Annual report 2021
Highlights
Photo of Plant cells/
transformation?
Velan ABV employees perform NDT and dimensional tests on a 52” ball valve using
a ScanArm and 3D digitalization software to maximize the efficiency of the process.
The nuclear team at Velan S.A.S. was happy to
participate in Nuclear Industry China’s 2020 exhibition
held this past October in Beijing.
A segment of Velan’s new cell layout to assemble large valves in Granby, Canada.
Velan installed 25 manufacturing cells in Montreal, Granby, and India as part of
the V20 transformation process.
Cover photo: A Velan Securaseal pneumatically operated severe service
Cover photo: 14” Class 600 Velan metal-seated switch valve, part of the same
metal-seated ball valve used for isolating high-pressure oil with catalyst fines
refinery installation shown in the above photo.
in a hydrocracking unit in Asia.
Velan was featured as the cover story, “Velan: 70 years
of excellence”, in Valve World magazine this past June.
2021 Financial highlights
Sales
(in millions of U.S. dollars)
Consolidated
Overseas
Overseas
U.S.A.
Canada
400
360
320
280
240
200
160
120
80
40
0
30
25
20
15
10
5
-
(5)
(10)
(15)
(20)
Net earnings (loss)(2) and EBITDA(1)
(in millions of U.S. dollars)
2017
2018
2018
2019
20202020
2021
2017
2018
2019
2020
2021
Net earnings (loss)(2)
EBITDA(1)
(in thousands of U.S. dollars, except per share amounts and number of employees)
Years Ended
Income statement data
Sales
Gross profit
Gross profit %
Administration costs
Income (loss) before income taxes
EBITDA(1)
EBITDA(1) %
EBITDA(1) per share
Net earnings (loss) (2)
Net earnings (loss) (2) %
Net earnings (loss) (2) per share (3)
Statement of financial position data
Net cash
Working capital
Property, plant, and equipment
Total assets
Total long-term debt
Equity
Number of employees
Canada
United States
Europe
Asia
Total
Feb 2021
Feb 2020
Feb 2019
Feb 2018
Feb 2017
$ 302,063
80,539
26.6%
$ 371,625
88,134
23.7%
$ 366,865
85,595
23.3%
$ 337,963
70,861
21.0%
$ 331,777
88,528
26.7%
80,091
1,375
15,573
5.2%
0.72
2,867
1.0%
0.13
85,189
(8,058)
6,522
1.8%
0.30
(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
$ 62,953
219,606
96,327
580,833
58,091
300,221
$ 31,010
174,811
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
546
109
557
469
1,681
619
123
546
491
1,779
716
140
522
481
1,859
732
146
489
463
1,830
763
157
482
474
1,876
(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.
1
Dear Shareholders,
Nearly thirty years ago while traveling in Europe with a colleague, we happened to
pass a building proudly bearing the Velan name. At the time I was not familiar with
the Company. My colleague, a veteran of decades in our industry, remarked that
Velan stood without equal in its products, application knowledge, and commitment
to customers, remarking that they do things no one else can do. I am deeply
humbled to be entrusted with appointment as Chairman of the Board of Velan,
which as first revealed to me so long ago, remains without peer in our industry.
Our Company has not merely persevered, we have excelled in the past fiscal year
in the face of a market unlike any ever seen. The COVID pandemic, which destroyed
much of the world’s economy, brought unprecedented challenges to our business as
well. Yet, quick and decisive action, led by our CEO Yves Leduc, with a concentrated
effort throughout the world, assured our business was properly recognized as essential in each of our global markets.
James A. Mannebach
Chairman of the Board
While necessary to continue operations, alone this recognition would have meant nothing without the heroic efforts of our
men and women striving to meet the needs of our customers while assuring health and safety of our team. While grateful
to all, I am especially inspired by our colleagues who reported to work each day in our factories producing products and
solutions sought after by our customers throughout the world. As a result, as countless companies ceased to do business, Velan
strengthened its market leading position.
As always, our industry is changing, at an accelerating pace. Our position as market leader is being attacked by recent
entrants, new technologies and rapidly evolving expectations of our customers. Stepping up to the challenge we announced a
transformational program designed to assure not only that we remain cost competitive, but critically that we deepen intimacy
with our customers assuring that Velan remains the first choice when faced with general purpose or the most demanding of
technical applications. Despite the challenges of COVID, our Company accelerated the V-20 program and we are encouraged
by its transformational effects to date; we are seeing critical improvement in operating efficiencies and most notably, owing to
our sharper customer focus, we earned outstanding order intake, ending the year with near record backlog, demanding crisp
execution in the new fiscal year. While hard work remains ahead, our improving cost position and enhanced customer centric
structure precisely position us for expansive growth in each of our strategic businesses.
Working with Yves, Bruno Carbonaro, our President and the Company’s global leaders, my focus will be on growth in
all our markets and restoring positive returns to our stakeholders. We are committed to successful completion of the V-20
transformation, assuring that our Company is best positioned to exceed the demands of the market. As true long ago at the
start of my journey with Velan, our Company remains a recognized leader throughout the world as we continue to do things
no one else can do.
In closing I express my deepest appreciation for the tireless efforts of our colleagues throughout the world. In these days of
COVID lockdown, uncertainty and unrelenting stress your commitment stirs and strengthens our resolve. Thank you. I also
thank Board Member Jacques Latendresse, retiring after eight years of service to our Company. His passionate unrelenting
insistence that the Company urgently strive for excellence serves as his legacy and our continuing challenge. Finally, to our
shareholders, we are grateful for your continued support and patience as we work to transform your Company. The growing
momentum of the past year bolsters our confidence as we embrace the next chapter of our Company’s future.
James A. Mannebach
Chairman of the Board
2
Message to our shareholders and employees
(In U.S. dollars, unless otherwise stated.)
2021 Highlights
Sales
18.7%
Order Backlog
$302.1M
38.3%
$562.5M
Net earnings(1)
Order Bookings
$19.3m
EBITDA(2)
140%
$2.9M
25.3%
$426.6M
Net Cash
$15.6M
103.2%
$63.0M
Results summary
Fiscal year 2021 will be remembered as a watershed year for
Velan. Although our sales were severely impacted by the global
pandemic, the Company made great progress on many fronts
while demonstrating its commitment to protecting its employees
and customers, ensuring the integrity of our global supply chain,
as well as to responsibly supporting each of the many local
communities where we are present.
In the end, we closed the year with notably improved results,
delivering net profits for the first time in four years and increased
our backlog by near 40%. Equally important, we succeeded in
deploying our V20 transformation strategy faster than originally
planned, thereby laying the base for our North American
operations’ financial health to return. This is evidenced by the
sharp reduction in our production overhead costs in North America
and the surge in margins observed in all our strategic businesses.
The dive of our sales was mitigated by Canadian federal subsi-
dies, profits from the sale of our Montreal plant, and important
cost reduction measures taken in North America. Combined, these
avoided the Company lay-offs which would have weakened us
going into this fiscal year. Instead, we expect to build on our book-
ings momentum, substantially improve our sales, and fully realize
the benefits of our V20 plan, a major milestone that clears the path
for directing more energy and focus to our growth strategy.
Yves Leduc
Chief Executive Officer
A company leading by example in health and safety
The day after the pandemic was declared, we held our first crisis
committee, attended by the CEO and maintained every week
since, and established the still active Covid-19 response team.
We stayed in touch with our customers and suppliers, and with all
our stakeholders and I am proud of how our employees in every
site and plant have risen to the occasion, immediately adjusting
work practices, remotely or in our plants, quickly deploying the
protocols and measures to maximize the safety and health of our
employees. We concluded the year with one of our best health and
safety records ever.
One of the highest backlogs in our history–during
the worst economic crisis since the Great Depression
We are a supplier of critical equipment to essential industries,
authorized to continue operations even during lockdowns, but the
shock on our sales and operations was nonetheless dramatic: for
example, customers delayed shipment release and the lockdown
of our Indian supply chain gravely affected our plants during the
fall. We estimate that at least two thirds of the drop in sales in
fiscal year 2021 were caused by the global economic crisis.
(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.
3
Message to our shareholders and employees
Our employees’ response was fantastic. From China sending masks
to North America and Europe, procuring oxygen concentrators
for our employees in India to joining forces to create new valve
designs, or even finding alternate routes when breaks in global
logistics interrupted the flow of material, never has the spirit
of teamwork and solidarity been more evident between Velan
employees across the world.
The global pandemic has hit our MRO business the hardest, deeply
affecting our non-project orders as the North American market
suffered greatly from the oil price depression during the spring. But
our four other strategic businesses grew our backlog to its highest
level in over eight years, thanks to our strong market position in
the Middle East, India, Southeast Asia, and China, in the nuclear,
petrochemical and oil production sectors, as well as to new
product designs that are true market or innovation breakthroughs.
Meanwhile orders were won thanks to the wide range of options
provided by an agile and diverse global manufacturing capacity, a
competitive advantage we have leveraged more than ever before.
Transforming the company in North America:
a major step forward
A gradual erosion of our business’ competitiveness, mainly in our
North American operations, led our Board of directors’ unanimous
approval of the V20 plan in January 2019, a transformation
strategy that aimed to better leverage our assets and strengths
and to unlock significant recurring bottom-line improvements.
In March 2020, when the pandemic broke out, we had barely
General Manager of Velan SAS Jean Luc Mazel with Thomas Rudigoz,
Member of Parliament for the first constituency of the Rhône had a
constructive discussion on the strengths of the nuclear industry while
touring the plant in Lyon.
4
Velan’s plant in Suzhou, China was certified for API6D valves opening
a range of opportunities for supply of goods for FPSO customers.
undertaken the investment-intensive portion of the plan. After
briefly considering delaying the project, the decision was made
to instead accelerate the deployment of our V20 agenda taking
measures to reduce expenses and resources.
In these challenging circumstances, we effectively carried out the
transformation plan last year, ahead of schedule, and as a result,
the Company has entered fiscal year 2022 with significantly
reduced structural costs and much improved margins in our North
American operations. Also, we accelerated the closure and sale
of one of our two large plants in Montreal and all remaining
plants, including our plant in India, have been reconfigured in line
with a less vertically integrated manufacturing model based on
production cells. This successful improvement of our margins of
our North American operations was one of the key goals of V20
(we coined the effort “Margin IQ”).
On the other hand, the task of transforming our manufacturing
model into a leaner and more agile operations in North America
is not over yet. The combination of new processes and adapted
capabilities, along with COVID-driven disruptions, the move
of machinery, the accelerated plant closure, created turbulence
causing significant production delays in our North American
plants. This is going to be a key area of focus in the months
to come.
Strong growth prospects, strong people
There were many other achievements to report during this
remarkable year. These are only just a few of them, each
constituting a building block for our growth ambitions:
• Following the collapse of the oil price in April, the spectacular
rebound of Velan-ABV, our Italian operation, fueled in part by
a breakthrough in its Middle East business
Message to our shareholders and employees
Velan Portugal completing its flagship product line of hydrofluoric acid
valves with the successful transfer of the small forged line of valves from
Montreal becoming part of Velan Portugal standard. manufacturing.
program.
Bruno Carbonaro
President and Acting Executive Vice-President,
General Manager, Project
• The certification of our plant in Suzhou, China, to produce
API 6D valves for our Italian operations, which, thanks to
freed-up capacity in Lucca, Italy, are now able to meet the
surge in demand for its high-end products
“
• The many breakthroughs of our French operations in
the cryogenic and big science fields and in their control
valve products, proving once again they are not “just
about nuclear”
Velan’s India plant reconfigured in line with a less vertically integrated
manufacturing model based on production cells as part of the V20
transformation process.
5
Despite the pandemic which negatively
impacted our revenues, the year was
marked by many successes: the very
strong order intake for our core product
lines in Asia–and in particular–in China,
the deployment of our new more agile
manufacturing system following the
closure of a plant in Canada and the
transfer of machining activities to
our Asian suppliers, and continued
innovation activity with the introduction
of the new triple offset and ball valves.
Velan begins the new year well
positioned to support the recovery of
its North American customers and to
continue to develop its installed base
in Asia, where we will progressively
strengthen our commercial
and industrial resources.
