment loss was recorded for this CGU at February 28,
2017.
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 22.1% in 2018, 20.8% in 2019, and 17.8% 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 $2,119 in 2018, 2019 and 2020.
The discounted cash flow model was established using a discount rate of 15.0% and a terminal growth rate of 2%.
Management based its selection of assumptions upon its assessment of the ability of the CGU to deliver on its past
levels of growth and profitability based on its current backlog of orders, as well as its evaluation of the longer term
potential of its key end-user markets, particularly nuclear power and cryogenics. The margin assumptions used were
in line with actual margins generated by the CGU in prior years.
5
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2018
$
As at
February 28,
2017
$
32,381
101,629
36,780
33,621
94,562
44,906
170,790
173,089
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $828 (2017 – $2,146), including reversals of $5,476 (2017 – $6,555).
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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 28, 2018. 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.
% of ownership
interest held by
the Company
2018
2017
% of ownership
interest held by
the non-
controlling
interests
2017
2018
Principal
Activities
Name of entity
Functional
Currency
Country of
incorporation
Velan Valve Corp.
U.S. Dollar
U.S.A.
Velan Ltd.
Juwon Special Steel Co. Ltd.
Velan Valvulas Industrias, Lda.
Velan S.A.S.
Segault S.A.S.
Velan GmbH
Velan ABV S.r.l.
Velan Valvac Manufacturing
Co. Ltd.
U.S. Dollar
Korean
Won
Euro
Euro
Euro
Euro
Euro
Korea
Korea
Portugal
France
France
Germany
Italy
U.S. Dollar
Taiwan
Velan Valve (Suzhou) Co. Ltd. U.S. Dollar
China
100
100
50
100
100
75
100
100
90
85
100
100
50
100
100
75
100
100
90
85
Velan Valves India Private
Limited
Indian
Rupee
India
100
100
b) Significant restrictions
-
-
-
-
Valve
Manufacture
Valve
Manufacture
50
50
Foundry
-
-
-
-
25
25
-
-
10
15
-
-
-
10
15
-
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Valve
Distribution
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
Valve
Manufacture
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 7% 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 as at
February 28, 2018 was $5,424 (2017 – $1,785).
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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(o)). 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 28,
2018
$
As at
February 28,
2017
$
As at
February 28,
2018
$
As at
February 28,
2017
$
6,521
3,344
3,177
13,452
8,948
4,504
8,440
3,318
5,122
13,206
8,544
4,662
4,903
1,355
3,548
1,873
79
1,794
5,293
1,367
3,926
1,857
68
1,789
7,681
9,784
5,342
5,715
Accumulated non-controlling interest
4,932
5,844
660
673
Summarized statement of comprehensive income (loss)
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
2018
$
2017
$
2018
$
2017
$
Sales
12,298
12,531
6,192
7,518
Net income (loss) for the year
Other comprehensive income
Total comprehensive income (loss) for the year
Net income (loss) allocated to non-controlling interest
Dividends paid to non-controlling interest
(2,460)
(471)
357
895
(2,103)
(1,090)
-
424
461
-
44
-
44
28
41
992
-
992
116
49
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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.
2018
$
2017
$
2018
$
Cash flows from operating activities
(1,188)
(580)
(102)
Cash flows from investing activities
Cash flows from financing activities
(662)
(4)
100
(4)
Net decrease in cash and cash equivalents
(1,854)
(484)
(14)
(404)
(520)
2017
$
245
(45)
(487)
(287)
M achinery &
equipment
Furniture &
fixtures
Data processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
Total
$
7 Property, plant and equipment
At February 29, 2016
Cost
Accumulated depreciation
Year ended February 28, 2017
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2017
Cost
Accumulated depreciation
Year ended February 28, 2018
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2018
Cost
Accumulated depreciation
Land
$
19,866
-
19,866
19,866
-
-
-
925
20,791
20,791
-
20,791
20,791
44
-
-
780
21,615
21,615
-
21,615
Buildings
$
53,175
(24,445)
28,730
28,730
1,353
-
(1,813)
(11)
28,259
148,597
(107,225)
41,372
41,372
5,293
(10)
(8,431)
(90)
38,134
54,389
(26,130)
28,259
149,077
(110,943)
38,134
28,259
1,396
-
(1,830)
763
28,588
38,134
3,632
(48)
(7,527)
1,337
35,528
57,775
(29,187)
28,588
155,632
(120,104)
35,528
7,984
(6,194)
1,790
1,790
254
(1)
(332)
(15)
1,696
8,079
(6,383)
1,696
1,696
258
(3)
(555)
132
1,528
8,705
(7,177)
1,528
6,737
(5,643)
1,094
1,094
532
(1)
(829)
(1)
795
7,077
(6,282)
795
795
406
-
(524)
15
692
3,128
(2,241)
887
3,581
(2,063)
1,518
243,068
(147,811)
95,257
887
149
(267)
(316)
15
468
1,518
140
(11)
(222)
(33)
1,392
95,257
7,721
(290)
(11,943)
790
91,535
2,948
(2,480)
468
3,318
(1,926)
1,392
245,679
(154,144)
91,535
468
399
(3)
(303)
8
569
1,392
67
-
(296)
181
1,344
91,535
6,202
(54)
(11,035)
3,216
89,864
6,782
(6,090)
692
3,081
(2,512)
569
3,848
(2,504)
1,344
257,438
(167,574)
89,864
Depreciation expense of $11,035 (2017 – $11,943) is included in the consolidated statement of income (loss): $9,950
(2017 – $10,703) in ‘cost of sales’ and $1,085 (2017 – $1,240) in ‘administration costs’.
