Annual report 2019
Highlights
That’s teamwork! Manufactured by Velan S.A.S. in France, this
valve was sent to Velan China’s Suzhou plant for hydrotesting
before reaching its destination in one of China’s nuclear power
plants.
A “sea” of manifolds including valves and steam traps manufactured
in Velan India and shipped to a chemical plant in Canada.
Cover photo:
Velan ABV API 6D trunnion
mounted ball valve.
Some of the plant and office employees at Velan Plant 1/5 in Montreal with Securaseal 8” Class 1500
metal-seated ball valves destined for a slurry pipeline in South America. The valves in the picture
incorporated suggested improvements to the valve design following a visit to the customer.
2019 Financial highlights
Sales
(in millions of U.S. dollars)
Consolidated
Consolidated
Overseas
Overseas
U.S.A.
Canada
480
440
400
360
320
280
240
200
160
120
80
40
0
50
40
30
20
10
-
(10)
(20)
(30)
Net earnings (loss)(2) and EBITDA(1)
(in millions of U.S. dollars)
2015
2016
2017
2018
2018
2019
2015
2016
2017
2018
2019
Net earnings (loss)(2)
EBITDA(1)
(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(1)
EBITDA(1) %
EBITDA(1) per share
Net earnings (loss) (2)
Net earnings (loss) (2) %
Net earnings (loss) (2) per share (3)
Statement of financial position data
Net cash
Working capital
Property, plant and equipment
Total assets
Total long-term debt
Equity
Number of employees
Canada
United States
Europe
Asia
Total
Feb 2019
Feb 2018
Feb 2017
Feb 2016
Feb 2015
$ 366,865
85,595
23.3%
$ 337,963
70,861
21.0%
$ 331,777
88,528
26.7%
$ 426,895
104,283
24.4%
$ 455,750
118,283
26.0%
93,336
(7,695)
7,087
1.9%
0.33
(4,882)
-1.3%
(0.23)
87,713
(18,512)
(4,376)
-1.3%
(0.20)
(17,811)
-5.3%
(0.82)
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
$ 40,866
207,777
83,537
524,357
21,851
308,833
$ 64,543
215,639
89,864
540,193
22,129
321,617
$ 76,227
233,262
91,535
519,297
22,433
331,911
$ 84,340
229,959
95,257
515,627
22,449
333,119
$ 83,962
227,793
91,285
558,628
14,827
345,093
716
140
522
481
1,859
732
146
489
463
1,830
763
157
482
474
1,876
787
165
520
430
1,902
917
181
528
441
2,067
(1) This term is a measure of performance and/or financial condition that is not defined under International Financial Reporting Standards and is therefore
unlikely to be comparable to similar measures presented by other companies. Such measures are used by management in assessing the operating results and
financial condition of the Company. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its
results and financial condition, and increase transparency and clarity into the operating results of its core business. Refer to the “Reconciliations of Non-IFRS
Measures” section in the Company’s Management Discussion and Analysis included in this Annual Report for a detailed calculation of this measure.
(2) Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
(3) See note 21 in the Notes to the Consolidated Financial Statements.
1
Dear Fellow Shareholders,
As Chairman of the Board and a member of the controlling
shareholder family, I share in the disappointment of all
shareholders with the fall in the share price during the last
year. On a positive note, in fiscal 2019 we had a significant
improvement in our results compared to fiscal 2018 as we
achieved increases of $12.9 million in earnings, $11.5 million
in EBITDA, 8.6% in sales, 20.7% in gross profit, and 16% in
bookings. The 4th quarter was the first quarter in five quarters
with a profit although we still had a loss for the year.
All of the above are promising signs but there is still a lot of
work to be done to achieve the kind of results that we want
and need. It is a great source of frustration for everyone that
we made another loss in fiscal 2019 and that the shares are
trading at only 49% of our net equity.
Tom Velan, Chairman of the Board
During the last year, our President and CEO, Yves Leduc, together with the executive team, developed a transformation
strategy for the company. In January of this year, the board unanimously approved the plan with measures that include
consolidating our four North American plants into three plants. The main objective of the plan is to return the company
to profitable growth while better serving our customers. We regret that some of our North American employees will lose
their jobs and that a manufacturing plant, which we worked so hard to create many years ago, will have to close. Our
executive team is working with the union to minimize the impact on the employees affected.
Even though Velan Holding owns 72% of the common shares, the Velan family decided years ago to have a minority
of Velan family members on the board to ensure a strong independent voice on the board. Also, all board committees
include only independent board members. Bill Sheffield, our lead director, is Chair of our Corporate Governance and
Human Resources Committee which also serves as the Nominating Committee for the independent directors.
We are continuing with our Board renewal succession plan. This year we have nominated Dahra Granovsky to replace
Cheryl Hooper who is retiring after six years of distinguished service on the board as Chair of the Audit Committee.
James Mannebach who joined the board last year will take over as Chair of the Audit Committee. Dahra Granovsky has
more than 21 years of experience in the manufacturing and distribution industries. She is CEO of BA Folding Cartons
and a director of Atlantic Packaging and Hammond Power Solutions (TSX:HPS).
On behalf of the Board of Directors, I want to thank Yves Leduc, the executive team, and all employees for their devoted
work under challenging circumstances. I also want to thank all our shareholders for the continuing support and the
confidence you have placed in the company.
Tom Velan
Chairman of the Board
2
Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated.)
Highlights
• Sales of $366.9 million
• Net loss(1) of $4.9 million
• Order Backlog of $449.7 million
• Order Bookings of $372.4 million
• Net Cash of $40.9 million
The highlights of fiscal year 2019 could be stated from two
different perspectives. First the Company’s financial performance
has improved versus the previous year’s disappointing results,
thanks in large part to our North American sales and operations’
recovering performance in sales and margins. Meanwhile
France’s steady performance of the last few years continues
and we are very pleased that Italy confirmed its fiscal year 2018
rebound with a second strong year in a row, and most notably,
built up a record backlog which will in turn convert into record
sales for them in fiscal year 2020. We also want to point out
Korea’s rapid ramp up in its manufacturing capacity, without
which North America would not have been able to fully capitalize
on the surge of orders resulting from its improved MRO business.
The second perspective is to consider fiscal year 2019 an important
milestone in the Company’s history. I stated last year, in reaction
to the disappointing results, “we will need to make important
changes to improve our operating results.” The year culminated
with the Board unanimously approving our ambitious plan to
transform the Company, after an in-depth strategic diagnosis.
The strategy can be summed up: we reorganized into business
units to better serve our customers, we are tightly connecting
those business units to our manufacturing and supply chain;
and we are reducing costs through plant consolidation in North
America and better leveraging of our state-of-the art facility
in India.
Our priority is now execution, which involves driving change on
several parallel fronts. Our employees have proven their great
engagement and resilience over the last couple of years. With
their help and our Board’s support, I am sure we will succeed in
Yves Leduc, Velan Inc’s President and Chief Executive Officer next to
a group of 8” gear operated nuclear globe valves, manufactured in
Canada.
bringing the Company back to profitable growth. Before I lift the
veil on the most important aspects of our transformation, let’s
have a closer look at our results.
Sales, order bookings, and backlog
Sales increased by $28.9 million or 8.6% from the prior year.
Sales were positively impacted by an increase in shipments from
the Company’s North American, Korean and Indian subsidiaries.
Thanks in part to improving conditions in the refinery market, the
Company was able to increase its North American MRO sales as
well as improve its shipments related to large project orders. More
importantly the surge was fueled by a series of tactical moves
that have strengthened our strategic position in the distribution
of replacement valves. In addition to revising our pricing
strategy, we have appointed AIV as a new master distributor.
It is one of the largest in the world, after its acquisition of Zenith,
a master distributor exclusively selling Velan valves since
the 80s. We have also initiated structured conversations with
operations leaders at key refineries, with the intention to adapting
our product and spares offerings and suite of services, thereby
prompting orders that directly benefit our distributors who sell
our valves. This is an example of the sharper end-user focus
underlying our market strategy.
(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
Once again this fiscal year, bookings have outpaced sales. Despite
this positive ratio, the total backlog decreased by $14.8 million
or 3.2% since the beginning of the fiscal year, settling at
$449.7 million. Despite a year of stronger bookings, our backlog
has decreased slightly due mainly to the cancellation, late in the
year, of a large project order to supply valves to a power plant
in Vietnam. The cancellation resulted from sanctions imposed
on Russia, and the Velan contract was through a Russian
engineering firm.
Net loss(1) and EBITDA(2)
Net loss(1) amounted to $4.9 million or $0.23 per share, an
improvement of $12.9 million over last year. EBITDA(2) amounted
to $7.1 million or $0.33 per share, improving last year’s results
by $11.5 million. Our financial performance is essentially the
consequence of improving our business performance, and to
a lesser extent, of the negative effects of the U.S. tax reform
legislation passed during the fourth quarter of the prior fiscal
year, which resulted in a one-time tax expense of $4.3 million
in fiscal 2018.
Gross profit increased by $14.7 million for the fiscal year, while
the gross profit percentage increased by 230 basis points from
21.0% to 23.3%. The increase for the year is due primarily
to a higher sales volume achieved by the Company’s North
American, Korean and Indian operations combined with the
shipment of a product mix with a greater proportion of projects
with higher margins by the Company’s French operations. As
explained above, our North American operations were able
to revitalize our MRO business while continuing to search for
margin improvements in our project business. The increase for
the year was slightly offset by the lower sales volume from our
German subsidiary, caused by the cancellation of the Vietnamese
order. However the growth was not enough to fully cover our
current costs, mainly in our North American operations. This is
one of the factors that drove management to propose a plan to re-
organize our North American operations and rethink our business
model. The strategy we are pursuing will significantly increase
our competitiveness and, not only address head on the margin
challenge that more directly affects North American operations,
but also bring the Company back to profitable growth. Let me
now explain it with further detail.
Bringing all the pieces together to capture Velan’s
full potential
With the measures approved last January, we aim to attack the few
key structural factors that hinder the Company’s competitiveness
and prevent it from fully leveraging its core capabilities and
brand advantage, and, consequently, from growing profitably in
an industry that has shifted in the last decade. To be clear though,
these measures do not constitute a new strategic direction for
Velan; they continue in the direction set more than two years ago.
Considering the investments already made under Velocity 2020
This 24"x20" API 6D ball valve manufactured by Velan ABV in
Italy is part of an order supplying high pressure valves to a major
FPSO (floating production storage and offloading project) in the oil
exploration sector.
Bookings increased by $51.5 million or 16.0% from the prior year.
Other than our successful MRO efforts, the increase in bookings
is due primarily to higher orders booked by the Company’s Italian
and French subsidiaries, notably approximately $66 million in
project orders won by the Company’s Italian operations to supply
high pressure valves to a major FPSO project, the result of our
Italian team successfully targeting a very attractive segment in
the oil exploration sector. Also, the Company’s French operations
won a $25 million order for the ITER organization, a strategic
research collaboration among 35 countries, located in France and
mandated to build and operate a device that will generate power
out of nuclear fusion. I am very proud that Velan has been chosen
as key supplier of valves for this prestigious project.
The above illustration shows ITER’s Nuclear Fusion Reactor. Velan
SAS in France will be supplying over 2,000 valves for installation in the
cooling water system.
4
Message to our shareholders and employees
concurrently with our distributors and the end-users of our
products and services. The Severe Service business unit will
grow through proactive engineering selling, compelling end-
users and EPCs to specify our own metal-seated ball valve
designs. As a result of our concentrated efforts of the last two
years, we have recently obtained three licensor approvals for
our designs, the last two pertaining to a Velan valve design
that meets the stringent requirements of an industrial process
in the petrochemical industry.
• A global manufacturing strategy designed to support our
customer focus and market strategies: Our decision to re-
organize our North American operations from four plants
to three, modernizing each plant and making them more
product-specific, dedicating them to our business units,
is a critical breakthrough in our transformation journey.
This important investment will reduce our production
overhead costs but more importantly increase agility and
flexibility. For example, the general manager of the Project
business unit, working closely with our Granby plant, which is
now dedicated to multi-turn valve project manufacturing, will
be able to affect supply chain strategies to reduce cycle times
and increase our quoting hit rate. Meanwhile our state-of-the-
art Indian facility, which we have successfully industrialized
to host most of our commodity product lines, will bolster our
already strong low-cost manufacturing base and integrate with
the operating plans of the MRO & Aftermarket business unit.
The vision is to transform Velan by making it less dependent on the
industry’s cycles and better able to shape its own fate by dictating
the pace and better selecting its customers. Our commitment
is to grow both sales and profitability. We are harnessing this
vision to specific top-line and margin improvement goals and
have equipped ourselves with the means to deliver them. The
execution of the plan requires significant and well-planned
investments and I am very thankful for the Board’s support
and unanimous approval of it. For example, we have set up a
44 participants from 11 different countries attended the 2019 Velan
annual Sales Training Seminar including distributors, agents and new
members of Velan global sales team. Our objective was to provide the
group with the tools needed to best represent Velan products and
services to customers.
