Annual report 2020
70 years of valve
manufacturing
Highlights
Duke Tran, Executive Vice-President, General Manager,
Severe Service, at an independent lab witnessing the fire
testing of five Velan valves including metal-seated ball
valves and a Torqseal® 2.0 triple offset valve. Velan’s
very stringent testing requirements resulted in a 100%
pass rate.
A sense of enthusiasm and pride can be seen in the above photo as the first ever 34”
Class 1500 forged pressure seal parallel slide valve made by Velan was completed.
The order was for two 24” and two 34” valves, each weighing over fifteen tons,
for main steam isolation in an olefins project in southern Texas.
Three 36” Class 300 two-way metal-seated ball valves installed at a refinery in
Egypt. Velan’s Aftermarket and Technical Services provided on site assistance
with the start-up.
Cover photo: 14” Class 600 Velan metal-seated switch valve, part of the same
refinery installation shown in the above photo.
Two of Velan’s engineering initiatives this year
involved: teaming up with Velan ABV to provide an
integrated automated valve package for the mining
industry; and gaining a foothold in the Ebullated
bed market. The actuator, itself a unique design,
was developed and patented by Velan ABV.
2020 Financial highlights
Sales
(in millions of U.S. dollars)
Net earnings (loss)(2) and Adjusted EBITDA(1)
(in millions of U.S. dollars)
480
440
400
360
320
280
240
200
160
120
80
40
0
Consolidated
Overseas
U.S.A.
Canada
50
40
30
20
10
-
(10)
(20)
(30)
2016
2017
2018
2018
2018
2019
2020
2020
2020
2016
2017
2018
2019
2020
Net earnings (loss)
(2)
Adjusted 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
Adjusted EBITDA(1)
Adjusted EBITDA(1) %
Adjusted 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 2020
Feb 2019
Feb 2018
Feb 2017
Feb 2016
$ 371,625
88,134
23.7%
$ 366,865
85,595
23.3%
$ 337,963
70,861
21.0%
$ 331,777
88,528
26.7%
$ 426,895
104,283
24.4%
85,189
(8,058)
16,088
4.3%
0.74
(16,390)
-4.4%
(0.76)
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
$ 31,010
180,095
98,179
538,496
19,297
284,861
$ 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
619
123
546
491
1,779
716
140
522
481
1,859
732
146
489
463
1,830
763
157
482
474
1,876
787
165
520
430
1,902
(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 22 in the Notes to the Consolidated Financial Statements.
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Dear Fellow Shareholders,
This year marks the 70th anniversary of our company which was
founded by my father, AK Velan, in 1950. He started his company
one year after arriving in Canada and right from his initial
startup, he had a vision of becoming a global manufacturing
company built on engineering and manufacturing expertise.
The spirit of his entrepreneurship and great passion for industrial
valves resonates with our people and in every valve we make.
As Chairman of the Board and a member of the controlling
shareholder family, I share in our shareholders’ disappointment
in the net loss reported for fiscal 2020 and the fall in the price of
our shares which are currently trading at less than 40% of the net
book value of our shareholder’s equity as at February 29, 2020.
On the other hand, I am encouraged by the progress made in
deploying our V20 transformation plan which is a cornerstone for our future development. Our return to profitable
growth depends on its success. Our operating results improved this year as EBITDA adjusted for the non-recurring
V20 restructuring costs more than doubled from $7.1 million to $16.1 million.
Tom Velan, Chairman of the Board
At the time of writing this message, we are in the midst of the Covid-19 pandemic which is having a major impact on
people all over the world and on the global economy including the oil industry which has been hit hard. So far, all
our employees around the world have kept safe and all our facilities have introduced stringent distancing measures
and working protocols. We are a company providing essential services to global energy and other industries, so we
have continued to operate on a reduced basis throughout the lockdown periods.
These are clearly very challenging times for everyone, and I am really proud to witness how Yves Leduc, our
executive team, and all employees around the world have risen to the occasion. On behalf of the Board of Directors,
I want to thank Yves and all employees for their devoted work and perseverance under unprecedented circumstances.
I also want to thank all our shareholders for the continuing support and the shared confidence in the renewed future
for this 70-year-old company.
Tom Velan
Chairman of the Board
AK Velan, the engineer and entrepreneur who founded
the company 70 years ago.
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Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated.)
Highlights
• Sales of $371.6 million
• Net loss(1) of $16.4 million
• Adjusted EBITDA(2) of $16.1 million
• Order Backlog of $406.8 million
• Order Bookings of $340.4 million
• Net Cash of $31.0 million
What a year this has been! Fiscal year 2020 began with one
of Velan’s most significant announcements in its history, a
transformation plan, known by every employee as V20, aiming
to make the Company more agile and laser-focused on serving
our customers. As the deployment efforts of the V20 plan grew in
momentum, the company was able to deliver improved adjusted
results, recovering from a terrible first quarter. And then, just
when blue skies were looming, the global economy was shattered
by COVID-19.
So, before diving into the year’s summary, let me start off with
what would normally be my conclusion: thanks to the great
progress in transforming the Company, and to the many actions
taken across its global operations, Velan is far better equipped
and more resilient to navigate through the storm and to rebound
when the economy recovers. Furthermore, our new President,
Bruno Carbonaro, with us since November, brings his wealth of
industrial experience and outstanding talents. Bruno, along with
other highly capable new hires, are increasing our leadership
capacity at a very important juncture in our history.
Yves Leduc, Velan Inc’s Chief Executive Officer, addressing employees
during his weekly video message from his home during the COVID-19
pandemic.
decreased shipments from the Company’s North American and
French operations.
Bookings decreased by $32.0 million or 8.6% from the prior
year, when both our Italian and French subsidiaries had recorded
significant project orders in their respective sectors. Also, in North
America, our MRO business, experiencing a more normalized
stocking replenishment cycle in fiscal year 2020, could not repeat
the unusually high surge of non-project valve re-stocking orders
experienced the previous year.
The Company ended the period with a backlog of $406.8 million,
a decrease of $42.9 million or 9.5%, resulting from a book-to-bill
ratio of 0.92. However, those numbers, while not satisfactory, are
not fully reflecting the business performance of fiscal year 2020,
as they were dragged down by a very poor booking and margin
performance in the first quarter, that we have gradually recovered
from in the following three quarters.
Sales, order bookings, and backlog: Recovering from
very disappointing first quarter results
Sales increased by $4.7 million or 1.3% from the prior year,
thanks to an increase in shipments from the Company’s Italian
operations that resulted from a record backlog in the upstream oil
and gas industry. The Italian performance was partially offset by
In addition, the Company’s quotation activity has notably
increased this year in sectors where margins are healthy, and
concurrently decreased in other sectors where margins are much
tighter. The shift is the result of deliberate screening, so that the
net decrease in the Company’s Backlog in the last year, which the
Company aims to reverse, must be understood in this context.
(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
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Message to our shareholders and employees
A net loss(1), while Operating profit and EBITDA(2) show
improvements when adjusted for restructuring and
transformation costs
Net loss(1) amounted to $16.4 million or $0.76 per share compared
to $4.9 million or $0.23 per share last year. Net loss(1) for the year
was significantly impacted by a one-time $8.2 million non-cash
tax adjustment to de-recognize unused tax losses as well as a
non-recurring amount of $9.6 million, as part of the Company’s
restructuring and transformative V20 plan. These costs include
cash severances, temporary project resources and their travel and
lodging costs, as well as the moving costs related to dismantling
and transportation of machinery and equipment required to opti-
mize our manufacturing footprint. Excluding this investment and
its after-tax impact as well as the extraordinary non-cash tax ad-
justment, the Company’s net loss(1) would have been $1.2 million
compared to $4.9 million last year, representing an improvement
of $3.7 million.
Meanwhile, operating profit before restructuring and trans-
formation costs(2) amounted to $2.9 million compared to a
comparable operating loss of $7.0 million last year. Adjusted
EBITDA(2) amounted to $16.1 million or $0.74 per share compared
to $7.1 million or $0.33 per share last year.
These improvements in our performance, adjusted for non-
recurring transformation costs, are primarily attributable to
successfully decreasing our administration costs and an increase
in gross profit percentage. On this adjusted basis, the Company
was able to make an operating profit for the first time since fiscal
year 2017 while our adjusted EBITDA(2) of $16.1 million more
than doubled compared to last year.
What drove gross profit to increase by $2.5 million for the fiscal
year from 23.3% to 23.7%, or 40 basis points? Let us remember
that gross profit landed on 19.2% at the end of the first quarter,
so the recovery in gross margin in the following three quarters,
averaging 25%, was significant. This came from a combination
of several factors, reflecting, first, the exceptional shipment
performance of our European operations. Second, a very poor
first quarter performance by our North American operations was
partially offset by an overall increase in margins through the last
three quarters, thanks to reduction of our production overhead in
accordance with the V20 plan, to a better mix, and to our business
units’ increased focus on higher quality orders.
V20: ahead of plan despite some early challenges
In the last twenty years, Velan has continued to live up to its
superb brand reputation as leader in valve technology and
product quality, while its business’ competitiveness, mainly its
North American operations, lost much ground to an increasingly
competitive industry. Consequently, our business model had to
be changed in order to better leverage our assets and strengths.
4
One of Velan’s Severe Service Strategic Business Unit’s (SBU) customer-
centric offerings this year included three actuated Securaseal metal-
seated ball valves, a Programmable Logic Controller (PLC), and local
control panels into a single factory-tested package installed in one of
the newest delayed coking units in the world.
The business case that led the Board of Directors to unanimously
approve the strategy announced in January 2019, consisted in
significant recurring bottom-line improvements achieved by
fiscal year 2022, justifying one-off investment and restructuring
costs to carry out the transformation. A year later, where do we
stand? There is much good news.
First, thanks to the resourcefulness of our project teams and to
growing North American project bookings, we will require less
than half of the one-off V20 investment, while realizing higher
recurring bottom-line benefits.
Second, although the greater portion of the V20 return on
investment was to be realized in FY22 and beyond, the Company
is already capturing the benefits of its modernized systems and
new approach to markets, and in many ways, is already deeply
transformed. This V20 progress update begins with a reminder
of the five key pillars that define our corporate transformation:
1. Drive growth thanks to greater customer intimacy through
five integrated and focused businesses, two of which already
existed (French and Italian operations) and the next three
basically re-centering our North American operations
2. Re-organize to consolidate four North American manufactur-
ing plants into three, creating more specialized manufacturing
centers
3. Drive substantial savings in cost and cycle time by shifting our
North American manufacturing operations towards a leaner,
less vertically integrated model centered on production cells
4. To our state-of-the-art low-cost Indian facility, transfer all non-
nuclear and non-navy small-forged valves, as well as pressure-
sealed valves normally destined to our MRO business
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Message to our shareholders and employees
5. Finally, invest in systems and processes to improve customer
service through, for example, best-of-class project manage-
ment, modernized cost monitoring and configuration pricing
Progress against these pillars can be measured in a few compel-
ling ways.
All five strategic businesses can boast of
remarkable
achievements, thanks to their business focus and coherent market
activities. I already mentioned our Italian operations, delivering
record sales and backlog in a breakthrough year, and our French
operations, still by far our most successful business. Meanwhile
in their first year, the newly created North American project
manufacturing business units contributed to the Company’s
much improved performance in the second half of the year,
registering excellent bookings in the petrochemical, mining, and
power sectors, while earning the trust of the American defense
industry with substantial orders in connection to its current
shipbuilding activities.
In the fall, after several months of negotiations, an agreement
between the Company and our unions was successfully reached
on how to proceed with the shift towards a new lean production
cell model. Following this milestone agreement, projects were
accelerated and production in our large Montreal plant 2-7 will
be stopped five months ahead of the original plan.
Production transfers to India will also be completed as
planned this year. This move, combined with the reduction of
production overhead in North America, will have a very positive
impact on the economics of our global MRO and After-market
business unit.
Finally, we are changing the way we do business and made
substantial progress in modernizing our systems and processes,
an effort initiated a few years back. Citing just one example, we
have made our project management capabilities a distinctive
competitive asset and the results, measured in terms of on-time
delivery, are impressive and noticed by our customers.
Many other notable achievements
Fiscal year 2020 saw numerous other developments that will
shape and grow our business, in areas like market development
and product innovation. Let me mention only these three.
As I mentioned earlier, the Company’s under performance
in recent years was largely driven by our North American
operations. Through this period, the economic performance
of our international subs has remained steady. Our Italian
operations, at Velan ABV, are a great example of this dynamism,
as we recently signed a joint venture agreement with a Saudi
partner, a key milestone in our Middle East strategy, the largest
valve market in the world.
Paolo Ranieri, Chief Executive Officer of Velan ABV and Mr. Fahad M.
Al-Ohaly, General Manager of Eastern Style Co shake hands before the
signing of the agreement aiming to localize a manufacturing facility of
Velan valves in the Saudi market. This partnership would give Velan
entry into one of the largest markets in the world with the status of a
Preferred Supplier.
Our French operations, renowned for their leadership in the
nuclear market, have been able to diversify their innovation
capabilities into several non-nuclear niches over the years, the
latest successful venture securing new orders of cryogenic valves
for the Indian aerospace industry, a very promising field. Just
don’t tell our French team that their business is “only nuclear”:
they will be quick to prove you wrong!
Finally, the market will soon see many new product introductions
from Velan. The latest one, announced this spring, the launch
of the Torqseal® 2.0 triple offset valve design, is major news for
the industry. It leverages our twenty years track record with the
technology, as we launch a ground-breaking new design that has
a wide range of potential industrial applications.
Velan’s Torqseal® 2.0 (patent pending) triple offset valve is engineered
to deliver repeatable full bi-directional zero leakage, lower torques, and
unmatched fugitive emissions performance.
5
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Message to our shareholders and employees
COVID-19, both a dark shadow and an opportunity to
stand out
Although this year’s message to shareholders has a positive edge
to it, the dangers of the terrible economic crisis that has assailed
the world are certainly not lost on the Board and my management
team. As supplier of critical equipment to essential industries, we
were spared its most immediate and devastating consequences
and our multi-national organization has responded admirably
in enabling remote work in a matter of days, protecting those
employees showing up every day at the shop, and ensuring the
continuity of our global supply chain.
But no one can foretell how deep and long the global recession
will go.
In such volatile environment, we should, first, be thankful
for the progress made in fiscal year 2020 in driving process
improvements, eliminating significant structural costs, and
bringing about a new market focus. The combination of these
actions has made the company lighter and more agile, and much
more resilient to great shocks.
Above, hospital nurses thank Velan for their generosity. During this
serious global coronavirus pandemic, Velan ABV made a donation to
the local Hospital in Lucca, Italy and to the national health system.
Velan China also supplied thousands of medical PPE (personal
protective equipment) including masks to our worldwide operations
who in turn donated masks within their local communities–showing
teamwork at its best!
Second, we will continue improving the work environment,
making it as safe and secure as possible for our employees. Like
many other companies, we are writing the book on how to manage
a manufacturing company through a pandemic. The well-being
of our employees and their family is our most important concern.
Third, the crisis will inevitably reshape our industries. How do
we plan through the fog? By remembering our raison d’être: we
are a manufacturing and technology company, with a remarkable
track record of standing for our customers with reputed products
and services that keep those essential infrastructure industries,
cornerstones to the world economies, safely running. Our
customers’ needs will rapidly evolve; if we pay attention and
listen to them, every single day, we will find innovative ways to
serve them, to reassure them.
There is disruption ahead, and possibly upheaval…but our
employees have already proven their capacity and resilience in
handling enormous change and turbulence. Their resolve bolsters
our confidence in an uncertain future. In many ways, the crisis
is bringing our employees from across the world closer and
collaboration has never been stronger. On behalf of our Board
and the Velan family, I thank them, and add, let’s keep going.