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
At February 29, 2016
Cost
Accumulated amortization
Year ended February 28, 2017
Beginning balance
Additions
Disposals and transfers
Amortization
Impairment loss
Exchange differences
At February 28, 2017
Cost
Accumulated amortization
Year ended February 28, 2018
Beginning balance
Additions
Disposals and transfers
Amortization
Impairment loss
Exchange differences
At February 28, 2018
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Other
Total
8,529
-
8,529
8,529
-
-
-
-
(228)
8,301
8,301
-
8,301
8,301
-
-
-
-
1,267
9,568
9,568
-
9,568
7,552
(7,089)
463
12,461
(4,159)
8,302
5,881
(2,844)
3,037
1,526
(1,505)
21
35,949
(15,597)
20,352
463
168
-
(155)
-
(13)
463
8,302
3,037
723
-
(994)
-
(169)
7,862
-
-
(594)
-
(61)
2,382
21
19
-
(24)
-
(1)
15
20,352
910
-
(1,767)
-
(472)
19,023
7,574
(7,111)
463
12,872
(5,010)
7,862
5,723
(3,341)
2,382
649
(634)
15
35,119
(16,096)
19,023
463
67
-
7,862
275
-
(139)
(1,082)
-
55
446
-
954
8,009
2,382
-
-
(621)
-
324
2,085
15
80
-
-
-
7
102
19,023
422
-
(1,842)
-
2,607
20,210
8,063
(7,617)
446
14,845
(6,836)
8,009
6,596
(4,511)
2,085
832
(730)
102
39,904
(19,694)
20,210
Amortization expense of $1,842 (2017 – $1,767) is included in the consolidated statement of income (loss): $1,397
(2017 – $1,354) in ‘cost of sales’ and $445 (2017 – $413) in ‘administration costs’.
As at February 28, 2018, the Company capitalized $275 (2017 – $723) of development costs, net of research and
development tax credits of $142 (2017 – $211), as patents, products and designs.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
9 Accounts payable and accrued liabilities
Trade accounts payable
Accrued liabilities
Other
10 Credit facilities
As at
February 28,
2018
$
As at
February 28,
2017
$
23,635
35,597
4,209
63,441
25,969
30,668
4,004
60,641
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities available
as at February 28, 2018:
Unsecured
Credit facilities available
Borrowing rates
$66,360 (CA$85,000) (2017 – $64,005 (CA$85,000))
(note 25)
Prime to prime + 0.75%
(2017 – Prime to prime + 0.75%)
The above unsecured facilities are available by way of demand operating lines of credit, bank loans, letters of
credit, bankers’ acceptances, LIBOR loans, letters of guarantee and bank overdrafts. These facilities are subject
to annual renewal.
As at February 28, 2018, an amount of nil (2017 – nil) was drawn against these unsecured credit facilities in the
form of demand operating lines of credit and bank overdrafts. An additional $25,227 (2017 – $9,765) was drawn
against these unsecured credit facilities in the form of letters of credit and letters of guarantee.
In addition to the unsecured credit facilities above, the Company maintains a facility with Export Development
Canada of $40,000 for letters of credit and letters of guarantee. As at February 28, 2018, $6,794 (2017 –
$8,162) was drawn against this facility.