”
Message to our shareholders and employees
Investment highlights
● Stellar brand reputation with 70-years track record
of outstanding product quality, engineering and
innovation capabilities
● One of broadest and deepest global base of end-
users and installed valves in the industry and
leading presence in the fast-growing markets of
China, Southeast Asia, and India
● V20 program delivering breakthrough cost savings
and contributing to surge in bookings
● Growth momentum fueled by improved margins
and highest backlog since FY2013
● Portfolio of diversified business platforms opening
multiple entries into attractive and fragmented
industrial sectors in the flow control industry
• The outstanding bookings of our Severe Service strategic
business, resulting in large part from the patient efforts
initiated in 2017 of obtaining licensor approvals for specialized
petrochemical applications
• The successful transformation of our Indian facility into a
versatile hub for our MRO products as well as for specialized
multi-turn products serving our end-user customers in India
and Southeast Asia.
In summary, it has been a year like no other. We had to learn how
to make our global manufacturing operations work while coping
with a devastating global health crisis and pursuing a complex
transformation: no book had ever been written on how to do this.
What a way to celebrate Velan’s 70th anniversary!
The pandemic brought about a deep sense of loneliness that each
of us must have had to grapple with so often in the last fifteen
months. Yet remarkable things were achieved by our employees,
uniting to overcome extraordinary challenges, both personal and
professional. I want to express my deepest gratitude to all our
employees and their families, for their courage, their perseverance,
and resilience.
Our progress this year would not have been possible without the
work and commitment of our experienced Board of Directors,
who remained dedicated to Velan’s success throughout the
most difficult moments. I want to thank our new chairman, Jim
Mannebach, for his great support and the wealth of business
experience and wise counseling that he provided both the board
and me personally.
In March 2020, in my weekly video, the first of many initiated to
inform our employees across the world of our navigation course
through unchartered waters, I predicted that Velan would come
out of the storm stronger than when it hit us. Clearly, we are
stronger, although still faced with many challenges ahead of us.
As we are now turning a lot more attention to our growth strategy,
the uncertainty of a world in flux continues to cloud the way, but
we like our odds and look forward to the journey.
Yves Leduc
Chief Executive Officer
This 14” Class 2500 forged pressure seal valve, installed in a power
plant in Florida–part of a large long-term contract with Velan to
supply over 100 (12”–24”) valves over 5 years.
6
Management’s discussion and analysis
May 19, 2021
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 28, 2021. This Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2021 and
February 29, 2020. 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 12 manufacturing plants
worldwide with 1,681 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 two 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.
7
Management’s discussion and analysis
CONSOLIDATED HIGHLIGHTS1
(millions, excluding per share amounts)
Consolidated statements of earnings (loss)
Sales
Gross profit
Gross profit %
Net earnings (loss)2
Net earnings (loss)2 %
Net earnings (loss)2 per share – basic and diluted
Operating profit (loss) before restructuring and transformation
costs (income)3
EBITDA3
Adjusted EBITDA3
Adjusted EBITDA3 %
Adjusted EBITDA3 per share – basic and diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided by (used in) operating activities
Cash provided by (used in) investing activities
Cash provided (used) by financing activities
Demand data
Net new orders received (“bookings”)
Period ending backlog of orders
Fiscal year
ended
February 28,
2021
Fiscal year
ended
February 29,
2020
Increase
(decrease)
%
Increase
(decrease)
$302.1
80.5
26.6%
2.9
1.0%
0.13
(1.7)
15.6
11.6
3.8%
0.54
21.6
(9.1)
2.9
33.1
426.6
562.5
$371.6
88.1
23.7%
(16.4)
(4.4)%
(0.76)
2.9
6.5
16.1
4.3%
0.74
21.6
9.6
(11.7)
(6.3)
340.4
406.8
$(69.5)
(18.7)%
(7.6)
(8.6)%
19.3
117.7%
0.89
117.1%
(4.6)
9.1
(4.5)
(158.6)%
140.0%
(28.0)%
(0.20)
(27.0)%
(18.7)
(194.8)%
14.6
39.4
86.2
155.7
124.8%
625.4%
25.3%
38.3%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
3 Non-IFRS measures – see reconciliations at the end of this report.
8
Management’s discussion and analysis
Highlights of fiscal 2021 as well as factors that may impact fiscal 2022
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net earnings1 amounted to $2.9 million or $0.13 per share compared to a net loss1 of $16.4 million or $0.76 per share last
year. Net earnings1 for the year was positively impacted by a $7.2 million after tax gain recognized on the disposal of one of
the Company’s Montreal plants, a vital part of the North American manufacturing footprint optimization plan which was
planned in the scope of V20. The disposed plant’s production has been transferred within the remaining North American
plants and the Company’s Indian operations. The improvement in net earnings1 was also explained by a $8.2 million non-
cash tax adjustment to de-recognize a portion of unused tax losses in the prior fiscal year (see Results of operations section).
Finally, the Company’s results were improved by an increase in its gross profit percentage combined with a reduction of
administration costs as well as restructuring and transformation costs, which includes a $1.4 million severance provision
reversal. These improvements were partially offset by a lower sales volume and $1.5 million of unrealized foreign exchange
losses incurred over the course of the fiscal year. The negative impact of the reduced sales volume on the Company’s net
earnings1 for the year was offset by the recording of $13.1 million of non-recurring pandemic wage subsidies, specifically
the Canada Emergency Wage Subsidy, which were allocated between cost of sales, administration expenses and restructuring
and transformation costs. The recording of wage subsidies allowed the Company to avoid lay-offs that otherwise would have
been necessary to blunt the financial impact of the pandemic, as such lay-offs would have weakened the Company going into
the subsequent fiscal year. Instead, the Company is expecting to build on its bookings momentum, substantially improve its
sales, and fully realize the benefits of its V20 plan.
Operating loss before restructuring and transformation income2 amounted to $1.7 million compared to an operating profit
before restructuring and transformation costs2 of $2.9 million last year. Adjusted EBITDA2 amounted to $11.6 million or
$0.54 per share compared to $16.1 million or $0.74 per share last year. The deterioration in operating loss before restructuring
and transformation income2 and adjusted EBITDA2 is primarily attributable to a lower sales volume and $1.5 million of
unrealized foreign exchange losses incurred over the course of the fiscal year, partially offset by an improved gross profit
percentage and lowered administration costs.
Sales amounted to $302.1 million, a decrease of $69.5 million or 18.7% compared to last year. Sales were negatively impacted
by the reduction of non-project orders recorded by the Company’s North American operations due to the unfavorable market
conditions triggered by the novel coronavirus (“COVID-19”) global pandemic, as well as the impact of the drop in the price
of oil on capex and maintenance spending in the oil and gas industry, which has significantly affected the Company’s
distribution channels. The shipments in the Company’s North American and Italian subsidiaries were negatively impacted by
continued supply chain and production issues created by the pandemic, while its North American operations were also
negatively affected by inefficiencies experienced in reconfiguring the manufacturing layout in the Canadian plants under the
V20 program which caused production delays.
Gross profit percentage increased by 290 basis points from 23.7% to 26.6%. The increase in the gross profit percentage was
primarily attributable to the delivery of a product mix with a greater proportion of higher margin product sales, from margin
improvements resulting from the production overhead savings brought by the Company’s restructuring and transformation
initiatives, as well as from the more selective screening and improved pricing discipline initiated over the last two years, as
part of the V20 plan, in North American quotation activities, that led to substantially improved margins in its project business.
The increase is also attributable to favorable movements of $3.2 million in warranty and $5.2 million in late delivery penalties
provisions due to an improved outlook in these areas as well as the recording of $7.0 million of non-recurring pandemic wage
subsidies which offset the impact of the lower sales volume for the fiscal year. The recording of wage subsidies allowed the
Company to avoid lay-offs that otherwise would have been necessary to blunt the financial impact of the pandemic.
Administration costs amounted to $80.1 million, a decrease of $5.1 million or 6.0%. The decrease is primarily attributable to
a $5.7 million reduction of administration salary expenses due to non-recurring pandemic wage subsidies as well as the
on-going effort to reduce administration overhead expenses including travel expenses and office maintenance costs, caused
principally by the travel restrictions and social distancing measures that were enforced in a majority of countries over the
course of the fiscal year. The Company’s administration costs were also higher in the prior fiscal year due to the recording of
a $0.9 million provision regarding the settlement of a product claim. The decrease in administration costs was partially offset
by a $1.4 million increase in the 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 Non-IFRS measures – see reconciliations at the end of this report.
9
Management’s discussion and analysis
Company's backlog
$438.2
$167.7
$464.5
$449.7
$177.8
$150.1
$562.5
$406.8
$224.0
$149.3
$270.5
$286.7
$299.6
$257.5
$338.5
600
500
400
300
200
100
0
February 28, 2017 February 28, 2018 February 28, 2019 February 29, 2020 February 28, 2021
Next 12 months
Beyond next 12 months
The Company ended the period with a backlog of $562.5 million, an increase of $155.7 million or 38.3% since the beginning
of the current fiscal year. The backlog was positively impacted by a strong book-to-bill ratio and the strengthening of the
euro spot rate against the U.S. dollar over the course of the fiscal year. The backlog also increased for the period due
temporary factors such as delays in shipments created by the COVID-19 pandemic and the reconfiguration of the Canadian
plants under the V20 program.
Bookings amounted to $426.6 million, an increase of $86.2 million or 25.3% compared to last year. This increase is primarily
attributable to large project orders booked in the Company’s French, Italian and North American operations, notably in the
nuclear, downstream oil and gas and process markets. This increase was partially offset by a decrease in non-project orders
booked in the Company’s North American operations.
The Company ended the year with net cash of $63.0 million, an increase of $32.0 million or 103.2% since the beginning of
the year. Management believes that the available net cash and unused credit facilities, along with future cash flows generated
from operations, are sufficient for the Company to meet its financial obligations, increase its capacity of liquidity, satisfy its
working capital requirements, and execute its business strategy. The increase in net cash is primarily attributable to an increase
in long-term debt combined with proceeds on the disposal of a manufacturing plant, partially offset by temporary negative
non-cash working capital movements, investments in property, plant and equipment, long-term debt repayments and V20
related disbursements. Net cash was positively impacted by the strengthening of the euro spot rate against the U.S. dollar
over the course of the fiscal year. In light of the ongoing pandemic and receipt of government subsidies, the Company has
suspended the payment of all dividends as well as share buybacks in fiscal year 2021.
Foreign currency impacts:
o Based on average exchange rates, the euro strengthened 4.1% against the U.S. dollar when compared to the same
period last year. This strengthening resulted in the Company’s net profits and bookings from its European
subsidiaries being reported as higher U.S. dollar amounts in the current fiscal year.
o Based on average exchange rates, the Canadian dollar weakened 0.7% against the U.S. dollar when compared to the
same period last year. This weakening resulted in the Company’s Canadian dollar expenses being reported as lower
U.S. dollar amounts in the current fiscal year.
o Based on spot exchange rates, the euro strengthened by 10.4% against the U.S. dollar when compared to the rate at
the end of the prior fiscal year. This strengthening resulted in the previously mentioned unrealized currency losses
on the conversion of monetary assets and liabilities by the Company’s European subsidiaries. Furthermore, the euro
strengthening was the main driver of a positive cumulative translation adjustment of $13.2 million which was
recorded directly in equity through other comprehensive income.
o The net impact of the above currency swings was generally unfavourable on the Company’s net earnings1, although
it was generally favourable on the Company’s equity.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
10
Management’s discussion and analysis
The Company celebrated its 70th anniversary in the midst of a pandemic which forced businesses to adapt to a new and extremely
challenging environment. As Velan is considered in most countries to be a supplier of critical equipment to essential industries, the
Company was spared from production lockdowns but nonetheless felt multiple consequences on its operations and its supply chain.
As the virus spread to the countries where Velan operates, the Company was swift in implementing exemplary sanitary measures,
social distancing, health surveys and protocols in case of outbreaks to maximize the safety and health of its employees.
The Company managed through the turbulence by finding solutions to the multiple challenges that occurred during the year. As an
example, a new financing agreement was finalized, providing increased flexibility for potential future growth opportunities.