5
Velan R-series metal-seated ball valve, designed for a high pressure and
corrosive hydrogen and sulphur-rich innovative industrial process in the
petrochemical industry.
in organizational development, operations improvement and new
systems, Velan is now well into a major transformation; we are
adapting our business model and constantly acquiring new key
capabilities and assets which the Company did not have before
our markets started their decline in 2015. Let me summarize the
most important cornerstones of our strategy:
• Modernized operations and technology-enabled processes:
Building on our new ERP system launched in 2017, we
are deploying automated project management scheduling
and tracking, integrated production capacity planning and
scheduling, configured price quotation (CPQ), preventive
maintenance planning and tracking, CRM and others. We are
literally digitizing Velan, a journey that will continue, as we
deploy process improvements across the company. The goal
is to reduce costs, but more importantly increase margins and
agility, while improving customer service
• Investing in knowhow and planning succession: In order to
strengthen our competitive edge in product technology, we
have increased our investment in training our employees,
both new and experienced employees, as well as customers. In
terms of management and leadership skills, we have recently
introduced LinkedIn Learning, making thousands of on-line
training videos and seminars accessible to our employees. The
response is fantastic
• More targeted go-to-market strategies and increased end-user
focus: With the new business units, we get P&L accountability
from our new business units’ general managers, improved
cross-functional teamwork and the ensuing ability to sharply
target attractive end-user applications. Each business unit
is defined in terms of its strategic and market focus. For
example, the new MRO & After-market unit will unlock
the great potential of our global installed base by working
Message to our shareholders and employees
Transformation Office whose mandate is to track and measure
the progress of each strategic initiative. We have been able to
staff those initiatives with a balanced mix of experienced Velan
employees, as well as new recruits, most of whom will be later
re-staffed in core positions as part of our succession planning.
Fiscal year 2019 gave us a glimpse of a promising recovery, but we
are not out of the woods. Fortunately, we have a solid foundation,
thanks to our outstanding brand and product reputation,
our Italian and French operations performing superbly, a
continuously improving and loyal distributor network, and above
all, incredibly talented employees in each of our global locations.
I am impressed with how our managers are going out of their
way to drive the transformation agenda, while keeping their eyes
on the daily business. Many leaders are emerging as formidable
change agents. And we have a strong and supportive board.
We have a tough challenge, but my point is, the stars are aligned.
My last words go to our Quebec employees, who were shocked
by the news that operations in our Plant 2-7 in Montreal were
going to be transferred, and the plant closed in two years. This
was the toughest of business decisions and I understand their
reaction. The remaining Montreal plant, just a block away,
adjacent to our global headquarters, is a better and more modern
building. We will seize the opportunity to make it an industry
center of excellence for severe service valves by investing in our
engineering center, and we will continue investing heavily in
training our employees to meet our customers’ most stringent
Aerial photo of the manufacturing facility adjacent to our global
headquarters where severe service valve production will be
concentrated.
requirements. My commitment is to keep the impact on jobs
as low as possible, working closely with the unions, as we
have enough time to do things right. Since the announcement,
I have observed nothing but passion, resilience and the utmost
professionalism from every employee. I am proud and grateful to
all of them and in the last months, my confidence in our future
has only gotten stronger as a result.
Yves Leduc
President and Chief Executive Officer
6
Management’s discussion and analysis
May 16, 2019
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, 2019. 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, 2019 and 2018. 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 13 manufacturing plants
worldwide with 1,859 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 one distribution facility 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 profit2
Gross profit2 %
EBITDA3
EBITDA3 %
EBITDA3 per share – basic and diluted
Net loss4
Net loss4 %
Net loss4 per share – basic and diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash 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,
2019
Fiscal year
ended
February 28,
2018
Increase
(decrease)
%
Increase
(decrease)
$366.9
85.6
23.3%
7.1
1.9%
0.33
(4.9)
$338.0
70.9
21.0%
(4.4)
(1.3)%
(0.20)
(17.8)
(1.3)%
(5.3)%
(0.23)
21.6
(9.6)
(8.1)
(2.5)
372.4
449.7
(0.82)
21.6
(1.9)
(6.7)
(11.1)
320.9
464.5
$28.9
14.7
8.6%
20.7%
11.5
261.4%
0.53
12.9
265.0%
72.5%
0.59
72.0%
(7.7)
(1.4)
8.6
51.5
(14.8)
(405.3)%
(20.9)%
77.5%
16.0%
(3.2)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 In accordance with the current fiscal year's presentation, the comparative figures were adjusted to reflect a more accurate allocation of cost of
sales and administration costs.
3 Non-IFRS measures – see reconciliations at the end of this report.
4 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 2019 as well as factors that may impact fiscal 2020
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net loss1 amounted to $4.9 million or $0.23 per share compared to $17.8 million or $0.82 per share last year. EBITDA2
amounted to $7.1 million or $0.33 per share compared to a negative $4.4 million or negative $0.20 per share last year. The
$12.9 million decrease in net loss1 is primarily attributable to a higher sales volume combined with better margins and the
negative effects of the U.S. tax reform legislation passed during the fourth quarter of the prior fiscal year, which resulted in
a one-time tax expense inclusion of $4.3 million in fiscal 2018.
Sales amounted to $366.9 million, an increase of $28.9 million or 8.6% compared to last year. Sales were positively impacted
by an increase in shipments from the Company’s North American, Korean and Indian operations, which was partially offset
by decreased shipments from the Company’s German operations. The Company was able to notably improve its MRO
business as well as increase its shipments related to large project orders. The Company’s North American operations had also
suffered last year from delays in shipments of certain large project orders caused by various customer-related issues.
Net new orders received (“bookings”) amounted to $372.4 million, an increase of $51.5 million or 16.0% compared to last
year. Excluding the effect of an order of $36.3 million, booked in a prior year and cancelled in the fourth quarter of the current
fiscal year, bookings would have increased by $87.8 million or 27.4% in the year. This increase is due primarily to higher
orders booked by the Company’s Italian and French subsidiaries, which recorded significant project orders relating to the
upstream oil and gas and nuclear power industries.
Despite the fact that bookings slightly outpaced sales in the year, the Company ended the year with a backlog of $449.7
million, a decrease of $14.8 million or 3.2% since the beginning of the current fiscal year. This decrease in backlog was
substantially due to the negative impact of the weakening of the euro spot rate against the U.S. dollar over the course of the
year as well as the cancellation of the $36.3 million order.
Gross profit percentage increased by 230 basis points from 21.0% to 23.3%. This increase is due primarily to the higher sales
volume of the Company’s North American, Korean and Indian operations combined with the shipment of a more efficient
product mix by the Company’s French operations, which was partially offset by the lower sales volume shipped by the
Company’s German operations. The Company’s North American operations were able to maintain the stronger margins in
its MRO business while continuing to search for margin improvements in the more challenging project business.
Administration costs amounted to $93.3 million, an increase of $5.6 million or 6.4%. This fluctuation is attributable to an
increase in bad debt, selling expenses, retirement expenses and freight charges for certain overseas project customers resulting
from the higher sales volume as well as the need to incur air freight costs on a large delayed order. The Company has also
invested $1.0 million in its current transformation initiative, Velocity 2020. The Company also experienced 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 settlements in these two years rather than to changes in long-term
trends.
The Company ended the year with net cash of $40.9 million, a decrease of $23.6 million or 36.6% since the beginning of the
year. This decrease is primarily attributable to negative non-cash working capital movements, investments in property, plant
and equipment, investments in intangible assets, long-term debt repayments as well as distributions to shareholders via
dividends, partially offset by an increase in long-term debt. Net cash was also negatively impacted by the weakening of the
euro spot rate against the U.S. dollar over the course of the year.
Foreign currency impacts:
o Despite the drop of the euro spot rate over the course of the year, the average exchange rates of the euro strengthened
1.0% 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. The drop of the euro spot rate in the current fiscal year resulted in a $9.3 million loss in accumulated
other comprehensive loss.
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.
9
Management’s discussion and analysis
o Based on average exchange rates, the Canadian dollar weakened 1.5% against the U.S. dollar when compared to the
same period last year. This weakening resulted in the Company’s Canadian dollar expenses being reported as lower
U.S. dollar amounts in the current year.
o The net impact of the above currency swings was generally favourable on the Company’s net loss1.
Fiscal year 2019 was a notable improvement compared to the last fiscal year for the Company. The Company saw a return to
profitability in the last quarter of the current fiscal year. The profit was achieved in part through the intelligence that was obtained
during the various phases of its transformation initiative, Velocity 2020. The Company has implemented measures to drives margins
and has a better visibility of its various manufacturing costs. The Company’s lower production overhead costs in the last quarter of
the fiscal year combined with the overall higher sales volume has allowed the Company to achieve a better gross margin in the current
fiscal year. As the competition remains intense in some key target markets, leading to increased pressure on pricing and lead times,
the Company understands that it needs to continue improving its delivery and operational performance. 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 implementation of a capacity visibility tool, and a significant increase in non-project commodity valves sales in the
Company’s North American operations through an improved distributor channel in the Company’s North American operations.
While the improved performance in the Company’s North American operations in this fiscal year were encouraging, the Company
recognizes that a lot more has to be done to obtain satisfactory results. While the Company is very committed to pursuing its
transformation initiative, it will ensure this initiative does not reduce focus on ongoing operations.
Other factors that may impact fiscal year 2020
The Company announced in January that it had reorganized into business units, allowing the Company to significantly reinforce its
market positioning, better serve customers, and drive growth. The Company has also announced measures to improve its operational
efficiency and optimize its manufacturing footprint in North America. The Company will consolidate its valve manufacturing facilities
in North America from four plants to three. The completion of the consolidation is scheduled for the end of fiscal year 2021. The
current production will be gradually reorganized so as to make the three remaining North American plants more specialized and
dedicated to the new business units, as well as expand production of less complex valves in India. The Company will work with the
union to minimize the impact on its employees and help those who will be impacted by this closure. This plan will allow the Company
to pursue additional efficiencies, decrease costs, and upgrade its systems while strengthening its market presence, improving its on
time delivery and maintaining its reputation for high quality industrial valves. The Company is making a significant strategic
investment in the next two fiscal years to carry out these changes, namely an amount of $15 million in fiscal year 2020. The benefits
of this investment will be realized in subsequent fiscal years. Furthermore, 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, 2019
Fiscal year ended
February 28, 2018
Fiscal year ended
February 28, 2017
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
$337,963
(17,811)
(0.82)
(0.82)
540,193
22,200
0.31
0.31
$331,777
7,737
0.36
0.36
519,297
22,532
0.31
0.31
$366,865
(4,882)
(0.23)
(0.23)
524,357
21,723
0.09
0.09
15,566,567
6,055,368
Sales for fiscal year 2019 increased by 8.6% compared to fiscal year 2018. This increase was primarily attributable to an increase in shipments
from the Company’s North American, Korean and Indian subsidiaries, which were partially offset by decreased shipments from the
Company’s German operations. The Company was able to notably improve its MRO business as well as increasing its shipments related to
large project orders. 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 in
fiscal year 2018.
Gross profit for fiscal year 2019 amounted to $85.6 million, an increase of $14.7 million from fiscal year 2018, while the gross profit
percentage increased from the 21.0% reported in fiscal year 2018 to 23.3% in fiscal year 2019. This increase was due primarily to the higher
sales volume achieved by the Company’s North American, Korea and Indian operations combined with the shipment of a more efficient
product mix by the Company’s French operations, which was partially offset by the lower sales volume shipped by the Company’s German
operations. Gross profit for fiscal year 2018 amounted to $70.9 million, a decrease of $17.6 million from fiscal year 2017, while the gross
profit percentage decreased from the 26.7% reported in fiscal year 2017 to 21.0% 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 material
cost savings.
Administration costs for fiscal year 2019 increased by $5.6 million when compared to fiscal year 2018. This fluctuation was attributable to
an increase in bad debt expense, selling expenses, retirement expenses and freight charges for certain overseas project customers resulting
from the higher sales volume as well as the need to incur air freight costs on a large delayed order. The Company had also invested $1.0
million in its current transformation initiative, Velocity 2020. The Company also experienced an increase in costs recognized in connection
with the Company’s ongoing asbestos litigation (see Contingencies section). Administration costs for fiscal year 2018 increased by $11.8
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).
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.
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, 2019 compared to the year ended February 28, 2018
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2019
Year ended
February 28,
2018
(millions)
Sales
$366.9
$338.0
Sales increased by $28.9 million or 8.6% from the prior year. Sales were positively impacted by an increase in shipments from the
Company’s North American, Korean and Indian subsidiaries, which was partially offset by decreased shipments from the Company’s
German operations. The Company was able to increase notably its MRO sales as well as improving its shipments related to large
project orders. The Company’s German operations decreased shipments were due to delays in shipments of certain large project orders
caused by various customer-related issues. As competition remains fierce the Company is continuing to shift its focus and target market
segments where its products enjoy a competitive advantage based upon its good reputation for quality.