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Foreign subsidiaries and structured entities have the following credit facilities available as at February 28, 2018:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$56,497 (€40,057; KW3,712,300; INR270,000)
(2017 – $50,066 (€41,672; KW3,791,730;
INR170,000)) (note 25)
Borrowing rates
0.20% to 8.84%
(2017 – 0.30% to 9.25%)
Foreign structured entities
$3,938 (KW4,262,000)
(2017 – $4,746 (KW5,363,200)) (note 25)
1.50% to 4.29%
(2017 – 1.50% to 3.09%)
The above credit facilities are available by way of demand operating lines of credit, bank loans, guarantees, letters of
credit and foreign exchange forward contracts. The majority of these credit facilities have variable borrowing rates
based on LIBOR, EURIBOR, KORIBOR, EONIA or prime rate. The borrowing rates listed above are the rates in
effect as at February 28, 2018 and February 28, 2017. 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
$2,530 (2017 – $2,842).
As at February 28, 2018, an amount of $13,066 (2017 – $7,792) was drawn against these secured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $5,548 (2017 – $1,824) was drawn
against these secured credit facilities in the form of letters of credit and letters of guarantee.
11 Provisions
Balance – Beginning of year
Additional provisions
Used during the year
Exchange differences
Balance – End of year
As at
February 28,
2018
$
As at
February 28,
2017
$
10,600
2,328
(3,563)
1,433
9,333
4,322
(2,754)
(301)
10,798
10,600
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.
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
12 Long-term debt
French subsidiaries
Unsecured bank loan (€2,402; February 28, 2017 – €3,000) (note 12(a))
Unsecured bank loan (€228; February 28, 2017 – €327) (note 12(b))
Italian subsidiary
Unsecured bank loan (€359; February 28, 2017 – €464) (note 12(c))
Unsecured bank loan (€355; February 28, 2017– €462) (note 12(d))
Unsecured state bank loan (€168; February 28, 2017 – €236) (note 12(e))
Unsecured bank loan (€153; February 28, 2017 – €253) (note 12(f))
Unsecured bank loan (€182; February 28, 2017 – €545) (note 12(g))
Unsecured bank loan (€400; February 28, 2017 – €667) (note 12(h))
Unsecured bank loan (€170; February 28, 2017 – €505) (note 12(i))
Unsecured bank loan (€563; February 28, 2017 – €938) (note 12(j))
Unsecured bank loan (€198; February 28, 2017 – €533) (note 12(k))
Unsecured state bank loan (€1,610; February 28, 2017 – €1,610) (note 12(l))
Korean structured entity
Secured bank loan (KW8,400; February 28, 2017 – KW13,200) (note 12(m))
Secured bank loan (KW8,000,000; February 28, 2017 – KW8,000,000)
(note 12(n))
Other (note 12(o))
Less: Current portion
As at
February 28,
2018
$
As at
February 28,
2017
$
2,934
278
438
434
206
187
222
489
207
687
241
1,967
8
7,392
6,439
3,179
347
492
490
250
268
578
706
535
993
565
1,706
12
7,080
5,232
22,129
8,151
22,433
7,115
13,978
15,318
a) The unsecured bank loan of $2,934 (€2,402) bears interest at 0.20% and is repayable in variable monthly
instalments of $61, expiring in 2022.
b) The unsecured bank loan of $278 (€228) bears interest at 0.89% and is repayable in monthly instalments of
$12, expiring in 2020.
c) The unsecured bank loan of $438 (€359) bears interest at 2.91% and is repayable in monthly instalments,
expiring in 2021.
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
d) The unsecured bank loan of $434 (€355) bears interest at 4.90% and is repayable in variable monthly
instalments, expiring in 2021.
e) The unsecured state bank loan of $206 (€168) is non-interest bearing and is repayable in variable semi-
annual instalments, expiring in 2020.
f) The unsecured bank loan of $187 (€153) bears interest at the 3-month Euribor rate plus 1.7% and is
repayable in quarterly instalments of $33, expiring in 2019.
g) The unsecured bank loan of $222 (€182) bears interest at the 6-month Euribor rate plus 1.25% and is
repayable in quarterly instalments of $118, expiring in 2018.
h) The unsecured bank loan of $489 (€400) bears interest at the 3-month Euribor rate plus 1.8% and is
repayable in quarterly instalments of $86, expiring in 2019.
i) The unsecured bank loan of $207 (€170) bears interest at the 3-month Euribor rate plus 1.6% and is
repayable in quarterly instalments of $111, expiring in 2018.
j) The unsecured bank loan of $687 (€563) bears interest the 3-month Euribor rate plus 1.6% and is repayable
in quarterly instalments of $121, expiring in 2019.
k) The unsecured bank loan of $241 (€198) bears interest at 1.37% and is repayable in monthly instalments of
$35, expiring in 2018.
l) The unsecured state bank loan of $1,967 (€1,610) bears interest at 3% and is repayable in variable semi-
annual instalments, expiring in 2024.
m) The secured bank loan of $8 (KW8,400) 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 $7,392 (KW8,000,000) bears interest at 2.21% and is repayable in quarterly
instalments of $241, expiring in 2025.
o)
Included in Other is an amount of $5,083 (€4,162) (February 28, 2015 – $4,045 (€3,817)) 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 (loss).