Additionally, and despite the global crisis’ dramatic impact on its operations, the Company was able to improve its financial health
with a notably increased backlog and margins thanks to the progress achieved through the V20 restructuring and transformation plan.
Finally, the Company was able to achieve great progress in accelerating the deployment of its V20 plan with the sale of one of its
manufacturing plants in Montreal, which was part of its North American footprint consolidation initiative, with limited resources in
the particular and unusual context throughout the year.
Other factors that may impact fiscal year 2022
Although the main focus remains to address the continuing challenges resulting from the COVID-19 pandemic, the Company has the
additional assignment to ensure the timely delivery of its near-record backlog while sorting through the production inefficiencies that
came with the reconfiguration of its Canadian plants. The backlog at the end of fiscal 2021 is showing notable growth in all the
Company’s business units except for the MRO segment, which suffered from the economic slowdown caused by the COVID-19
pandemic, thereby causing its bookings to sharply fall. Additionally, the aforementioned increased backlog, which contains improved
margins, provided added flexibility for the Company who is now turning its attention to its growth strategy.
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. 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.
11
Management’s discussion and analysis
SUMMARY OF RESULTS
Summary financial data derived from the Company’s financial statements prepared in accordance with IFRS for the three most recently completed
reporting periods are as follows:
For the reporting periods ended on the following dates
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fiscal year ended
February 28, 2021
Fiscal year ended
February 29, 2020
Fiscal year ended
February 28, 2019
Operating Data
Sales
Net Earnings (loss)1
Earnings (loss) per Share – Basic and 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
$371,625
(16,390)
(0.76)
538,496
19,609
$366,865
(4,882)
(0.23)
524,357
21,723
0.09
0.09
0.09
0.09
$302,063
2,867
0.13
580,833
56,443
-
-
15,566,567
6,019,068
Sales for fiscal year 2021 decreased by 18.7% compared to fiscal year 2020. This decrease was primarily attributable to the reduction of non-project
orders recorded by the Company’s North American operations due to the unfavorable market conditions triggered by the COVID-19 pandemic, as
well as the impact of the drop in the price of oil on capex and maintenance spending in the oil and gas industry, which had significantly affected the
Company’s distribution channels. The shipments in the Company’s North American and Italian subsidiaries were negatively impacted by continued
supply chain and production issues created the COVID-19 pandemic, while its North American operations were also negatively impacted by
inefficiencies experienced in reconfiguring the manufacturing layout in the Canadian plants under the V20 program which caused production delays.
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 its 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 was 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.
Gross profit for fiscal year 2021 amounted to $80.5 million, a decrease of $7.6 million from fiscal year 2020, while the gross profit percentage
increased from the 23.7% reported in fiscal year 2020 to 26.6% in fiscal year 2021. The increase in the gross profit percentage was primarily
attributable to the delivery of a product mix with a greater proportion of higher margin product sales, from margin improvements resulting from the
production overhead savings brought by the Company’s restructuring and transformation initiatives, as well as from the more selective screening and
improved pricing discipline initiated over the last two years, as part of the V20 plan, in North American quotation activities, that led to substantially
improved margins in its project business. The increase was also attributable to favorable movements of $3.2 million in warranty and $5.2 million in
late delivery penalties provisions due to an improved outlook in these areas as well as the recording of $7.0 million of non-recurring pandemic wage
subsidies which offset the impact of the lower sales volume for the fiscal year. The recording of wage subsidies allowed the Company to avoid lay-
offs that otherwise would have been necessary to blunt the financial impact of the pandemic. 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 improved performance came from the strong sales volume and higher margin sales in the Company’s European
operations, partially offset by the lower sales volume shipped by the Company’s North American operations.
Administration costs for fiscal year 2021 decreased by $5.1 million when compared to fiscal year 2020. The decrease was primarily attributable to a
$5.7 million reduction of administration salary expenses due to non-recurring pandemic wage subsidies as well as the on-going effort to reduce
administration overhead expenses including travel expenses and office maintenance costs, caused principally by the travel restrictions and social
distancing measures that were enforced in a majority of countries over the course of the fiscal year. The decrease in administration costs was partially
offset by a $1.4 million increase in the costs recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies section).
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 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).
The fiscal year 2021 net earnings1 was positively impacted by a $7.2 million after tax gain recognized on the disposal of one of the Company’s
Montreal plants. The fiscal year 2020 net loss1 was negatively impacted by a $8.2 million non-cash tax adjustment to de-recognize a portion of unused
tax losses (see Results of operations 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.
12
Management’s discussion and analysis
RESULTS OF OPERATIONS – for the year ended February 28, 2021 compared to the year ended February 29, 2020
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2021
Year ended
February 29,
2020
(millions)
Sales
$302.1
$371.6
Sales decreased by $69.5 million or 18.7% from the prior year. Sales were negatively impacted by the reduction of non-project orders
recorded by the Company’s North American operations due to the unfavorable market conditions triggered by the COVID-19 global
pandemic, as well as the impact of the drop in the price of oil on capex and maintenance spending in the oil and gas industry, which
has significantly affected the Company’s distribution channels. The shipments in the Company’s North American and Italian
subsidiaries were also negatively impacted by continued supply chain and production issues created by the pandemic, while the North
American operations were also negatively impacted by inefficiencies experienced in reconfiguring the manufacturing layout in the
Canadian plants under the V20 program which caused production delays.
Bookings and backlog
(millions)
Year ended
February 28,
2021
Year ended
February 29,
2020
Bookings
$426.6
$340.4
Bookings increased by $86.2 million or 25.3% from the prior year. The increase in bookings is primarily attributable to large project
orders booked in the Company’s French, Italian and North American operations, notably in the nuclear, downstream oil and gas and
process markets. This increase was partially offset by a decrease in non-project orders booked in the Company’s North American
operations.
(millions)
Backlog
February
2021
February
2020
February
2019
$562.5
$406.8
$449.7
For delivery within the subsequent fiscal year
$338.5
$257.5
$299.6
For delivery beyond the subsequent fiscal year
$224.0
$149.3
$150.1
Percentage – beyond the subsequent fiscal year
39.8%
36.7%
33.4%
As a result of bookings outpacing sales in the current fiscal year, the Company’s book-to-bill ratio was 1.41 for the year. Furthermore,
the total backlog increased by $155.7 million or 38.3% since the beginning of the fiscal year, settling at $562.5 million. The backlog
was positively impacted by a strong book-to-bill ratio resulting from the Company’s effective market development efforts targeting
end-user applications in India, South East Asia, and China, where the Company is well positioned and, to a lesser extent, the
strengthening of the euro spot rate against the U.S. dollar over the course of the fiscal year. The backlog also increased in the year
due to the delays in shipments created by the COVID-19 pandemic and the reconfiguration of the Canadian plants under the V20
program.
13
Management’s discussion and analysis
Gross profit
(millions)
Gross profit
Year ended
February 28,
2021
Year ended
February 29,
2020
$80.5
$88.1
Gross profit percentage
26.6%
23.7%
Gross profit decreased by $7.6 million for the fiscal year, while the gross profit percentage increased by 290 basis points from 23.7%
to 26.6%. The increase in the gross profit percentage was primarily attributable to the delivery of a product mix with a greater
proportion of higher margin product sales, from margin improvements resulting from the production overhead savings brought by the
Company’s restructuring and transformation initiatives as well as from the more astute screening and pricing discipline initiated over
the last two years, as part of the V20 plan, in North American quotation activities, that led to substantially improved margins in its
project business. The increase is also attributable to favorable movements of $3.2 million in warranty and $5.2 million in late delivery
penalties provisions due to an improved outlook in these areas as well as the recording of $7.0 million of non-recurring pandemic
wage subsidies which offset the impact of the lower sales volume for the fiscal year. The recording of wage subsidies allowed the
Company to avoid lay-offs that otherwise would have been necessary to blunt the financial impact of the pandemic.
Administration costs
(millions)
Administration costs*
As a percentage of sales
Year ended
February 28,
2021
Year ended
February 29,
2020
$80.1
26.5%
$85.2
22.9%
$9.6
*Includes asbestos-related costs of:
$11.0
Administration costs decreased by $5.1 million or 6.0% for the fiscal year. The decrease in administration costs is primarily attributable
to a $5.7 million reduction of administration salary expenses provided by non-recurring pandemic wage subsidies combined with the
on-going effort to reduce administration overhead expenses including travel expenses and office maintenance costs, caused principally
by the travel restrictions and social distancing measures that were enforced in a majority of countries over the course of the fiscal year.
The Company’s administration costs were also higher in the prior fiscal year due to the recording of a $0.9 million provision regarding
the settlement of a product claim. The decrease in administration costs was partially offset by a $1.4 million increase in the costs
recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies section).
Like many other U.S. valve manufacturers, two of the Company’s U.S. subsidiaries have been named as defendants in a number of
pending lawsuits brought on behalf of individuals seeking to recover damages for their alleged asbestos exposure. These lawsuits are
related to products manufactured and sold in the past. Management believes that any asbestos was incorporated entirely within the
product in such a way that it would not 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.
14
Management’s discussion and analysis
Other expense
(millions)
Year ended
February 28,
2021
Year ended
February 29,
2020
Other expense
$2.1
$0.1
Other expense increased by $2.0 million for the fiscal year. The increase in other expenses is primarily due to land clean-up costs of a
former factory. These costs are unrelated to the sale of the Montreal manufacturing plant that occurred this fiscal year.
Income taxes
(in thousands, excluding percentages)
Year ended
February 28, 2021
%
$
Year ended
February 29, 2020
%
$
Income tax at statutory rate of 26.5% (2020 – 26.6%)
364
26.5
(2,143)
26.6
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible (taxable) foreign exchange losses (gains)
De-recognition of unused tax losses
Non-taxable portion of taxable capital gain
Losses not tax effected (losses utilized not previously tax effected)
Global Intangible Low-Taxed Income (“GILTI”)
Benefit attributable to a financing structure
Prior period tax adjustments and assessments
Other
469
(274)
-
(798)
478
(211)
(300)
(522)
(28)
34.1
(19.9)
-
(58.0)
34.7
(15.4)
(21.8)
(38.0)
(2.0)
1,469
378
8,256
-
(1,227)
2,636
(253)
(536)
(37)
(18.2)
(4.7)
(102.5)
-
15.3
(32.7)
3.1
6.6
0.5
Income tax expense (recovery)
(822)
(59.8)
8,543
(106.0)
The favorable movement in the Company’s income tax recovery in the current fiscal year is primarily attributable to the non-taxable
portion of the taxable capital gain on the disposal of the Montreal plant. The unfavorable movement in the Company’s income tax
expense in the prior fiscal year is primarily attributable to the de-recognition of a portion of the future benefit of unused tax losses in
the Company’s North American operations.
15
Management’s discussion and analysis
Net earnings (loss)1, Operating profit (loss) before restructuring and transformation costs (income)2 and Adjusted EBITDA2
(millions)
Net earnings (loss)1
As a percentage of sales
Operating profit (loss) before restructuring and transformation costs
(income)2
Adjusted EBITDA2
As a percentage of sales
Year ended
February 28,
2021
Year ended
February 29,
2020
$2.9
1.0%
$(1.7)
$11.6
3.8%
$(16.4)
(4.4)%
$2.9
$16.1
4.3%
Net earnings1 amounted to $2.9 million or $0.13 per share compared to a net loss1 of $16.4 million or $0.76 per share last year. Net
earnings1 for the year was positively impacted by a $7.2 million after-tax gain recognized on the disposal of one of the Company’s
Montreal plants, a vital part of the North American manufacturing footprint optimization plan which was planned in the scope of V20.
The disposed plant’s production has been transferred within the remaining North American plants and the Company’s Indian
operations. The improvement in net earnings1 was also explained by a $8.2 million non-cash tax adjustment to de-recognize a portion
of unused tax losses in the prior fiscal year (see Results of operations section). Finally, the Company’s results were improved by an
increase in its gross profit percentage combined with a reduction in administration costs as well as restructuring and transformation
costs, which includes a $1.4 million severance provision reversal. These improvements were partially offset by a lower sales volume
and $1.5 million of unrealized foreign exchange losses incurred over the course of the fiscal year. The negative impact of the reduced
sales volume on the Company’s net earnings1 for the year was offset by the recording of $13.1 million of non-recurring pandemic
wage subsidies which were allocated between cost of sales, administration expenses and restructuring and transformation costs.