Bookings and backlog
(millions)
Year ended
February 28,
2019
Year ended
February 28,
2018
Bookings
$372.4
$320.9
Bookings increased by $51.5 million or 16.0% from the prior year. Bookings were negatively impacted by the cancellation of a $36.3
million large project order, booked in a prior fiscal year, to supply valves to a power plant in Vietnam. The project was being led by
a consortium of three entities. The Company booked the order for the Vietnam project via a Russian contractor that was a member of
the consortium. The project suffered important delays when the United States of America imposed sanctions on the Russian contractor.
As a result of these sanctions, the contractor served a termination notice to the end-user and suspended all supplier contracts. The
Company has removed the order from its backlog.
If the effect of this order cancellation is removed, bookings would have increased by $87.8 million or 27.4% in the year. The increase
in bookings is due primarily to higher orders booked by the Company’s Italian and French subsidiaries This notably included
approximately $66 million in project orders won by the Company’s Italian operations to supply valves to the upstream oil and gas
sector in Central and South America. Also, the Company’s French operations won a $25 million order for the ITER organization, a
very prestigious project, consisting in a strategic research collaboration between 35 countries, located in France and mandated to build
and operate a device that will generate power out of nuclear fusion.
(millions)
Backlog
February
2019
February
2018
February
2017
$449.7
$464.5
$438.2
For delivery within the subsequent fiscal year
$299.6
$286.7
$270.5
For delivery beyond the subsequent fiscal year
$150.1
$177.8
$167.7
Percentage – beyond the subsequent fiscal year
33.4%
38.3%
38.3%
As a result of bookings outpacing sales in the current fiscal year, the Company’s book-to-bill ratio was 1.01 for the year. Despite this
positive ratio, the total backlog decreased by $14.8 million or 3.2% since the beginning of the fiscal year, settling at $449.7 million.
This decrease in backlog was substantially due to the negative impact of the weakening 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 as well as the cancellation of the Vietnamese
order.
12
Management’s discussion and analysis
Gross profit
(millions)
Gross profit
Year ended
February 28,
2019
Year ended
February 28,
2018
$85.6
$70.9
Gross profit percentage
23.3%
21.0%
Gross profit increased by $14.7 million for the fiscal year, while the gross profit percentage increased by 230 basis points from 21.0%
to 23.3%. The increase for the year is due primarily to a higher sales volume achieved by the Company’s North American, Korean
and Indian operations combined with the shipment of a product mix with a greater proportion of projects with higher margins by the
Company’s French operations. The Company’s North American operations were able to maintain the stronger margins in its MRO
business while continuing to search for margin improvements in the more challenging project business. The increase for the year was
partially offset by a lower sales volume from the Company’s German subsidiary as a result of the cancellation of the $36.3 million
Vietnamese order. The current volume of sales for the year produces a gross margin that is still not sufficient to fully absorb the current
costs of the Company, mainly in its North American operations. With the announcement in January of the plan to consolidate its North
American operations, the Company is pursuing its global cost reduction and efficiency transformation initiative with the goal of
improving its margins by reducing supply chain, production and overhead costs.
Administration costs
(millions)
Administration costs*
As a percentage of sales
Year ended
February 28,
2019
Year ended
February 28,
2018
$93.3
25.4%
$87.7
25.9%
$8.2
*Includes asbestos-related costs of:
$9.2
Administration costs increased by $5.6 million or 6.4% for the fiscal year. This fluctuation is attributable to the increase in bad debt
expense of the Company’s German and Korean operations with respect to specific customers in financial difficulties. The increase is
also due to the Company’s investment of $1.0 million in its current transformation initiative, Velocity 2020 as well as an investment
in its sales force at the end of the prior fiscal year which increased the Company’s sales employees base in this fiscal year. The
Company has also offered retirement packages to certain employees in order to reduce the level of its administration costs and
experienced an increase in freight charges for certain overseas project customers resulting from the higher sales volume as well as the
need to incur air freight costs on a large delayed order. Furthermore, the Company has experienced 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 settlements 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,
2019
Year ended
February 28,
2018
Other expense (income)
$(0.7)
$1.5
Other income increased by $2.2 million for the fiscal year. The increase for the year is primarily attributable to recognized mark-to-
market losses of $1.8 million in the prior year on foreign exchange forward contracts used by the Company to hedge the net monetary
position of its European subsidiaries, which is denominated in euros. The euro spot rate had appreciated 15.3% against the U.S. dollar
since the beginning of the prior 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
prior 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 in the prior year, even though the Company’s net loss1 was depressed as
a result.
Net finance costs
(millions)
Year ended
February 28,
2019
Year ended
February 28,
2018
Net finance costs
$0.7
$0.2
Net finance costs increased by $0.5 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, 2019
%
$
Year ended
February 28, 2018
%
$
Income tax at statutory rate of 26.7% (2018 – 26.8%)
(2,053)
26.7
(4,958)
26.8
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
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
Prior period adjustments and assessments
Other
1,640
327
724
(525)
(891)
-
(1,494)
(29)
(21.3)
(4.3)
(9.4)
6.8
11.6
-
19.4
0.4
1,396
(303)
1,151
-
(917)
4,259
(204)
(63)
(7.5)
1.6
(6.2)
-
5.0
(23.1)
1.1
0.3
Provision (recovery) for income taxes
(2,301)
29.9
361
(2.0)
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 loss1
(millions)
Net loss1
Year ended
February 28,
2019
Year ended
February 28,
2018
$(4.9)
$(17.8)
As a percentage of sales
(1.3)%
(5.3)%
EBITDA2
As a percentage of sales
$7.1
1.9%
$(4.4)
(1.3)%
Net loss1 amounted to $4.9 million or $0.23 per share compared to $17.8 million or $0.82 per share last year. EBITDA2 amounted to
$7.1 million or $0.33 per share compared to a negative $4.4 million or negative $0.20 per share last year. The $12.9 million decrease
in net loss1 is primarily attributable to a higher sales volume combined with better margins and the negative effects of the U.S. tax
reform legislation passed during the fourth quarter of the prior fiscal year, which resulted in a one-time tax expense inclusion of $4.3
million in fiscal 2018.
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
2019
$105,345
1,519
November
2018
$92,271
(236)
August
2018
$91,375
(2,438)
May
2018
$77,874
(3,727)
February
2018
$102,607
(8,221)
November
2017
$87,738
305
QUARTERS ENDED
May
August
2017
2017
$71,087
$76,531
(4,304)
(5,591)
0.07
0.07
(0.01)
(0.01)
(0.11)
(0.11)
(0.17)
(0.17)
(0.38)
(0.38)
0.02
0.02
(0.26)
(0.26)
(0.20)
(0.20)
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 2018 and August 2018 due to increased shipments of such orders, while the lower sales amounts for the quarters
ended in May 2017, August 2017, November 2017 and May 2018 were due to delayed execution on the shipments of such orders.
Sales were higher in the quarters ended in February 2019 and November 2018 due to increased shipments of large project orders but
also an improvement in the MRO business. Net earnings1 for the quarter ended in February 2019 was higher due to a higher sales
volume and 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 quarter ended November 2017 was lower due to a less efficient
product mix. The net loss1 for the quarters ended in August 2018 and November 2018 are largely due to the fact that the North
American operations are still below break even and additional costs were incurred in the quarter to meet delivery commitments. The
net loss1 for the quarters ended in February 2018 and May 2018 was due to a less efficient product mix and shipping delays caused by
internal operational issues. The quarter ended in February 2018 also had 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, 2019 compared to the quarter ended February 28, 2018
(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,
2019
Three-month
period ended
February 28,
2018
Sales
$105.3
$102.6
Sales increased by $2.7 million or 2.6% for the quarter. The sales volume for the quarter is the highest of any quarter of the past two
fiscal years. Sales for the quarter were improved in the Company’s Italian, Korean and Indian subsidiaries, while its North American
operations realized lower sales for the quarter. The sales volume and mix for the quarter were sufficient for the Company to reach
profitability with the current state of its cost structure.
Bookings
(millions)
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Bookings
$82.0
$72.9
Bookings increased by $9.1 million or 12.5% for the quarter. Bookings in the quarter were negatively impacted by the cancellation of
a $36.3 million large project order, booked in a prior fiscal year, to supply valves to the power market in Vietnam. If the effect of this
order cancellation is removed, bookings would have increased by $45.4 million or 62.3% in the quarter. The increase in bookings for
the quarter is due primarily to higher orders booked by the Company’s Italian and French subsidiaries. This notably included
approximately $36 million in project orders won by the Company’s Italian operations to supply valves to the upstream oil and gas
sector in Central and South America. Also, the Company’s French operations won a $25 million order for the ITER organization, a
very prestigious project, consisting in a strategic research collaboration between 35 countries, located in France and mandated to build
and operate a device that will generate power out of nuclear fusion.
Gross profit
(millions)
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Gross profit
$25.9
$18.1
Gross profit percentage
24.6%
17.6%
Gross profit increased by $7.8 million for the quarter, while the gross profit percentage increased by 700 basis points from the prior
year quarter. The gross profit was obtained due to the higher sales volume in the Company’s Italian, Korean and Indian subsidiaries
combined with the shipment of a product mix with a greater proportion of projects with higher margins by the Company’s North
American and French operations. The increase in gross profit was also obtained due to the Company’s reduction of its production
costs during the course of the quarter. As such, the higher sales volume combined with the lower level of production costs allowed
for the Company to achieve a significant improvement in gross profit. For the quarter, the Company kept its focus on MRO sales
where stronger margins are achievable and was also able to deliver good margins on its project business. The Company believes that
the improvement in gross profit for the quarter is in part due to the various processes and systems that were put in place within the
scope of the transformation initiative, Velocity 2020.
16
Management’s discussion and analysis
Administration costs
(millions)
Administration costs*
As a percentage of sales
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
$27.1
25.7%
$23.4
22.8%
$2.0
*Includes asbestos-related costs of:
$3.2
Administration costs for the quarter increased by $3.7 million or 15.8% for the quarter. The increase is attributable to retirement
packages that were offered to certain employees in order for the Company, as part of restructuring, to reduce its administration costs.
The increase is also attributable to a higher bad debt expense in the Company’s German operations caused by a specific customer in
financial difficulty. Finally, the increase is also due to an increase in sales commissions 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
settlements than to changes in long-term trends.
Net finance costs
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
(millions)
Net finance costs
$-
$0.1
Net finance costs decreased by $0.1 million for the quarter. The Company did not incur any new long-term debt borrowings over the
course of the quarter.
17
Management’s discussion and analysis
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 28, 2019
%
$
Three-month period ended
February 28, 2018
%
$
Income tax at statutory rate of 26.7% (2018 – 26.8%)
(184)
26.7
(1,429)
26.8
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
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
Prior period adjustments and assessments
Other
483
(11)
(416)
(525)
(218)
-
(1,494)
500
(70.2)
1.6
60.5
76.3
31.7
-
217.2
(72.7)
824
(92)
645
-
(230)
4,259
(204)
(88)
(14.5)
1.7
(12.1)
-
4.3
(79.8)
3.8
1.7
Provision (recovery) for income taxes
(1,865)
(271.1)
3,685
(69.1)
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.
Net earnings (loss)1
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
$1.5
1.4%
$3.8
3.6%
$(8.2)
(8.0)%
$(1.2)
(1.2)%
(millions)
Net earnings (loss)1
As a percentage of sales
EBITDA2
As a percentage of sales
Net earnings1 amounted to $1.5 million or $0.07 per share compared to a net loss1 of $8.2 million or $0.38 per share last year. EBITDA2
amounted to $3.8 million or $0.18 per share compared to a negative $1.2 million or negative $0.05 per share last year. The $9.7 million
increase in net earnings1 is primarily attributable to a higher sales volume combined with better margins and the negative effects of
the U.S. tax reform legislation passed during the fourth quarter of the prior fiscal year, which resulted in a one-time tax expense
inclusion of $4.3 million in fiscal 2018.
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
Bank indebtedness and short-term bank loans
Derivative liabilities
Total
$
21,851
74,910
40,240
31,979
83
Less than
1 year
$
8,609
74,910
40,240
31,979
83
As at February 28, 2019
4 to 5
Years
$
After
5 years
$
3,782
-
-
-
-
3,520
-
-
-
-
1 to 3
Years
$
5,940
-
-
-
-
On February 28, 2019, the Company’s order backlog was $449.7 million, and its net cash plus unused credit facilities amounted to
$123.3 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.
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 cash
(millions)
February
2019
November
2018
February
2018
November
2017
February
2017
Net cash
$40.9
$50.0
$64.5
$76.0
$76.2
The Company’s net cash decreased by $9.1 million or 18.2% over the course of the quarter and by $23.6 million or 36.6% since the
beginning of the current fiscal year. This decrease is primarily attributable to negative non-cash working capital movements,
investments in property, plant and equipment, investments in intangible assets, long-term debt repayments as well as distributions to
shareholders via dividends, partially offset by an increase in long-term debt. Net cash was also negatively impacted by the weakening
of the euro spot rate against the U.S. dollar over the course of the year.