Yves Leduc
Chief Executive Officer
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Management’s discussion and analysis
May 20, 2020
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 29, 2020. This Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended February 29, 2020 and
February 28, 2019. The Company’s consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). 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 1,779 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
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.
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7
Management’s discussion and analysis
CONSOLIDATED HIGHLIGHTS1
(millions, excluding per share amounts)
Consolidated statements of earnings (loss)
Sales
Gross profit
Gross profit %
Net loss3
Net loss3 %
Net loss3 per share – basic and diluted
Operating profit (loss) before restructuring and transformation
costs4
Adjusted EBITDA4
Adjusted EBITDA4 %
Adjusted EBITDA4 per share – basic and diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided by (used in) operating activities
Cash used in investing activities
Cash used by financing activities
Demand data
Net new orders received
Period ending backlog of orders
Fiscal year
ended
February 29,
2020
Fiscal year
ended
February 28,
20192
Increase
(decrease)
%
Increase
(decrease)
$371.6
88.1
23.7%
(16.4)
(4.4)%
(0.76)
2.9
16.1
4.3%
0.74
21.6
9.6
(11.7)
(6.3)
340.4
406.8
$366.9
85.6
23.3%
(4.9)
(1.3)%
(0.23)
(7.0)
7.1
1.9%
0.33
21.6
(9.6)
(8.1)
(2.5)
372.4
449.7
$4.7
2.5
1.3%
2.9%
11.5
234.7%
0.53
230.4%
9.9
9.0
141.4%
126.8%
0.41
124.2%
19.2
(3.6)
(3.8)
(32.0)
(42.9)
200.0%
(44.4)%
(152.0)%
(8.6)%
(9.5)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 The Company has adopted IFRS 16 at the beginning of the current fiscal year using the modified retrospective transition method whereby the
comparative period was not restated.
3 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
4 Non-IFRS measures – see reconciliations at the end of this report.
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8
Management’s discussion and analysis
Highlights of fiscal 2020 as well as factors that may impact fiscal 2021
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales amounted to $371.6 million, an increase of $4.7 million or 1.3% compared to last year. Sales were positively impacted
by an increase in shipments from the Company’s Italian operations which continued to deliver the record backlog, destined
to the upstream oil and gas industry. This increase was partially offset by decreased shipments from the Company’s North
American and French operations. The decrease in shipments from the Company’s North American operations is primarily
attributable to an unusually high surge of non-project valve re-stocking orders from its distributors in the first quarter of the
prior fiscal year.
Administration costs amounted to $85.2 million, a decrease of $8.1 million or 8.7%. The decrease in administration costs was
achieved despite the recording of a $0.9 million provision regarding the settlement of a product claim that was filed against
the Company in a prior fiscal year as well as a slight increase in the 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 a long-term trend. The reduction in administration costs is mainly attributable to
lower sales commissions as well as the higher freight charges that were incurred in the prior fiscal year in order to air freight
a large delayed order. The Company also benefited from the reduction of staff levels, for which the related retirement
packages were recorded in the last quarter of the previous year.
Gross profit percentage increased by 40 basis points from 23.3% to 23.7%. This reflects a much-improved performance in
the last three quarters of the year, each delivering above 24% in gross profit, a notable recovery from the first quarter where
gross profit was only 19.2%. The recovery came from the strong sales volume and higher margin sales in the Company’s
European operations. Meanwhile, on a full-year comparison basis, this increase was partially offset by the lower sales volume
shipped by the Company’s North American operations. The gross profit percentage was also negatively impacted by the very
low margins experienced in the first quarter in the Company’s North American operations. However, these saw an overall
improvement in margins through the last three quarters, thanks to the reduction of its production overhead in accordance with
the V20 plan, a better product mix, and its business units’ increased focus on higher quality orders.
Net loss1 amounted to $16.4 million or $0.76 per share compared to $4.9 million or $0.23 per share last year. Net loss1 for
the year was significantly impacted by a $8.2 million non-cash tax adjustment to de-recognize a portion of unused tax losses
as well as a charge of $9.6 million related to the Company’s restructuring and transformative initiative, V20. Restructuring
and transformation costs include cash severances and related costs paid or to be paid to former employees, temporary project
resources and their travel and lodging costs as well as the moving costs related to dismantling and transportation of machinery
and equipment to reflect the optimized manufacturing footprint plan. Excluding this $9.6 million charge, as well as the
after-tax impact of these restructuring and transformation costs incurred during the year, the Company’s net loss1 would have
been $9.4 million compared to $4.9 million last year, representing an increase in net loss1 of $4.5 million which is primarily
attributable to a non-cash income tax charge (see Results of operations section), partially offset by lower administration costs
and an improved gross margin percentage.
Operating profit before restructuring and transformation costs2 amounted to $2.9 million compared to an operating loss of
$7.0 million last year. Adjusted EBITDA2 amounted to $16.1 million or $0.74 per share compared to $7.1 million or $0.33
per share last year. The improvement in operating profit before restructuring and transformation costs2 and adjusted EBITDA2
is primarily attributable to lowered administration costs and an increase in gross profit percentage. On this adjusted basis, the
Company was able to make an operating profit for the first time since fiscal year 2017 while the Company’s adjusted EBITDA
more than doubled compared to last year.
Net new orders received (“bookings”) amounted to $340.4 million, a decrease of $32.0 million or 8.6% compared to last year.
This decrease is due primarily to lower orders booked by the Company’s Italian and French subsidiaries, which had recorded
significant project orders relating to the upstream oil and gas and nuclear power industries in the previous fiscal year.
The Company ended the period with a backlog of $406.8 million, a decrease of $42.9 million or 9.5% since the beginning of
the current fiscal year. The decrease in backlog is primarily attributable to a lower book-to-bill3 ratio of 0.92 and the
weakening of the euro spot rate against the U.S. dollar over the course of the current fiscal year. Here again, those results,
while not satisfactory, are not fully reflecting the business performance of fiscal year 2020, as they were dragged down by a
very weak booking performance in the first quarter, that gradually improved in the following three quarters, namely in the
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.
3 Defined as net new orders received compared to sales
9
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Management’s discussion and analysis
Company’s North American operations, where, thanks to increased market and business focus through the new strategic
business units, a book-to-bill ratio of 1.21 was achieved during the last two quarters.
The Company ended the year with net cash of $31.0 million, a decrease of $9.9 million or 24.2% since the beginning of the
year. This decrease is primarily attributable to investments in property, plant and equipment and intangible assets, long-term
debt and lease liabilities repayments, as well as distributions to shareholders via dividends, partially offset by cash provided
by operating activities and an increase in long-term debt. Net cash was also negatively impacted by V20 related
disbursements as well as the weakening of the euro spot rate against the U.S. dollar over the course of the current year.
Foreign currency impacts:
o Based on average exchange rates, the euro weakened 4.6% against the U.S. dollar when compared to the same period
last year. This weakening resulted in the Company’s net profits and bookings from its European subsidiaries being
reported as lower U.S. dollar amounts in the current year.
o Based on average exchange rates, the Canadian dollar weakened 1.3% 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 unfavourable on the Company’s results1.
Fiscal year 2020 ended right before the World Health Organization declared the recent outbreak of a novel coronavirus (“COVID-19”)
a global pandemic. The outbreak of the COVID-19 epidemic late in the fiscal year slightly affected the results, but the Company was
successful in greatly mitigating the impact of the emerging crisis, thanks to the tight monitoring of its global supply chain and to the
pursued improvements under the V20 plan. In addition, the Company was able to deliver its highest sales quarter since fiscal 2015 as
its Italian operations turned in the best quarterly performance in its history. The Company has also been able to significantly reduce
its administration costs compared to the prior fiscal year and aims to lower them even further in the course of the next two fiscal years.
Finally, progress will continue in the deployment of initiatives along the V20 restructuring and transformation plan. The plan
ultimately aims to better serve its key markets through better company-wide alignment and increased focus, to reduce its structural
costs and excess capacity, reorganize for agility and reduced cycle time and leverage its global footprint. The Company is also planning
on relying on data-driven solutions that will allow better accuracy with respect to, for example, pricing decisions, cost tracking and
allocation of resources.
Other factors that may impact fiscal year 2021
The outbreak of the COVID-19 virus has resulted in governments worldwide enacting emergency measures to combat the spread of
the virus. These measures have caused material disruptions to businesses, globally resulting in an economic slowdown, including
demand for products and ability to secure timely access to supplies as a result of various government mandated shutdowns. The
Company has nonetheless been able to continue its operations with minimal interruption since it has been deemed to provide an
essential service by various governmental authorities. Management continues to closely monitor the global situation surrounding the
virus, as well as taking proactive steps to ensure the well-being and safety of its employees, and the continuity of its operations and
businesses. It is too soon to assess how deep and long the global recession will go, nor is the Company able at this stage to reliably
estimate the impact that these developments will have on the Company's financial results, conditions and cash flows. The Company
has reacted swiftly to the crisis, protecting its supply chain, developing contingency plans, reducing its expenses, and staying close to
its customers. Meanwhile, the COVID-19 pandemic has affected the progress of the V20 restructuring and transformative plan only
in a very limited way. The Company still aims to have the V20 plan mostly completed, as scheduled, by the end of fiscal year 2021.
Furthermore, there can be no assurance that additional 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
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Management’s discussion and analysis
SUMMARY OF RESULTS
Summary financial data derived from the Company’s financial statements prepared in accordance with IFRS for the three most recently
completed reporting periods are as follows:
For the reporting periods ended on the following dates
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fiscal year ended
February 29, 2020
Fiscal year ended
February 28, 2019
Fiscal year ended
February 28, 2018
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
$366,865
(4,882)
(0.23)
(0.23)
524,357
21,723
0.09
0.09
$337,963
(17,811)
(0.82)
(0.82)
540,193
22,200
0.31
0.31
$371,625
(16,390)
(0.76)
(0.76)
538,496
19,609
0.09
0.09
15,566,567
6,019,068
Sales for fiscal year 2020 increased by 1.3% compared to fiscal year 2019. This increase was primarily attributable to an increase in shipments from
the Company’s Italian operations which continued to deliver the record backlog, destined to the upstream oil and gas industry. This increase was
partially offset by decreased shipments from the Company’s North American and French operations. The decrease in shipments from the Company’s
North American operations is primarily attributable to an unusually high surge of non-project valve restocking orders from its distributors in the first
quarter of the prior fiscal year. 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.
Gross profit for fiscal year 2020 amounted to $88.1 million, an increase of $2.5 million from fiscal year 2019, while the gross profit percentage
increased from the 23.3% reported in fiscal year 2019 to 23.7% in fiscal year 2020. This reflected a much-improved performance in the last three
quarters of the year, each delivering above 24% in gross profit, a notable recovery from the first quarter where gross profit was only 19.2%. The
recovery came from the strong sales volume and higher margin sales in the Company’s European operations. Meanwhile, on a full-year comparison
basis, this increase was partially offset by the lower sales volume shipped by the Company’s North American operations. The gross profit percentage
was also negatively impacted by the very low margins experienced in the first quarter in the Company’s North American operations. However, these
saw an overall improvement in margins through the last three quarters, thanks to the reduction of its production overhead in accordance with the V20
plan, a better mix, and its business units’ increased focus on higher quality orders. 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.
Administration costs for fiscal year 2020 decreased by $8.1 million when compared to fiscal year 2019. This decrease was attributable to lower sales
commissions and freight charges as well as benefiting from the reduction of staff levels, for which the related retirement packages were recorded in
the last quarter of the previous year. This decrease was partially offset by a $0.9 million expense regarding the settlement of a product claim that was
filed against the Company in a prior year as well as a slight increase in costs recognized in connection with the Company’s ongoing asbestos litigation
(see Contingencies section). 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 the assessment of its current restructuring and transformation initiative, V20. The Company also experienced an increase in costs
recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies section).
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
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Management’s discussion and analysis
RESULTS OF OPERATIONS – for the year ended February 29, 2020 compared to the year ended February 28, 2019
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 29,
2020
Year ended
February 28,
2019
(millions)
Sales
$371.6
$366.9
Sales increased by $4.7 million or 1.3% from the prior year. Sales were positively impacted by an increase in shipments from the
Company’s Italian operations which continued to deliver the record backlog, destined to the upstream oil and gas industry. This
increase was partially offset by decreased shipments from the Company’s North American and French operations. The decrease in
shipments from the Company’s North American operations is primarily attributable to an unusually high surge of non-project valve
re-stocking orders from its distributors in the first quarter of the prior fiscal year.
Bookings and backlog
(millions)
Year ended
February 29,
2020
Year ended
February 28,
2019
Bookings
$340.4
$372.4
Bookings decreased by $32.0 million or 8.6% from the prior year. The decrease in bookings is due primarily to lower orders booked
in the Company’s Italian and French operations, which had both recorded significant project orders relating to the upstream oil & gas
and nuclear power industries in the previous fiscal year. 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 had 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. This decrease was partially offset by the suspension in the fourth quarter of the previous fiscal year of a
$36.3 million large project order, booked in a prior fiscal year, to supply valves to a power plant in Vietnam. The decrease is also
attributable to a poor booking performance in the first quarter of the fiscal year which the Company gradually recovered in the
following three quarters.
(millions)
Backlog
February
2020
February
2019
February
2018
$406.8
$449.7
$464.5
For delivery within the subsequent fiscal year
$257.5
$299.6
$286.7
For delivery beyond the subsequent fiscal year
$149.3
$150.1
$177.8
Percentage – beyond the subsequent fiscal year
36.7%
33.4%
38.3%
As a result of sales outpacing bookings in the current fiscal year, the Company’s book-to-bill ratio was 0.92 for the year. Furthermore,
the total backlog decreased by $42.9 million or 9.5% since the beginning of the fiscal year, settling at $406.8 million. The backlog
was negatively impacted by the lower book-to-bill ratio and the weakening of the euro spot rate against the U.S. dollar over the course
of the year. The Company’s quotation activity has notably increased this year in sectors where margins are healthy, and concurrently
decreased in other sectors where the Company experiences the most aggressive competition and where margins are much tighter. The
shift is the result of deliberate screening that is expected to take effect gradually as the Company replaces its existing backlog with
higher margin orders. The net decrease in the Company’s backlog in the last year, which the Company aims to reverse, must be
understood in this context. In addition, and as stated earlier, the Company’s booking performance throughout the year, while not
satisfactory, is not fully reflecting the strong momentum experienced during the latter half of the year, namely in the Company’s North
American operations, where, thanks to increased market and business focus through the new strategic business units, a book-to-bill
ratio of 1.21 was achieved.
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12
Management’s discussion and analysis
Gross profit
(millions)
Gross profit
Year ended
February 29,
2020
Year ended
February 28,
2019
$88.1
$85.6
Gross profit percentage
23.7%
23.3%
Gross profit increased by $2.5 million for the fiscal year, while the gross profit percentage increased by 40 basis points from 23.3% to
23.7%. This reflects a much-improved performance in the last three quarters of the year, each delivering above 24% in gross profit, a
notable recovery from the first quarter where gross profit was only 19.2%. The recovery came from the strong sales volume and higher
margin sales in the Company’s European operations. Meanwhile, on a full-year comparison basis, this increase was partially offset by
the lower sales volume shipped by the Company’s North American operations. The gross profit percentage was also negatively
impacted by the very low margins experienced in the first quarter in the Company’s North American operations. However, these saw
an overall improvement in margins through the last three quarters, thanks to reduction of its production overhead in accordance with
the V20 plan, a better product mix, and its business units’ increased focus on higher quality orders. Overall, the Company delivered a
backlog that dated back to the prior fiscal year, which meant that the margins did not yet reflect the impact of the margin improvement
measures launched under the Company’s restructuring and transformative V20 plan. The combined effect of these measures gradually
took effect over the course of the year and will continue during the next year but the greater impact of the Company’s V20 initiatives
are only expected late in fiscal year 2021, when the task of reorganizing and reducing the Company’s North American footprint is
planned to be completed.