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
p) The following is a schedule of future debt payments:
February 28, 2019
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
Subsequent years
$
8,151
2,970
2,401
2,212
1,336
5,059
22,129
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted to
$12,411 (2017 – $12,519).
q) 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
6,055,368 Subordinate Voting Shares (February 28, 2017 –
6,100,668) (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 28,
2018
$
As at
February 28,
2017
$
65,964
7,126
73,090
66,458
7,126
73,584
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a maximum of
151,549 of the issued Subordinate Voting Shares of the Company, representing approximately 2.5% of the
issued shares of such class as at October 18, 2017, during the ensuing 12-month period ending October 30,
2018. During the year ended February 28, 2018, 45,300 (2017 – 69,900) Subordinate Voting Shares were
purchased for a cash consideration of $630 (2017 – $926) and cancelled. The amount by which the repurchase
amount is above the stated capital of the shares has been debited to 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.
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 $40 (2017 – $76) was recorded in the consolidated statement of income (loss) and
credited to contributed surplus.
The table below summarizes the status of the Share Option Plan.
Number
of shares Weighted average exercise price
Outstanding – February 29, 2016
Outstanding – February 28, 2017
Exercisable – February 28, 2017
Outstanding – February 28, 2017
Outstanding – February 28, 2018
Exercisable – February 28, 2018
140,000
140,000
60,000
140,000
140,000
95,000
$14.24 (CA$19.26)
$14.50 (CA$19.26)
$15.01 (CA$19.94)
$14.50 (CA$19.26)
$15.04 (CA$19.26)
$15.37 (CA$19.69)
Weighted
average
contractual
life in
months
50.4
38.4
38.4
26.4
e) On July 13, 2017, the Company adopted a PSU plan allowing the Board of Directors, through its Corporate
Governance and Human Resources (“CGHR”) Committee, to grant PSUs to certain of its full-time employees. A
PSU is a notional unit whose value is based on the volume weighted average price of the Company’s
Subordinate Voting Shares on the Toronto Stock Exchange for the 20 trading days immediately preceding the
grant date. The PSU plan is non-dilutive since vested PSUs shall be settled solely in cash. Each PSU grant shall
vest at the end of a three-year performance cycle, which will normally start on March 1 of the year in which
such PSU is granted and end on the last day of February of the third year following such grant, subject to the
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
achievement of certain performance objectives over such cycle, as determined by the Company’s CGHR
Committee.
As at February 28, 2018, the Company had a total of 25,250 (2017 – nil) PSUs outstanding. A compensation
cost of $82 (2017 – nil) was recorded in the consolidated statement of income (loss) and credited to accounts
payable and accrued liabilities. No payments have been made in relation to PSUs since the inception of the plan
and no PSUs have vested as at February 28, 2018.
f) On July 13, 2017, the Company adopted a DSU plan allowing the Board of Directors, through its CGHR
Committee, to grant DSUs to certain of its independent directors and full-time employees. A DSU is a notional
unit whose value is based on the volume weighted average price of the Company’s Subordinate Voting Shares
on the Toronto Stock Exchange for the 20 trading days immediately preceding the grant date. The DSU plan is
non-dilutive since vested DSUs shall be settled solely in cash. Each DSU grant shall vest at the earlier of:
the sixth anniversary of its grant date; or
the day the holder of the DSU attains the retirement age, which, unless otherwise determined by the
CGHR Committee, is the earliest of age 65, or the age at which the combination of years of service at
the Company plus his or her age is equal to 75, being understood that the retirement age shall not be
less than 55 years old.
For more certainty, a grant made to an independent director or full-time employee who has reached the
retirement age will be deemed immediately vested, unless otherwise determined by the CGHR Committee at or
after the time of grant. Notwithstanding the foregoing, grants of DSUs made to non-employee directors of the
Company shall vest on their grant date.
As at February 28, 2018, the Company had a total of 12,464 (2017 – nil) DSUs outstanding. A compensation
cost of $78 (2017 – nil) was recorded in the consolidated statement of income (loss) and credited to accounts
payable and accrued liabilities. No payments have been made in relation to DSUs since the inception of the plan
and 4,918 (2017 – nil) DSUs have vested as at February 28, 2018.