Cash used in operating activities
(millions)
Fiscal Year
ended
February 28,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Cash used in operating activities
$(9.6)
$(1.9)
$(4.2)
$(8.9)
Cash used in operating activities amounted to $4.2 million for the current quarter compared to $8.9 million in the prior year. The
current quarter’s usage of funds consisted of negative cash net losses1 of $1.4 million and negative non-cash working capital
movements of $2.8 million. Cash used in operating activities amounted to $9.6 million for the current year compared to $1.9 million
in the prior year. The current year’s usage of funds consisted of positive cash net earnings1 of $1.7 million and negative non-cash
working capital movements of $11.3 million.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Accounts receivable increase
$0.1
$10.3
$11.1
$23.9
Accounts receivable balances are a function of the timing of sales and cash collections. The accounts receivable balance remained
relatively flat for the fiscal year. The increase for the quarter is due primarily to a greater proportion of the Company’s accounts
receivable, which consisted in part of sales for large project orders that generally entail longer collection terms, being recorded closer
to the end of the current quarter.
Inventories
(millions)
Inventories decrease
Customer deposits increase (decrease)
Fiscal Year
ended
February 28,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
$5.1
$(8.8)
$2.6
$5.7
$4.6
$2.6
$12.8
$2.8
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 the current
quarter and decreased for the current fiscal year. The fluctuation for the quarter and fiscal year is due to the timing of the booking of
certain large export orders, particularly in the Company’s French and North American operations.
1 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,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Accounts payable and accrued liabilities (decrease) increase
$11.3
$3.2
$5.3
$(0.8)
For all of the indicated periods, the fluctuations in accounts payable and accrued liabilities were primarily related to the timing of
payments.
Additions to property, plant and equipment
(millions)
Fiscal Year
ended
February 28,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
Additions to property, plant and equipment
$7.5
$6.2
$1.1
$1.8
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,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
$4.0
$3.6
$ -
$3.2
$ -
$0.9
$ -
$0.9
During the current fiscal year, the Company continued to pay down its outstanding long-term debt. However, in order to take
advantage of historically low borrowing rates in Europe, two of the Company’s European subsidiaries entered into new long-term loan
arrangements. One of the Company’s French subsidiaries borrowed $3.4 million (€3.0 million) through an unsecured bank loan
bearing interest at 0.42% and repayable in 60 monthly instalments, expiring in 2023. In addition, the other French subsidiary borrowed
$0.6 million (€0.5 million) through an unsecured bank loan bearing interest at 0.53% and repayable in 60 monthly instalments, expiring
in 2023.
Dividends paid and repurchase of shares
(millions)
Dividends paid
Repurchase of shares
Fiscal Year
ended
February 28,
2019
Fiscal Year
ended
February 28,
2018
Three-month
period ended
February 28,
2019
Three-month
period ended
February 28,
2018
$3.1
$-
$6.7
$0.6
$0.5
$ -
$1.7
$ -
The Company changed its current dividend policy at the end of the prior fiscal year, reducing the dividend from CA$0.10 per share
per quarter to CA$0.03 per share per quarter. The new policy took effect with the dividend payment of June 29, 2018. In order to
preserve cash for the Velocity 2020 initiative, the Company did not renew its Normal Course Issuer Bid in the current fiscal year. No
shares were repurchased in the current quarter and fiscal year. Last year, 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 year.
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
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
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, 2019 and 2018 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2019
February 28,
2018
February 28,
2019
$
February 28,
2018
$
February 28,
2019
February 28,
2018
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 € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for € – 0 to 12 months
1.36
1.30
1.15-1.18
-
1.14
-
-
1.26-1.28
1.25
1.18-1.19
1.18-1.24
1.24-1.28
1.18
0.89
(61)
183
(15)
-
(2)
-
-
(1,558) US$26,000
US$26,000
US$2,010
-
€907
-
-
433
(2)
92
(39)
64
(1)
US$92,000
US$92,000
US$2,190
US$4,785
€16,297
€15,390
£281
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 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, 2019 and 2018:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
2019
$
(555)
464
2018
$
(524)
396
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, 2019, four (2018 – four)
customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 10.5% (2018 –
9.6%), and the Company’s ten largest customers accounted for 58.9% (2018 – 57.3%) of trade accounts receivables. In addition, one
customer accounted for 10.9% of the Company’s sales (2018 – 9.9%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific
evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts receivable,
historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established for each
customer and reviewed periodically. An allowance for doubtful accounts is recorded when, based on management’s evaluation, the
collection of an account receivable is not reasonably certain.
For some trade accounts receivable, the Company may obtain security in the form of credit insurance which can be called upon if the
counterparty is in default under the terms of the agreement.
The Company also applies the IFRS 9 simplified approach to measure expected credit losses using a lifetime expected credit loss
allowance for trade receivables.
The expected credit loss rates are based on the Company’s historical credit losses experienced over the last fiscal year prior to period
end. The historical rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the
Company’s customers.
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,
2019
$
As at
February 28,
2018
$
75,888
13,329
15,860
26,845
131,922
1,662
130,260
7,260
91,534
12,421
8,546
18,714
131,215
1,088
130,127
7,255
137,520
137,382
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
24
Management’s discussion and analysis
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
As at
February 28,
2019
$
As at
February 28,
2018
$
1,088
1,056
(215)
(202)
(65)
1,662
1,239
212
(444)
(122)
203
1,088
Liquidity risk – see discussion in liquidity and capital resources section
CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defence related to certain products that may have contained an internal asbestos containing component. 1,349
claims were outstanding at the end of the reporting period (February 28, 2018 – 1,190). These claims were filed in the states of
Arizona, California, Connecticut, Delaware, Florida, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri,
Montana, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, Texas, Virginia, Washington, West
Virginia and Wisconsin. During the current fiscal year, the Company resolved 437 claims (February 28, 2018 – 457) and was the
subject of 596 new claims (February 28, 2018 – 501). Because of the many uncertainties inherent in predicting the outcome of these
proceedings, as well as the course of asbestos litigation in the United States, management believes that it is not possible to make an
estimate of the Company’s asbestos liability. Accordingly, no provision has been set up in the accounts. Settlement costs and legal
fees related to these asbestos claims amounted to $3,185 for the quarter (February 28, 2018 - $1,960) and $9,212 for the year (February
28, 2018 - $8,213).
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
25
Management’s discussion and analysis
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,
2018
2019
Feb. 28,
2018
Feb. 28,
2019
Purchases of material components
$256
$900
$1,013
$1,230
The Company entered into an agreement with PDK pursuant to which it has the right to purchase the shares of PDK for a
consideration equal to the book value thereof in the event that they propose to sell their shares to a third party. In the event
that PDK proposes to sell all or substantially all of its assets to a third party, the Company has the right to purchase inventory
at cost and other assets at book value. In the event of a proposed liquidation or sale of sufficient assets such that PDK cannot
fulfill its obligations to the Company under any outstanding purchase orders, the Company also has the right and the
obligation to purchase PDK’s inventory at an amount equal to the cost thereof. The maximum obligation of the Company
pursuant to such put right is $200.
b)
One of the Company`s subsidiaries and certain of its executives leased, on a weekly basis, a property from Velan Holdings
Co. Ltd., the controlling shareholder. Velan Holdings Co. Ltd. charged weekly rates based on usage. Note that this lease
agreement was terminated during the prior fiscal year.
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2018
2019
Feb. 28,
2018
Feb. 28,
2019
Rent
$-
$-
$-
$12
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, 2019 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, 2019.
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.
26
Management’s discussion and analysis
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, 2019 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
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:
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.
Accrual for performance guarantees
Accrual for performance guarantees consist of possible late delivery and other contractual non-compliance penalties or liquidated
damages. The Company estimates the specific contractual terms, historical trends and forward-looking performance risks. The
Company estimates its exposure under these obligations based on an analysis of all identified or expected claims. Any change in the
assumptions used could impact the value of the accrual for performance guarantees 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.
27
Management’s discussion and analysis
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.
ACCOUNTING STANDARDS AND AMENDMENTS ADOPTED IN THE YEAR
(i)
In July 2014, the IASB issued IFRS 9, Financial Instruments. The IASB had 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 represented the final version of the Standard, replacing earlier versions of IFRS 9 and
substantially completing the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement.
This standard replaced the multiple classification and measurement models for financial assets and liabilities with a single
model that had only three classification categories: amortized cost and fair value through other comprehensive income and
fair value through profit or loss. The basis of classification depended on the entity’s business model and the contractual
cash flow characteristics of the financial asset or liability. The standard introduced a new, expected loss impairment model
that requires more timely recognition of expected credit losses. Specifically, the new Standard required entities to account
for expected credit losses from when financial instruments are first recognised and it lowered the threshold for recognition
of full lifetime expected losses. The new standard also introduced a substantially-reformed model for hedge accounting
with enhanced disclosures about risk management activity and aligned hedge accounting more closely with risk
management.
The new standard was adopted prospectively effective March 1, 2018 and resulted in no material adjustments.
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specified how and when revenue should
be recognized as well as requiring the provision of more informative and relevant disclosures. Its core principle is that an
entity recognizes 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
replaced 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 was adopted effective March 1, 2018 and the Company elected the modified retrospective transition
alternative whereby transitional adjustments were recorded as an opening adjustment to retained earnings on the effective
date, without restatement of comparative figures. The Company determined that an adjustment to retained earnings was
required as at March 1, 2018 as a result of the adoption of this standard. Accruals for performance guarantees are considered
a form of variable consideration under IFRS 15. Such accruals may arise from possible late delivery and other contractual
non-compliance penalties or liquidated damages. Under IFRS 15, the Company modified the measurement of its accrual
for performance guarantees to be its best estimate of the eventual outcome of the performance guarantees. This best estimate
considers the specific contractual terms and forward-looking performance risks. Previously, the Company measured its
accrual for performance guarantees by reference to the maximum expected exposure from the underlying contracts.
Moreover, under the new standard, late delivery penalties, which were previously recorded as an expense in cost of sales,
are recorded as a reduction of sales.
28
Management’s discussion and analysis
The impacts of this adjustment on the current results can be found in the summarized impacts of IFRS 15 in the financial
statements section below.
The new standard did not have a significant impact on the timing of the Company’s revenues from the sale of goods as
most of such revenues 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 is 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 have not had a material impact on the current and prior year
periods’ consolidated revenues.
Summarized impacts of IFRS 15 in the financial statements
Financial statement line items not mentioned below have not been impacted by the Company's transition to IFRS 15.
Consolidated Statements of Financial Position
As at
Assets
Non-current assets
Deferred income taxes
Liabilities
Current liabilities
Accrual for performance guarantees
Equity
Retained earnings
February 28, 2018
IAS 18 carrying
amounts
$
IFRS 15
Adjustment
March 1, 2018
IFRS 15 carrying
amounts
$
22,034
2,490
24,524
32,655
(7,231)
25,424
256,668
4,741
261,409
(iii)
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 was adopted effective March 1, 2018 and resulted in no material adjustments.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
(i)
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 for lessees. It 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.
29
Management’s discussion and analysis
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. The Company has elected to use the modified retrospective approach and has determined that
it will not early adopt it. The Company will elect to apply the standard to contract that were previously identified as leases
under IAS 17 and IFRIC 4. The Company will not apply the standard to contracts that were not previously identified as
containing a lease applying IAS 17 and IFRIC 4. The Company will use the exemptions proposed by the standard on lease
contracts for which the lease terms ends within 12 months as the date of initial application, and lease contracts for which
the underlying asset is of low value. The Company elected not to apply the standard to new leases with a term less than 12
months. The Company’s operating leases, as disclosed in the commitment note (note 22 (c)) of the Company’s annual
consolidated financial statements for the year ended February 28, 2019, are within the scope of IFRS 16 with the exception
of those meeting the aforementioned exemption requirements.
In situations where the Company is a lessee, the result will be adding a right-of-use asset and a liability for the present
value of the future lease payments to the balance sheet for most of its contracts that were considered operating leases under
IAS 17. The Company will depreciate its right-of-use asset on the lesser of the lease term or the useful life of the asset.
The Company is currently finalizing its assessment of the impact of this new standard.
(ii)
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. As
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.
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.
30
Management’s discussion and analysis
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 the 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 the 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.
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.
31
Management’s discussion and analysis
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.
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.
32
Management’s discussion and analysis
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.