Operating loss before restructuring and transformation income2 amounted to $1.7 million compared to an operating profit before
restructuring and transformation costs2 of $2.9 million last year. Adjusted EBITDA2 amounted to $11.6 million or $0.54 per share
compared to $16.1 million or $0.74 per share last year. The deterioration in operating loss before restructuring and transformation
income2 and adjusted EBITDA2 is primarily attributable to a lower sales volume and $1.5 million of unrealized foreign exchange
losses incurred over the course of the fiscal year, partially offset by an improved gross profit percentage and lowered administration
costs. The recording of wage subsidies allowed the Company to avoid lay-offs that otherwise would have been necessary to blunt the
financial impact of the pandemic, as they would have weakened the Company going into the subsequent fiscal year. Instead, the
Company is expecting to build on its bookings momentum, substantially improve its sales, and fully realize the benefits of its V20
plan.
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.
16
Management’s discussion and analysis
RESULTS OF OPERATIONS – quarter ended February 28, 2021 compared to the quarter ended February 29, 2020
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the prior fiscal year)
Sales
(millions)
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Sales
$85.5
$113.6
Sales decreased by $28.1 million or 24.7% for the quarter. Sales for the quarter were negatively impacted by the reduction of
non-project orders recorded by the Company’s North American operations due to the unfavorable market conditions triggered by the
COVID-19 pandemic, as well as the impact of the drop in the price of oil on capex and maintenance spending in the oil and gas
industry, which have significantly affected the Company’s distribution channels. The Company’s reduced quarterly shipments are also
attributable to continued supply chain and production issues created by the COVID-19 pandemic as well as inefficiencies experienced
in reconfiguring the manufacturing layout in the Canadian plants under the V20 program which caused production delays.
Bookings
(millions)
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Bookings
$80.9
$88.3
Bookings decreased by $7.4 million or 8.4% for the quarter. The decrease in bookings for the quarter is primarily attributable to a
reduction of large project orders recorded by the Company’s North American operations. Additionally, bookings were negatively
impacted by the lower non-project orders recorded by the Company’s North American operations due to the negative impact of the
COVID-19 pandemic which caused a drop in the price of oil in 2019-2020 that continued to significantly affect the Company’s
distribution channels through the rest of the fiscal year.
Gross profit
(millions)
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Gross profit
$23.1
$27.9
Gross profit percentage
27.0%
24.6%
Gross profit decreased by $4.8 million for the quarter, while the gross profit percentage increased by 240 basis points from 24.6% to
27.0%. The increase in the gross profit percentage for the quarter was primarily attributable to the margin improvements resulting
from the production overhead savings brought by the Company’s restructuring and transformation initiatives. The increase is also
attributable to the recording of $1.3 million of non-recurring pandemic wage subsidies which offset the impact of the lower sales
volume for the quarter. The recording of wage subsidies allowed the Company to avoid lay-offs that otherwise would have been
necessary to blunt the financial impact of the pandemic.
17
Management’s discussion and analysis
Administration costs
(millions)
Administration costs*
As a percentage of sales
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
$24.2
28.3%
$21.5
18.9%
$2.7
*Includes asbestos-related costs of:
$2.9
Administration costs increased by $2.7 million or 12.6% for the quarter. The increase in administration costs for the quarter is primarily
attributable to the lower R&D tax credit and capitalizable costs recorded in the current quarter.
Income taxes
(in thousands, excluding percentages)
Three-month period ended
February 28, 2021
%
$
Three-month period ended
February 29, 2020
%
$
Income tax at statutory rate of 26.5% (2020 – 26.6%)
(621)
26.5
(393)
26.6
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible foreign exchange loss
De-recognition of unused tax losses
Non-taxable portion of taxable capital gain
Losses utilized not previously tax effected
Global Intangible Low-Taxed Income (“GILTI”)
Drawback (Benefit) attributable to a financing structure
Prior period tax adjustments and assessments
Other
69
90
-
(798)
(295)
(211)
(110)
(522)
87
(2.9)
(3.9)
-
34.0
12.6
9.0
4.7
22.3
(3.7)
658
31
8,013
-
(782)
2,636
408
(536)
(125)
(44.5)
(2.1)
(541.8)
-
52.9
(178.2)
(27.6)
36.2
8.5
Income tax expense (recovery)
(2,311)
98.6
9,910
(670.0)
Net earnings (loss)1, Operating profit (loss) 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
$(0.7)
Adjusted EBITDA2
As a percentage of sales
$2.9
3.4%
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
$0.3
0.4%
$(11.1)
(9.8)%
$6.2
$9.9
8.7%
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
18
Management’s discussion and analysis
Net earnings1 amounted to $0.3 million or $0.02 per share compared to a net loss1 of $11.1 million or $0.51 per share last year. The
improvement in net earnings1 for the quarter was primarily due to the recording in the prior fiscal year of a $8.2 million non-cash tax
adjustment to de-recognize a portion of unused tax losses as well as a reduction of restructuring and transformation costs combined
with an improved gross profit percentage in the current quarter. This increase in net earnings1 was partially offset by a lower sales
volume and an increase in administration costs. The negative impact on the Company’s net earnings1 of the reduced sales volume for
the quarter was offset by the recording of $2.4 million of non-recurring pandemic wage subsidies which were allocated between cost
of sales, administration expenses and restructuring and transformation costs. Operating loss before restructuring and transformation
costs2 amounted to $0.7 million compared to an operating profit of $6.2 million last year. Adjusted EBITDA2 amounted to $2.9
million or $0.14 per share compared to $9.9 million or $0.46 per share last year. The deterioration in operating loss before restructuring
and transformation costs2 and adjusted EBITDA2 is primarily attributable to a lower sales volume and higher administration costs,
partially offset by an improved gross profit percentage. The recording of wage subsidies allowed the Company to avoid lay-offs that
otherwise would have been necessary to blunt the financial impact of the pandemic, as such lay-offs would have weakened the
Company going into the subsequent fiscal year. Instead, the Company is expecting to build on its bookings momentum, substantially
improve its sales, and fully realize the benefits of its V20 plan.
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 and diluted
February
2021
$85,510
338
November
2020
$71,560
9,527
August
2020
$68,340
(5,112)
May
2020
$76,653
(1,886)
February
2020
$113,641
(11,116)
November
2019
$88,701
(819)
QUARTERS ENDED
May
August
2019
2019
$83,816
$85,467
(5,824)
1,369
0.02
0.44
(0.24)
(0.09)
(0.51)
(0.04)
0.06
(0.27)
Sales can vary from one quarter to the next due to the timing of the shipment of large project orders. Sales were higher in the quarter
ended in February 2020 due to increased shipments of such orders, while the lower sales amounts for the quarters ended in May 2019,
August 2019 and November 2019 were due to delays on the shipments of such orders. Sales were lower in the quarters ended in May
2020, August 2020, November 2020 and February 2021 due to the many disruptions caused by the COVID-19 pandemic as well as
inefficiencies experienced in reconfiguring the Canadian plants under the V20 program. 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 quarter ended in February
2020 was due to the de-recognition of unused tax losses as well as the $7.1 million spent on the Company’s restructuring and
transformative initiative, V20. The net loss1 for the quarters ended in May 2020 and August 2020 was due to a lower sales volume,
the expenses incurred by the Company in the scope of its restructuring and transformation plan as well as unrecognized tax losses,
primarily in the Company’s North American operations. The net loss1 for the quarter ended in August 2020 was also negatively
impacted by land clean-up costs of a former factory. Net earnings1 for the quarter ended in November 2020 was achieved through the
gain realized on the disposal of one of the Company’s manufacturing plants in Montreal. The net earnings1 for the quarter ended in
February 2021 was obtained through an improved gross profit percentage and lower restructuring and transformation costs despite a
lower sales volume and higher administration costs.
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.
19
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 28, 2021
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
58,091
14,227
90,840
62,083
11,735
303
10,436
1,852
90,840
62,083
11,735
303
32,620
2,554
-
-
-
-
8,319
1,535
-
-
-
-
10,212
13,327
-
-
-
-
Total
$
61,587
19,268
90,840
62,083
11,735
303
The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to $3,590,
which are covered by letters of credit.
Future minimum payments under low value / short term leases are as follows:
February 28, 2022
February 28, 2023
February 29, 2024
February 28, 2025
$
316
177
75
22
590
On February 28, 2021, the Company’s order backlog was $562.5 million, and its net cash plus unused credit facilities amounted to
$152.5 million, which it believes, along with future cash flows generated from operations, is sufficient to meet its financial obligations,
increase its capacity of liquidity, 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 remaining stages of 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 is in
compliance with all covenants related to its debt and credit facilities.
As part of managing its liquidity risk, the Company also monitors the financial health of its key customers and suppliers.
The Company’s North American operations secured over the course of the fiscal year new financing in the form of a $17.7 million
secured mortgage loan and a $65.0 million revolving credit facility which will be used to support the Company’s operations, complete
its restructuring and transformation plan as well as provide the necessary capital to pursue future growth initiatives, while strengthening
its balance sheet as the world economy still faces a period of uncertainty.
20
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
2021
November
2020
February
2020
November
2019
February
2019
Net cash
$63.0
$73.0
$31.0
$39.0
$40.9
The Company’s net cash decreased by $10.0 million or 13.7% over the course of the quarter and increased by $32.0 million or 103.2%
since the beginning of the current fiscal year. This decrease for the quarter is primarily attributable to temporary negative non-cash
working capital movements combined with the reimbursement of short-term bank loans, partially offset by an increase in long-term
debt. The increase for the fiscal year is primarily attributable to an increase in long-term debt combined with proceeds on the disposal
of a manufacturing plant, partially offset by temporary negative non-cash working capital movements, investments in property, plant
and equipment, long-term debt repayments and V20 related disbursements. Net cash was positively impacted by the strengthening of
the euro spot rate against the U.S. dollar over the course of the fiscal year.
Cash provided by (used in) operating activities
(millions)
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Cash provided by (used in) operating activities
$(9.1)
$9.6
$(16.8)
$(3.7)
Cash used in operating activities amounted to $16.8 million for the current quarter compared to $3.7 million in the prior year. The
current quarter’s usage of funds consisted of a net loss1 adjusted for non-cash items of 3.2 million and negative non-cash working
capital movements of $13.6 million. Cash used in operating activities amounted to $9.1 million for the current year compared to cash
provided by operating activities of $9.6 million in the prior year. The current year’s usage of funds consisted of a net loss1 adjusted
for non-cash items of $1.9 million and positive non-cash working capital movements of $7.2 million.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Accounts receivable decrease (increase)
$8.4
$(1.3)
$(14.1)
$(13.8)
Accounts receivable balances are a function of the timing of sales and cash collections. The accounts receivable balance increase in
the current quarter was primarily due to a greater proportion of the Company’s accounts receivable, which consisted primarily of sales
for large project orders that generally entail longer collection terms, being recorded closer to the end of the current year. The accounts
receivable balance decrease in the fiscal year was primarily due to overall lower sales volume for the period.
Inventories
(millions)
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Inventories decrease (increase)
Customer deposits increase (decrease)
$(26.1)
$11.0
$(7.4)
$8.3
$(11.0)
$4.2
$7.9
$(4.1)
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
21
Management’s discussion and analysis
Inventories typically increase in times of rising backlog and order bookings and decrease when the opposite occurs. Inventories are
also a function of timing between receipts and shipments. For both periods, inventories increased as a result of the notable increase
in the Company’s backlog. In order to help finance its investment in inventories, the Company, where possible, obtains customer
deposits for large orders. Customer deposits increased for both periods due to higher customer deposits on certain large export project
orders in the Company’s North American operations for the quarter and French and North American operations for the fiscal year.
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Accounts payable and accrued liabilities increase (decrease)
$13.6
$0.6
$11.4
$(1.0)
For all of the indicated periods, the fluctuations in accounts payable and accrued liabilities were primarily related to the timing of
payments.