Administration costs
(millions)
Administration costs*
As a percentage of sales
Year ended
February 29,
2020
Year ended
February 28,
2019
$85.2
22.9%
$93.3
25.4%
$9.2
*Includes asbestos-related costs of:
$9.6
Administration costs decreased by $8.1 million or 8.7% for the fiscal year. The reduction in administration costs is primarily
attributable to lower sales commissions as well as the higher freight charges that were incurred in the prior fiscal year in order to air
freight a large delayed order. The Company also benefited from the reduction of staff levels, for which the related retirement packages
were recorded in the last quarter of the previous year. This decrease was achieved despite the recording of a $0.9 million provision
regarding the settlement of a product claim that was filed against the Company in a prior fiscal year and a slight increase in the costs
recognized in connections 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 a long-term trend.
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.
Net finance costs
(millions)
Year ended
February 29,
2020
Year ended
February 28,
2019
Net finance costs
$1.4
$0.7
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13
Management’s discussion and analysis
Net finance costs increased by $0.7 million for the fiscal year. While long-term debt is lower compared to the prior fiscal year, the
Company’s overall debt load increased over the course of the current fiscal year, particularly the bank indebtedness in its North
American operations, resulting in an increase in its finance costs (see Liquidity and Capital Resources section).
Income taxes
(in thousands, excluding percentages)
Year ended
February 29, 2020
%
$
Year ended
February 28, 2019
%
$
Income tax at statutory rate of 26.6% (2019 – 26.7%)
(2,143)
26.6
(2,053)
26.7
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible foreign exchange loss
De-recognition of unused tax losses
Losses utilized not previously tax effected
Benefit attributable to a financing structure
Prior period tax adjustments and assessments
Other
Income tax expense (recovery)
1,469
378
8,256
(1,227)
(253)
2,100
(37)
(18.2)
(4.7)
(102.5)
15.3
3.1
(26.1)
0.5
1,640
327
724
(525)
(891)
(1,494)
(29)
(21.3)
(4.3)
(9.4)
6.8
11.6
19.4
0.4
8,543
(106.0)
(2,301)
29.9
The unfavorable movement in the Company’s income tax expense in the current year is primarily attributable to the de-recognition of
a portion of unused tax losses in the Company’s North American operations. The unfavorable movement is also explained by U.S tax
regulations addressing the deductibility of certain interest expenses and the base erosion provision for Global Intangible Low-taxed
Income (“GILTI”), under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain
foreign subsidiaries.
Net loss1, Operating profit before restructuring and transformation costs2 and Adjusted EBITDA2
(millions)
Net loss1
As a percentage of sales
Operating profit (loss) before restructuring and transformation costs2
Adjusted EBITDA2
As a percentage of sales
Year ended
February 29,
2020
Year ended
February 28,
2019
$(16.4)
(4.4)%
$2.9
$16.1
4.3%
$(4.9)
(1.3)%
$(7.0)
$7.1
1.9%
Net loss1 amounted to $16.4 million or $0.76 per share compared to $4.9 million or $0.23 per share last year. Net loss1 for the year
was significantly impacted by a $8.2 million non-cash tax adjustment to de-recognize a portion of unused tax losses as well as a charge
of $9.6 million related to the Company’s restructuring and transformative initiative, V20. Restructuring and transformation costs
include cash severances and related costs paid or to be paid to former employees, temporary project resources and their travel and
lodging costs as well as the moving costs related to dismantling and transportation of machinery and equipment to reflect the optimized
manufacturing footprint plant. Excluding this $9.6 million charge, as well as the after-tax impact of restructuring and transformation
costs incurred during the year, the Company’s net loss1 would have been $9.4 million compared to $4.9 million last year, representing
an increase in net loss1 of $4.5 million in net loss1 which is primarily attributable to a non-cash income tax charge, partially offset by
lower administration costs and an improved gross margin percentage. Operating profit before restructuring and transformation costs2
amounted to $2.9 million compared to an operating loss of $7.0 million last year. Adjusted EBITDA2 amounted to $16.1 million or
$0.74 per share compared to $7.1 million or $0.33 per share last year. The improvement in operating profit before restructuring and
transformation costs2 and adjusted EBITDA2 is primarily attributable to lowered administration costs and an increase in gross profit
percentage.
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.
14
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Management’s discussion and analysis
SUMMARY OF QUARTERLY RESULTS
Summary financial data derived from the Company’s unaudited financial statements from each of the eight most recently completed
quarters are as follows:
For the quarters in months 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
2020
$113,641
(11,116)
November
2019
$88,701
(819)
August
2019
$85,467
1,369
May
2019
$83,816
(5,824)
February
2019
$105,345
1,519
November
2018
$92,271
(236)
QUARTERS ENDED
May
August
2018
2018
$77,874
$91,375
(3,727)
(2,438)
(0.51)
(0.51)
(0.04)
(0.04)
0.06
0.06
(0.27)
(0.27)
0.07
0.07
(0.01)
(0.01)
(0.11)
(0.11)
(0.17)
(0.17)
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 2020 and August 2018 due to increased shipments of such orders, while the lower sales amounts for the quarters
ended in May 2018, May 2019, August 2019 and November 2019 were due to delays on the shipments of such orders. Sales were
higher in the quarters ended in February 2019 and November 2018 due to increased shipments of a large project order in China, but,
more significantly, as a result of a large surge in the MRO business. Net earnings1 for the quarter ended in February 2019 was higher
due to an improved sales volume and a more profitable product mix. The net loss1 for the quarter ended in May 2019 was due to a less
profitable product mix partly caused by the shipment of technically complex orders with lower margins. Net earnings1 for the quarter
ended August 2019 was due to a more profitable product mix. The net loss1 for the quarters ended in August 2018 and November 2018
were largely due to the fact that the North American operations were below break even and additional costs were incurred in the
quarter to meet delivery commitments. The net loss1 for the quarter ended in May 2018 was due to a less profitable product mix and
shipping delays caused by internal operational issues. The net loss1 for the quarter ended in February 2020 was due to the de-
recognition of unused tax losses as well as the $7.1 million spend on the Company’s restructuring and transformative initiative, V20.
RESULTS OF OPERATIONS – quarter ended February 29, 2020 compared to the quarter ended February 28, 2019
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the prior fiscal year)
Sales
(millions)
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Sales
$113.6
$105.3
Sales increased by $8.3 million or 7.9% 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 subsidiary, while its North American operations realized
lower sales. The Company’s Italian operations were able to register the best quarterly performance of the subsidiary’s history amidst
the turbulence caused by the COVID-19 virus.
Bookings
(millions)
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Bookings
$88.3
$82.0
Bookings increased by $6.3 million or 7.7% for the quarter. The increase in bookings for the quarter is due primarily to large severe
service orders booked in the Company’s North American operations. Additionally, bookings had negatively been impacted in the last
quarter of the previous fiscal year by the suspension of a $36.3 million large project order which had been booked in a prior fiscal
year, to supply valves to the power market in Vietnam. This increase in bookings was partially offset by lower order bookings in the
15
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Management’s discussion and analysis
Company’s Italian and French operations, which had both recorded significant project orders relating to the upstream oil & gas and
nuclear power industries in the last quarter of previous fiscal year.
Gross profit
(millions)
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Gross profit
$27.9
$25.9
Gross profit percentage
24.6%
24.6%
Gross profit increased by $2.0 million for the quarter, while the gross profit percentage remained stable when compared to the prior
year quarter. The increase in gross profit was achieved through an overall higher sales volume, while the Company’s gross profit
percentage remained stable due to less efficient sales mix when compared to the quarter of the previous year.
Administration costs
(millions)
Administration costs*
As a percentage of sales
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
$21.5
18.9%
$27.1
25.7%
$3.2
*Includes asbestos-related costs of:
$2.7
Administration costs decreased by $5.6 million or 20.7% for the quarter. The Company benefited from the reduction of staff levels,
for which the related retirement packages were recorded in the last quarter of the previous year. The decrease is also attributable to
lower sales commissions as well as a decrease in costs associated with the Company’s ongoing asbestos litigation (see Contingencies
section). The fluctuation in asbestos costs is due more to the timing of settlements rather than a long-term trend.
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 29, 2020
%
$
Three-month period ended
February 28, 2019
%
$
Income tax at statutory rate of 26.6% (2019 – 26.7%)
(393)
26.6
(184)
26.7
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible (taxable) foreign exchange loss (gain)
De-recognition of unused tax losses
Losses utilized not previously tax effected
Drawback (Benefit) attributable to a financing structure
Prior period tax adjustments and assessments
Other
658
31
8,013
(782)
408
2,100
(125)
(44.5)
(2.1)
(541.8)
52.9
(27.6)
(142.0)
8.5
483
(11)
(416)
(525)
(218)
(1,494)
500
(70.2)
1.6
60.5
76.3
31.7
217.2
(72.7)
Income tax expense (recovery)
9,910
(670.0)
(1,865)
(271.1)
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16
Management’s discussion and analysis
Net earnings (loss)1, Operating profit before restructuring and transformation costs2 and Adjusted EBITDA2
(millions)
Net earnings (loss)1
As a percentage of sales
Operating profit (loss) before restructuring and transformation costs2
Adjusted EBITDA2
As a percentage of sales
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
$(11.1)
(9.8)%
$6.2
$9.9
8.7%
$1.5
1.4%
$(0.7)
$3.8
3.6%
Net loss1 amounted to $11.1 million or $0.51 per share compared to net earnings1 of $1.5 million or $0.07 per share last year. Net loss1
for the quarter was significantly impacted by a $8.2 million non-cash tax adjustment to de-recognize a portion of unused tax losses as
well as a charge of $7.1 million related to the Company’s restructuring and transformative initiative, V20. Restructuring and
transformation costs include cash severances and related costs paid or to be paid to former employees, temporary project resources
and their travel and lodging costs as well as the moving costs related to dismantling and transportation of machinery and equipment
to reflect the optimized manufacturing footprint plant. Excluding this $7.1 million charge, as well as the after-tax impact of these
restructuring and transformation costs incurred during the quarter, the Company’s net loss1 would have been $5.9 million compared
to net earnings1 of $1.5 million last year, representing a decrease in the Company’s results of $7.4 million which is primarily
attributable to a non-cash income tax charge, partially offset by lower administration costs and an improved gross margin. Operating
profit before restructuring and transformation costs2 amounted to $6.2 million compared to an operating loss of $0.7 million last year.
Adjusted EBITDA2 amounted to $9.9 million or $0.46 per share compared to $3.8 million or $0.18 per share last year. The
improvement in operating profit before restructuring and transformation costs2 and adjusted EBITDA2 is primarily attributable to
lowered administration costs and an increase in gross profit.
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.
17
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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:
As at February 29, 2020
Carrying
value
$
Less than
1 year
1 to 3
Years
4 to 5
Years
After
5 years
$
$
$
$
Long-term debt
Long-term lease liabilities
Accounts payable and accrued liabilities
Customer deposits
Bank indebtedness and short-term bank loans
Derivative liabilities
19,297
15,343
74,271
47,208
45,696
1,169
8,311
1,970
74,271
47,208
45,696
1,169
5,420
3,074
-
-
-
-
3,349
2,187
-
-
-
-
2,217
13,205
-
-
-
-
Total
$
19,297
20,436
74,271
47,208
45,696
1,169
On February 29, 2020, the Company’s order backlog was $406.8 million, and its net cash plus unused credit facilities amounted to
$91.8 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. The Company also believes that its
unused credit facilities are sufficient to overcome the COVID-19 pandemic and the adverse effects the virus has had on the world’s
economy. 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. As at
February 29, 2020, the Company was in breach of one of its covenants and a waiver was obtained subsequent to year-end date which
waives the covenants as of February 29, 2020 and May 31, 2020 at which point the Company anticipates that it will be fully compliant
with its covenants.
As part of managing its liquidity risk, the Company also monitors the financial health of its key customers and suppliers.
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18
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
2020
November
2019
February
2019
November
2018
February
2018
Net cash
$31.0
$39.0
$40.9
$50.0
$64.5
The Company’s net cash decreased by $8.0 million or 20.5% over the course of the quarter and by $9.9 million or 24.2% since the
beginning of the current fiscal year. This decrease is primarily attributable to investments in property, plant and equipment and
intangible assets, long-term debt and lease liabilities repayments as well as distributions to shareholders via dividends, partially offset
by cash provided by operating activities and an increase in long-term debt. Net cash was also negatively impacted by V20 related
disbursements as well as the weakening of the euro spot rate against the U.S. dollar over the course of the year.
Cash provided by (used in) operating activities
(millions)
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Cash provided by (used in) operating activities
$9.6
$(9.6)
$(3.7)
$(4.2)
Cash used in operating activities amounted to $3.7 million for the current quarter compared to $4.2 million in the prior year. The
current quarter’s usage of funds consisted of a net loss1 adjusted for non-cash items of 9.7 million and positive non-cash working
capital movements of $6.0 million. Cash provided by operating activities amounted to $9.6 million for the current year compared to
cash used in operating activities of $9.6 million in the prior year. The current year’s source of funds consisted of a net loss1 adjusted
for non-cash items of $4.5 million and positive non-cash working capital movements of $14.1 million.
Accounts receivable
(millions)
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Accounts receivable increase
$1.3
$0.1
$13.8
$11.1
Accounts receivable balances are a function of the timing of sales and cash collections. The accounts receivable balance increased in
both the current quarter and fiscal year due primarily to a greater proportion of the Company’s accounts receivable, which consist
primarily of sales for large project orders that generally entail longer collection terms, being recorded closer to the end of the current
quarter.
Inventories
(millions)
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Inventories decrease (increase)
Customer deposits increase (decrease)
$(7.4)
$8.3
$5.1
$(8.8)
$7.9
$(4.1)
$4.6
$2.6
For the current quarter, inventories decreased since the Company had a strong shipping quarter. However, for the fiscal year as a
whole, inventories increased due to the replenishment of stock following large shipments that occurred in prior quarters as well as the
build up of inventory in reaction to the booking of certain larger project orders. In the prior fiscal year, the Company had large
shipments closer to the end of the fiscal year 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 fiscal year and
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
19
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Management’s discussion and analysis
decreased for the current quarter. 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.
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Accounts payable and accrued liabilities increase (decrease)
$0.6
$11.3
$(1.0)
$5.3
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 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Additions to property, plant and equipment
$10.3
$7.5
$1.3
$1.1
The additions to property, plant and equipment in the current fiscal year include a 2.8M investment required by the local authorities
to re-zone the land of the Company’s Korean foundry.
Long-term lease liabilities
(millions)
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
Repayment of long-term lease liabilities
$1.6
nil
$0.4
nil
The Company has adopted IFRS 16 at the beginning of the current fiscal year using the modified retrospective transition method
whereby the comparative period was not restated. As per the new standard, repayments of the capital portion of lease liabilities are
considered financing activities in the statement of cash flow.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
$1.1
$2.9
$4.0
$3.6
$ -
$0.5
$ -
$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, one of the Company’s French subsidiaries borrowed $1.1 million (€1.0
million) in the form of an unsecured bank loan, bearing interest at 0.30% and repayable in 60 monthly instalments, expiring in 2024.