33
Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2019 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 earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA")
(in thousands)
For the fiscal year ended:
Feb. 28,
2019
Feb. 28,
2018
Feb. 29,
2017
Feb. 28,
2016
Feb. 28,
2015
Net income (loss) attributable to Subordinate Voting Shares
and Multiple Voting Shares
(4,882)
(17,811)
7,737
3,641
18,580
Adjustments for:
Goodwill impairment loss
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs (income) - net
Income taxes
EBITDA
-
11,566
2,009
695
(2,301)
-
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
7,087
(4,376)
26,201
38,563
45,066
For the quarter ended:
Feb. 28,
2019
Feb. 28,
2018
Net income (loss) attributable to Subordinate Voting Shares
and Multiple Voting Shares
1,519
(8,221)
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs (income) - net
Income taxes
EBITDA
3,461
677
23
(1,865)
2,792
545
64
3,685
3,815
(1,135)
34
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
35
36
Independent auditor’s report
To the Shareholders of
Velan Inc.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Velan Inc. and its subsidiaries (together, the Company) as at February 28, 2019
and 2018, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board
(IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at February 28, 2019 and 2018;
the consolidated statements of income (loss) for the years then ended;
the consolidated statements of comprehensive income (loss) for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to consolidated financial statements, which include a summary of significant accounting
policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
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: +1 514 876 1502, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
37
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information,
other than the consolidated financial statements and our auditor’s report thereon, included in the annual
report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information, and we do not
and will not express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or whether
it appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of
this auditor’s report, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard. When we read the information, other
than the consolidated financial statements and our auditor’s report thereon, included in the annual report,
if we conclude that there is a material misstatement therein, we are required to communicate the matter to
those charged with governance.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
38
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
39
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and that we communicated to them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is
Marc-Stéphane Pennee.
Montréal, Quebec
May 16, 2019
1 CPA auditor, CA, public accountancy permit No. A123642
40
Velan Inc.
Velan Inc.
Consolidated Statements of Financial Position
Consolidated Statements of Financial Position
As at February 28, 2019 and 2018
As at February 28, 2019 and 2018
(in thousands of U.S. dollars)
(in thousands of U.S. dollars)
Assets
Assets
Current assets
Current assets
Cash and cash equivalents
Cash and cash equivalents
Short-term investments
Short-term investments
Accounts receivable (note 25)
Accounts receivable (note 25)
Income taxes recoverable
Income taxes recoverable
Inventories (not e 5)
Inventories (not e 5)
Deposits and prepaid expenses
Deposits and prepaid expenses
Derivative assets
Derivative assets
Non-current assets (note 4)
Non-current assets (note 4)
Property, plant and equipment (notes 7 and 19)
Property, plant and equipment (notes 7 and 19)
Intangible assets and goodwill (notes 4 and 8)
Intangible assets and goodwill (notes 4 and 8)
Deferred income taxes (note 20)
Deferred income taxes (note 20)
Other assets
Other assets
Total assets
Total assets
Liabilities
Liabilities
Current liabilities
Current liabilities
Bank indebtedness (note 10)
Bank indebtedness (note 10)
Short-term bank loans
Short-term bank loans
Accounts payable and accrued liabilities (note 9)
Accounts payable and accrued liabilities (note 9)
Income taxes payable
Income taxes payable
Dividend payable
Dividend payable
Customer deposits
Customer deposits
Provisions (note 11)
Provisions (note 11)
Accrual for performance guarantees (note 11)
Accrual for performance guarantees (note 11)
Derivative liabilities
Derivative liabilities
Current portion of long-term debt (note 12)
Current portion of long-term debt (note 12)
Non-current liabilities
Non-current liabilities
Long-term debt (note 12)
Long-term debt (note 12)
Income taxes payable
Income taxes payable
Deferred income taxes (note 20)
Deferred income taxes (note 20)
Other liabilities
Other liabilities
Total liabilities
Total liabilities
Equity
Equity
Equity attributable to Subordinate and Multiple Voting shareholders
Equity attributable to Subordinate and Multiple Voting shareholders
Share capital (note 13)
Share capital (note 13)
Contributed surplus
Contributed surplus
Retained earnings
Retained earnings
Accumulated other comprehensive loss
Accumulated other comprehensive loss
Non-controlling interests (note 6)
Non-controlling interests (note 6)
Total equity
Total equity
Total liabilities and equity
Total liabilities and equity
Commitments and contingencies (note 22)
Commitments and contingencies (note 22)
February 28,
February 28,
2019
2019
$
$
February 28,
February 28,
2018
2018
$
$
70,673
70,673
658
658
137,520
137,520
16,863
16,863
165,583
165,583
4,612
4,612
189
189
396,098
396,098
83,537
83,537
18,146
18,146
25,947
25,947
629
629
128,259
128,259
524,357
524,357
29,807
29,807
2,172
2,172
74,910
74,910
495
495
497
497
40,240
40,240
8,494
8,494
23,014
23,014
83
83
8,609
8,609
188,321
188,321
13,242
13,242
1,742
1,742
3,738
3,738
8,481
8,481
27,203
27,203
85,391
85,391
647
647
137,382
137,382
8,012
8,012
170,790
170,790
4,222
4,222
604
604
407,048
407,048
89,864
89,864
20,210
20,210
22,034
22,034
1,037
1,037
133,145
133,145
540,193
540,193
20,848
20,848
1,074
1,074
63,441
63,441
2,186
2,186
1,678
1,678
48,963
48,963
10,798
10,798
32,655
32,655
1,615
1,615
8,151
8,151
191,409
191,409
13,978
13,978
2,078
2,078
2,889
2,889
8,222
8,222
27,167
27,167
215,524
215,524
218,576
218,576
73,090
73,090
6,074
6,074
254,606
254,606
(28,990)
(28,990)
304,780
304,780
4,053
4,053
308,833
308,833
524,357
524,357
73,090
73,090
6,057
6,057
256,668
256,668
(19,790)
(19,790)
316,025
316,025
5,592
5,592
321,617
321,617
540,193
540,193
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
Approved by the Board of Directors
T.C. Velan, Director
T.C. Velan, Director
Yves Leduc, Director
Yves Leduc, Director
41
Velan Inc.
Consolidated Statements of Income (Loss)
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 24)
Cost of sales (notes 5, 14 and 15)
Gross profit
Administration costs (note 16)
Other expense (income)
Operating loss
Finance income
Finance costs
Finance costs – net
Loss before income taxes
Income taxes (note 20)
Net loss for the year
Net loss attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
Loss per share (note 21)
Basic
Diluted
2019
$
2018
$
366,865
337,963
281,270
267,102
85,595
93,336
(741)
(7,000)
865
(1,560)
(695)
(7,695)
(2,301)
(5,394)
(4,882)
(512)
(5,394)
70,861
87,713
1,463
(18,315)
1,102
(1,299)
(197)
(18,512)
361
(18,873)
(17,811)
(1,062)
(18,873)
(0.23)
(0.23)
(0.82)
(0.82)
Dividends declared per Subordinate and Multiple Voting Share
0.09 (CA$0.12)
0.31 (CA$0.40)
The accompanying notes are an integral part of these consolidated financial statements.
42
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars)
Comprehensive loss
Net 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 loss
Comprehensive loss attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
2019
$
2018
$
(5,394)
(18,873)
(9,300)
15,938
(14,694)
(2,935)
(14,082)
(612)
(14,694)
(2,051)
(884)
(2,935)
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.
43
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars)
Equity attributable to the Subordinate and M ultiple Voting
shareholders
Share
capital
Contributed
surplus
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
Non-
controlling
interest
Total
equity
Balance - February 28, 2017
73,584
6,017
(35,550)
281,343
325,394
6,517
331,911
Net loss for the period
Other comprehensive income
-
-
-
-
-
(17,811)
(17,811)
(1,062)
(18,873)
15,760
-
15,760
178
15,938
73,584
6,017
(19,790)
263,532
323,343
5,633
328,976
Effect of share-based compensation (note 13 (d))
Share repurchase (note 13 (c))
Dividends
M ultiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
-
(494)
-
-
-
Balance - February 28, 2018
73,090
Adjustment related to the transition to IFRS 15 (note 3)
-
Adjusted balance - March 1, 2018
73,090
Net loss for the period
Other comprehensive loss
-
-
40
-
-
-
-
6,057
-
6,057
-
-
-
-
-
-
-
-
40
(136)
(630)
(4,824)
(4,824)
(1,904)
(1,904)
-
-
-
-
40
(630)
(4,824)
(1,904)
-
-
(41)
(41)
(19,790)
256,668
316,025
5,592
321,617
-
4,741
4,741
-
4,741
(19,790)
261,409
320,766
5,592
326,358
-
(4,882)
(4,882)
(9,200)
-
(9,200)
(512)
(100)
(5,394)
(9,300)
73,090
6,057
(28,990)
256,527
306,684
4,980
311,664
Effect of share-based compensation (note 13 (d))
Dividends
M ultiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
-
-
-
-
17
-
-
-
-
-
-
-
-
17
(1,427)
(1,427)
(494)
(494)
-
-
-
-
-
(927)
17
(1,427)
(494)
(927)
Balance - February 28, 2019
73,090
6,074
(28,990)
254,606
304,780
4,053
308,833
The accompanying notes are an integral part of these consolidated financial statements.
44
Velan Inc.
Consolidated Statements of Cash Flows
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Cash flows from
Operating activities
Net loss for the period
Adjustments to reconcile net income to cash provided by operating activities (note 27)
Changes in non-cash working capital items (note 28)
Cash used by operating activities
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 used by investing activities
Financing activities
Dividends paid to Subordinate and M ultiple Voting shareholders
Dividends paid to non-controlling interest
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 used by financing activities
Effect of exchange rate differences on cash
Net change in cash during the period
Net cash – Beginning of the period
Net cash – End of the period
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.
45
2019
$
2018
$
(5,394)
7,118
(11,311)
(9,587)
(18,873)
6,994
9,986
(1,893)
(11)
(7,510)
(1,141)
144
403
(8,115)
(3,102)
(927)
-
1,098
3,989
(3,586)
(2,528)
327
(6,202)
(437)
141
(507)
(6,678)
(6,681)
(41)
(630)
(576)
-
(3,206)
(11,134)
(3,447)
8,021
(23,677)
(11,684)
64,543
76,227
40,866
64,543
70,673
(29,807)
85,391
(20,848)
40,866
64,543
26
10,459
532
3,752
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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 16, 2019.
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.
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
For fiscal year ended February 28, 2018 (Prior to the adoption of IFRS 9)
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.
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
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.
For fiscal year ended February 28, 2019
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,
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). All financial instruments are initially recognized at fair value and subsequently measured
at amortized cost, fair value through other comprehensive income or fair value through profit and loss depending on
the Company’s business model for managing the financial assets and the contractual cash flow characteristics of the
financial asset. Except in very limited circumstances, the classification is not changed subsequent to initial
recognition.
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. Financial liabilities are
derecognized when the obligation under the liability is discharged, cancelled or expires.
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Financial instruments classified at fair value through profit and loss
Derivative financial instruments are classified at fair value through profit and loss 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.
Financial instruments classified at amortized cost
The Company’s cash and cash equivalents, short-term investments and accounts receivable, bank indebtedness, short-
term bank loans, accounts payable and accrued liabilities, customer deposits, dividend payable and long-term debt,
including interest payable are financial instruments 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.
The Company assesses the expected credit losses associated with its financial assets measured at amortized costs at
the end of every fiscal year. The impairment methodology applied depends on whether there has been a significant
increase in credit risk.
The Company applies the simplified approach permitted by IFRS 9 for trade receivables which requires the expected
lifetime losses to be recorded at initial recognition.
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 measured at fair value with changes in fair value recognized in profit and loss or designated at fair
value through profit or loss. In other words, if the derivative is embedded in a financial instrument classified at fair
value through profit and loss, it is not separated.
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 any substantial party to that contract, the currency in which the price of the related good or service that is
acquired or delivered is routinely denominated in commercial transactions around the world, the currency that is
commonly used in contracts to purchase or sell non-financial items in the economic environment in which the
transactions takes place, the embedded derivative is considered to be closely related to the host instrument 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.
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
For fiscal year ended February 28, 2018 (Prior to the adoption of IFRS 15)
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the
ordinary course of the Company’s activities. Revenue is shown net of sales and value-added taxes, returns, rebates
and discounts.
Revenue is recognized when the amount of revenue and associated costs can be reliably measured, it is probable that
future economic benefits will flow to the Company and when specific criteria have been met for each of the
Company’s activities as described below.
Sales of goods
Sales of goods are recognized when the Company has delivered products to the customer and there is no unfulfilled
obligation that could affect the customer’s acceptance of the products. Delivery of the products does not occur until
the products have been shipped to a specified location in accordance with the agreed-upon shipping terms, the risk of
obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in
accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective evidence
that all criteria for acceptance have been satisfied. Customers have a right to return faulty products, and some
products are sold with volume discounts. Sales are recorded based on the price specified in the sales contract, net of
the estimated volume discounts and returns at the time of sale. Accumulated experience is used to estimate and
provide for the discounts and returns. The volume discounts are assessed based on anticipated annual purchases.
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.