Additions to property, plant and equipment
(millions)
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
Additions to property, plant and equipment
$9.8
$10.3
$2.3
Proceeds on disposal of property, plant and
equipment
$13.7
$0.3
$-
$1.3
$0.1
The fluctuation in additions to property, plant and equipment for any period when compared to the prior comparable period is due to
the timing of the receipts of certain equipment.
On November 2, 2020, the Company sold one of its Montreal manufacturing plants. The sale was a vital part of the North American
manufacturing footprint optimization plan which was planned in the scope of its restructuring and transformation plan. The disposed
plant’s production has been transferred within the remaining North American plants and the Company’s Indian operations. The net
proceeds for the disposition of the building and the land was $12.4 million, while the net book value of the assets was $2.8 million
which resulted in a gain of $9.6 million Additionally, during the fiscal year, the Company used the service of an auctioneer to dispose
of some excess machinery and equipment in preparation for the plant sale.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Change in revolving credit facility
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
$18.2
$3.6
$22.1
$1.1
$2.9
$-
$3.9
$0.7
$11.3
$ -
$0.5
$-
During the current quarter, the Company’s French subsidiary borrowed $3.0 million in the form of an unsecured bank loan, bearing
interest at a variable rate and expiring in 2026.
22
Management’s discussion and analysis
During the fiscal year, the Company’s North American operations borrowed $11.6 million in the form of a secured mortgage loan
bearing monthly interest payments at a yearly interest rate of 3.80%, with principal payments beginning in October 2021 and repayable
over 15 years. Additionally, its Italian subsidiary secured three new long-term debt issuances with two financial institutions as part of
the measures and initiatives put in place by the Italian government to support companies in the current pandemic context. Specifically,
the subsidiary borrowed $3.6 million in the form of unsecured bank loans, bearing interest between 1.00% and 1.25%, with principal
repayments beginning in 2021 and 2022 and repayable in monthly and quarterly installments, expiring in 2025 and 2026.
On July 3, 2020, the Company secured new financing in the form of a $65,000 multi-currency revolving credit facility subject to a
borrowing base calculation and renewable every three years. This revolving credit facility can be drawn in US dollars or Canadian
dollars. Drawings bear interest at either the US Base rate, US Prime rate, Canadian prime rate, CDOR or LIBOR, plus a margin based
on the Company’s excess availability. Under the terms of the credit facility, the Company is required to satisfy a restrictive covenant
based on a financial ratio. As at February 28, 2021, the Company was in compliance with its covenant.
Dividends paid and repurchase of shares
(millions)
Dividends paid
Repurchase of shares
Fiscal Year
ended
February 28,
2021
Fiscal Year
ended
February 29,
2020
Three-month
period ended
February 28,
2021
Three-month
period ended
February 29,
2020
$0.5
$-
$2.0
$0.2
$-
$-
$0.5
$0.1
At the end of the fiscal year ended February 29, 2020, the Board of Directors deemed appropriate to suspend the quarterly dividend.
The decision remains unchanged and will be reviewed on a quarterly basis.
The Board of Directors of the Company had 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 the prior fiscal year. The Board of
Directors elected not to renew the normal course issuer bid during the current fiscal 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).
23
Management’s discussion and analysis
Risk overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following table:
Risks
Market
Financial instrument
Currency
Interest rate
Credit
Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
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.
The amounts outstanding under derivatives contracts as at February 28, 2021 and February 29, 2020 are as follows:
Range of exchange rates
Fair value
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2021
February 29,
2020
February 28,
2021
$
February 29,
2020
$
February 28,
2021
February 29,
2020
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Buy US$ for CA$ – 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
1.30
1.22
-
1.22-1.24
1.16-1.20
1.33-1.34
1.31-1.33
1.10-1.11
1.11-1.14
1.10-1.11
-
1,139-1,171
(135)
48
-
(168)
148
-
(923) US$22,000
US$22,000
357
-
(3)
€18,363
(174)
€18,363
198
-
(70)
US$68,000
US$68,000
US$1,205
€16,790
€16,790
US$1,647
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.
24
Management’s discussion and analysis
The following table provides a sensitivity analysis of the Company’s most significant foreign exchange exposures related to its net
position in the foreign currency financial instruments, which includes cash and cash equivalents, short-term investments bank
indebtedness, short-term bank loans, derivative financial instruments, accounts receivable, accounts payable and accrued liabilities,
customer deposits and long-term debt, including interest payable. A hypothetical strengthening of 5.0% of the following currencies
would have had the following impact for the fiscal years ended February 28, 2021 and February 29, 2020:
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
Net income (loss)
2021
$
(1,429)
593
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.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2021, five (2020 – four)
customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 15.6%
(2020 – 15.0%) and the Company’s ten largest customers accounted for 63.5% (2020 – 61.2%) of trade accounts receivables. In
addition, one customer accounted for 13.7% of the Company’s sales (2020 – 13.4%).
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. 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.
25
Management’s discussion and analysis
The lifetime expected loss allowance for trade receivables was determined as follows:
Expected loss rate
Gross carrying amount
Loss allowance
Expected loss rate
Gross carrying amount
Loss allowance
As at February 28, 2021
Past due more
than 30 days
0.606%
19,630
119
Past due 31 to 90
days
0.682%
9,672
66
Past due more
than 90 days
4.203%
17,653
742
Total
123,362
1,146
As at February 29, 2020
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
Current
0.287%
76,407
219
Current
1.041%
83,711
871
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash equivalents and short-term
investments, which it manages by dealing with highly rated financial institutions. The Company’s primary credit risk is limited to the
carrying value of the trade accounts receivable and gains on derivative assets.
The table below summarizes the ageing of trade accounts receivable as at:
As at
February 28,
2021
$
As at
February 29,
2020
$
76,407
19,630
9,672
17,653
123,362
1,146
122,216
13,157
83,711
16,619
7,445
21,989
129,764
2,002
127,762
7,480
135,373
135,242
As at
February 28,
2021
$
As at
February 29,
2020
$
2,002
(142)
(313)
(497)
96
1,146
1,662
1,045
(95)
(552)
(58)
2,002
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 (reversal)
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
Liquidity risk – see discussion in liquidity and capital resources section
26
Management’s discussion and analysis
CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defence related to certain products that may have contained an internal asbestos containing component. 1,696
claims were outstanding at the end of the reporting period (February 29, 2020 – 1,561). During the current fiscal year, the Company
resolved 388 claims (February 29, 2020 – 436) and was the subject of 523 new claims (February 29, 2020 – 648). Settlement costs
and legal fees related to these asbestos claims amounted to $2,897 for the quarter (February 29, 2020 - $2,677) and $11,011 for the
year (February 29, 2020 - $9,621).
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 10, 13, 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. 29,
Feb. 28,
2020
2021
Feb. 29,
2020
Feb. 28,
2021
Purchases of material components
$108
$325
$508
$708
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.
27
Management’s discussion and analysis
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a timely manner
so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuer’s
Annual and Interim Filings) as at February 28, 2021 and have concluded that such disclosure controls and procedures were designed
and operating effectively.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS.
Management has evaluated the design and effectiveness of its internal controls and procedures over financial reporting (as defined in
National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings). The evaluation was based on the
“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). This evaluation was performed by the CEO and the CFO of the Company with the assistance of other Company
Management and staff to the extent deemed necessary. Based on this evaluation, the CEO and the CFO concluded that the internal
controls and procedures over financial reporting were appropriately designed and operating effectively as at February 28, 2021.
In spite of its evaluation, Management does recognize that any controls and procedures no matter how well designed and operated,
can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen event
that lapses in the disclosure of internal controls and procedures occur and/or mistakes happen of a material nature, the Company
intends to take the steps necessary to minimize the consequences thereof.
Changes in internal control over financial reporting
The Company did not make any material changes to the design of internal control over financial reporting during the year ended
February 28, 2021 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).
28
Management’s discussion and analysis
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 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).
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
Since December 2019, the COVID-19 global pandemic has caused temporary disruptions in the Company’s production and supply
chain which have materially adversely affected its business and financial results. The economic slowdown triggered by the global
pandemic, mainly in the oil and gas sector at the beginning of the fiscal year, has also translated in lower non-project valve sales for
the Company. Nevertheless, the Company’s net order bookings have shown a positive trend for the fiscal year ended February 28,
2021. The Company has implemented proactive measures to protect its global workforce and mitigate the numerous effects of the
pandemic, but given the ongoing dynamic nature of circumstances surrounding COVID-19, it is not possible to reliably estimate the
length, severity and long term impact the global pandemic may have on the Company’s results, conditions and cash-flows. The
COVID-19 global pandemic should be considered a new risk factor.
In reaction to the COVID-19 pandemic, the Company applied for the Canada Emergency Wage Subsidy which allowed the Company
to avoid lay-offs that otherwise would have been necessary to blunt the financial impact of the pandemic.
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.
29
Management’s discussion and analysis
NEW ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
(i)
(ii)
In January 2020, the International Accounting Standards Board (“IASB”) issued Classification of Liabilities as Current or
Non-current (Amendments to IAS 1) providing a more general approach to the classification of liabilities under IAS 1 based
on the contractual arrangements in place at the reporting date. The amendments in Classification of Liabilities as Current
or Non-current (Amendments to IAS 1) affect only the presentation of liabilities in the statement of financial position, not
the amount or timing of recognition of any asset, liability income or expenses, or the information that entities disclose
about those items. In July 2020, the IASB published Classification of Liabilities as Current or Non-current – Deferral of
Effective Date (Amendment to IAS 1) deferring the effective date of the January 2020 amendments to IAS 1 by one year.
The amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2023 with earlier
adoption permitted. The Company is currently evaluating the impact of these amendments on its financial statements.
In August 2020, the International Accounting Standards Board (“IASB”) issued Interest Rate Benchmark Reform (Phase
2), which amends IFRS 9 Financial instruments, IAS 39 Financial instruments: Recognition and measurement, IFRS 7
Financial instruments: Disclosures and IFRS 16 Leases. The Phase 2 amendments address issues that might affect financial
reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. These
amendments complement those issued in 2019 and focus on issues that might affect financial reporting during the reform
of an interest rate benchmark, including the effects of changes to contractual cash flows arising from the replacement of
an interest rate benchmark with an alternative benchmark rate. The amendments are effective for annual periods beginning
on or after January 1, 2021, with earlier adoption permitted. The Company is currently evaluating the impact of these
amendments on its financial statements.
CERTAIN RISKS THAT COULD AFFECT OUR BUSINESS
Debt restrictions
The Company’s operations are substantially restricted by the terms of its debt, which could limit its ability to plan for or react to
market conditions, or to meet its capital needs. The Company’s credit facilities and the indenture governing its senior notes include a
number of significant restrictive covenants. These covenants restrict, under certain conditions, the Company’s ability to:
incur debt;
pay dividends on stock, repurchase stock or redeem subordinated debt;
make investments;
sell assets, including capital stock in subsidiaries;
guarantee other indebtedness;
enter into agreements that restrict dividends or other distributions from restricted subsidiaries;
enter into transactions with affiliates;
create or assume liens securing debt;
sell or transfer and leaseback transactions;
engage in mergers or consolidations; and
enter into a sale of all or substantially all of our assets.
These covenants could limit the Company’s ability to plan for or react to market conditions or to meet its capital needs. The Company’s
current credit facility contains other, more restrictive covenants, including financial covenants that require it to achieve certain financial
and operating results, and maintain compliance with specified financial ratios. The Company’s ability to comply with these covenants
and requirements may be affected by events beyond its control, and it may have to curtail some of its operations and growth plans to
maintain compliance. The restrictive covenants contained in the Company’s senior note indenture, along with the Company’s credit
facility, do not apply to its joint ventures, minority investments and unrestricted subsidiaries.
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.
30
Management’s discussion and analysis
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.
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.
31
Management’s discussion and analysis
Foreign currency exchange risks
Due to the geographic mix of the Company’s customers and its operations, the Company is exposed to foreign currency exchange risk.
The Company enters into foreign currency forward contracts in order to manage a portion of its net exposure to foreign currencies.
Such forward contracts contain an inherent credit risk related to default on obligations by the counterparty, which the company
mitigates by entering into contracts with sound financial institutions that it anticipates will satisfy their obligations. Risk related to
currency fluctuations could have a material adverse effect on the Company's results of operations and its financial position.