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20
Management’s discussion and analysis
Dividends paid and repurchase of shares
(millions)
Dividends paid
Repurchase of shares
Fiscal Year
ended
February 29,
2020
Fiscal Year
ended
February 28,
2019
Three-month
period ended
February 29,
2020
Three-month
period ended
February 28,
2019
$2.0
$0.2
$3.1
$-
$0.5
$0.1
$0.5
$ -
The Company changed its dividend policy two years ago, reducing the dividend from CA$0.10 per share per quarter to CA$0.03 per
share per quarter. The revised policy took effect starting with the dividend payment of June 29, 2018. The dividend paid in the first
quarter of the prior fiscal year was under the prior dividend policy.
The Board has decided it is appropriate in the current context to suspend the quarterly dividend, effective immediately. This decision
will be reviewed on a quarterly basis.
The Board of Directors of the Company has authorized on October 10, 2019 a normal course issuer bid to purchase for cancellation
up to 151,384 Subordinate Voting Shares representing approximately 2.5 % of the outstanding Subordinate Voting Shares of the
Company. Following the approval of the Normal Course Issuer Bid by the TSX, the Company repurchased for cancellation a total of
36,300 Subordinate Voting Shares for a cash consideration of $0.2 million over the course of year.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and
fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk management program focuses on
mitigating unpredictable financial market risks and their potential adverse effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies approved by the
Board of Directors. The identification, evaluation and hedging of the financial risks are the responsibility of the corporate finance team
in conjunction with the finance teams of the Company’s subsidiaries. The Company uses derivative financial instruments to hedge
certain risk exposures. Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be
entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are
to be entered into for risk management purposes only).
Risk overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following table:
Financial instrument
Currency
Interest rate
Credit
Liquidity
Risks
Market
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
21
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
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Management’s discussion and analysis
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will fluctuate because
of changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk arising from
various currency exposures. Currency risk arises when future commercial transactions and recognized assets and liabilities are
denominated in a currency other than a company’s functional currency. The Company has operations with different functional
currencies, each of which will be exposed to currency risk based on its specific functional currency.
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same currency. The
remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the Company uses foreign currency
derivatives, primarily foreign exchange forward contracts. These derivatives are not designated as hedges for accounting purposes.
The amounts outstanding under derivatives contracts as at February 29, 2020 and February 28, 2019 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 29,
2020
February 28,
2019
February 29,
2020
$
February 28,
2019
$
February 29,
2020
February 28,
2019
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
Sell US$ for KW – 0 to 12 months 1,139-1,171
Total Gain (loss)
-
1.10-1.11
1.10-1.14
1.10-1.11
1.33-1.34
1.31-1.33
1.36
1.30
1.15-1.18
-
1.14
-
-
(923)
357
-
(3)
(174)
198
(70)
(615)
(61) US$68,000
US$68,000
183
-
(15)
US$1,205
-
€16,790
(2)
€16,790
-
-
US$1,647
105
US$26,000
US$26,000
US$2,010
-
€907
-
-
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 29, 2020 and February 28, 2019:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net loss
2019
$
(555)
464
2020
$
(1,463)
411
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.
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22
Management’s discussion and analysis
Cash flow and fair value interest rate risk
The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash and cash equivalents.
Items at variable rates expose the Company to cash flow interest rate risk, and items at fixed rates expose the Company to fair value
interest rate risk. The Company’s long-term debt and credit facilities predominantly bear interest, and its cash and cash equivalents
earn interest at variable rates. An assumed 0.5% change in interest rates would have no significant impact on the Company’s net
income or cash flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 29, 2020, four (2019 – four)
customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 15.0%
(2019 – 10.5%), and the Company’s ten largest customers accounted for 61.2% (2019 – 58.9%) of trade accounts receivables. In
addition, one customer accounted for 13.4% of the Company’s sales (2019 – 10.9%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific
evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts receivable,
historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established for each
customer and reviewed periodically. A loss allowance 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.
As at February 29, 2020, the lifetime expected loss allowance for trade receivables was determined as follows:
Expected loss rate
Gross carrying amount
Loss allowance
Current
1.041%
83,711
871
Past due more
than 30 days
1.173%
16,619
195
Past due 31 to 90
days
1.289%
7,445
96
Past due more
than 90 days
3.820%
21,989
840
Total
129,764
2,002
As at February 29, 2020
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.
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23
Management’s discussion and analysis
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: Loss allowance
Trade accounts receivable
Other receivables
Total accounts receivable
The table below summarizes the movements in the loss allowance:
Balance – Beginning of year
Loss allowance expense
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
As at
February 29,
2020
$
As at
February 28,
2019
$
83,711
16,619
7,445
21,989
129,764
2,002
127,762
7,480
75,888
13,329
15,860
26,845
131,922
1,662
130,260
7,260
135,242
137,520
As at
February 29,
2020
$
As at
February 28,
2019
$
1,662
1,045
(95)
(552)
(58)
2,002
1,088
1,056
(215)
(202)
(65)
1,662
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. 1,561
claims were outstanding at the end of the reporting period (February 28, 2019 – 1,349). These claims were filed in the states of
Arizona, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Missouri, Montana, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia,
Washington and West Virginia. During the current fiscal year, the Company resolved 436 claims (February 28, 2019 – 437) and was
the subject of 648 new claims (February 28, 2019 – 596). Because of the many uncertainties inherent in predicting the outcome of
these proceedings, as well as the course of asbestos litigation in the United States, management believes that it is not possible to make
an estimate of the Company’s asbestos liability. Accordingly, no provision has been set up in the accounts. Settlement costs and legal
fees related to these asbestos claims amounted to $2,677 for the quarter (February 28, 2019 - $3,185) and $9,621 for the year (February
28, 2019 - $9,212).
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 alleged damages to the Facility in excess of $9,000 related to allegedly
defective valves supplied by Velan Valve Corp. The claim was for alleged strict product liability and alleged negligence. The Company
vigorously defended its position and undertook all actions necessary to protect its reputation. During the year ended February 29, 2020,
the Company made a final settlement of this case and recorded a net settlement of $850.
24
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Management’s discussion and analysis
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 11, 23 and 26 of the
Company’s audited consolidated financial statements. The types of transactions entered into, all of which are in the normal course of
business, are as follows:
Performance bond guarantees related to product warranty and on-time delivery
•
• Letters of credit issued to overseas suppliers
• Low value and/or Short-term operating leases
RELATED PARTY TRANSACTIONS (in thousands of U.S. dollars)
The Company has entered into the following transactions with related parties, which are measured at their exchange value.
a)
PDK Machine Shop Ltd. (“PDK”) is a company owned by certain relatives of the controlling shareholder. PDK is a supplier
of machined material components for use in the Company’s plants.
Three months ended Twelve months ended
Feb. 28,
Feb. 29,
2019
2020
Feb. 29,
2020
Feb. 28,
2019
Purchases of material components
$325
$256
$708
$1,013
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.
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a timely manner
so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuer’s
Annual and Interim Filings) as at February 29, 2020 and have concluded that such disclosure controls and procedures were designed
and operating effectively.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS.
Management has evaluated the design and effectiveness of its internal controls and procedures over financial reporting (as defined in
National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings). The evaluation was based on the
“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). This evaluation was performed by the CEO and the CFO of the Company with the assistance of other Company
Management and staff to the extent deemed necessary. Based on this evaluation, the CEO and the CFO concluded that the internal
controls and procedures over financial reporting were appropriately designed and operating effectively as at February 29, 2020.
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.
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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 29, 2020 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 (loss).
Warranty 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 (loss).
Provision for performance guarantees
Provision 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 provision 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 (loss).
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. Determining whether there are indicators of
potential impairment is a matter of significant judgment. When determining the recoverable amount of a CGU, management prepares
estimates based on assumptions such as the weighted-average cost of capital, the Earnings before interest, taxes, depreciation and
amortization (“EBITDA”) margin and revenue growth. 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
(loss).
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Management’s discussion and analysis
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
COVID-19
The outbreak of the COVID-19 virus has resulted in governments worldwide enacting emergency measures to combat the spread of
the virus. These measures have caused material disruptions to businesses globally resulting in an economic slowdown, including
demand for products and ability to secure timely access to supplies as a result of various government mandated shutdowns. The
Company has been able to continue its operations with minimal interruption since it has been deemed to provide an essential service
by the government authorities. Management continues to closely monitor the global situation surrounding the virus, as well as taking
proactive steps to ensure the well-being and safety of its employees, and the continuity of its operations and businesses. In developing
estimates for the year ended February 29, 2020, management determined that COVID-19 has minimal impact on key assumptions.
However, because of the uncertainty that exists, it is not possible to reliably estimate the impact that these developments will have on
the Company's financial results, conditions and cash flows.
Consolidation
The Company consolidates the accounts of Juwon Special Steel Co. Ltd. in these consolidated 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 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 was adopted effective March 1, 2019 and the Company elected the modified retrospective transition
method on the effective date, without restatement of the comparative figures. As such, comparative information continues
to be reported under previous accounting standards.
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract
includes the right to control the use of an identified asset for a period of time in exchange for consideration.
In situations where the Company is a lessee, the result is the recording, at the lease commencement date, of a right-of-use
asset and a lease liability for the present value of the future lease payments on the statement of financial position for most
of its contracts that were considered operating leases under IAS 17. In order to determine the present value of the future
lease payments, the Company uses the interest rate implicit in the lease or, if that rate cannot be readily determined, the
Company uses the incremental borrowing rate of each of its subsidiaries. The Company depreciates its right-of-use asset
on the lesser of the lease term or the useful life of the asset using the straight-line method since it closely reflects the
expected pattern of consumption of the future economic benefits.
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Management’s discussion and analysis
The right-of-use asset may be periodically reduced by impairment losses, if any, and adjusted for certain remeasurement
of the lease liability. The lease liability is measured at amortized cost using the effective interest method. It is remeasured
when there is a change in future lease payments arising from a change in an index, rate or estimate. The lease liability is
remeasured with a corresponding adjustment to the carrying value of the right-of use asset. If the carrying value of the
right-of-use asset has been reduced to zero, the remaining adjustment is recorded in the statement of income (loss).
Cash payments for the principal portion of the lease liability are presented within the financial activities and the interest
portion of the lease liability is presented within the operating activities of the statement of cash flows. Payments associated
with short-term leases and leases of low value assets are not included in the measurement of the lease liability and are
presented in operating activities in the statement of cash flows.
At the date of initial application, the Company elected to measure the right-of-use asset in an amount equal to the lease
liability. The Company also applied the following practical expedients when applying IFRS 16 to leases previously
classified as operating leases under IAS 17:
a) The Company elected to apply the standard to contracts that were previously identified as leases under IAS 17 and
IFRIC 4 and elected to not apply the standard to contracts that were not previously identified as leases under IAS 17
and IFRIC 4.
b) The Company has elected to exclude intangible assets from the scope of this standard.
c) The Company used the exemptions proposed by the standard on lease contracts for which the lease terms end within
12 months as the date of initial application, and lease contracts for which the underlying asset is of low value.
d) The Company used hindsight to determine the lease terms if the contract contained options to extend or terminate
the lease term.
The following table reconciles the Company’s operating lease obligations at February 28, 2019 to the lease liabilities
recognized on initial application of IFRS 16 at March 1, 2019.
Operating Lease Commitments disclosed as at February 28, 2019
Discounted using the lessee's weighted average incremental borrowing rate of 2.49% at
the date of initial application
(Less): Short-term leases and low-value leases recognized on straight-line basis as
expense
Add: Adjustments as a result of a different treatment of extension and termination
options
Lease liability recognized as at March 1, 2019
Of which are:
Current portion of long-term lease liabilities
Long-term lease liabilities
15,763
(4,249)
(331)
3,980
15,163
1,290
13,873
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Management’s discussion and analysis
The recognized right-of-use assets relate to the following types of assets:
Land
Buildings
Machinery & Equipment
Furniture & Fixtures
Data Processing Equipment
Rolling Stock
Total right-of-use assets
As at
February 29, 2020
$
As at
March 1, 2019
$
6,648
6,559
359
33
138
1,417
6,528
7,150
113
48
241
1,083
15,154
15,163
The following table summarizes the impact of adopting IFRS 16 on the Company’s consolidated statement of financial
position as at March 1, 2019. Prior amounts have not been restated. The Company’s transition to IFRS 16 did not impact
the Company’s retained earnings.
Non-current assets
Property, Plant and Equipment
Current liabilities
Current portion of long-term lease liabilities
Non-current liabilities
Long-term lease liabilities
February 28, 2019
$
Adjustment due
to IFRS 16
$
March 1,
2019
$
83,537
15,163
98,700
- 1,290
1,290
- 13,873
13,873
(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 Company has adopted the interpretation of IFRIC 23 on March 1, 2019 and concluded that it has no impact on
previously reported results.
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.
The Company’s financial condition and results of operations may be adversely affected by commodity price volatility. Crude oil and
natural gas prices have fluctuated widely in the recent past and are subject to fluctuations in response to relatively minor changes in
supply, demand, market uncertainty and other factors that are beyond the Company’s control. Crude oil and natural gas prices are
impacted by a number of factors including, but not limited to: the global supply of and demand for crude oil and natural gas; global
economic conditions; the actions of the Organization of Petroleum Exporting Countries (“OPEC”) and OPEC+; government
regulation; political stability and geopolitical factors; the ability to transport crude to markets; developments related to the market for
liquefied natural gas; the availability and prices of alternate fuel sources; and weather conditions.
29
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Management’s discussion and analysis
Recently, global oil prices have weakened materially as a result of the recent global outbreak of a novel coronavirus ("COVID-19"),
compounded by OPEC+, led by Saudi Arabia and Russia, failing to reach an agreement on constraining output. Concerns over global
economic conditions, fluctuations in interest rates and foreign exchange rates, stock market volatility, energy costs, geopolitical issues,
OPEC+ actions, inflation, the availability and cost of credit, the deceleration of economic growth in China, trade disputes between the
United States and China, civil unrest in Venezuela and Iran and the outbreak of COVID-19 have contributed to increased economic
uncertainty and diminished expectations for the global economy. Further weakening of commodity prices could have a material
adverse effect on the Company’s business, financial condition and results of operations.
Disease and Epidemics
The impact of disease and epidemics may have a negative impact on the Company and its performance and financial position. In
December 2019, a novel strain of coronavirus, known as “COVID-19” was identified in Wuhan, China. As of March 20, 2020,
COVID-19 had spread to over 100 countries and been declared a pandemic by the World Health Organization. COVID-19 has resulted
in, and renewed outbreaks of COVID-19 or new epidemics could result in, health or other government authorities requiring the closure
of offices or other businesses, and could also result in a general economic decline. For example, such events may adversely impact
economic activity through disruption in supply and delivery chains. Moreover, the Company’s operations could be negatively affected
if personnel are affected by or quarantined as the result of, or in order to avoid, exposure to a contagious illness. The Company has
been designated as an “essential business” at this time, with minimal disruptions to operations.
A resulting negative impact on economic fundamentals and consumer confidence may negatively impact market value, increase market
volatility, cause credit spreads to widen, and reduce liquidity, all of which could have an adverse effect on the business of the Company.
The duration of the business disruption and related financial impact caused by a widespread health crisis cannot be reasonably
estimated. The speed and extent of the spread of COVID-19, and the duration and intensity of resulting business disruption and related
financial and social impact, are uncertain, and such adverse effects may be material. While governmental agencies and private sector
participants will seek to mitigate the adverse effects of this coronavirus, which may include such measures as heightened sanitary
practices, telecommuting, quarantine, curtailment or cessation of travel, and other restrictions, and the medical community is seeking
to develop vaccines and other treatment options, the efficacy of such measures is uncertain. The Company’s operations and business
results could be materially adversely affected. The extent to which COVID-19 (or any other disease or epidemic) impacts business
activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the severity of the coronavirus and the actions required to contain this coronavirus or treat
its impact, among others.