For fiscal year ended February 28, 2019
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 variable compensation such as sales and value-
added taxes, returns, rebates, discounts and accruals for performance guarantees.
Revenue is recognized when the 5-step approach dictated by IFRS 15 has been completed. The 5-steps leading to
revenue recognition are to identify the contract(s) with a customer, identify the performance obligations in the
contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract,
and recognize revenue when (or as) the entity satisfies a performance obligation.
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
control, the risk of obsolescence and loss have been transferred to the customer, and either the customer has accepted
the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has
objective evidence that all criteria for acceptance have been satisfied. Customers have a right to return faulty
products, and some products are sold with volume discounts. Sales are recorded based on the price specified in the
sales contract, net of the estimated volume discounts and returns at the time of sale. Accumulated experience is used
to estimate and provide for the discounts, returns and accruals for performance guarantees. 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 2.7% on an annual basis. Interest is paid on bank indebtedness at rates ranging from 1.5% to 6.6%.
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.
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Property, plant and equipment
Property, plant and equipment are valued at acquisition or manufacturing costs less any related government
assistance, accumulated depreciation and any accumulated impairment losses. Acquisition costs include any
expenditure that is directly related to the acquisition of the item. Manufacturing costs include direct material and
labour costs plus applicable manufacturing overheads. Borrowing costs directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial period of time to be ready for their intended use
are added to the cost of those assets, until such time as those assets are ready for their intended use.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only
when it is probable that future economic benefits associated with the item will flow to the Company and the cost of
the item can be reliably measured. The carrying amount of 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:
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Patents, products and designs
Customer lists
Non-compete agreements
Computer software
Government assistance
Method
Straight-line
Straight-line
Straight-line
Straight-line
Term
5 to 15 years
10 years
5 years
1 to 3 years
The Company receives assistance in the form of investment tax credits (“ITCs”). ITCs are accounted for using the
cost reduction method. Under this method, assistance relating to eligible expenditures is deducted from the cost of the
related assets or related expenses in the period in which the expenditures are incurred, provided there is reasonable
assurance of realization.
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.
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Income taxes
The provision for income taxes for the year comprises current and deferred taxes. 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
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.
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 are provisions that arise for possible late delivery and other contractual non-
compliance penalties or liquidated damages. It is recognized when the Company has a present legal or constructive
obligation as a result of a past event, and the amount has been reliably estimated. Accrual for performance guarantees
is not recognized for costs that need to be incurred to operate in the future or expected future operating losses.
Accrual for performance guarantees is measured at the present value of the expenditures required to settle the
obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the obligation.
Leases
Leases are classified as either finance or operating leases. Leases that transfer substantially all of the risks and
rewards of ownership of the asset to the Company are accounted for as finance leases. Finance leases are capitalized
at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the
minimum lease payments. Assets acquired under a finance lease are depreciated over the shorter of the period of
expected use on the same basis as other similar assets and the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Rental payments under operating leases are expensed in the consolidated statement of income (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
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
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.
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.
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Accrual for performance guarantees
Accrual for performance guarantees consist of possible late delivery and other contractual non-compliance penalties
or liquidated damages. The Company estimates the specific contractual terms, historical trends and forward-looking
performance risks. The Company estimates its exposure under these obligations based on an analysis of all identified
or expected claims. Any change in the assumptions used could impact the value of the accrual for performance
guarantees on the consolidated statement of financial position with a corresponding impact made to 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.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
3 New accounting standards and amendments
New accounting standards and amendments adopted in the year
(i)
In July 2014, the IASB issued IFRS 9, Financial Instruments. The IASB had 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 represented the final version of the Standard, replacing
earlier versions of IFRS 9 and substantially completing the IASB’s project to replace IAS 39, Financial
Instruments: Recognition and Measurement.
This standard replaced the multiple classification and measurement models for financial assets and liabilities
with a single model that had only three classification categories: amortized cost and fair value through other
comprehensive income and fair value through profit or loss. The basis of classification depended on the entity’s
business model and the contractual cash flow characteristics of the financial asset or liability. The standard
introduced a new, expected loss impairment model that requires more timely recognition of expected credit
losses. Specifically, the new Standard required entities to account for expected credit losses from when financial
instruments are first recognised and it lowered the threshold for recognition of full lifetime expected losses. The
new standard also introduced a substantially-reformed model for hedge accounting with enhanced disclosures
about risk management activity and aligned hedge accounting more closely with risk management.
The new standard was adopted prospectively effective March 1, 2018 and resulted in no material adjustments.
(ii)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014 and specified how and when
revenue should be recognized as well as requiring the provision of more informative and relevant disclosures.
Its core principle is that an entity recognizes 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 replaced 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 was adopted effective March 1, 2018 and the Company elected the modified retrospective
transition alternative whereby transitional adjustments were recorded as an opening adjustment to retained
earnings on the effective date, without restatement of comparative figures. The Company determined that an
adjustment to retained earnings was required as at March 1, 2018 as a result of the adoption of this standard.
Accruals for performance guarantees are considered a form of variable consideration under IFRS 15. Such
accruals may arise from possible late delivery and other contractual non-compliance penalties or liquidated
damages. Under IFRS 15, the Company modified the measurement of its accrual for performance guarantees to
be its best estimate of the eventual outcome of the performance guarantees. This best estimate considers the
specific contractual terms and forward-looking performance risks. Previously, the Company measured its
accrual for performance guarantees by reference to the maximum expected exposure from the underlying
contracts.
Moreover, under the new standard, late delivery penalties, which were previously recorded as an expense in cost
of sales, are recorded as a reduction of sales.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The impacts of this adjustment on the current results can be found in the summarized impacts of IFRS 15 in the
financial statements section below.
The new standard did not have a significant impact on the timing of the Company’s revenues from the sale of
goods as most of such revenues 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 is 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 have not had a material impact on the current and prior year periods’
consolidated revenues.
Summarized impacts of IFRS 15 in the financial statements
Financial statement line items not mentioned below have not been impacted by the Company's transition to IFRS 15.
Consolidated Statements of Financial Position
As at
Assets
Non-current assets
Deferred income taxes
Liabilities
Current liabilities
Accrual for performance guarantees
Equity
Retained earnings
February 28, 2018
IAS 18 carrying
amounts
$
IFRS 15
Adjustment
March 1, 2018
IFRS 15 carrying
amounts
$
22,034
2,490
24,524
32,655
(7,231)
25,424
256,668
4,741
261,409
(iii)
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 was adopted effective March 1, 2018 and resulted in no material adjustments.
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
New accounting standards and amendments issued but not yet adopted
(i)
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 for lessees.
It 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. The Company has elected to use the modified retrospective
approach and has determined that it will not early adopt it. The Company will elect to apply the standard to
contract that were previously identified as leases under IAS 17 and IFRIC 4. The Company will not apply the
standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4.
The Company will use the exemptions proposed by the standard on lease contracts for which the lease terms
ends within 12 months as the date of initial application, and lease contracts for which the underlying asset is of
low value. The Company elected not to apply the standard to new leases with a term less than 12 months. The
Company’s operating leases, as disclosed in the commitment note (note 22 (c)) of the Company’s annual
consolidated financial statements for the year ended February 28, 2019, are within the scope of IFRS 16 with
the exception of those meeting the aforementioned exemption requirements.
In situations where the Company is a lessee, the result will be adding a right-of-use asset and a liability for the
present value of the future lease payments to the balance sheet for most of its contracts that were considered
operating leases under IAS 17. The Company will depreciate its right-of-use asset on the lesser of the lease
term or the useful life of the asset. The Company is currently finalizing its assessment of the impact of this new
standard.
(ii)
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. As the Company is currently assessing the impact of this new standard, it has determined that it will
not early adopt it.
4 Non-current assets and goodwill impairment analysis
Non-current assets impairment test at February 28, 2019
As a result of the market capitalization of the Company being lower than the book value of its equity, indicating
potential impairment of non-current assets, the Company performed an impairment test as at February 28, 2019. As
such, the Company tested for impairment the carrying amount of such assets allocated to various CGU’s. Based on
this test, the Company determined that the recoverable amount of such assets exceeded the carrying amount of
$171,349 by $77,025. Accordingly, no impairment loss was recorded for these CGU’s at February 28, 2019.
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The recoverable amount was determined based on the higher of value-in-use and fair value less costs of disposal on a
CGU by CGU basis, using a discounted cash flow model. For CGUs where recoverable amounts were determined
based on value-in-use, 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 tested CGUs ranging from -4.9% to 20.5% in 2020, 9.6% to 20.5% in 2021, 9.7% to 18.8% in 2022, and
13.2% to 20.1% in 2023.
Expected working capital cash absorption ratio for the CGUs of 35% of annual incremental sales increases.
Expected annual capital expenditure needs (excluding proceeds from sale of assets) for the tested CGUs for a
total of $16,272 in 2020, $9,056 in 2021, $5,908 in 2022 and $6,312 for 2023.
-
-
- The discounted cash flow model was established using a discount rate ranging from 13.6% to 15.4% and a
terminal growth rate ranging from 2% to 4.5%.
The impairment projections included the estimated impact of a recently announced strategy to consolidate its
manufacturing operations. Given that management has a detailed plan in place and has begun executing this plan, the
inclusion of the impact of this strategy is permitted.
For CGUs where recoverable amounts were determined based on fair value less cost of disposal, the significant key
assumptions listed above were the same except for:
- Expected working capital cash absorption ratio for the CGUs of 25% of annual incremental sales increases.
- The discounted cash flow model was established using a discount rate ranging from 12.9% to 13.6% and a
terminal growth rate of 2%.
- Synergies of 40% of administrative costs were added back to EBITDA as they represent redundant costs that a
market participant would not incur.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the non-current assets
associated with the CGU’s 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
Increase in synergies
Increase
(Decrease) in
recoverable
amount
$
21,878
(18,755)
4,797
1,420
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 non-
current assets associated with the various CGU’s:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease in synergies
Goodwill impairment test at February 28, 2019
Increase
(Decrease) in
recoverable
amount
$
(21,878)
22,426
(3,834)
(1,419)
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 $26,446 by $37,761. Accordingly, no goodwill impairment loss was recorded for this CGU at February
28, 2019.
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 EBITDA as a percentage of sales for the CGU of 20.5% in 2020, 18.5% in 2021, and 18.8% in 2022
and 16.3% in 2023.
Expected working capital cash absorption ratio for the CGU of 35% of annual incremental sales increases.
Expected annual capital expenditure needs for the CGU of 2% of annual sales.
The discounted cash flow model was established using a discount rate of 13.6% 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.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 $36,361 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.
5
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2019
$
As at
February 28,
2018
$
35,858
96,863
32,862
32,381
101,629
36,780
165,583
170,790
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $2,518 (2018 – $828), including reversals of $7,111 (2018 – $5,476).
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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, 2019. 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
2019
2018
% of ownership
interest held by
the non-
controlling
interests
2018
2019
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 6% 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, 2019 was $3,972 (2018 – $5,424).
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.
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statement of financial position
Current assets
Current liabilities
Current net assets
Non-current assets
Non-current liabilities
Non-current net assets
Net assets
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
As at
February 28,
2019
$
As at
February 28,
2018
$
As at
February 28,
2019
$
As at
February 28,
2018
$
5,754
5,716
38
12,109
7,461
4,648
6,521
3,344
3,177
13,452
8,948
4,504
5,323
1,712
3,611
1,878
47
1,831
4,903
1,355
3,548
1,873
79
1,794
4,686
7,681
5,442
5,342
Accumulated non-controlling interest
3,397
4,932
655
660
Summarized statement of comprehensive income (loss)
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
2019
$
2018
$
2019
$
2018
$
Sales
14,251
12,298
7,403
6,192
Net income (loss) for the year
Other comprehensive income (loss)
(941)
(2,460)
(201)
357
Total comprehensive income (loss) for the year
(1,142)
(2,103)
Net income (loss) allocated to non-controlling interest
(508)
(1,090)
Dividends paid to non-controlling interest
927
-
101
-
101
(4)
-
44
-
44
28
41
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statement of cash flows
Juwon Special Steel Co. Ltd.
Velan Valvac
Manufacturing Co. Ltd.