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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,
cost of sales, and other income (loss) and amounted to:
Sales
Cost of sales
Other income (loss)
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 (gain) (note 14)
Other production overhead costs
16 Administration costs
Employee expenses, excluding scientific research investment tax credits
(note 17)
Scientific research investment tax credits (notes 17 and 18)
Commissions
Freight to customers
Professional fees
Movement in allowance for doubtful accounts (note 25)
Depreciation and amortization (notes 7, 8 and 19)
Other
2018
$
(1,212)
(1,215)
(1,823)
2018
$
10,868
133,498
75,072
11,347
828
1,215
36,550
2017
$
56
949
496
2017
$
(17,467)
141,335
73,657
12,057
2,146
(949)
32,470
269,378
243,249
2018
$
42,757
(2,978)
7,619
4,344
13,509
(354)
1,530
19,010
85,437
2017
$
39,467
(2,999)
5,293
4,120
13,087
(398)
1,653
15,645
75,868
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
17 Employee expenses
Wages and salaries
Social security costs
Scientific research investment tax credits (note 18)
Share-based compensation (note 13(d), (e) and (f))
Other
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
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
2018
$
84,259
27,732
(2,978)
200
5,638
2017
$
80,538
26,271
(2,999)
76
6,239
114,851
110,125
2018
$
9,608
(2,978)
6,630
2018
$
11,035
1,842
12,877
2017
$
7,969
(2,999)
4,970
2017
$
11,943
1,767
13,710
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
17 Employee expenses
Wages and salaries
Social security costs
Scientific research investment tax credits (note 18)
Share-based compensation (note 13(d), (e) and (f))
Other
2018
$
84,259
27,732
(2,978)
200
5,638
2017
$
80,538
26,271
(2,999)
76
6,239
114,851
110,125
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
2018
$
9,608
(2,978)
6,630
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
2018
$
11,035
1,842
12,877
2017
$
7,969
(2,999)
4,970
2017
$
11,943
1,767
13,710
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
20 Income taxes
Current taxes:
Current tax on profits for the year
Adjustments in respect of prior years
Deferred taxes:
Origination and reversal of temporary differences
Adjustments in respect of prior years
2018
$
8,929
-
8,929
(8,568)
-
(8,568)
2017
$
4,533
(26)
4,507
314
(141)
173
Income tax expense
361
4,680
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:
2018
$
2017
$
Income tax at statutory rate of 26.78% (2017 – 26.88%)
(4,958)
3,493
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Effect of U.S. Tax Reform*
Taxable foreign exchange gain
Losses not tax effected
Losses utilized not previously tax effected
Benefit attributable to a financing structure
Other
Income tax expense
1,396
4,259
(303)
1,151
-
(917)
(267)
361
1,527
-
(344)
1,552
(444)
(927)
(177)
4,680
* U.S. Tax Reform was substantially enacted on December 22, 2017 under its official name “An Act to Provide for
Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”. As a
result of the enactment of this legislation, the Company’s U.S. subsidiary recorded a one-time tax expense of $4,259,
of which $2,258 is due to the new mandatory repatriation tax and $2,001 is due to the effect of the tax rate reduction
on its net deferred income tax assets.
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(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
2018
$
17,479
4,555
(2,272)
(617)
19,145
2018
$
10,167
8,568
410
19,145
2018
$
(2,917)
(3,180)
8,034
(1,505)
8,836
9,505
372
19,145
2017
$
8,631
4,320
(2,279)
(505)
10,167
2017
$
10,129
173
(135)
10,167
2017
$
(4,897)
(3,141)
7,538
(1,184)
10,107
2,920
(1,176)
10,167
The Company did not recognize deferred income tax assets of $3,287 (2017 – $2,779) in respect of non-capital losses
amounting to $14,086 (2017 – $11,646) that can be carried forward to reduce taxable income in future years. These
losses expire between 2021 and indefinitely.
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The Company did not recognize deferred income tax assets of $368 (2017 – $369) in respect of capital losses
amounting to $2,745 (2017 – $2,745) that can be carried forward indefinitely against future taxable capital gains.
Deferred tax liabilities of $6,594 (2017 – $7,475) have not been recognized for the withholding tax and other taxes
that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are not expected to reverse in
the foreseeable future. Unremitted earnings as at February 28, 2018 totalled $295,379 (2017 – $317,598).
21 Earnings (loss) per share
a) Basic
Basic earnings per share is calculated by dividing the net income (loss) attributable to the Subordinate and
Multiple Voting shareholders by the weighted average number of Subordinate and Multiple Voting Shares
outstanding during the year.