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.
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Management’s discussion and analysis
Interest rate risk and Debt Financing
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. At maturity of
such instruments, the Company may also not be able to refinance such instruments at terms favorable to the Company, or at all. In
addition, the terms of the Company`s indebtedness provide that, upon an event of default, such indebtedness becomes immediately
due and payable. Failure to refinance existing indebtedness on favorable terms or to comply with the terms of such indebtedness could
have a material adverse effect on the Company's results of operations and its financial position.
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 regard to the outcome of Brexit negotiations, and such processes could derail at any time.
The Company’s business and operating results could be adversely impacted by trade protection measures resulting from breakdowns
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.
Canada and five other countries have ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”),
entered into force on December 31, 2018 in the six countries and which is intended to allow for preferential market access among the
countries that are parties to the CPTPP. The CPTPP entered into force between Canada and Vietnam on January 14, 2019. It is uncertain
what effect CPTPP will have on Velan (and its customers and suppliers) and the industrial products industry.
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.
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Management’s discussion and analysis
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defense related to certain products that may have contained an internal component containing asbestos.
Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail. Unfavorable rulings,
judgments or settlement terms could have a material adverse impact on the Company’s business, financial condition, results of
operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased significantly
during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability insurance coverage
will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be followed
to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a lack of a
strong health and safety program may expose it to lost production time, penalties and lawsuits, and may impact future orders as
customers may take into account the Company’s health and safety record when awarding sales contracts.
Environmental compliance matters
The Company’s operations and properties are subject to increasingly stringent laws and regulations relating to environmental
protection, including air and water discharges, waste management and disposal and employee safety. Such laws and regulations both
impose substantial fines for violations and mandate cessation of operations in certain circumstances, the installation of costly pollution
control equipment, or the undertaking of costly site remediation activities. Furthermore, new laws and regulations, or stricter
enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean up
requirements could require the Company to incur additional costs which could be significant.
Controls over disclosures and financial reporting
In accordance with National Instrument 52-109, the CEO and the CFO of the Company are responsible for designing, maintaining,
and evaluating the effectiveness of disclosure controls and procedures. The CEO and the CFO are also responsible for the effective
design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements in accordance with IFRS. A system of controls is subject to certain inherent limitations and is
partially based on the possibility or probability of future events. Accordingly, a system of internal controls can provide only
reasonable, and not absolute, assurance of reaching the desired objectives.
Control of the Company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.8% of the voting interests in the Company. Voting control enables the Controlling Shareholder to determine all
matters requiring shareholder approval. The Controlling Shareholder has advised the Company that the disposition of the shares
requires the consent of certain Velan family members and controlled entities.
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company, which may
negatively affect the price and liquidity of the Subordinated Voting Shares. The sale of a significant number of Subordinate Voting
Shares by the Controlling Shareholder pursuant to the exercise of the conversion right attached to the Multiple Voting Shares may
negatively impact upon the market price and liquidity of the Subordinate Voting Shares.
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.
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Management’s discussion and analysis
Compliance with international laws
Due to the international nature of its operations, the Company is subject to differing systems of laws and regulations which are often
complex and differ from one country to the next. Such laws and regulations include but are not limited to anti-bribery legislation,
export and customs controls, foreign currency exchange controls, transfer pricing regulations and economic sanctions imposed by
governmental authorities. Failure to comply with such laws could negatively impact earnings and may result in criminal, civil and
administrative legal sanctions. The Company has implemented policies and procedures to effect compliance with these laws by its
employees and representatives.
Non-controlling interest
The Company’s operations in China and Taiwan, and certain of its operations in France and Korea are undertaken with partners that
are classified as non-controlling interest. The success of these operations depends on the satisfactory performance of such partners in
their obligations. The failure of such partners to perform their obligations could impose additional financial and performance
obligations on the Company that could negatively impact its earnings and financial condition.
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.
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Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2020 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.
Operating profit (loss) before restructuring and transformation costs and Adjusted net earnings (loss) before interest, taxes,
depreciation and amortization ("EBITDA")
For the fiscal year ended:
Feb. 29,
2020
Feb. 28,
2019
Feb. 28,
2018
Feb. 28,
2017
Feb. 28,
2016
Operating profit (loss)
(6,669)
(7,000)
(18,315)
13,068
12,388
Adjustment for:
Restructuring and transformation costs
Operating profit (loss) before restructuring and
transformation costs
9,566
2,897
-
-
-
2,759
(7,000)
(18,315)
13,068
15,147
Net income (loss)1
(16,390)
(4,882)
(17,811)
7,737
3,641
Adjustments for:
Goodwill impairment loss
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs – net
Income taxes
EBITDA
Adjustment for:
Restructuring and transformation costs
-
10,803
2,177
1,389
8,543
6,522
-
11,566
2,009
695
(2,301)
7,087
-
11,035
1,842
197
361
(4,376)
-
11,943
1,767
74
4,680
26,201
11,510
13,301
2,008
(199)
8,302
38,563
9,566
-
-
-
2,759
Adjusted EBITDA
16,088
7,087
(4,376)
26,201
41,322
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
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Management’s discussion and analysis
For the quarter ended:
Operating loss
Adjustment for:
Restructuring and transformation costs
Operating profit (loss) before restructuring and
transformation costs
Net income (loss)1
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible assets
Finance costs – net
Income tax expense (recovery)
EBITDA
Adjustment for:
Restructuring and transformation costs
Adjusted EBITDA
Feb. 29,
2020
Feb. 28,
2019
(908)
(665)
7,086
6,178
-
(665)
(11,116)
1,519
2,758
679
550
9,911
2,782
3,461
677
23
(1,865)
3,815
7,086
-
9,868
3,815
The term “operating profit or loss before restructuring and transformation costs” is defined as operating profit or loss plus restructuring
and transformation costs. The Company opted to not adjust the prior year figures due to the different nature of the expenses, which
were more related to the assessment of the required restructuring and transformation plan rather than the execution of the plan itself.
The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
The term “adjusted EBITDA” is defined as net income or loss attributable to Subordinate and Multiple Voting Shares plus
restructuring and transformation costs, depreciation of property, plant & equipment, plus amortization of intangible assets, plus net
finance costs plus income tax provision. The Company opted to not adjust the prior year figures due to the different nature of the
expenses, which were more related to the assessment of the required restructuring and transformation plan rather than the execution
of the plan itself. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
35
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Velan Inc.
Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
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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 29, 2020
and February 28, 2019, 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 29, 2020 and February 28, 2019;
the consolidated statements of loss for the years then ended;
the consolidated statements of comprehensive 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 the 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
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
38
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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
otherwise 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.
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39
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.
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40
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.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with 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 Jean-François
Lecours.
/s/PricewaterhouseCoopers LLP1
Montréal, Quebec
May 20, 2020
1 CPA auditor, CA, public accountancy permit No. A126402
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41
Velan Inc.
Consolidated Statements of Financial Position
As at February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable (note 4)
Income taxes recoverable
Inventories (note 5)
Deposits and prepaid expenses
Derivative assets
Non-current assets
Property, plant and equipment (notes 7 and 8)
Intangible assets and goodwill (note 9)
Deferred income taxes (note 21)
Other assets
Total assets
Liabilities
Current liabilities
Bank indebtedness (note 10)
Short-term bank loans
Accounts payable and accrued liabilities (note 11)
Income taxes payable
Customer deposits
Provisions (note 12)
Provision for performance guarantees (note 12)
Derivative liabilities
Current portion of long-term lease liabilities (note 8)
Current portion of long-term debt (note 13)
Non-current liabilities
Long-term lease liabilities (note 8)
Long-term debt (note 13)
Income taxes payable
Deferred income taxes (note 21)
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
Commitments and contingencies (note 23)
February 29,
2020
$
February 28,
2019
$
75,327
627
135,242
8,747
170,265
5,191
555
395,954
98,179
17,148
26,702
513
70,673
658
137,520
16,863
165,583
4,612
189
396,098
83,537
18,146
25,947
629
142,542
128,259
538,496
524,357
44,317
1,379
74,271
1,493
47,208
14,963
21,127
1,169
1,621
8,311
215,859
13,722
10,986
1,576
2,869
8,623
37,776
29,807
2,172
75,407
495
40,240
8,494
23,014
83
-
8,609
188,321
-
13,242
1,742
3,738
8,481
27,203
253,635
215,524
284,861
308,833
538,496
524,357
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
T.C. Velan, Director
Yves Leduc, Director
42
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Velan Inc.
Consolidated Statements of Loss
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding per share amounts)
Sales (note 25)
Cost of sales (notes 5 and 16)
Gross profit
Administration costs (note 17)
Restructuring and transformation costs (note 20)
Other expense (income)
Operating loss
Finance income
Finance costs
Finance costs – net
Loss before income taxes
Income taxes (note 21)
Net loss for the year
Net loss attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
Loss per share (note 22)
Basic
Diluted
2020
$
2019
$
371,625
366,865
283,491
281,270
88,134
85,189
9,566
48
(6,669)
1,220
(2,609)
(1,389)
(8,058)
8,543
(16,601)
(16,390)
(211)
(16,601)
(0.76)
(0.76)
85,595
93,336
-
(741)
(7,000)
865
(1,560)
(695)
(7,695)
(2,301)
(5,394)
(4,882)
(512)
(5,394)
(0.23)
(0.23)
Dividends declared per Subordinate and Multiple Voting Share
0.09 (CA$0.12)
0.09 (CA$0.12)
The accompanying notes are an integral part of these consolidated financial statements.
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43
Velan Inc.
Consolidated Statements of Comprehensive Loss
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding per share amounts)
Comprehensive loss
Net loss for the year
Other comprehensive 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
2020
$
2019
$
(16,601)
(5,394)
(5,215)
(9,300)
(21,816)
(14,694)
(21,447)
(369)
(14,082)
(612)
(21,816)
(14,694)
Other comprehensive loss is composed solely of items that may be reclassified subsequently to the consolidated statement of loss.
The accompanying notes are an integral part of these consolidated financial statements.
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44
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding per share amounts)
Equity attributable to the Subordinate and Multiple Voting
shareholders
Accumulated
other
comprehensive
loss
Contributed
surplus
Retained
earnings
Share
capital
Total
Non-
controlling
interest
Total
equity
Balance – February 28, 2018
73,090
6,057
(19,790)
261,409
320,766
5,592
326,358
Net loss for the year
Other comprehensive loss
Effect of share-based compensation (note 14 (d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
-
-
-
-
-
-
-
-
17
-
-
-
-
(9,200)
(4,882)
-
(4,882)
(9,200)
(512)
(100)
(5,394)
(9,300)
-
-
-
-
-
17
-
17
(1,427)
(494)
-
(1,427)
(494)
-
-
-
(927)
(1,427)
(494)
(927)
Balance – February 28, 2019
73,090
6,074
(28,990)
254,606
304,780
4,053
308,833
Net loss for the year
Other comprehensive loss
Effect of share-based compensation (note 14 (d))
Share repurchase (note 14 (c))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
-
-
-
(395)
-
-
-
-
(9)
195
-
-
-
(5,057)
(16,390)
-
(16,390)
(5,057)
(211)
(158)
(16,601)
(5,215)
-
-
-
-
-
-
(9)
(200)
(1,395)
(552)
(1,395)
(552)
-
-
-
-
(9)
(200)
(1,395)
(552)
Balance – February 29, 2020
72,695
6,260
(34,047)
236,269
281,177
3,684
284,861
The accompanying notes are an integral part of these consolidated financial statements.
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45
Velan Inc.
Consolidated Statements of Cash Flows
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding per share amounts)
Cash flows from
Operating activities
Net loss for the year
Adjustments to reconcile net loss to cash provided (used) by operating activities (note 28)
Changes in non-cash working capital items (note 29)
Cash provided (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 Multiple Voting shareholders
Dividends paid to non-controlling interest
Repurchase of shares (note 14 (c))
Short-term bank loans
Increase in long-term debt
Repayment of long-term debt
Repayment of long-term lease liabilities
Cash used by financing activities
Effect of exchange rate differences on cash
Net change in cash during the year
Net cash – Beginning of the year
Net cash – End of the year
Net cash is composed of:
Cash and cash equivalents
Bank indebtedness
Supplementary information
Interest received (paid)
Income taxes received (paid)
2020
$
2019
$
(16,601)
12,125
14,119
9,643
31
(10,303)
(1,781)
272
102
(11,679)
(1,963)
-
(200)
(793)
1,122
(2,896)
(1,575)
(6,305)
(1,515)
(9,856)
40,866
31,010
75,327
(44,317)
31,010
(904)
3,006
(5,394)
7,118
(11,311)
(9,587)
(11)
(7,510)
(1,141)
144
403
(8,115)
(3,102)
(927)
-
1,098
3,989
(3,586)
-
(2,528)
(3,447)
(23,677)
64,543
40,866
70,673
(29,807)
40,866
26
(10,459)
Excluded adjustment recognized on adoption of IFRS 16:
Adjustment to right-of-use assets (note 3)
15,163
-
The accompanying notes are an integral part of these consolidated financial statements.
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46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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 as issued by the International Accounting Standards Board (“IFRS”).
These consolidated financial statements were approved by the Company’s Board of Directors on May 20, 2020.
2
Summary of significant accounting policies
Functional and presentation currency
Functional currency is defined as the currency of the primary economic environment in which an entity operates.
Indicators for determining an entity’s functional currency are broken down into primary and secondary indicators.
Primary indicators include:
•
•
•
the currency of sales and cash inflows;
the currency of the country having primary influence over sales prices; and
the currency of expenses and cash outflows.
Primary indicators receive more weight than secondary indicators. If a functional currency can be determined based
on the primary indicators, the secondary indicators are not considered.
The functional and presentation currency of the Company is the U.S. dollar.
Consolidation
These consolidated 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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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 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 loss for the year.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity. The Company’s financial assets comprise mainly cash and cash equivalents, short-term
investments, accounts receivable and derivative assets. The Company’s financial liabilities comprise mainly bank
indebtedness, short-term bank loans, accounts payable and accrued liabilities, customer deposits, 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.
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 loss in the year 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 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 loss over the expected life of the instrument.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
Fair value
Estimated fair values for financial instruments are designed to approximate amounts at which the instruments could
be exchanged in a current arm’s-length transaction between knowledgeable willing parties. The fair value of
derivative instruments is determined using valuation techniques.
The Company has evaluated the fair values of its financial instruments based on the current interest rate environment,
related market values and current pricing of financial instruments with comparable terms.
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the
ordinary course of the Company’s activities. Revenue is shown net of 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.
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49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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.
Short-term investments
Short-term investments include all highly liquid investments with original maturities greater than three months but
less than one year.
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 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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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 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 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:
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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.
Income taxes
The provision for income taxes for the year comprises current and deferred income taxes. Taxes are recognized in the
consolidated statement of 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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
Provision for performance guarantees
Provision 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. Provision for
performance guarantees is not recognized for costs that need to be incurred to operate in the future or expected future
operating losses.
Provision 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
For fiscal year ended February 28, 2019 (Prior to the adoption of IFRS 16)
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 loss on a
straight-line basis over the term of the lease.
For fiscal year ended February 29, 2020
In situations where the Company is a lessee, it recognizes a right-of-use asset and a lease liability when the asset is
available for use. The right-of-use asset is measured at the amount of the lease liability adjusted for any initial direct
costs, prepaid lease payments, restoration costs, and any lease incentives received. The right-of-use asset is
depreciated over the shorter of the lease term and useful life of the asset using the straight-line method since it closely
reflects the expected pattern of consumption of the future economic benefits. The right-of-use asset may be
periodically reduced by impairment losses, if any, and adjusted for certain remeasurement of the lease liability.