Interest rate risk 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.
Election of protectionist governments or implementation of protectionist trade policies could negatively impact the movement of
goods, services, and people across borders, including within North America. Uncertainty created by rapidly changing political
circumstances may impact the Company’s ability to plan effectively over the short- and medium-terms, until such time as policy
changes or new laws, if any, are implemented.
The Company’s business and operating results could also be adversely impacted by changes in tax laws, possibility of expropriation
and embargo, foreign exchange restrictions and political, military and/or terrorist disruptions or changes in regulatory environments.
32
Management’s discussion and analysis
Force majeure events
Force majeure events are unforeseeable events or circumstances that occur beyond the control of the Company. Such events include
but are not limited to political unrest, war, terrorism, strikes, riots, and crime, as well as seismic or severe weather related events such
as earthquakes, hurricanes, tsunamis, tornadoes, ice storms, flooding and volcanic eruptions. The risk of occurrence of a force majeure
event is unpredictable and may result in delays or cancellations of orders and deliveries to customers, delays in the receipt of materials
from suppliers, damage to facilities or equipment, personal injury or fatality, and possible legal liability.
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover damages
for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management
believes it has a strong defense related to certain products that may have contained an internal component containing asbestos.
Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail. Unfavorable rulings,
judgments or settlement terms could have a material adverse impact on the Company’s business, financial condition, results of
operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased significantly
during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability insurance coverage
will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be followed
to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a lack of a
strong health and safety program may expose it to lost production time, penalties and lawsuits, and may impact future orders as
customers may take into account the Company’s health and safety record when awarding sales contracts.
Environmental compliance matters
The Company’s operations and properties are subject to increasingly stringent laws and regulations relating to environmental
protection, including air and water discharges, waste management and disposal and employee safety. Such laws and regulations both
impose substantial fines for violations and mandate cessation of operations in certain circumstances, the installation of costly pollution
control equipment, or the undertaking of costly site remediation activities. Furthermore, new laws and regulations, or stricter
enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean up
requirements could require the Company to incur additional costs which could be significant.
Controls over disclosures and financial reporting
In accordance with National Instrument 52-109, the CEO and the CFO of the Company are responsible for designing, maintaining,
and evaluating the effectiveness of disclosure controls and procedures. The CEO and the CFO are also responsible for the effective
design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements in accordance with IFRS. A system of controls is subject to certain inherent limitations and is
partially based on the possibility or probability of future events. Accordingly, a system of internal controls can provide only
reasonable, and not absolute, assurance of reaching the desired objectives.
Control of the Company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.8% of the voting interests in the Company. Voting control enables the Controlling Shareholder to determine all
matters requiring shareholder approval. The Controlling Shareholder has advised the Company that the disposition of the shares
requires the consent of certain Velan family members and controlled entities.
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company, which may
negatively affect the price and liquidity of the Subordinated Voting Shares. The sale of a significant number of Subordinate Voting
Shares by the Controlling Shareholder pursuant to the exercise of the conversion right attached to the Multiple Voting Shares may
negatively impact upon the market price and liquidity of the Subordinate Voting Shares.
33
Management’s discussion and analysis
Income and other tax risks
The Company operates in a number of different tax jurisdictions and has a significant amount of cross-border purchase and sale
transactions. The tax rules and regulations in various countries are becoming more complex. There is a risk that one or more tax
authorities could disagree with the tax treatment adopted by the Company, resulting in defense costs and possible tax assessments.
Compliance with international laws
Due to the international nature of its operations, the Company is subject to differing systems of laws and regulations which are often
complex and differ from one country to the next. Such laws and regulations include but are not limited to anti-bribery legislation,
export and customs controls, foreign currency exchange controls, transfer pricing regulations and economic sanctions imposed by
governmental authorities. Failure to comply with such laws could negatively impact earnings and may result in criminal, civil and
administrative legal sanctions. The Company has implemented policies and procedures to effect compliance with these laws by its
employees and representatives.
Non-controlling interest
The Company’s operations in China and Taiwan, and certain of its operations in France and Korea are undertaken with partners that
are classified as non-controlling interest. The success of these operations depends on the satisfactory performance of such partners in
their obligations. The failure of such partners to perform their obligations could impose additional financial and performance
obligations on the Company that could negatively impact its earnings and financial condition.
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. The failure
to prevent, detect, or respond to a breach in the Company’s information technology networks could have a material adverse impact on
the Company’s business, financial condition, result of operations and cash flows.
34
Management’s discussion and analysis
RECONCILIATIONS OF NON-IFRS MEASURES
In this MD&A and other sections of the 2021 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 (income) and Adjusted net earnings (loss) before interest,
taxes, depreciation and amortization ("EBITDA")
For the fiscal year ended:
Feb. 28,
2021
Feb. 29,
2020
Feb. 28,
2019
Feb. 28,
2018
Feb. 28,
2017
Operating profit (loss)
2,241
(6,669)
(7,000)
(18,315)
13,068
Adjustments for:
Restructuring and transformation costs
Gain on disposal of Montreal plant
Operating profit (loss) before restructuring and
transformation costs (income)
5,622
(9,552)
(1,689)
9,566
-
2,897
-
-
-
-
-
-
(7,000)
(18,315)
13,068
Net income (loss)1
2,867
(16,390)
(4,882)
(17,811)
7,737
Adjustments for:
Depreciation of property, plant and equipment
Amortization of intangible assets and financing costs
Finance costs – net
Income taxes
EBITDA
Adjustments for:
Restructuring and transformation costs
Gain on disposal of Montreal plant
10,148
2,514
866
(822)
15,573
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
5,622
(9,552)
9,566
-
-
-
-
-
-
-
Adjusted EBITDA
11,643
16,088
7,087
(4,376)
26,201
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
35
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 and financing costs
Finance costs – net
Income taxes
EBITDA
Adjustment for:
Restructuring and transformation costs
Adjusted EBITDA
Feb. 28,
2021
Feb. 29,
2020
(2,000)
(908)
1,290
(710)
7,086
6,178
338
(11,116)
2,632
646
343
(2,311)
1,648
2,758
679
550
9,911
2,782
1,290
7,086
2,938
9,868
The term “operating profit or loss before restructuring and transformation costs or income” is defined as operating profit or loss plus
restructuring and transformation costs less the gain on the disposal of a Montreal plant. 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, less the gain on the disposal of a Montreal plant, plus depreciation of property, plant &
equipment, plus amortization of intangible assets, plus net finance costs plus income tax provision. 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.
36
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
37
Independent auditor’s report
To the Shareholders of Velan Inc.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Velan Inc. and its subsidiaries (together, the Company) as at February 28, 2021
and February 29, 2020, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at February 28, 2021 and February 29, 2020;
the consolidated statements of income (loss) for the years then ended;
the consolidated statements of comprehensive income (loss) for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include significant accounting policies and
other explanatory information.
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
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the consolidated financial statements for the year ended February 28, 2021. These matters were
addressed in the context of our audit of the consolidated financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
Realizability of deferred income tax assets
Our approach to addressing the matter involved the
following procedures, among others:
Refer to note 2 – Summary of significant
accounting policies and note 21 – Income taxes to
the consolidated financial statements.
The Company recognized deferred income tax
assets for an amount of $33.1 million as at
February 28, 2021. 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. 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 profits.
We considered this a key audit matter due to the
significant judgment applied by management to
estimate future taxable profits that support the
recognition of deferred income tax assets. This in
turn resulted in subjectivity and increased audit effort
in performing procedures to test the underlying
estimates of future taxable profits. Professionals with
specialized skill and knowledge in the fields of
foreign and Canadian taxation laws also assisted
us in our procedures.
Tested management’s assessment of the
realizability of deferred income tax assets on a
jurisdictional basis including the assessment of
whether it is probable that sufficient future
taxable profits will be generated over the
future period.
Evaluated whether the future taxable profits
used by management were reasonable
considering current and past performance by
jurisdiction, plans approved by the Board of
Directors, and whether those future taxable
profits were consistent with evidence obtained in
other areas of the audit.
Tested the underlying data used in
management’s estimation of future taxable
profits and performed sensitivity analysis on
the underlying data to evaluate the potential
impact on management’s estimate of future
taxable profits.
Evaluated whether management appropriately
adjusted for differences between accounting and
taxable profits.
With the assistance of professionals with
specialized skill and knowledge of foreign and
Canadian taxation laws, evaluated the
application of jurisdictional tax laws and
regulations used in the Company’s future
taxable profits.
39
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.
40
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.
41
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.
From the matters communicated with those charged with governance, we determine those matters that
were of most significance in the audit of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is
Jean-François Lecours.
/s/PricewaterhouseCoopers LLP1
Montréal, Quebec
May 19, 2021
1 CPA auditor, CA, public accountancy permit No. A126402
42
Velan Inc.
Consolidated Statements of Financial Position
As at February 28, 2021 and February 29, 2020
(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)
Income taxes recoverable
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)
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
February 28,
2021
$
February 29,
2020
$
74,688
285
135,373
3,798
204,161
8,670
196
427,171
96,327
17,319
5,927
33,140
949
75,327
627
135,242
3,463
170,265
5,191
555
390,670
98,179
17,148
5,284
26,702
513
153,662
147,826
580,833
538,496
11,735
-
90,840
1,609
62,083
29,515
303
1,578
9,902
207,565
12,649
48,189
1,410
2,545
8,254
44,317
1,379
73,271
1,493
47,208
37,090
1,169
1,621
8,311
215,859
13,722
10,986
1,576
2,869
8,623
73,047
37,776
280,612
253,635
300,221
284,861
580,833
538,496
Commitments and contingencies (note 23)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
James A. Mannebach, Director
Yves Leduc, Director
43
Velan Inc.
Consolidated Statements of Income (Loss)
For the years ended February 28, 2021 and February 29, 2020
(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 (income) (note 20)
Other expense
Operating profit (loss)
Finance income
Finance costs
Finance costs – net
Income (loss) before income taxes
Income tax expense (recovery) (note 21)
Net income (loss) for the year
Net income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
2021
$
2020
$
302,063
371,625
221,524
283,491
80,539
80,091
(3,930)
2,137
2,241
1,037
(1,903)
(866)
1,375
(822)
2,197
2,867
(670)
2,197
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)
Earnings (loss) per share (note 22)
Basic and diluted
0.13
(0.76)
Dividends declared per Subordinate and Multiple Voting Share
-
0.09 (CA$0.12)
The accompanying notes are an integral part of these consolidated financial statements.
44
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding per share amounts)
Comprehensive income (loss)
Net income (loss) for the year
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other
than the reporting currency (U.S. dollar)
Comprehensive income (loss)
Comprehensive income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interests
2021
$
2020
$
2,197
(16,601)
13,163
15,360
(5,215)
(21,816)
15,907
(547)
(21,447)
(369)
15,360
(21,816)
Other comprehensive income (loss) is composed solely of items that may be reclassified subsequently to the consolidated statement of income
(loss).
The accompanying notes are an integral part of these consolidated financial statements.
45
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2021 and February 29, 2020
(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, 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
Net income for the year
Other comprehensive income
-
-
-
-
-
13,040
2,867
-
2,867
13,040
(670)
123
2,197
13,163
Balance – February 28, 2021
72,695
6,260
(21,007)
239,136 297,084
3,137
300,221
The accompanying notes are an integral part of these consolidated financial statements.
46
Velan Inc.
Consolidated Statements of Cash Flows
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding per share amounts)
Cash flows from
Operating activities
Net income (loss) for the year
Adjustments to reconcile net income (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 provided (used) by investing activities
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders
Repurchase of shares (note 14 (c))
Short-term bank loans
Net change in revolving credit facility
Increase in long-term debt
Repayment of long-term debt
Repayment of long-term lease liabilities
Cash provided (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)
The accompanying notes are an integral part of these consolidated financial statements.
2021
$
2020
$
2,197
(4,080)
(7,212)
(9,095)
342
(9,810)
(1,095)
13,738
(274)
2,901
(482)
-
(1,379)
22,132
18,195
(3,643)
(1,724)
33,099
5,038
31,943
31,010
62,953
74,688
(11,735)
62,953
(967)
(6,757)
(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
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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 19, 2021.