2018
2017
Net income (loss) attributable to Subordinate and Multiple Voting
shareholders
$(17,811)
$7,737
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings (loss) per share
21,640,632
21,722,089
$(0.82)
$0.36
b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of Subordinate and Multiple
Voting Shares outstanding to assume conversion of all dilutive potential Subordinate and Multiple Voting
Shares. The Company has one category of dilutive potential Subordinate and Multiple Voting Shares: stock
options. For the stock options, a calculation is done to determine the number of Subordinate and Multiple
Voting Shares that could have been acquired at fair value (determined as the average market share price of the
Company’s outstanding Subordinate and Multiple Voting Shares for the period), based on the exercise prices
attached to the stock options. The number of Subordinate and Multiple Voting Shares calculated above is
compared with the number of Subordinate and Multiple Voting Shares that would have been issued assuming
exercise of the stock options.
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
2018
2017
Net income (loss) attributable to Subordinate and Multiple Voting
shareholders
$(17,811)
$7,737
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Adjustments for stock options
21,640,632
-
21,722,089
5,608
Weighted average number of Subordinate and Multiple Voting Shares for
diluted earnings (loss) per share
21,640,632
21,727,697
Diluted earnings (loss) per share
$(0.82)
$0.36
As at February 28, 2018, 140,000 stock options have an antidilutive effect (2017 – nil).
22 Commitments and contingencies
a)
In the normal course of business, the Company issues performance bond guarantees related to product warranty
and on-time delivery as well as advance payment guarantees and bid bonds. As at February 28, 2017, the
aggregate maximum value of these guarantees, if exercised, amounted to $80,437 (2017 –$79,145). The
guarantees expire as follows:
February 28, 2019
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
Subsequent years
$
29,037
13,434
15,948
4,654
443
16,921
80,437
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$3,430 (2017 – $3,356), which are covered by letters of credit.
c) Future minimum payments under operating leases (related mainly to premises and machinery) are as follows:
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
February 28, 2019
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
$
1,628
1,584
853
272
8
4,345
d) Two of the Company’s U.S. subsidiaries have been named as defendants in a number of asbestos-related legal
proceedings pertaining to products they formerly sold. Management believes it has a strong defence, and the
subsidiaries have previously been dismissed from a number of similar cases. Because of the many uncertainties
inherent in predicting the outcome of these proceedings, as well as the course of asbestos litigation in the United
States, management believes that it is not possible to make an estimate of the subsidiaries’ asbestos liability.
Accordingly, no provision has been set up in the accounts.
During the year ended February 28, 2018, legal and related costs for these matters amounted to $8,213
(2017 – $6,839).
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 is vigorously defending its position and is undertaking 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.
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
23 Related party transactions
Transactions and balances with related parties occur in the normal course of business. Related party transactions and
balances not otherwise disclosed separately in these consolidated financial statements are as follows:
Affiliated company owned by certain relatives of controlling shareholder
Purchases – Material components
Sales – Material components
Amount charged by the controlling shareholder to one of the Company’s
subsidiaries and certain of its executives
Rent based on weekly usage
Accounts payable and accrued liabilities
Affiliated companies
Controlling shareholder
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation – Options
Share-based compensation – PSUs & DSUs
2018
$
1,230
-
12
342
-
4,291
40
160
2017
$
955
8
27
72
8
4,177
76
-
1 Key management includes directors (executive and non-executive) and certain members of senior management.
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Segment reporting
The Company reflects its results under a single reportable operating segment. The geographic distribution of its sales
and assets is as follows:
February 28, 2018
Sales
Customers -
Domestic
Export
Intercompany (export)
Total
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
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
$
Consolidation
Adjustment Consolidated
$
$
18,176
58,033
28,461
104,670
33,441
1,403
213,553
248,397
81,026
-
7,331
88,357
6,688
-
20,531
27,219
39,095
60,485
445
100,025
13,322
392
169,190
182,904
20,134
14,993
1,426
36,553
2,548
124
40,953
43,625
24,936
21,085
32,685
78,706
33,865
67
114,796
-
-
(70,348)
183,367
154,596
-
(70,348)
337,963
-
18,224
(128,904)
89,864
20,210
430,119
148,728
(110,680)
540,193
February 28, 2017
Canada
$
United
States
$
France
$
Italy
$
Other
$
Consolidation
Adjustment Consolidated
$
$
15,885
62,691
50,660
129,236
34,963
1,429
213,167
249,559
113,640
-
17,851
131,491
7,577
-
30,581
38,158
38,861
50,688
1,522
91,071
12,119
8,612
149,310
170,041
1,815
13,896
1,494
17,205
2,862
8,967
40,104
51,933
14,270
20,031
64,421
98,722
34,014
16
112,976
-
-
(135,948)
184,471
147,306
-
(135,948)
331,777
-
-
(137,406)
91,535
19,023
408,739
147,006
(137,406)
519,297
78
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk
management program focuses on mitigating unpredictable financial market risks and their potential adverse effects on
the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies
approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are the
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
table:
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following
Financial instrument
Currency
Interest rate
Credit
Liquidity
Risks
Market
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
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Accrual for performance guarantees
Customer deposits
Dividend payable
Derivative liabilities
Long-term debt
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.