The lease liability is measured at the present value of lease payments payable discounted using the implicit rate or the
Company’s incremental borrowing rate when the implicit rate cannot be determined. It is subsequently measure at
amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments
arising from a change in an index, rate or estimate. Cash payments for the principal portion of the lease liability are
presented within the financial activities and the interest portion of the lease liability is presented within the operating
activities of the statement of cash flows.
The Company has elected to apply the recognition exemptions for short term leases and leases where the underlying
asset has a low value whereby payments made are charged to the consolidated statement of loss on a straight-line
basis over the term of the lease.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Share-based compensation plans
Grants under the Company’s share-based compensation plans are accounted for in accordance with the fair value
based method of accounting. The Company operates a share-based compensation plan under which it receives
services from employees as consideration for share options, performance share units (“PSUs”) and deferred share
units (“DSUs”).
Share options
The fair value of the employee services received in exchange for the grant of the options is amortized over the vesting
period as compensation expense, with a corresponding increase to contributed surplus. The total amount to be
expensed is determined by multiplying the number of options expected to vest with the fair value of one option as of
the grant date as determined by the Black-Scholes option pricing model. Remaining an employee of the Company for
a specified period of time is the only condition for vesting. Vesting typically occurs one-quarter per year over four
years from the grant date. This non-market performance condition is factored into the estimate of the number of
options expected to vest. If the number of options expected to vest differs from that originally expected, the expense
is adjusted accordingly. When options are exercised, the Company issues new shares. The proceeds received, together
with the amount recorded in contributed surplus, net of any directly attributable transaction costs, are recorded in
share capital.
PSUs and DSUs
PSUs and DSUs may be granted to certain of its independent directors and full-time employees as part of their
long-term compensation package entitling them to receive payout in cash based on the Company’s share price at the
relevant time. A liability for PSUs and DSUs is measured at fair value on the grant date and is subsequently adjusted
at each balance sheet date for changes in fair value according to the estimation made by management of the number
of PSUs and DSUs that will eventually vest. The liability is recognized to accounts payable and accrued liabilities
over the vesting period, with a corresponding charge to compensation expense.
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.
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
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 loss.
Warranty 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
loss.
Provision for performance guarantees
Provision 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 provision for performance
guarantees on the consolidated statement of financial position with a corresponding impact made to sales on the
consolidated statement of loss.
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. Determining whether there are indicators of potential impairment is a matter of significant judgment.
When determining the recoverable amount of a CGU, management prepares estimates based on assumptions such as
the weighted-average cost of capital, the Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
margin and revenue growth. 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 loss.
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
COVID-19
The outbreak of the novel coronavirus (“COVID-19”) has resulted in governments worldwide enacting emergency
measures to combat the spread of the virus. These measures have caused material disruptions to businesses globally
resulting in an economic slowdown, including demand for products and ability to secure timely access to supplies as
a result of various government mandated shutdowns. The Company has been able to continue its operations with
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
minimal interruption since it has been deemed to provide an essential service by various governmental authorities.
Management continues to closely monitor the global situation surrounding the virus, as well as taking proactive steps
to ensure the well-being and safety of its employees, and the continuity of its operations and businesses. In
developing estimates for the year ended February 29, 2020, management determined that COVID-19 has minimal
impact on key assumptions. However, because of the uncertainty that exists, it is not possible to reliably estimate the
impact that these developments will have on the Company's financial results, conditions and cash flows.
Consolidation
The Company consolidates the accounts of Juwon Special Steel Co. Ltd. in these consolidated financial statements. It
was determined that the Company has substantive rights over this structured entity that are currently exercisable and
for which there is no barrier, despite the fact that its percentage ownership in this entity is only 50%. These
substantive rights are obtained through the shareholders’ agreement signed between the Company and the non-
controlling interest which gives the Company the ultimate decision right on any decision taken for which both parties
in the joint arrangement are not in agreement. As per the shareholders’ agreement, the Board of Directors,
representing the interests of shareholders, has responsibility to establish operating decisions (including budgets),
approve capital transactions and determine key management personnel remuneration. Consequently, the Company,
through its rights set out in the shareholders’ agreement, has substantive rights that give it the ability to direct the
relevant activities of Juwon Special Steel Co. Ltd. while being exposed to variable returns. As such, it was
determined that this entity should be consolidated.
3 New accounting standards and amendments
New accounting standards and amendments adopted in the year
(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 was adopted effective March 1, 2019 and the Company elected the modified retrospective
transition method on the effective date, without restatement of the comparative figures. As such, comparative
information continues to be reported under previous accounting standards.
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the
contract includes the right to control the use of an identified asset for a period of time in exchange for
consideration.
In situations where the Company is a lessee, the result is the recording, at the lease commencement date, of a
right-of-use asset and a lease liability for the present value of the future lease payments on the statement of
financial position for most of its contracts that were considered operating leases under IAS 17. In order to
determine the present value of the future lease payments, the Company uses the interest rate implicit in the lease
or, if that rate cannot be readily determined, the Company uses the incremental borrowing rate of each of its
subsidiaries. The Company depreciates its right-of-use asset on the lesser of the lease term or the useful life of
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
the asset using the straight-line method since it closely reflects the expected pattern of consumption of the future
economic benefits.
The right-of-use asset may be periodically reduced by impairment losses, if any, and adjusted for certain
remeasurement of the lease liability. The lease liability is measured at amortized cost using the effective
interest method. It is remeasured when there is a change in future lease payments arising from a change in an
index, rate or estimate. The lease liability is remeasured with a corresponding adjustment to the carrying value
of the right-of use asset. If the carrying value of the right-of-use asset has been reduced to zero, the remaining
adjustment is recorded in the statement of loss.
Cash payments for the principal portion of the lease liability are presented within the financial activities and the
interest portion of the lease liability is presented within the operating activities of the statement of cash flows.
Payments associated with short-term leases and leases of low value assets are not included in the measurement
of the lease liability and are presented in operating activities in the statement of cash flows.
At the date of initial application, the Company elected to measure the right-of-use asset in an amount equal to
the lease liability. The Company also applied the following practical expedients when applying IFRS 16 to
leases previously classified as operating leases under IAS 17:
a) The Company elected to apply the standard to contracts that were previously identified as leases under
IAS 17 and IFRIC 4 and elected to not apply the standard to contracts that were not previously identified
as leases under IAS 17 and IFRIC 4.
b) The Company has elected to exclude intangible assets from the scope of this standard.
c) The Company used the exemptions proposed by the standard on lease contracts for which the lease terms
end within 12 months as the date of initial application, and lease contracts for which the underlying asset
is of low value.
d) The Company used hindsight to determine the lease terms if the contract contained options to extend or
terminate the lease term.
The following table reconciles the Company’s operating lease obligations at February 28, 2019 to the lease
liabilities recognized on initial application of IFRS 16 at March 1, 2019.
Operating Lease Commitments disclosed as at February 28, 2019
Discounted using the lessee's weighted average incremental borrowing rate of
2.49% at the date of initial application
(Less): Short-term leases and low-value leases recognized on straight-line basis as
expense
Add: Adjustments as a result of a different treatment of extension and termination
options
Lease liability recognized as at March 1, 2019
Of which are:
Current portion of long-term lease liabilities
Long-term lease liabilities
15,763
(4,249)
(331)
3,980
15,163
1,290
13,873
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The recognized right-of-use assets relate to the following types of assets:
Land
Buildings
Machinery & Equipment
Furniture & Fixtures
Data Processing Equipment
Rolling Stock
Total right-of-use assets
As at
February 29, 2020
$
As at
March 1, 2019
$
6,648
6,559
359
33
138
1,417
6,528
7,150
113
48
241
1,083
15,154
15,163
The following table summarizes the impact of adopting IFRS 16 on the Company’s consolidated statement of
financial position as at March 1, 2019. Prior amounts have not been restated. The Company’s transition to
IFRS 16 did not impact the Company’s retained earnings.
Non-current assets
Property, Plant and Equipment
Current liabilities
Current portion of long-term lease liabilities
Non-current liabilities
Long-term lease liabilities
February 28,
2019
$
Adjustment due
to IFRS 16
$
March 1,
2019
$
83,537
15,163
98,700
- 1,290
1,290
- 13,873
13,873
(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 Company has adopted the interpretation of IFRIC 23 on March 1, 2019 and concluded that it has no impact
on previously reported results.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
4 Accounts receivable
Trade accounts receivable
Loss allowance
Other receivables
Total accounts receivable
The table below summarizes the movements in the loss allowance:
Balance – Beginning of year
Loss allowance expense
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
As at
February 29,
2020
$
As at
February 28,
2019
$
129,764
(2,002)
7,480
131,922
(1,662)
7,260
135,242
137,520
As at
February 29,
2020
$
As at
February 2,
2019
$
1,662
1,045
(95)
(552)
(58)
2,002
1,088
1,056
(215)
(202)
(65)
1,662
The loss allowance is included in the administration costs on the consolidated statement of loss.
Amounts charged to the loss allowance account are generally written off when there is not reasonable expectation of
recovery.
5
Inventories
Raw materials
Work in process
Finished goods
As at
February 29,
2020
$
As at
February 28,
2019
$
35,920
95,123
39,222
35,858
96,863
32,862
170,265
165,583
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $3,971 (2019 – $2,518), including reversals of $3,905 (2019 – $7,111).
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
6 Subsidiaries and transactions with non-controlling interests
a)
Interest in subsidiaries
Set out below are the Company’s principal subsidiaries at February 29, 2020. 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
2020
2019
% of ownership
interest held by
the non-
controlling
interests
2019
2020
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 cash equivalents 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 8% (2019 – 6%) of the Company’s cash and
cash equivalents and short-term investments are subject to such restrictions. The total amount of cash and cash
equivalents and short-term investments subject to such restrictions as at February 29, 2020 was $5,741
(2019 – $3,972).
c) Non-controlling interests
Set out below is summarized financial information for each subsidiary 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 13(o)). The amounts disclosed for each subsidiary are
before intercompany eliminations.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statements of financial position
Current assets
Current liabilities
Current net assets (liabilities)
Non-current assets
Non-current liabilities
Non-current net assets
Net assets
Accumulated non-controlling interest
Juwon Special Steel Co. Ltd.
Velan Valvac Manufacturing
Co. Ltd.
As at
February 29,
2020
$
As at
February 28,
2019
$
As at
February 29,
2020
$
As at
February 28,
2019
$
5,621
8,316
(2,695)
13,924
6,867
7,057
4,362
3,032
5,754
5,716
38
12,109
7,461
4,648
4,686
3,397
4,839
1,246
3,593
1,924
19
1,905
5,498
652
5,323
1,712
3,611
1,878
47
1,831
5,442
655
Summarized statements of comprehensive income (loss)
Juwon Special Steel Co. Ltd.
Velan Valvac Manufacturing
Co. Ltd.
2020
$
2019
$
2020
$
2019
$
Sales
16,202
14,251
7,450
7,403
Net income (loss) for the year
Other comprehensive income (loss)
(9)
(315)
(941)
(201)
Total comprehensive income (loss) for the year
(324)
(1,142)
Net loss allocated to non-controlling interest
(207)
(508)
Dividends paid to non-controlling interest
-
927
55
-
55
(4)
-
101
-
101
(4)
-
Summarized statements of cash flows
Juwon Special Steel Co. Ltd.
Velan Valvac Manufacturing
Co. Ltd.
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
2020
$
2019
$
1,309
(1,303)
(2,786)
505
(312)
(1,810)
2020
$
694
(86)
-
2019
$
(26)
(101)
-
Net increase (decrease) in cash and cash equivalents
(1,789)
(2,608)
608
(127)
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
7 Property, plant and equipment
Land Buildings
$
$
Machinery &
equipment
$
Furniture
& fixtures
$
Data
processing
equipment
$
Rolling
Stock
$
Leasehold
improvements
$
Right-of-
use assets
(note 8)
$
21,615
-
21,615
57,775
(29,187)
28,588
155,632
(120,104)
35,528
8,705
(7,177)
1,528
6,782
(6,090)
692
3,081
(2,512)
569
21,615
-
-
-
(656)
20,959
28,588
1,083
-
(1,762)
(543)
27,366
35,528
5,020
(134)
(8,293)
(771)
31,350
1,528
307
-
(481)
(62)
1,292
692
627
(1)
(399)
(12)
907
569
138
-
(230)
(13)
464
20,959
-
20,959
57,178
(29,812)
27,366
152,533
(121,183)
31,350
8,503
(7,211)
1,292
7,249
(6,342)
907
3,093
(2,629)
464
20,959
5,239
-
-
-
(900)
25,298
27,366
1,036
-
-
(1,980)
(266)
26,156
31,350
3,164
-
(131)
(5,709)
(385)
28,289
1,292
35
-
-
(385)
(22)
920
907
549
-
-
(510)
(11)
935
464
133
-
(22)
(192)
(16)
367
3,848
(2,504)
1,344
1,344
335
-
(401)
(79)
1,199
2,769
(1,570)
1,199
1,199
147
-
-
(242)
(44)
1,060
-
-
-
-
-
-
-
-
-
-
-
-
15,163
1,768
593
(118)
(1,785)
(467)
15,154
Total
$
257,438
(167,574)
89,864
89,864
7,510
(135)
(11,566)
(2,136)
83,537
252,284
(168,747)
83,537
98,700
12,071
593
(271)
(10,803)
(2,111)
98,179
25,298
-
25,298
56,518
(30,362)
26,156
151,576
(123,287)
28,289
8,428
(7,508)
920
7,669
(6,734)
935
2,868
(2,501)
367
2,798
(1,738)
1,060
16,895
(1,741)
15,154
272,050
(173,871)
98,179
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
Year ended February 29, 2020
Beginning balance
Additions
Modifications to lease terms
Disposals
Depreciation
Exchange differences
At February 29, 2020
Cost
Accumulated depreciation
Depreciation expense of $10,803 (2019 – $11,566) is included in the consolidated statement of loss: $8,792
(2019 – $10,502) in ‘cost of sales’ and $2,011 (2019 – $1,064) in ‘administration costs’.