Cash flows from operating activities
2019
$
2018
$
(1,303)
(1,188)
2019
$
(26)
Cash flows from investing activities
505
(662)
(101)
Cash flows from financing activities
(1,810)
(4)
-
2018
$
(102)
(14)
(404)
Net decrease in cash and cash equivalents
(2,608)
(1,854)
(127)
(520)
7 Property, plant and equipment
At February 29, 2017
Cost
Accumulated depreciation
Year ended February 28, 2018
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2018
Cost
Accumulated depreciation
Year ended February 28, 2019
Beginning balance
Additions
Disposals
Depreciation
Exchange differences
At February 28, 2019
Cost
Accumulated depreciation
Land
$
20,791
-
20,791
20,791
44
-
-
780
21,615
21,615
-
21,615
21,615
-
-
-
(656)
20,959
20,959
-
20,959
Buildings
$
54,389
(26,130)
28,259
28,259
1,396
-
(1,830)
763
28,588
57,775
(29,187)
28,588
28,588
1,083
-
(1,762)
(543)
27,366
57,178
(29,812)
27,366
Machinery &
equipment
Furniture &
fixtures
Data processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
149,077
(110,943)
38,134
38,134
3,632
(48)
(7,527)
1,337
35,528
155,632
(120,104)
35,528
35,528
5,020
(134)
(8,293)
(771)
31,350
152,533
(121,183)
31,350
8,079
(6,383)
1,696
1,696
258
(3)
(555)
132
1,528
8,705
(7,177)
1,528
1,528
307
-
(481)
(62)
1,292
8,503
(7,211)
1,292
7,077
(6,282)
795
795
406
-
(524)
15
692
6,782
(6,090)
692
692
627
(1)
(399)
(12)
907
7,249
(6,342)
907
2,948
(2,480)
468
468
399
(3)
(303)
8
569
3,081
(2,512)
569
569
138
-
(230)
(13)
464
3,093
(2,629)
464
3,318
(1,926)
1,392
1,392
67
-
(296)
181
1,344
3,848
(2,504)
1,344
1,344
335
-
(401)
(79)
1,199
2,769
(1,570)
1,199
Total
$
245,679
(154,144)
91,535
91,535
6,202
(54)
(11,035)
3,216
89,864
257,438
(167,574)
89,864
89,864
7,510
(135)
(11,566)
(2,136)
83,537
252,284
(168,747)
83,537
Depreciation expense of $11,566 (2018 – $11,035) is included in the consolidated statement of income (loss):
$10,502 (2018 – $9,950) in ‘cost of sales’ and $1,064 (2018 – $1,085) in ‘administration costs’.
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
At February 29, 2017
Cost
Accumulated amortization
Year ended February 28, 2018
Beginning balance
Additions
Amortization
Exchange differences
At February 28, 2018
Cost
Accumulated amortization
Year ended February 28, 2019
Beginning balance
Additions
Amortization
Exchange differences
At February 28, 2019
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Other
Total
8,301
-
8,301
8,301
-
-
1,267
9,568
9,568
-
9,568
9,568
-
-
(625)
8,943
8,943
-
8,943
7,574
(7,111)
463
12,872
(5,010)
7,862
463
67
(139)
55
446
7,862
275
(1,082)
954
8,009
8,063
(7,617)
446
14,845
(6,836)
8,009
446
339
(225)
(26)
534
8,009
882
(1,138)
(418)
7,335
8,139
(7,605)
534
14,889
(7,554)
7,335
5,723
(3,341)
2,382
2,382
-
(621)
324
2,085
6,596
(4,511)
2,085
2,085
-
(630)
(123)
1,332
6,165
(4,833)
1,332
649
(634)
15
35,119
(16,096)
19,023
15
80
-
7
102
832
(730)
102
102
(80)
(16)
(4)
2
699
(697)
2
19,023
422
(1,842)
2,607
20,210
39,904
(19,694)
20,210
20,210
1,141
(2,009)
(1,196)
18,146
38,835
(20,689)
18,146
Amortization expense of $2,009 (2018 – $1,842) is included in the consolidated statement of income (loss): $1,406
(2018 – $1,397) in ‘cost of sales’ and $603 (2018 – $445) in ‘administration costs’.
As at February 28, 2019, the Company capitalized $882 (2018 – $275) of development costs, net of research and
development tax credits of $234 (2018 – $142), as patents, products and designs.
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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,
2019
$
As at
February 28,
2018
$
31,016
40,039
3,855
74,910
23,635
35,597
4,209
63,441
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities available
as at February 28, 2019:
Unsecured
Credit facilities available
Borrowing rates
$64,546 (CA$85,000) (2018 – $66,360 (CA$85,000))
(note 25)
Prime to prime + 0.75%
(2018 – 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, 2019, an amount of $13,620 (2018 – $7,782) was drawn against these unsecured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $12,991 (2018 –
$17,445) 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, 2019, $6,162 (2018 –
$6,794) was drawn against this facility.
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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, 2019:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$62,779 (€48,162; KW4,485,600; INR270,000)
(2018 – $56,497 (€40,057; KW3,712,300;
INR270,000)) (note 25)
Borrowing rates
0.20% to 9.75%
(2018 – 0.20% to 8.84%)
Foreign structured entities
$3,737 (KW4,203,600)
(2018 – $3,938 (KW4,262,000)) (note 25)
1.50% to 6.55%
(2018 – 1.50% to 4.29%)
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, 2019 and February 28, 2018. 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
$6,965 (2018 – $2,530).
As at February 28, 2019, an amount of $16,187 (2018 – $13,066) was drawn against these secured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $5,828 (2018 – $5,548) was drawn
against these secured credit facilities in the form of letters of credit and letters of guarantee.
11 Accruals for performance guarantees and provisions
a) Accrual for performance guarantees
Balance – Beginning of year
Opening adjustment – IFRS 15 (note 3)
Adjusted balance – Beginning of the year
Additional provisions
Used during the year
Reversed during the year
Exchange differences
As at
February 28,
2019
$
As at
February 28,
2018
$
32,655
(7,231)
25,424
6,320
(3,370)
(4,030)
(1,330)
27,440
-
27,440
7,842
(2,678)
(3,634)
3,685
Balance – End of year
23,014
32,655
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The company’s accrual for performance guarantees consist of possible late delivery and other contractual non-
compliance penalties or liquidated damages. Management’s best estimates considers the specific contractual terms
and forward-looking performance risks. The accrual is recognized when the Company has a present legal or
constructive obligation as a result of a past event, and the amount to be disbursed can be reliably estimated.
b) Warranty provision
Balance – Beginning of year
Additional provisions
Used during the year
Reversed during the year
Exchange differences
Balance – End of year
As at
February 28,
2019
$
As at
February 28,
2018
$
10,798
2,150
(1,702)
(2,118)
(634)
10,600
2,328
(2,208)
(1,355)
1,433
8,494
10,798
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.
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
12 Long-term debt
French subsidiaries
Unsecured bank loan (€2,752; February 28, 2018 – nil) (note 12(a))
Unsecured bank loan (€1,804; February 28, 2018 – €2,402) (note 12(b))
Unsecured bank loan (€417; February 28, 2018 – nil) (note 12(c))
Unsecured bank loan (€127; February 28, 2018 – €228) (note 12(d))
Italian subsidiary
Unsecured bank loan (€256; February 28, 2018 – €359) (note 12(e))
Unsecured bank loan (€280; February 28, 2018– €355) (note 12(f))
Unsecured state bank loan (€67; February 28, 2018 – €168) (note 12(g))
Unsecured bank loan (€51; February 28, 2018 – €153) (note 12(h))
Unsecured bank loan (nil; February 28, 2018 – €182) (note 12(i))
Unsecured bank loan (€133; February 28, 2018 – €400) (note 12(j))
Unsecured bank loan (nil; February 28, 2018 – €170) (note 12(k))
Unsecured bank loan (€188; February 28, 2018 – €563) (note 12(l))
Unsecured bank loan (nil; February 28, 2018 – €198) (note 12(m))
Unsecured state bank loan (€1,359; February 28, 2018 – €1,610) (note 12(n))
Korean structured entity
Secured bank loan (KW3,600; February 28, 2018 – KW8,400) (note 12(o))
Secured bank loan (KW8,000,000; February 28, 2018 – KW8,000,000)
(note 12(p))
Other (note 12(q))
Less: Current portion
As at
February 28,
2019
$
As at
February 28,
2018
$
3,142
2,059
477
145
292
319
77
59
-
152
-
214
-
1552
3
7,112
6,248
21,851
8,609
-
2,934
-
278
438
434
206
187
222
489
207
687
241
1,967
8
7,392
6,439
22,129
8,151
13,242
13,978
a) The unsecured bank loan of $3,142 (€2,752) bears interest at 0.42% and is repayable in monthly instalments of
$58, expiring in 2023.
b) The unsecured bank loan of $2,059 (€1,804) bears interest at 0.20% and is repayable in monthly instalments of
$57, expiring in 2022.
c) The unsecured bank loan of $477 (€417) bears interest at 0.53% and is repayable in monthly instalments of $10,
expiring in 2023.
d) The unsecured bank loan of $145 (€127) bears interest at 0.89% and is repayable in monthly instalments of $9,
expiring in 2020.
e) The unsecured bank loan of $292 (€256) bears interest at 2.91% and is repayable in monthly instalments,
expiring in 2021.
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
f) The unsecured bank loan of $319 (€280) bears interest at 4.90% and is repayable in monthly instalments,
expiring in 2021.
g) The unsecured state bank loan of $77 (€67) is non-interest bearing and is repayable in variable semi-annual
instalments, expiring in 2020.
h) The unsecured bank loan of $59 (€51) bears interest at the 3-month Euribor rate plus 1.7% and is repayable in
quarterly instalments of $27, expiring in 2019.
i) The unsecured bank loan of nil bears interest at the 6-month Euribor rate plus 1.25% and is repayable in
quarterly instalments of $95, expired in 2018.
j) The unsecured bank loan of $152 (€133) bears interest at the 3-month Euribor rate plus 1.8% and is repayable in
quarterly instalments of $70, expiring in 2019.
k) The unsecured bank loan of nil bears interest at the 3-month Euribor rate plus 1.6% and is repayable in quarterly
instalments of $90, expired in 2018.
l) The unsecured bank loan of $214 (€188) bears interest the 3-month Euribor rate plus 1.6% and is repayable in
quarterly instalments of $98, expiring in 2019.
m) The unsecured bank loan of nil bears interest at 1.37% and is repayable in monthly instalments of $28, expired
in 2018.
n) The unsecured state bank loan of $1,552 (€1,359) bears interest at 3% and is repayable in variable semi-annual
instalments, expiring in 2024.
o) The secured bank loan of $3 (KW3,600) 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.
p) The secured bank loan of $7,112 (KW8,000,000) bears interest at 2.21% and is repayable in quarterly
instalments of $222, expiring in 2025.
q)
Included in Other is an amount of $4,990 (€4,371) (February 28, 2018 – $5,083 (€4,162)) 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).
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
r) The following is a schedule of future debt payments:
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
February 29, 2024
Subsequent years
$
8,609
3,032
2,908
2,082
1,700
3,520
21,851
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted to
$11,534 (2018 – $12,411).
s) 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 (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 28,
2019
$
As at
February 28,
2018
$
65,964
7,126
73,090
65,964
7,126
73,090
c) Pursuant to its Normal Course Issuer Bid, the Company was 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 ended October 30, 2018.
During the year ended February 28, 2018, 45,300 Subordinate Voting Shares were purchased for a cash
consideration of $630 and cancelled. The amount by which the repurchase amount was above the stated capital
of the shares had been debited to retained earnings. During the year ended February 28, 2019, there were no
Subordinate Voting Shares repurchased for cancellation.
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.
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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 $17 (2018 – $40) 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, 2017
Outstanding – February 28, 2018
Exercisable – February 28, 2018
Outstanding – February 28, 2018
Outstanding – February 28, 2019
Exercisable – February 28, 2019
140,000
140,000
95,000
140,000
140,000
130,000
$14.50 (CA$19.26)
$15.04 (CA$19.26)
$15.37 (CA$19.69)
$15.04 (CA$19.26)
$14.63 (CA$19.26)
$14.86 (CA$19.57)
Weighted
average
contractual
life in
months
38.4
26.4
26.4
14.4
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
achievement of certain performance objectives over such cycle, as determined by the Company’s CGHR
Committee.
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
As at February 28, 2019, the Company had a total of 24,611 (2018 – 25,250) PSUs outstanding, representing a
total liability of $71 (2018 - $82) which is included in accounts payable and accrued liabilities. A compensation
recovery of $9 (2018 – cost of $82) was recorded in the consolidated statement of income (loss) and debited
(credited in 2018) to accounts payable and accrued liabilities. No payments have been made in relation to PSUs
since the inception of the plan. As at February 28, 2019, 981 PSUs were forfeited, and no PSUs have vested.