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk
management program focuses on mitigating unpredictable financial market risks and their potential adverse effects on
the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies
approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are the
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:
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
Market risk
Currency risk
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
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.
79
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same
currency. The remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the
Company uses foreign currency derivatives, primarily foreign exchange forward contracts. These derivatives are not
designated as hedges for accounting purposes.
The amounts outstanding as at February 28, 2018 and February 28, 2017 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2018
February 28,
2017
February 28,
2018
$
February 28,
2017
$
February 28,
2018
February 28,
2017
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Buy US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
Buy US$ for € – 0 to 12 months
Sell US$ for KW – 0 to 12 months
Sell € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for € – 0 to 12 months
1.26-1.28
1.25
1.18-1.19
1.18-1.24
-
1.24-1.28
1.18
0.89
1.32
1.30-1.31
1.09-1.16
1.06-1.28
1,193-1,200
1.06-1.08
1.06-1.08
0.84-0.85
(1,558)
433
(2)
92
-
(39)
64
(1)
(615) US$92,000
US$92,000
337
US$2,190
(20)
US$4,785
249
-
99
€16,297
(155)
€15,390
509
£281
(1)
US$40,000
US$40,000
US$336
US$4,295
US$1,668
€16,122
€33,600
£144
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 28, 2018 and February 28, 2017:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
2018
$
(524)
396
2017
$
(121)
496
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact for both fiscal years.
80
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 28, 2018, four
(2017 – four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 9.6% (2017 – 8.5%), and the Company’s ten largest customers accounted for 57.3% (2017 – 52.4%). In
addition, one customer accounted for 9.86% of the Company’s sales (2017 – 13.3%).
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.
81
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The table below summarizes the ageing of trade accounts receivable as at:
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
The table below summarizes the movements in the allowance for doubtful accounts:
Balance – Beginning of year
Bad debt expense
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
Liquidity risk
As at
February 28,
2018
$
As at
February 28,
2017
$
91,534
12,421
8,546
18,714
131,215
1,088
130,127
7,255
77,262
19,330
7,625
16,508
120,725
1,239
119,486
6,026
137,382
125,512
As at
February 28,
2018
$
As at
February 28,
2017
$
1,239
212
(444)
(122)
203
1,088
1,653
414
(598)
(214)
(16)
1,239
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.
82
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The following tables present the Company’s financial liabilities identified by type and future contractual dates of
payment as at:
Total
$
22,129
63,411
48,963
32,655
21,922
1,615
Total
$
22,433
60,641
43,953
26,943
9,442
799
Less than
1 year
$
8,151
63,411
48,963
32,655
21,922
1,615
Less than
1 year
$
7,115
60,641
43,953
26,943
9,442
799
As at February 28, 2018
4 to 5
Years
$
After
5 years
$
3,548
-
-
-
-
-
5,059
-
-
-
-
-
As at February 28, 2017
4 to 5
Years
$
After
5 years
$
4,194
-
-
-
-
-
4,910
-
-
-
-
-
1 to 3
Years
$
5,371
-
-
-
-
-
1 to 3
Years
$
6,214
-
-
-
-
-
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
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.
83
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The fair value of financial assets and financial liabilities measured on the consolidated statements of financial
position are as follows:
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
As at February 28, 2018
Level 1
$
Level 2
$
Level 3
$
-
-
604
1,615
-
-
As at February 28, 2017
Level 1
$
Level 2
$
Level 3
$
-
-
1,202
799
-
-
Total
$
604
1,615
Total
$
1,202
799
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.
26 Capital management
The Company’s capital management strategy is designed to maintain strong liquidity in order to pursue its organic
growth strategy, undertake selective acquisitions and provide an appropriate investment return to its shareholders
while taking a conservative approach to financial leveraging.
The Company’s financial strategy is designed to meet the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital
structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid to
shareholders or undertake any other activities it considers appropriate under the circumstances.
The Company monitors capital on the basis of its total debt-to-equity ratio. Total debt consists of all interest-bearing
debt, and equity is defined as total equity.