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63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8 Leases
a) Right-of-use assets
Year ended February 29, 2020
Beginning balance (note 3)
Additions
Modifications to lease terms
Disposals
Depreciation
Exchange differences
At February 29, 2020
Cost
Accumulated depreciation
b) Long-term lease liabilities
Land
$
Buildings
$
Machinery &
equipment
$
Furniture &
fixtures
$
Data processing
equipment Rolling Stock
$
$
Total
$
6,528
-
485
-
(109)
(256)
6,648
6,755
(107)
6,648
7,150
363
38
-
(808)
(184)
6,559
7,358
(799)
6,559
113
295
52
-
(96)
(5)
359
454
(95)
359
48
-
-
-
(13)
(2)
33
46
(13)
33
241
-
-
-
(103)
-
138
241
(103)
138
1,083
1,110
18
(118)
(656)
(20)
1,417
2,041
(624)
1,417
15,163
1,768
593
(118)
(1,785)
(467)
15,154
16,895
(1,741)
15,154
Current portion of long-term lease liabilities
Long-term lease liabilities
Amounts recognized in the consolidated statement of loss:
Expenses relating to short‐term leases (included in ‘cost of sales’ and
‘administration costs’)
Expenses relating to leases of low‐value assets, excluding short‐term leases of
low‐value assets (included in ‘cost of sales’ and ‘administration costs’)
Expenses related to variable lease payments (included in ‘cost of sales’ and
‘administration costs’)
Interest expenses (included in ‘finance costs’)
As at
February 29,
2020
$
As at
March 1,
2019
$
1,621
13,722
1,290
13,873
15,343
15,163
2020
$
311
153
128
389
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64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
9
Intangible assets and goodwill
At February 28, 2018
Cost
Accumulated depreciation
Year ended February 28, 2019
Beginning Balance
Additions
Disposals and transfers
Amortization
Exchange differences
At February 28, 2019
Cost
Accumulated amortization
Year ended February 29, 2020
Beginning Balance
Additions
Disposals and transfers
Amortization
Exchange differences
At February 29, 2020
Cost
Accumulated amortization
Goodwill
$
Computer
software
$
Patents,
products &
designs
$
Customer
lists
$
Other
$
Total
$
9,568
-
9,568
9,568
-
-
-
(625)
8,943
8,943
-
8,943
8,943
-
-
-
(344)
8,599
8,599
-
8,599
8,063
(7,617)
446
446
339
-
(225)
(26)
534
8,139
(7,605)
534
534
337
(2)
(309)
(14)
546
8,176
(7,630)
546
14,845
(6,836)
8,009
8,009
882
-
(1,138)
(418)
7,335
14,889
(7,554)
7,335
7,335
1,444
-
(1,265)
(199)
7,315
15,872
(8,557)
7,315
6,596
(4,511)
2,085
2,085
-
-
(630)
(123)
1,332
6,165
(4,833)
1,332
1,332
-
-
(603)
(43)
686
5,928
(5,242)
686
832
(730)
102
102
-
(80)
(16)
(4)
2
699
(697)
2
2
-
-
-
-
2
39,904
(19,694)
20,210
20,210
1,221
(80)
(2,009)
(1,196)
18,146
38,835
(20,689)
18,146
18,146
1,781
(2)
(2,177)
(600)
17,148
673
(671)
2
39,248
(22,100)
17,148
Amortization expense of $2,177 (2019 – $2,009) is included in the consolidated statement of loss: $1,349 (2019 – $1,406)
in ‘cost of sales’ and $828 (2019 – $603) in ‘administration costs’.
As at February 29, 2020, the Company capitalized $1,444 (2019 – $882) of development costs, net of research and
development tax credits of $605 (2019 – $234), as patents, products and designs.
The Company’s goodwill is associated with the CGU related to Velan S.A.S. In 2019, the Company tested this CGU for
impairment and concluded that no goodwill impairment needed to be recorded, given an excess of $37,761 compared to a
carrying amount of $26,446. In 2020, the Company has not identified material changes in the composition of the CGU, its
carrying amount or its results of operations, amongst others. In accordance with IFRS, the Company has not tested this
CGU for impairment.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
10 Credit facilities
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities available
as at February 29, 2020:
Unsecured
Credit facilities available
Borrowing rates
$63,338 (CA$85,000) (2019 – $64,546 (CA$85,000))
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 on June 30.
As at February 29, 2020, an amount of $33,341 (2019 – $13,620) was drawn against these unsecured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $9,183
(2019 – $12,991) was drawn against these unsecured credit facilities in the form of letters of credit and letters of
guarantee. This credit facility is subject to certain covenants. As at February 29, 2020, the Company was in
breach of one of its covenants and a waiver was obtained subsequent to year-end date which waives the
covenants as of February 29, 2020 and May 31, 2020 at which point the Company anticipates that it will be fully
compliant with its covenants.
In addition to the unsecured credit facilities above, the Company maintains a facility with Export Development
Canada of $30,000 (2019 – $40,000) for letters of credit and letters of guarantee. As at February 29, 2020,
$6,404 (2019 – $6,162) was drawn against this facility. The credit facility expires on August 30, 2020 and is
renewed annually.
b) Foreign subsidiaries and structured entities have the following credit facilities available as at February 29, 2020:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$66,677 (€53,662; KW4,281,800; INR270,000; NTD
15,000) (2019 – $62,779 (€48,162;
KW4,485,600; INR270,000)) (note 27)
Foreign structured entities
$5,720 (KW6,900,000)
(2019 – $3,737 (KW4,203,600)) (note 27)
Borrowing rates
0.20% to 9.30%
2.86% to 3.49%
The above credit facilities are available by way of demand operating lines of credit, bank loans, guarantees, letters of
credit and foreign exchange forward contracts. The majority of these credit facilities have variable borrowing rates
based on LIBOR, EURIBOR, KORIBOR, EONIA or prime rate. The borrowing rates listed above are the rates in
effect as at February 29, 2020. 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 $7,016 (2019 – $6,965).
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66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
As at February 29, 2020, an amount of $10,976 (2019 – $16,187) was drawn against these secured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $8,069 (2019 – $5,828) was drawn
against these secured credit facilities in the form of letters of credit and letters of guarantee.
11 Accounts payable and accrued liabilities
Trade accounts payable
Dividend payable
Accrued liabilities
Other
12 Provisions
a) Provision for performance guarantees
Balance – Beginning of year
Additional provisions
Used during the year
Reversed during the year
Exchange differences
Balance – End of year
As at
February 29,
2020
$
As at
February 28,
2019
$
32,091
482
33,847
7,851
74,271
31,016
497
40,039
3,855
75,407
As at
February 29,
2020
$
As at
February 28,
2019
$
23,014
5,447
(1,266)
(5,285)
(783)
25,424
6,320
(3,370)
(4,030)
(1,330)
21,127
23,014
The company’s provision 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.
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67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 29,
2020
$
As at
February 28,
2019
$
8,494
5,983
(2,641)
(2,061)
(298)
9,477
10,798
2,150
(1,702)
(2,118)
(634)
8,494
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.
c) Severance provision
Balance – Beginning of year
Additional provisions
Used during the year
Balance – End of year
As at
February 29,
2020
$
-
6,760
(1,274)
5,486
During the year ended February 29, 2020, the Company recorded a $6,760 severance provision on its consolidated
statement of financial position. Excluding an amount of $519, the provision is relating to the Company’s ongoing
restructuring and transformation initiative (note 20). The Company has paid $1,274 worth of severance packages and
related expenses during the fiscal year ended February 29, 2020, which brought the provision at $5,486 at the end of
the fiscal year.
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68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
13 Long-term debt
French subsidiaries
Unsecured bank loan (€2,156; February 28, 2019 – (€2,752) (note 13(a))
Unsecured bank loan (€1,204; February 28, 2019 – €1,804) (note 13(b))
Unsecured bank loan (€318; February 28, 2019 – €417) (note 13(c))
Unsecured bank loan (€25; February 28, 2019 – €127) (note 13(d))
Unsecured bank loan (€867; February 28, 2019 – nil) (note 13(e))
Italian subsidiary
Unsecured bank loan (€148; February 28, 2019 – €256) (note 13(f))
Unsecured bank loan (€182; February 28, 2019– €280) (note 13(g))
Unsecured state bank loan (€33; February 28, 2019 – €67) (note 13(h))
Unsecured bank loan (nil; February 28, 2019 – €51) (note 13(i))
Unsecured bank loan (nil; February 28, 2019 – €133) (note 13(j))
Unsecured bank loan (nil; February 28, 2019 – €188) (note 13(k))
Unsecured state bank loan (€1,150; February 28, 2019 – €1,359) (note 13(l))
Korean structured entity
Secured bank loan (nil; February 28, 2019 – KW3,600) (note 13(m))
Secured bank loan (KW7,757,040; February 28, 2019 – KW8,000,000)
(note 13(n))
Other (note 13(o))
Less: Current portion
As at
February 29,
2020
$
As at
February 28,
2019
$
2,367
1,321
349
28
952
163
200
37
-
-
-
1,262
-
6,431
6,187
3,142
2,059
477
145
-
292
319
77
59
152
214
1,552
3
7,112
6,248
19,297
8,311
21,851
8,609
10,986
13,242
a) The unsecured bank loan of $2,367 (€2,156) bears interest at 0.42% and is repayable in monthly instalments of
$55, expiring in 2023.
b) The unsecured bank loan of $1,321 (€1,204) bears interest at 0.20% and is repayable in monthly instalments of
$55, expiring in 2022.
c) The unsecured bank loan of $349 (€318) bears interest at 0.53% and is repayable in monthly instalments of $9,
expiring in 2023.
d) The unsecured bank loan of $28 (€25) bears interest at 0.89% and is repayable in monthly instalments of $9,
expiring in 2020.
e) The unsecured bank loan of $952 (€867) bears interest at 0.30% and is repayable in monthly instalments of $18,
expiring in 2024.
f) The unsecured bank loan of $163 (€148) bears interest at 2.50% and is repayable in monthly instalments of $10,
expiring in 2021.
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69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
g) The unsecured state bank loan of $200 (€182) bears interest at 4.50% and is repayable in monthly instalments of
$9, expiring in 2021.
h) The unsecured bank loan of $37 (€33) is non-interest bearing and is repayable in semi-annual instalments of
$37, expiring in 2020.
i) The unsecured bank loan of nil bears interest at the 3-month Euribor rate plus 1.7% and is repayable in quarterly
instalments of $28, expired in 2019.
j) The unsecured bank loan of nil bears interest at the 3-month Euribor rate plus 1.8% and is repayable in quarterly
instalments of $72, expired 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 $101, expired in 2019.
l) The unsecured state bank loan of $1,262 (€1,150) bears interest at 3% and is repayable in semi-annual
instalments of $126, expiring in 2024.
m) The secured bank loan of nil bears interest at 1.50% and was repaid in 2020. Certain land, a building, and certain
machinery and equipment were pledged as collateral for this loan.
n) The secured bank loan of $6,431 (KW7,757,040) bears interest at 1.97% and is repayable in quarterly
instalments of $201, expiring in 2025. Certain land, a building, and certain machinery and equipment are
pledged as collateral for this loan.
o)
Included in Other is an amount of $5,042 (€4,593) (February 28, 2019 – $4,990 (€4,371)) 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 loss.
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted to $8,763
(2019 – $11,534).
The carrying value of long-term debt approximates its fair value.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
14 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
6,019,068 Subordinate Voting Shares (February 28, 2019 –
6,055,368) (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 29,
2020
$
As at
February 28,
2019
$
65,569
7,126
72,695
65,964
7,126
73,090
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a maximum of
151,384 of the issued Subordinate Voting Shares of the Company, representing approximately 2.5% of the
issued shares of such class as at October 10, 2019, during the ensuing 12-month period ending October 22,
2020. During the year ended February 29, 2020, 36,300 (2019 – nil) Subordinate Voting Shares were purchased
for a cash consideration of $200 (2019 – nil) and cancelled.
d) The Company established a fixed share option plan (the “Share Option Plan”) in 1996, amended in fiscal 2007,
to allow for the purchase of Subordinate Voting Shares by certain of its full-time employees, directors, officers
and consultants.
The subscription price for Subordinate Voting Shares granted under options is the greater of (i) the weighted
average trading price for such Subordinate Voting Shares for the five days preceding the date of grant during
which the Subordinate Voting Shares were traded on the Toronto Stock Exchange (“TSX”) or (ii) the trading
price for the Subordinate Voting Shares on the last day the Subordinate Voting Shares were traded on the TSX
immediately preceding the date of grant.
Under the Share Option Plan, the maximum number of Subordinate Voting Shares issuable from time to time is
a fixed maximum percentage of 5% of the aggregate of the Multiple Voting Shares and the Subordinate Voting
Shares issued and outstanding from time to time.
The granting of options is at the discretion of the Board of Directors which, at the date of grant, establishes the
term and vesting period. Vesting of options generally commences 12 months after the date of grant and accrues
annually over the vesting period provided there is continuous employment. The maximum term permissible is
10 years.
A stock-based compensation expense reversal of $9 (2019 – compensation cost of $17) was recorded in the
consolidated statement of loss and debited (2019 – credited) to contributed surplus.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The table below summarizes the status of the Share Option Plan.
Number
of shares
140,000
140,000
130,000
Weighted average exercise price
$15.04 (CA$19.26)
$14.63 (CA$19.26)
$14.86 (CA$19.57)
Weighted
average
contractual
life in
months
26.4
14.4
Outstanding – February 28, 2018
Outstanding – February 28, 2019
Exercisable – February 28, 2019
Outstanding – February 28, 2019
140,000
$14.63 (CA$19.26)
14.4
Expired/forfeited
(110,000)
$15.39 (CA$20.37)
Outstanding – February 29, 2020
Exercisable – February 29, 2020
30,000
30,000
$11.33 (CA$15.22)
$11.33 (CA$15.22)
-
2.5
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.
As at February 29, 2020, the Company had nil (2019 – 24,611) PSUs outstanding, representing a total liability
of nil (2019 - $71 which was included in accounts payable and accrued liabilities). A compensation cost
recovery of $71 (2019 – $9) was recorded in the consolidated statement of loss and decreased accounts payable
and accrued liabilities. No payments have been made in relation to PSUs since the inception of the plan. For the
year ended February 29, 2020, 20,675 PSUs expired (2019 – nil), 4,297 PSUs (2019 – 981) 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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 29, 2020, the Company had a total of 45,268 (2019 – 28,768) DSUs outstanding, representing a
total liability of $127 (2019 - $98) which is included in accounts payable and accrued liabilities. A
compensation cost of $29 (2019 – $29) was recorded in the consolidated statement of loss and increased
accounts payable and accrued liabilities. A total of 23,756 (2019 – 16,369) DSUs were granted during the course
of the current fiscal year. No payments (2019 – 9$) has been made in relation to the DSUs in 2020 and 18,503
(2019 – 11,178) DSUs have vested at the end of the fiscal year. For the year ended February 29, 2020, 6,827
DSUs (2019 – 327) were forfeited.
15 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 expense (income) and amounted to:
Sales
Cost of sales
Other expense (income)
16 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
Depreciation and amortization
Movement in inventory provision – net
Foreign exchange loss
Other production overhead costs
2020
$
109
(372)
2
2020
$
(7,292)
170,334
74,150
10,141
3,971
372
31,815
2019
$
924
(866)
(185)
2019
$
3,531
149,881
77,861
11,908
2,518
866
34,705
283,491
281,270
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
17 Administration costs
Employee expenses, excluding scientific research investment tax credits
Scientific research investment tax credits
Commissions
Freight to customers
Professional fees
Movement in allowance for doubtful accounts
Depreciation and amortization
Other
18 Employee expenses
Wages and salaries
Social security costs
Scientific research investment tax credits
Share-based compensation
Costs relating to workforce reduction
Other
2020
$
44,367
(2,280)
4,029
4,279
14,804
953
2,839
16,198
85,189
2020
$
85,318
27,520
(2,280)
(15)
6,760
5,175
2019
$
46,532
(2,237)
5,850
5,122
15,679
841
1,667
19,882
93,336
2019
$
88,960
28,740
(2,237)
37
-
6,656
122,478
122,156
19 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
2020
$
8,263
(2,280)
2019
$
9,304
(2,237)
5,983
7,067
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
20 Restructuring and transformation costs
On January 10, 2019, the Company announced measures to improve its operational efficiency and optimize its
manufacturing footprint in North America. The Company’s current production is gradually being reorganized from
four North American plants to three more specialized plants that will be structured to better support the new business
units’ market strategies. The production of certain non-project valves produced in North America, as well as less
complex project valves are also being transferred to India. The workforce reduction and plant consolidation
commenced during the fourth quarter of the current fiscal year and should be completed over the course of the
ensuing twelve months.
During the current fiscal year, the Company incurred restructuring and transformation costs of $9,566 (2019 – nil),
which consisted primarily of cash severance and related costs paid or to be paid to former employees, temporary
project resources and their travel and lodging costs as well as the moving costs related to dismantling and
transportation of machinery and equipment to reflect the optimized manufacturing footprint plan.