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, 2019, the Company had a total of 28,768 (2018 – 12,464) DSUs outstanding, representing a
total liability of $98 (2018 - $78) which is included in accounts payable and accrued liabilities. A
compensation cost of $29 (2018 – $78) was recorded in the consolidated statement of income (loss) and credited
to accounts payable and accrued liabilities. A payment of $9 has been made in relation to the DSUs in 2019
(2018 – nil) and 11,178 (2018 – 4,918) DSUs have vested at the end of the fiscal year. As at February 28, 2019,
327 DSU’s were forfeited.
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 expense (income)
2019
$
924
(866)
(185)
2018
$
(1,212)
(1,215)
(1,823)
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
15 Cost of sales
Change in inventories of finished goods and work in progress
Raw materials and consumables used
Employee expenses, excluding scientific research investment tax credits
(note 17)
Depreciation and amortization (notes 7, 8 and 19)
Movement in inventory provision – net (note 5)
Foreign exchange loss (note 14)
Other production overhead costs
2019
$
3,531
149,881
77,861
11,908
2,518
866
34,705
2018
$
10,868
133,498
72,796
11,347
828
1,215
36,550
281,270
267,102
In accordance with the current fiscal year’s presentation, the Company has also elected to adjust its comparative
figures to reflect a more accurate allocation of cost of sales and administration 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
2019
$
46,532
(2,237)
5,850
5,122
15,679
841
1,667
19,882
93,336
2018
$
45,033
(2,978)
7,619
4,344
13,509
(354)
1,530
19,010
87,713
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
2019
$
88,960
28,740
(2,237)
37
6,656
2018
$
84,259
27,732
(2,978)
200
5,638
122,156
114,851
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
2019
$
9,304
(2,237)
2018
$
9,608
(2,978)
7,067
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
2019
$
11,566
2,009
13,575
2018
$
11,035
1,842
12,877
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
Income tax expense (recovery)
2019
$
8,270
(4,982)
3,288
(9,078)
3,489
2018
$
9,023
(94)
8,929
(8,458)
(110)
(5,589)
(8,568)
(2,301)
361
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:
2019
$
2018
$
Income tax at statutory rate of 26.68% (2018 – 26.78%)
(2,053)
(4,958)
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
Prior period adjustments and assessments
Benefit attributable to a financing structure
Other
Income tax expense
1,640
-
327
724
(525)
(1,494)
(891)
(29)
(2,301)
1,396
4,259
(303)
1,151
-
(204)
(917)
(63)
361
* 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 was due to the new mandatory repatriation tax and $2,001 was due to the effect of the tax rate
reduction on its net deferred income tax assets.
78
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
2019
$
20,878
5,069
(1,780)
(1,958)
2018
$
17,479
4,555
(2,272)
(617)
Net deferred income tax asset
22,209
19,145
The movement of the net deferred income tax asset account is as follows:
Balance – Beginning of year
Recovery to consolidated statement of income
Opening retained earnings adjustment due to adoption of IFRS 15 (note 3)
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
2019
$
19,145
5,589
(2,490)
(35)
22,209
2019
$
(2,075)
(2,762)
11,720
(1,132)
3,341
11,560
1,557
2018
$
10,167
8,568
-
410
19,145
2018
$
(2,917)
(3,180)
8,034
(1,505)
8,836
9,505
372
22,209
19,145
The Company has concluded that the deferred tax assets relating to the non-capital loss carryforwards will be
recoverable before their expiry using the estimated future taxable income based on the business plans and budgets of
the Company. These losses expire between 2038 and indefinitely.
79
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The Company did not recognize deferred income tax assets of $3,364 (2018 – $3,287) in respect of non-capital losses
amounting to $14,867 (2018 – $14,086) that can be carried forward to reduce taxable income in future years. These
losses expire between 2021 and indefinitely.
The Company did not recognize deferred income tax assets of $368 (2018 – $368) in respect of capital losses
amounting to $2,745 (2018 – $2,745) that can be carried forward indefinitely against future taxable capital gains.
Deferred tax liabilities of $5,494 (2018 – $6,594) 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, 2019 totalled $290,671 (2018 – $295,379).
21 Loss per share
a) Basic
Basic loss per share is calculated by dividing the net loss attributable to the Subordinate and Multiple Voting
shareholders by the weighted average number of Subordinate and Multiple Voting Shares outstanding during the
year.
2019
2018
Net loss attributable to Subordinate and Multiple Voting shareholders
$(4,882)
$(17,811)
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic loss per share
b) Diluted
21,621,935
21,640,632
$(0.23)
$(0.82)
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.
80
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
2019
2018
Net loss attributable to Subordinate and Multiple Voting shareholders
$(4,882)
$(17,811)
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
21,621,935
21,640,632
Weighted average number of Subordinate and Multiple Voting Shares for
diluted loss per share
Diluted loss per share
21,621,935
21,640,632
$(0.23)
$(0.82)
As at February 28, 2019, 140,000 stock options have an antidilutive effect (2018 – 140,000).
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, 2019, the
aggregate maximum value of these guarantees, if exercised, amounted to $69,202 (2018 –$80,437). The
guarantees expire as follows:
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
February 29, 2024
Subsequent years
$
22,969
17,838
8,131
1,384
9,738
9,142
69,202
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$3,988 (2018 – $3,430), which are covered by letters of credit.
81
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) Future minimum payments under operating leases (related mainly to premises and machinery) are as follows:
February 29, 2020
February 28, 2021
February 28, 2022
February 28, 2023
February 29, 2024
Subsequent years
$
964
1,446
1,035
691
628
10,999
15,763
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, 2019, legal and related costs for these matters amounted to $9,212
(2018 – $8,213).
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.
82
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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:
2019
$
2018
$
Affiliated company owned by certain relatives of controlling shareholder
Purchases – Material components
1,013
1,230
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
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation – Options
Share-based compensation – PSUs & DSUs
-
98
4,206
17
20
12
342
4,291
40
160
1 Key management includes directors (executive and non-executive) and certain members of senior management.
83
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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, 2019
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
$
$
47,657
65,186
37,235
150,078
30,736
1,986
215,979
248,701
109,618
-
8,707
118,325
6,165
-
27,796
33,961
41,957
55,964
222
98,143
12,935
9,219
153,350
175,504
2,108
33,593
376
36,077
1,871
6,887
52,608
61,366
16,616
(5,834)
77,068
-
-
(123,608)
217,956
148,909
-
87,850
(123,608)
366,865
31,830
54
118,874
-
-
(145,933)
83,537
18,146
422,674
150,758
(145,933)
524,357
February 28, 2018
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
9,885
169,190
192,397
20,134
14,993
1,426
36,553
2,548
8,855
40,953
52,356
24,936
21,085
32,685
78,706
33,865
67
114,796
-
-
(70,348)
183,367
154,596
-
(70,348)
337,963
-
-
(128,904)
89,864
20,210
430,119
148,728
(128,904)
540,193
84
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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:
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
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
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.
85
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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, 2019 and February 28, 2018 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2019
February 28,
2018
February 28,
2019
$
February 28,
2018
$
February 28,
2019
February 28,
2018
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 € for US$ – 0 to 12 months
Buy € for US$ – 0 to 12 months
Buy £ for € – 0 to 12 months
1.36
1.30
1.15-1.18
-
1.14
-
-
1.26-1.28
1.25
1.18-1.19
1.18-1.24
1.24-1.28
1.18
0.89
(61)
183
(15)
-
(2)
-
-
(1,558) US$26,000
US$26,000
US$2,010
-
€907
-
-
433
(2)
92
(39)
64
(1)
US$92,000
US$92,000
US$2,190
US$4,785
€16,297
€15,390
£281
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, 2019 and February 28, 2018:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
2019
$
(555)
464
2018
$
(524)
396
A hypothetical weakening of 5.0% of the above currencies would have had the opposite impact for both fiscal years.
86
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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, 2019, four
(2018 – four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 10.5% (2018 – 9.6%), and the Company’s ten largest customers accounted for 58.9% (2018 – 57.3%)
of trade accounts receivable. In addition, one customer accounted for 10.9% of the Company’s sales (2018 – 9.9%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs
specific evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the
ageing of accounts receivable, historical payment patterns, customer creditworthiness and current economic trends. A
specific credit limit is established for each customer and reviewed periodically. An allowance for doubtful accounts is
recorded when, based on management’s evaluation, the collection of an account receivable is not reasonably certain.
For some trade accounts receivable, the Company may obtain security in the form of credit insurance which can be
called upon if the counterparty is in default under the terms of the agreement.
The Company also applies the IFRS 9 simplified approach to measure expected credit losses using a lifetime
expected credit loss allowance for trade receivables.
The expected credit loss rates are based on the Company’s historical credit losses experienced over the last fiscal year
prior to period end. The historical rates are then adjusted for current and forward-looking information on
macroeconomic factors affecting the Company’s customers.
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.
87
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on
derivative assets.
The table below summarizes the ageing of trade accounts receivable as at:
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
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,
2019
$
As at
February 28,
2018
$
75,888
13,329
15,860
26,845
131,922
1,662
130,260
7,260
91,534
12,421
8,546
18,714
131,215
1,088
130,127
7,255
137,520
137,382
As at
February 28,
2019
$
As at
February 28,
2018
$
1,088
1,056
(215)
(202)
(65)
1,662
1,239
212
(444)
(122)
203
1,088
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.
88
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
$
21,851
74,910
40,240
31,979
83
Less than
1 year
$
8,609
74,910
40,240
31,979
83
Total
$
22,129
63,411
48,963
21,922
1,615
Less than
1 year
$
8,151
63,411
48,963
21,922
1,615
As at February 28, 2019
4 to 5
Years
$
After
5 years
$
3,782
-
-
-
-
3,520
-
-
-
-
As at February 28, 2018
4 to 5
Years
$
After
5 years
$
3,548
-
-
-
-
5,059
-
-
-
-
1 to 3
Years
$
5,940
-
-
-
-
1 to 3
Years
$
5,371
-
-
-
-
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
Bank indebtedness and short-term bank loans
Derivative liabilities
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
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.
89
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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
Total
$
Level 1
$
Level 2
$
Level 3
$
As at February 28, 2019
Assets
Derivative assets
Liabilities
Derivative liabilities
189
83
-
-
189
83
-
-
As at February 28, 2018
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
604
1,615
-
-
604
1,615
-
-
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.
90
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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,
2019
$
As at
February 28,
2018
$
29,807
2,172
8,609
13,242
53,830
20,848
1,074
8,151
13,978
44,051
308,833
321,617
17.4% 13.7%
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 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
2019
$
11,566
2,009
(5,589)
17
(9)
(1,132)
256
2018
$
11,035
1,842
(8,568)
40
(87)
1,595
1,137
7,118
6,994
91
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2019 and 2018
(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 Cash net of 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
Cash ne t of de bt
Cash and cash equivalents
Gross debt - fixed interest rates
Gross debt - variable interest rates
Cash ne t of de bt
2019
$
2018
$
(140)
5,137
(10,383)
(395)
11,314
(640)
(8,840)
(2,335)
(5,029)
(10,349)
2,594
(756)
(724)
3,159
3,743
5,652
223
6,444
(11,311)
9,986
2019
$
2018
$
70,673
(40,588)
(13,242)
16,843
70,673
(23,598)
(30,232)
16,843
85,391
(30,073)
(13,978)
41,340
85,391
(21,411)
(22,640)
41,340
O ther Assets
Cash and cash
e quivalents /
Bank
indebtedness
Short-term bank
loans
O ther Liabilities
Current portion
of long-te rm
debt
Long-term debt
Total
Cash net of debt as at March 1, 2017
76,227
(1,650) (7,115) (15,318) 52,144
Cash flows
Foreign exchange adjustments
Other non-cash movements
(19,705)
576
2,002
1,204
(15,923)
8,021
-
-
-
(443) (1,238) 6,340
(2,595) 1,374
(1,221)
Cash net of debt as at February 28, 2018
64,543
(1,074) (8,151) (13,978) 41,340
Cash flows
Foreign exchange adjustments
Other non-cash movements
(20,230)
(3,447)
-
(1,098)
2,866
(3,268) (21,730)
-
-
210
630
(2,607)
(3,534) 3,374
(160)
Cash net of debt as at February 28, 2019
40,866
(2,172) (8,609) (13,242) 16,843
92
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
J. Mannebach
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, General Manager, Project Manufacturing & Global Sales
Chief Financial Officer
V. Apostolescu
Vice-President, Quality Assurance
S. Bruckert
Executive 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
G. Perez
D. Tran
D. Velan
R. Velan
S. Velan
Vice-President, Sales, Process Industries
Vice-President, Product Technology and Strategic Initiatives
Executive Vice-President, General Manager, Severe Service, Head of Corporate Engineering,
Research & Development
Vice-President, Marketing
Executive Vice-President, General Manager, MRO and Aftermarket
Vice-President, Information Technology and Transformation
93
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
AST Trust Company
Shares outstanding as at February 28, 2019
6,055,368 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High CA $17.96
CA $7.85
Low
Closing on February 28, 2019: CA $9.22
Annual meeting
The Annual Meeting of Shareholders will be held July 11, 2019,
at 3:00 p.m. in the Salle Saint-Denis of the:
Club Saint James
1145 Union Avenue
Montreal, Quebec, Canada H3B 3C2
94
Velan worldwide
Head Office
An extensive global network
Montreal, QC, Canada
Velan Inc.
• 13 production facilities
• 4 plants in North America
• 4 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
Plant
Lucca, Italy
Velan ABV S.r.l.
Suzhou, China
Velan Valve (Suzhou) Co. Ltd.
Williston, VT, USA
Velan Valve Corp.
Plant
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