84
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The total debt-to-equity ratio was as follows:
Bank indebtedness
Short-term bank loans
Current portion of long-term debt
Long-term debt
Total debt
Equity
Total debt-to-equity ratio
As at
February 28,
2018
$
As at
February 28,
2017
$
20,848
1,074
8,151
13,978
44,051
7,792
1,650
7,115
15,318
31,875
321,617
331,911
13.7% 9.6%
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.
27 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred income taxes
Share-based compensation expense
Gain on disposal of property, plant and equipment
Net change in derivative assets and liabilities
Net change in other liabilities
2018
$
11,035
1,842
(8,568)
40
(87)
1,595
1,137
2017
$
11,943
1,767
173
76
(109)
(1,751)
(1,832)
6,994
10,267
85
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2018 and 2017
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
28 Changes in non-cash working capital items
Accounts receivable
Inventories
Income taxes recoverable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Provisions
Accrual for performance guarantees
29 Net debt reconciliation
Cash and cash equivalents
Long-term debt - repayable within one year (including Bank indebtedness and Short-term bank
loans)
Long-term debt - repayable after one year
Ne t de bt
Cash and cash equivalents
Gross debt - fixed interest rates
Gross debt - variable interest rates
Ne t de bt
2018
$
2017
$
(10,349)
2,594
(756)
(724)
3,159
3,743
5,652
223
6,444
(5,946)
(10,572)
(1,472)
195
(2,303)
(4,802)
15,822
1,266
(3,622)
9,986
(11,434)
2018
$
2017
$
85,391
84,019
(30,073)
(16,557)
(13,978)
41,340
(15,318)
52,144
85,391
(21,411)
(22,640)
41,340
84,019
(21,003)
(10,872)
52,144
O ther Asse ts
O the r Liabilitie s
Cash and cash
e quivalents /
Bank
inde bte dne ss
Short-te rm
bank loans and
curre nt portion
of long-term
debt
Long-te rm debt
Total
Net debt as at March 1st, 2017
Cash flows
Foreign exchange adjustments
Other non-cash movements
Net debt as at February 28th, 2018
76,227
(8,766) (15,318) 52,144
(19,705)
2,578
1,204
(15,923)
8,021
(443) (1,238) 6,340
-
(2,595) 1,374
(1,221)
64,543
(9,226) (13,978) 41,340
86
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
Y. Leduc
Director
K. MacKinnon
Director
Corporate officers
Y. Leduc
I. Velan
M. Allen
W. Maar
J. Ball
President and Chief Executive Officer
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. Calabrese
Vice-President, Technical Sales, Multi-Turn Products
J. Del Buey
Vice-President, Technical Sales, Quarter-Turn Products
P. Dion
P. Lee
G. Perez
C. Pogue
Vice-President, Sales, Process Industries
Vice-President, Commercial Sales (Eastern Division)
Vice-President, Product Technology and Strategic Initiatives
Vice-President, Commercial Sales (Western Division)
R. Sossoyan
Vice-President, Global Financial Reporting
D. Tran
D. Velan
R. Velan
S. Velan
Vice-President, Engineering
Vice-President, Marketing
Vice-President, Customer Service
Vice-President, Information Technology and Strategic Planning
87
Shareholder information
Head office
7007 Côte-de-Liesse
Montreal, Quebec, Canada H4T 1G2
Website
www.velan.com
Investor relations
John D. Ball
Chief Financial Officer
7007 Côte-de-Liesse, Montreal, Quebec, Canada H4T 1G2
Tel.: (514) 748-7743, Ext. 5537
Fax: (514) 748-8635
Auditors
PricewaterhouseCoopers LLP
Transfer agent
CST Trust Company
Shares outstanding as at February 28, 2017
6,055,368 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High CA $20.49
CA $17.00
Low
Closing on February 28, 2017: CA $17.55
Annual meeting
The Annual Meeting of Shareholders will be held July 12, 2018,
at 3:00 p.m. in the Salle Saint-Denis of the:
Club Saint James
1145 Union Avenue
Montreal, Quebec, Canada H3B 3C2
88
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
• 2 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 S.A.S.
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 S.A.S.
Ansan City, South Korea
Velan Ltd.
Houston, TX, U.S.A.
VelTEX
Plant 4 and 6
Plant
Plant
Granby, QC, Canada
Velan Inc.
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Taichung, Taiwan
Velan-Valvac
Manufacturing
- U.S.A.
Plant 3
Plant 1
Plant
Lucca, Italy
Velan ABV S.r.l.
Suzhou, China
Velan Valve (Suzhou) Co. Ltd.
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