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.
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Foreign currency transactions and balances
The Company and its subsidiaries translate foreign currency transactions and balances into their functional
currencies. Foreign currency is defined as any currency that is different from an individual entity’s functional
currency.
Monetary assets and liabilities in foreign currencies are translated at year-end exchange rates. Non-monetary assets
are translated at rates prevailing at the transaction dates. Revenue and expenses in foreign currencies are translated at
weekly average rates throughout the year. Gains and losses arising on translation are included in the consolidated
statement of income (loss) for the year.
Translation of accounts of foreign subsidiaries
The financial statements of the Company’s foreign subsidiaries whose functional currency is not the U.S. dollar are
translated into U.S. dollars for reporting purposes. All assets and liabilities are translated at year-end rates, and
revenue and expenses at the average rate for the period. Resulting gains and losses are included in other
comprehensive 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 have been
transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are
derecognized when the obligation underlying the liability has been discharged, cancelled or has expired.
Financial instruments classified at fair value through profit and loss
Derivative financial instruments are classified at fair value through profit and loss at each statement of financial
position date with the changes in fair value recorded in the consolidated statement of income (loss) in the year in
which these changes arise.
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 income (loss) over the expected life of the
instrument.
The Company assesses the expected credit losses associated with its financial assets measured at amortized costs at
the end of every fiscal year. The impairment methodology applied depends on whether there has been a significant
increase in credit risk.
The Company applies the simplified approach permitted by IFRS 9 for trade receivables which requires the expected
lifetime losses to be recorded at initial recognition.
Embedded derivatives
Derivatives may be embedded in other financial instruments (the “host instrument”). Embedded derivatives are
treated as separate derivatives if their economic characteristics and risks are not closely related to those of the host
instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined
contract is not measured at fair value with changes in fair value recognized in profit and loss, nor 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.
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 provisions 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.
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.
Provision for performance guarantees are provisions that arise for possible late delivery and other contractual
non-compliance penalties or liquidated damages. It is recognized as a reduction of sales 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.
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.
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 write-down may be reversed if the circumstances which caused it no longer
exist.
Property, plant and equipment
Property, plant and equipment are valued at acquisition or manufacturing costs less any related government
assistance, accumulated depreciation and any accumulated impairment losses. Acquisition costs include any
expenditure that is directly related to the acquisition of the item. Manufacturing costs include direct material and
labour costs plus applicable manufacturing overheads. Borrowing costs directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial period of time to be ready for their intended use
are added to the cost of those assets, until such time as those assets are ready for their intended use.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only
when it is probable that future economic benefits associated with the item will flow to the Company and the cost of
the item can be reliably measured. The carrying amount of a replaced part is expensed as the parts are used. All other
repairs and maintenance are charged to the consolidated statement of income (loss) during the period in which they
are incurred.
Depreciation of assets commences when the assets are ready for their intended use. The assets’ residual values and
useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Changes in expected useful
life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by
changing the depreciation period or method, as appropriate, and treated on a prospective basis as a change in
estimate.
Depreciation on the property, plant and equipment is determined principally using the following methods and annual
rates or terms:
Buildings
Machinery and equipment and
furniture and fixtures
Data processing equipment
Rolling stock
Leasehold improvements
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
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the Company’s share of the net identifiable
assets of the acquired subsidiary at the date of acquisition. Goodwill is carried at cost less accumulated impairment
losses.
Intangible assets
Purchased intangible assets relate primarily to patents, products, designs, customer lists, non-compete agreements and
computer software. Internally generated intangible assets relate to development costs. Research and development
costs are expensed as incurred unless the development costs meet the criteria for deferral.
Amortization expense is recognized in the consolidated statement of income (loss) in the expense category consistent
with the function of the intangible asset. The assets’ useful lives are reviewed, and adjusted if appropriate, at the end
of each reporting period or more frequently if events or circumstances occur that would indicate a change in useful
life. Changes in expected useful life or the expected pattern of consumption of future economic benefits embodied in
the asset are accounted for by changing the amortization period or method, as appropriate, and treated on a
prospective basis as a change in estimate. Amortization is determined principally using the following methods and
terms:
Patents, products and designs
Customer lists
Non-compete agreements
Computer software
Government assistance
Method
Straight-line
Straight-line
Straight-line
Straight-line
Term
5 to 15 years
10 years
5 years
1 to 3 years
Government assistance, in the form of wage subsidies and investment tax credits (“ITCs”), is 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. The details of the wage subsidies received by the Company are disclosed in notes 16 to 19.
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
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 income (loss), except to the extent that it relates to items recognized in other
comprehensive income (loss) or directly in equity, in which case the taxes are recognized in other comprehensive
income (loss) or equity, respectively.
Current income taxes
The current income taxes charge is calculated on the basis of the tax laws enacted or substantively enacted at the
statement of financial position date in the countries where the Company generates taxable profits. 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
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
against a current tax liability when they relate to income taxes levied by the same taxation authority and the taxation
authority permits the Company to make or receive a single net payment. Deferred income tax assets and liabilities are
offset when the Company has a legally enforceable right to set off current income tax assets against current income
tax liabilities and deferred income tax assets and liabilities related to income taxes levied by the same taxation
authority on either: (1) the same taxable entity; or (2) different taxable entities which intend either to settle current tax
liabilities and assets on a net basis, or to realize assets and settle the liabilities simultaneously, in each future period in
which significant amounts of deferred income tax liabilities or assets are expected to be settled or recovered.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event,
it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably
estimated. Provisions are not recognized for costs that need to be incurred to operate in the future or expected future
operating losses.
Provisions are measured at the present value of the expenditures required to settle the obligation using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the
obligation.
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
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 income (loss) on a
straight-line basis over the term of the lease.
Share-based compensation plans
Grants under the Company’s share-based compensation plans are accounted for in accordance with the fair
value-based method of accounting. The Company operates a share-based compensation plan under which it receives
services from employees as consideration for share options, performance share units (“PSUs”) and deferred share
units (“DSUs”).
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 write-down 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).
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 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).
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 profits 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
Novel coronavirus (“COVID-19”) global pandemic
Since December 2019, the COVID-19 global pandemic has caused temporary disruptions in the Company’s
production and supply chain which have materially adversely affected its business and financial results. The
economic slowdown triggered by the global pandemic, mainly in the oil and gas sector at the beginning of the
fiscal year, has also translated in lower non-project valve sales for the Company. Nevertheless, the Company’s
net order bookings have shown a positive trend for the fiscal year ended February 28, 2021. The Company has
implemented proactive measures to protect its global workforce and mitigate the numerous effects of the
pandemic, but given the ongoing dynamic nature of circumstances surrounding COVID-19, it is not possible to
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
reliably estimate the length, severity and long term impact the global pandemic may have on the Company’s
results, conditions and cash-flows. The COVID-19 global pandemic should be considered a new risk factor.
In reaction to the COVID-19 pandemic, the Company applied for the Canada Emergency Wage Subsidy which
allowed the Company to avoid lay-offs that otherwise would have been necessary to blunt the financial impact
of the pandemic. The details of the wage subsidies received by the Company are disclosed in notes 16 to 19.
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 issued but not yet adopted
In January 2020, the International Accounting Standards Board (“IASB”) issued Classification of Liabilities as
Current or Non-current (Amendments to IAS 1) providing a more general approach to the classification of
liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments in
Classification of Liabilities as Current or Non-current (Amendments to IAS 1) affect only the presentation of
liabilities in the statement of financial position, not the amount or timing of recognition of any asset, liability
income or expenses, or the information that entities disclose about those items. In July 2020, the IASB
published Classification of Liabilities as Current or Non-current – Deferral of Effective Date (Amendment to
IAS 1) deferring the effective date of the January 2020 amendments to IAS 1 by one year. The amendments to
IAS 1 are effective for annual reporting periods beginning on or after January 1, 2023 with earlier adoption
permitted. The Company is currently evaluating the impact of these amendments on its financial statements.
In August 2020, the International Accounting Standards Board (“IASB”) issued Interest Rate Benchmark
Reform (Phase 2), which amends IFRS 9 Financial instruments, IAS 39 Financial instruments: Recognition and
measurement, IFRS 7 Financial instruments: Disclosures and IFRS 16 Leases. The Phase 2 amendments
address issues that might affect financial reporting after the reform of an interest rate benchmark, including its
replacement with alternative benchmark rates. These amendments complement those issued in 2019 and focus
on issues that might affect financial reporting during the reform of an interest rate benchmark, including the
effects of changes to contractual cash flows arising from the replacement of an interest rate benchmark with an
alternative benchmark rate. The amendments are effective for annual periods beginning on or after
January 1, 2021, with earlier adoption permitted. The Company is currently evaluating the impact of these
amendments on its financial statements.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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 (reversal)
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
As at
February 28,
2021
$
As at
February 29,
2020
$
123,362
(1,146)
13,157
129,764
(2,002)
7,480
135,373
135,242
As at
February 28,
2021
$
As at
February 29,
2020
$
2,002
(142)
(313)
(497)
96
1,146
1,662
1,045
(95)
(552)
(58)
2,002
The loss allowance is included in the administration costs on the consolidated statement of income (loss).
Amounts charged to the loss allowance account are generally written off when there is not a reasonable expectation
of recovery.
5
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2021
$
As at
February 29,
2020
$
40,404
118,553
45,204
35,920
95,123
39,222
204,161
170,265
As a result of variations in the ageing of its inventories, the Company recognized a net additional inventory provision
for the year of $3,843 (2020 – $3,971), including reversals of $6,601 (2020 – $3,905).
The net book value of inventories pledged as security under the Company’s long-term debt amounted to $103,235
(2020 – nil).
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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 as at February 28, 2021. 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
2021
2020
% of ownership
interest held by
the non-
controlling
interests
2020
2021
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 7% (2020 – 8%) 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 28, 2021 was $4,781
(2020 – $5,741).
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(g)). The amounts disclosed for each subsidiary are
before intercompany eliminations.
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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 28,
2021
$
As at
February 29,
2020
$
As at
February 28,
2021
$
As at
February 29,
2020
$
5,475
10,977
(5,502)
14,756
6,450
8,306
2,804
2,456
5,621
8,316
(2,695)
13,924
6,867
7,057
4,362
3,032
4,823
1,002
3,821
1,906
-
1,906
5,727
681
4,839
1,246
3,593
1,924
19
1,905
5,498
652
Summarized statements of comprehensive income (loss)
Juwon Special Steel Co. Ltd.
Velan Valvac Manufacturing
Co. Ltd.
2021
$
2020
$
2021
$
2020
$
Sales
12,130
16,202
5,283
7,450
Net income (loss) for the year
Other comprehensive income (loss)
Total comprehensive income (loss) for the year
Net income (loss) allocated to non-controlling interest
(1,801)
244
(1,557)
(698)
(9)
(315)
(324)
(207)
229
-
229
29
55
-
55
(4)
Summarized statements of cash flows
Juwon Special Steel Co. Ltd.
Velan Valvac Manufacturing
Co. Ltd.