The portion of these restructuring and transformation costs relating to workforce reduction amounted to $6,241 while
$3,325 related to plant consolidation and optimization. The Company has paid $1,274 worth of severance packages
and related expenses during the fiscal year ending February 29, 2020 which brought the provision at $5,486 at the end
of the fiscal year. All other restructuring and transformation costs are expensed as incurred.
21 Income taxes
Current taxes:
Current tax on profits for the year
Adjustments in respect of prior years
Deferred income taxes:
Origination and reversal of temporary differences
Adjustments in respect of prior years
Income tax expense (recovery)
2020
$
2019
$
7,822
2,485
8,270
(4,982)
10,307
3,288
(1,923)
159
(9,078)
3,489
(1,764)
(5,589)
8,543
(2,301)
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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:
2020
$
2019
$
Income tax at statutory rate of 26.60% (2019 – 26.68%)
(2,143)
(2,053)
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Taxable foreign exchange gain
De-recognition of unused tax losses
Losses utilized not previously tax effected
Prior period adjustments and assessments
Benefit attributable to a financing structure
Other
1,469
378
8,256
(1,227)
2,100
(253)
(37)
1,640
327
724
(525)
(1,494)
(891)
(29)
Income tax expense (recovery)
8,543
(2,301)
The analysis of deferred income tax assets and deferred income 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
2020
$
18,447
8,255
(1,300)
(1,569)
2019
$
20,878
5,069
(1,780)
(1,958)
Net deferred income tax asset
23,833
22,209
The movement of the net deferred income tax asset account is as follows:
Balance – Beginning of year
Recovery of income taxes in the consolidated statement of loss
Exchange differences
2020
$
22,209
1,764
(140)
2019
$
16,655
5,589
(35)
Balance – End of year
23,833
22,209
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The significant components of the net deferred income tax asset are as follows:
Property, plant and equipment
Intangible assets
Non-deductible provisions and reserves
Investment tax credits
Inventories
Non-capital loss carryforwards
Other
2020
$
(2,980)
(1,764)
13,705
(1,432)
3,574
10,462
2,268
2019
$
(2,075)
(2,762)
11,720
(1,132)
3,341
11,560
1,557
23,833
22,209
The Company did not recognize deferred income tax assets of $10,312 (2019 – $3,364) in respect of non-capital
losses amounting to $40,611 (2019 – $14,867) that can be carried forward to reduce taxable income in future years.
These losses expire between 2021 and indefinitely. For the remainder of non-capital losses, the Company has
concluded that their related deferred income tax assets will be recoverable before their expiry dates using the
estimated future taxable income based on the business plans and budgets of the Company. These losses expire
beginning in 2038 to indefinitely.
The Company did not recognize deferred income tax assets of $368 (2019 – $368) in respect of capital losses
amounting to $2,745 (2019 – $2,745) that can be carried forward indefinitely against future taxable capital gains.
Deferred income tax liabilities of $5,391 (2019 – $5,494) have not been recognized for the withholding tax and other
taxes that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are not expected to
reverse in the foreseeable future. Unremitted earnings as at February 29, 2020 totalled $266,930 (2019 – $290,671).
22 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.
2020
2019
Net loss attributable to Subordinate and Multiple Voting shareholders
$(16,390)
$(4,882)
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic loss per share
21,614,875
21,621,935
$(0.76)
$(0.23)
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of Subordinate and Multiple
Voting Shares outstanding to assume conversion of all dilutive potential Subordinate and Multiple Voting
Shares. The Company has one category of dilutive potential Subordinate and Multiple Voting Shares: stock
options. For the stock options, a calculation is done to determine the number of Subordinate and Multiple
Voting Shares that could have been acquired at fair value (determined as the average market share price of the
Company’s outstanding Subordinate and Multiple Voting Shares for the period), based on the exercise prices
attached to the stock options. The number of Subordinate and Multiple Voting Shares calculated above is
compared with the number of Subordinate and Multiple Voting Shares that would have been issued assuming
exercise of the stock options.
2020
2019
Net loss attributable to Subordinate and Multiple Voting shareholders
$(16,390)
$(4,882)
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
21,614,875
21,621,935
Weighted average number of Subordinate and Multiple Voting Shares for
diluted loss per share
Diluted loss per share
21,614,875
21,621,935
$(0.76)
$(0.23)
As at February 29, 2020, 30,000 stock options have an antidilutive effect (2019 – 140,000).
23 Commitments and contingencies
a)
In the normal course of business, the Company issues performance bond guarantees related to product warranty
and on-time delivery as well as advance payment guarantees and bid bonds. As at February 29, 2020, the
aggregate maximum value of these guarantees, if exercised, amounted to $55,992 (2019 – $69,202). The
guarantees expire as follows:
February 28, 2021
February 28, 2022
February 28, 2023
February 29, 2024
February 28, 2025
Subsequent years
$
22,571
8,363
2,412
13,851
1,786
7,009
55,992
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$3,550 (2019 – $3,988), which are covered by letters of credit.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) Future minimum payments under operating leases (related mainly to information technology equipment) are
as follows:
February 28, 2021
February 28, 2022
February 28, 2023
February 29, 2024
February 28, 2025
$
397
294
172
31
23
917
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 recorded in the consolidated financial statements.
During the year ended February 29, 2020, legal and related costs for these matters amounted to $9,621
(2019 – $9,212). These costs are expensed as incurred.
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 recorded in the consolidated
financial statements.
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 alleged damages to the Facility in excess of $9,000 related to allegedly defective valves supplied by
Velan Valve Corp. The claim was for alleged strict product liability and alleged negligence. During the year
ended February 29, 2020, the Company has recorded a final net settlement of $850 in regard to the claim.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Related party transactions
Transactions and balances with related parties occur in the normal course of business. Related party transactions and
balances not otherwise disclosed separately in these consolidated financial statements are as follows:
Affiliated company owned by certain relatives of controlling shareholder
Purchases – Material components
708
1,013
2020
$
2019
$
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
25 Segment reporting
91
98
4,532
(9)
(42)
4,206
17
20
The Company reflects its results under a single reportable operating segment. The geographic distribution of its sales
and assets is as follows:
Canada
$
United
States
$
As at February 29, 2020
Consolidated
France
$
Italy
$
Other
$
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
32,454
36,998
40,046
106,210
-
14,208
46,823
42,637
349
846
67,427
337
21,985
16,245
60,068
-
-
(115,008)
208,318
163,307
-
Total
109,498
120,418
89,809
68,610
98,298
(115,008)
371,625
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
31,931
2,981
169,065
7,466
-
70,534
19,035
8,834
153,828
6,309
5,291
59,457
33,438
42
123,802
-
-
(153,517)
98,179
17,148
423,169
Total identifiable assets
203,977
78,000
181,697
71,057
157,282
(153,517)
538,496
1 Key management includes directors (executive and non-executive) and certain members of senior management.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Canada
$
United
States
$
As at February 28, 2019
Consolidated
France
$
Italy
$
Other
$
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
47,657
65,186
37,235
109,618
-
8,707
41,957
55,964
222
2,108
33,593
376
16,616
(5,834)
77,068
-
-
(123,608)
217,956
148,909
-
Total
150,078
118,325
98,143
36,077
87,850
(123,608)
366,865
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
30,736
1,986
215,979
6,165
-
27,796
12,935
9,219
153,350
1,871
6,887
52,608
31,830
54
118,874
-
-
(145,933)
83,537
18,146
422,674
Total identifiable assets
248,701
33,961
175,504
61,366
150,758
(145,933)
524,357
26 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk
management program focuses on mitigating unpredictable financial market risks and their potential adverse effects on
the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies
approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are the
responsibility of the corporate finance team in conjunction with the finance teams of the Company’s 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).
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates. The Company operates internationally and is exposed to
foreign exchange risk arising from various currency exposures. Currency risk arises when future commercial
transactions and recognized assets and liabilities are denominated in a currency other than a company’s functional
currency. The Company has operations with different functional currencies, each of which will be exposed to
currency risk based on its specific functional currency.
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same
currency. The remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the
Company uses foreign currency derivatives, primarily foreign exchange forward contracts. These derivatives are not
designated as hedges for accounting purposes.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The amounts outstanding under derivatives contracts as at February 29, 2020 and February 28, 2019 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 29,
2020
February 28,
2019
February 29,
2020
$
February 28,
2019
February 29,
2020
February 28,
2019
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
Sell US$ for KW – 0 to 12 months 1,139-1,171
Total Gain (loss)
-
1.10-1.11
1.11-1.14
1.10-1.11
1.33-1.34
1.31-1.33
1.36
1.30
1.15-1.18
-
1.14
-
-
(923)
357
-
(3)
(174)
198
(70)
(615)
(61) US$68,000
US$68,000
183
(15)
-
US$1,205
-
€16,790
(2)
€16,790
-
US$1,647
-
105
US$26,000
US$26,000
US$2,010
-
€907
-
-
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 loss 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, provision for performance guarantees and
long-term debt, including interest payable. A hypothetical strengthening of 5.0% of the following currencies would
have had the following impact for the fiscal years ended February 29, 2020 and February 28, 2019:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net loss
2019
$
(555)
464
2020
$
(1,463)
411
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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 29, 2020, four
(2019 – four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 15.0% (2019 – 10.5%) and the Company’s ten largest customers accounted for 61.2% (2019 – 58.9%)
of trade accounts receivable. In addition, one customer accounted for 13.4% of the Company’s sales (2019 – 10.9%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs
specific evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the
ageing of accounts receivable, historical payment patterns, customer creditworthiness and current economic trends. A
specific credit limit is established for each customer and reviewed periodically. A loss allowance 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.
As at February 29, 2020, the lifetime expected loss allowance for trade receivables was determined as follows:
Expected loss rate
Gross carrying amount
Loss allowance
Current
1.041%
83,711
871
Past due more
than 30 days
1.173%
16,619
195
Past due 31 to
90 days
1.289%
7,445
96
Past due more
than 90 days
3.820%
21,989
840
Total
129,764
2,002
As at February 29, 2020
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.
Liquidity risk
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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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:
As at February 29, 2020
Carrying
value
$
Less than
1 year
1 to 3
Years
4 to 5
Years
After
5 years
$
$
$
$
Long-term debt
Long-term lease liabilities
Accounts payable and accrued liabilities
Customer deposits
Bank indebtedness and short-term bank loans
Derivative liabilities
19,297
15,343
74,271
47,208
45,696
1,169
8,311
1,970
74,271
47,208
45,696
1,169
5,420
3,074
-
-
-
-
3,349
2,187
-
-
-
-
2,217
13,205
-
-
-
-
Total
$
19,297
20,436
74,271
47,208
45,696
1,169
As at February 28, 2019
Carrying
value
Less than
1 year
$
$
1 to 3
Years
$
4 to 5
Years
$
After
5 years
$
Long-term debt
Accounts payable and accrued liabilities
Customer deposits
Bank indebtedness and short-term bank loans
Derivative liabilities
21,851
74,910
40,240
31,979
83
8,609
74,910
40,240
31,979
83
5,940
-
-
-
-
3,782
-
-
-
-
3,520
-
-
-
-
Total
$
21,851
74,910
40,240
31,979
83
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.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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 29, 2020
Assets
Derivative assets
Liabilities
Derivative liabilities
555
1,169
-
-
555
1,169
-
-
As at February 28, 2019
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
189
83
-
-
189
83
-
-
Fair value measurements of the Company’s derivative assets and liabilities are classified under Level 2 because such
measurements are determined using published market prices or estimates based on observable inputs such as interest
rates, yield curves, and spot and future exchange rates. The carrying value of the Company’s financial instruments is
considered to approximate fair value, unless otherwise indicated.
27 Capital management
The Company’s capital management strategy is designed to maintain strong liquidity in order to pursue its organic
growth strategy, undertake selective acquisitions and provide an appropriate investment return to its shareholders
while taking a conservative approach to financial leveraging.
The Company’s financial strategy is designed to meet the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital
structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid to
shareholders or undertake any other activities it considers appropriate under the circumstances.
The Company monitors capital on the basis of its total debt-to-equity ratio. Total debt consists of all interest-bearing
debt, and equity is defined as total equity.
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(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 lease liabilities
Current portion of long-term debt
Long-term lease liabilities
Long-term debt
Total debt
Equity
Total debt-to-equity ratio
Adjusted total debt-to-equity ratio (note a))
a) Adjusted total debt-to-equity ratio
As at
February 29,
2020
$
As at
February 28,
2019
$
44,317
1,379
1,621
8,311
13,722
10,986
80,336
29,807
2,172
-
8,609
-
13,242
53,830
284,861
308,833
28.2% 17.4%
22.8% 17.4%
Excluding the impact of the transition to IFRS 16, which was adopted prospectively without restatement of prior
periods, on the Company’s financial statements, the debt-to-equity ratio would have been 22.8% as at
February 29, 2020.
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 is not subject to any capital requirements
imposed by a regulator.
28 Adjustments to reconcile net loss to cash provided (used) by operating activities
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred income taxes
Share-based compensation expense (recovery)
Gain on disposal of property, plant and equipment
Net change in derivative assets and liabilities
Net change in other liabilities
2020
$
10,803
2,177
(1,764)
(9)
(117)
720
315
2019
$
11,566
2,009
(5,589)
17
(9)
(1,132)
256
12,125
7,118
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Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 29, 2020 and February 28, 2019
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
29 Changes in non-cash working capital items
Accounts receivable
Inventories
Income taxes recoverable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Provisions
Provision for performance guarantees
30 Debt from financing activities reconciliation
2020
$
(1,251)
(7,360)
8,022
(711)
581
848
8,345
6,753
(1,108)
2019
$
(140)
5,137
(10,383)
(395)
11,314
(640)
(8,840)
(2,335)
(5,029)
14,119
(11,311)
Debt as at March 1, 2018
Cash flows
Foreign exchange adjustments
Other non-cash movements
Debt as at February 28, 2019
IFRS 16 transition adjustments
Debt as at March 1, 2019
Cash flows
Foreign exchange adjustments
Other non-cash movements
Debt as at February 29, 2020
Short-term
bank loans
Long-term lease
liabilities
Long-term
debt
Total
1,074
1,098
-
-
2,172
-
2,172
(793)
-
-
1,379
-
-
-
-
-
15,143
15,143
(1,575)
(468)
2,243
15,343
22,129
403
(840)
159
21,851
-
21,851
(1,774)
(780)
-
19,297
23,203
1,501
(840)
159
24,023
15,143
39,166
(4,142)
(1,248)
2,243
36,019
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Directors and officers
Corporate directors
T. Velan
Chairman of the Board
W. Sheffield
Lead Director
D. Granovsky
Director
J. Latendresse
Director
Y. Leduc
Director
J. Mannebach
Director
R. Velan
Director
Corporate officers
Y. Leduc
Chief Executive Officer
B. Carbonaro
President and Acting Executive Vice-President, General Manager, Project
J. Ball
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
Y. Lauzé
Senior Vice-President, Sales, Process Industries
Vice-President, Engineering
R. Ostiguy
Vice-President, Finance
G. Perez
D. Tran
D. Velan
R. Velan
S. Velan
Vice-President, Product Technology and Strategic Initiatives
Executive Vice-President, General Manager, Severe Service
Vice-President, Marketing
Executive Vice-President, General Manager, MRO and Aftermarket
Vice-President, Transformation Office and Information Technology
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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 29, 2020
6,019,068 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High CA $10.90
Low
CA $6.50
Closing on February 29, 2020: CA $7.00
Annual meeting
The Annual Meeting of Shareholders will be held July 9, 2020,
at 3:00 p.m. This year, due to the global COVID-19 pandemic,
the Annual Meeting of Shareholders will be held in a virtual
only format, via online live webcast.
90
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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