2021
$
2020
$
2021
$
Cash flows from operating activities
(188)
1,309
(575)
Cash flows from investing activities
Cash flows from financing activities
(324)
(711)
(2,786)
(312)
(19)
-
2020
$
694
(86)
-
Net increase (decrease) in cash and cash equivalents
(1,223)
(1,789)
(594)
608
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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)
$
Total
$
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
2,769
(1,570)
1,199
1,199
147
-
-
(242)
(44)
1,060
-
-
-
252,284
(168,747)
83,537
15,163
1,768
593
(118)
(1,785)
(467)
15,154
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
25,298
703
-
(576)
-
1,076
26,501
26,156
4,280
-
(2,484)
(1,643)
461
26,770
28,289
3,905
-
(1,423)
(5,464)
706
26,013
920
200
-
(3)
(303)
36
850
935
587
-
-
(579)
27
970
367
64
-
(5)
(143)
13
296
1,060
71
-
-
(223)
103
1,011
15,154
631
(1,088)
(183)
(1,793)
1,195
13,916
98,179
10,441
(1,088)
(4,674)
(10,148)
3,617
96,327
26,501
-
26,501
56,184
(29,414)
26,770
141,940
(115,927)
26,013
8,797
(7,947)
850
7,876
(6,906)
970
2,583
(2,287)
296
3,117
(2,106)
1,011
17,221
(3,305)
13,916
264,219
(167,892)
96,327
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
Year ended February 28, 2021
Beginning balance
Additions
Modifications to lease terms
Disposals
Depreciation
Exchange differences
At February 28, 2021
Cost
Accumulated depreciation
Depreciation expense of $10,148 (2020 – $10,803) is included in the consolidated statement of income (loss): $8,222
(2020 – $8,792) in “cost of sales” and $1,926 (2020 – $2,011) in “administration costs”.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8 Leases
a) Right-of-use assets
Land
$
Buildings
$
Machinery &
equipment
$
Furniture &
fixtures
$
Data processing
equipment Rolling Stock
$
$
Total
$
Year ended February 29, 2020
Beginning balance
Additions
Modifications to lease terms
Disposals
Depreciation
Exchange differences
At February 29, 2020
Cost
Accumulated depreciation
Year ended February 28, 2021
Beginning balance
Additions
Modifications to lease terms
Disposals
Depreciation
Exchange differences
At February 28, 2021
Cost
Accumulated depreciation
b) Long-term lease liabilities
6,528
-
485
-
(109)
(256)
6,648
6,755
(107)
6,648
6,648
-
-
-
(118)
689
7,219
7,460
(241)
7,219
7,150
363
38
-
(808)
(184)
6,559
7,358
(799)
6,559
6,559
86
(973)
(95)
(838)
438
5,177
6,831
(1,654)
5,177
113
295
52
-
(96)
(5)
359
454
(95)
359
359
-
-
-
(116)
15
258
479
(221)
258
48
-
-
-
(13)
(2)
33
46
(13)
33
33
-
-
-
(13)
2
22
50
(28)
22
Current portion of long-term lease liabilities
Long-term lease liabilities
241
-
-
-
(103)
-
138
241
(103)
138
138
100
-
-
(76)
3
165
257
(92)
165
1,083
1,110
18
(118)
(656)
(20)
1,417
2,041
(624)
1,417
1,417
445
(115)
(88)
(632)
48
1,075
15,163
1,768
593
(118)
(1,785)
(467)
15,154
16,895
(1,741)
15,154
15,154
631
(1,088)
(183)
(1,793)
1,195
13,916
2,144
(1,069)
1,075
17,221
(3,305)
13,916
As at
February 28,
2021
$
As at
February 29,
2020
$
1,578
12,649
1,621
13,722
14,227
15,343
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Amounts recognized in the consolidated statement of income (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”)
9
Intangible assets and goodwill
Goodwill
$
Computer
software
$
Patents,
products &
designs
$
Customer
lists
$
At February 28, 2019
Cost
Accumulated depreciation
Year ended February 29, 2020
Beginning Balance
Additions
Disposals and transfers
Amortization
Exchange differences
At February 29, 2020
Cost
Accumulated amortization
Year ended February 28, 2021
Beginning Balance
Additions
Amortization
Exchange differences
At February 28, 2021
Cost
Accumulated amortization
8,943
-
8,943
8,943
-
-
-
(344)
8,599
8,599
-
8,599
8,599
-
-
896
9,495
9,495
-
9,495
8,139
(7,605)
534
534
337
(2)
(309)
(14)
546
8,176
(7,630)
546
546
219
(290)
39
514
14,889
(7,554)
7,335
7,335
1,444
-
(1,265)
(199)
7,315
15,872
(8,557)
7,315
7,315
876
(1,421)
435
7,205
6,165
(4,833)
1,332
1,332
-
-
(603)
(43)
686
5,928
(5,242)
686
686
-
(626)
43
103
2021
$
2020
$
272
125
127
356
311
153
128
389
Other
$
Total
$
699
(697)
2
38,835
(20,689)
18,146
2
-
-
-
-
2
18,146
1,781
(2)
(2,177)
(600)
17,148
673
(671)
2
39,248
(22,100)
17,148
2
-
-
-
2
17,148
1,095
(2,337)
1,413
17,319
8,683
(8,169)
514
17,949
(10,744)
7,205
6,545
(6,442)
103
15
(13)
2
42,687
(25.368)
17,319
Amortization expense of $2,337 (2020 – $2,177) is included in the consolidated statement of income (loss): $1,394
(2020 – $1,349) in “cost of sales” and $943 (2020 – $828) in “administration costs”.
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
As at February 28, 2021, the Company capitalized $876 (2020 – $1,444) of development costs, net of government
assistance of $262 (2020 – $605), 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 2021, the Company has not identified material changes in the composition of the CGU, its
estimated recoverable amount or its results of operations, amongst others. In accordance with IFRS, the Company has not
tested this CGU for impairment.
10 Credit facilities
a) The Company and its U.S. subsidiary company, Velan Valve Corp., had $63,338 (CA$85,000) of unsecured
credit facilities available as at February 29, 2020. The credit facilities were subject to a prime to prime + 0.75%
borrowing rate. As at February 29, 2020, an amount of $33,341 was drawn against these unsecured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $9,183 was drawn
against these unsecured credit facilities in the form of letters of credit and letters of guarantee. These credit
facilities were reimbursed and not renewed during the fiscal year.
The Company has a facility with Export Development Canada of $28,100 (2020 – $30,000) for letters of credit
and letters of guarantee. As at February 28, 2021, $19,039 (2020 – $6,404) was drawn against this facility. The
credit facility expires on August 31, 2021 and is renewed annually.
b) Foreign subsidiaries and structured entities have the following credit facilities available as at February 28, 2021:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$78,740 (€59,439; KW4,046,800; INR190,000; NTD
15,000) (2020 – $66,677 (€53,662;
KW4,281,800; INR270,000; NTD 15,000))
(note 27)
Borrowing rates
0.18% to 9.70%
Foreign structured entities
$7,806 (KW8,800,000)
(2020 – $5,720 (KW6,900,000)) (note 27)
2.48% to 3.08%
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 EURIBOR, KORIBOR, EONIA or prime rate. The borrowing rates listed above are the rates in effect as at
February 28, 2021. The terms of the above facilities range from annual renewal to an indefinite term. The aggregate
net book value of the assets pledged under the above credit facilities amounted to $6,797 (2020 – $7,016).
As at February 28, 2021, an amount of $11,735 (2020 – $10,976) was drawn against these secured credit facilities in
the form of demand operating lines of credit and bank overdrafts. An additional $15,037 (2020 – $8,069) was drawn
against these secured credit facilities in the form of letters of credit and letters of guarantee.
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
11 Accounts payable and accrued liabilities
Trade accounts payable
Dividend payable
Goods and services taxes payable
Commissions payable
Accrued liabilities
Accrued payroll expenses
Other
12 Provisions
Balance - February 28, 2019
Additions
Usage
Reversals
Exchange differences
Balance – February 29, 2020
Additions
Usage
Reversals
Exchange differences
As at
February 28,
2021
$
As at
February 29,
2020
$
37,080
-
1,500
1,834
25,636
21,673
3,117
90,840
32,091
482
3,985
2,486
13,032
18,285
2,910
73,271
Provision for
performance
guarantees
$
Warranty
provision
$
Severance
provision
$
Other
provision
$
23,014
5,447
(1,266)
(5,285)
(783)
21,127
2,029
(1,180)
(5,079)
1,918
8,494
5,983
(2,641)
(2,061)
(298)
9,477
2,464
(735)
(4,710)
645
-
6,760
(1,274)
-
-
5,486
-
(2,574)
(1,353)
-
1,000
-
-
-
-
1,000
1,000
-
-
-
Total
$
32,508
18,190
(5,181)
(7,346)
(1,081)
37,090
5,493
(4,489)
(11,142)
2,563
Balance – February 28, 2021
18,815
7,141
1,559
2,000
29,515
The company’s provision for performance guarantees consists 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.
The Company offers various warranties to its customers. 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
66
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
During the year ended February 29, 2020, the Company recorded a $6,760 severance provision on its consolidated
statement of financial position. The provision was primarily relating to the Company’s restructuring and
transformation initiative (note 20).
The Company is often being audited for compliance by regulatory agencies. Management estimates the related
provision based on historical information as well as a forward-looking risk assessment.
13 Long-term debt
Revolving credit facility (note 13(a))
Canadian subsidiary
Secured bank loan ($CAD 15,000; February 29, 2020 – nil) (note 13(b))
French subsidiaries
Unsecured bank loans (€5,547; February 29, 2020 – (€4,570) (note 13(c))
Italian subsidiary
Unsecured bank loan (€3,000; February 29, 2020 – €330) (note 13(d))
Unsecured state bank loan (€920; February 29, 2020 – €1,183) (note 13(e))
Korean structured entity
Secured bank loan (KW7,064,200; February 29, 2020 – KW7,757,040)
(note 13(f))
Other (note 13(g))
Less: Current portion
As at
February 28,
2021
$
As at
February 29,
2020
$
22,132
11,581
6,723
3,636
1,115
6,266
6,638
58,091
9,902
-
-
5,017
363
1,299
6,431
6,187
19,297
8,311
48,189
10,986
a) On July 3, 2020, the Company and its U.S. subsidiary company, Velan Valve Corp. secured new financing in
the form of a $65,000 multi-currency revolving credit facility subject to a borrowing base calculation and
renewable every three years. This revolving credit facility can be drawn in US dollars or Canadian dollars.
Drawings bear interest at either the US Base rate, US Prime rate, Canadian prime rate, CDOR or LIBOR,
plus a margin based on the Company’s excess availability. Under the terms of the credit facility, the
Company is required to satisfy a restrictive covenant based on a financial ratio. As at February 28, 2021,
the Company had drawn down $22,132 on the revolving credit facility and had $5,436 in the form of
outstanding letters of credit and letters of guarantee on a total $55,518 borrowing availability.
Furthermore, the Company was in compliance with its covenant.
b) The secured mortgage bank loan of $11,581 ($CAD 15,000) bears interest at 3.80% with monthly principal
repayments of $94 beginning in October 2021 and repayable over 15 years.
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) The unsecured bank loans total $6,723 (€5,547) and bear interest at a range of [0.20% - 0.81%]. Repayments
include monthly payments of $10 and $20, and quarterly payments of $61. These loans expire between 2021 and
2026.
d) The unsecured bank loans total $3,636 (€3,000) bears interest at a range of [1.00% - 1.25%]. Repayments
include monthly payments of $20 with principal repayments beginning in July 2021 and quarterly payments of
$199 with principal repayments beginning in October 2022. These loans expire in 2025 and 2026.
e) The unsecured bank loan of $1,115 (€920) bears interest at 3.00% and is repayable in semi-annual payments of
$139, expires in 2024.
f) The secured bank loan of $6,266 (KW7,064,200) bears interest at 1.40% and expires in 2025. In fiscal 2021,
payments against the loan amounted to $830, while beginning in fiscal 2022 quarterly payments of $313 will
begin until expiration.
g)
Included in Other is an amount of $5,380 (€4,438) (February 29, 2020 – $5,042 (€4,593)) related to an
unconditional put option held by a minority shareholder in one of the Company’s subsidiary companies. This is
recognized as a liability instead of non-controlling interest. The liability is initially recognized as the
non-controlling interest’s share of the net identifiable assets of the subsidiary or structured entity. Subsequently,
the liability is carried at the amount of the present value of estimated future cash flows discounted at the original
effective rate. Adjustments to the carrying value are recorded as interest expense in the consolidated statement
of income (loss).
The aggregate net book value of the assets pledged as collateral under the revolving credit facility amounted to
$290,288 (2020 – nil) and under long-term debt agreements amounted to $28,832 (2020 – $8,763).
The carrying value of long-term debt approximates its fair value.
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
15,566,567 Multiple Voting Shares
As at
February 28,
2021
$
As at
February 29,
2020
$
65,569
7,126
72,695
65,569
7,126
72,695
c) Pursuant to its Normal Course Issuer Bid, the Company was 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. The Company elected not to renew its Normal Course Issuer Bid. No shares were
repurchased for cancellation during the year ended February 28, 2021. During the year ended February 29, 2020,
36,300 Subordinate Voting Shares were purchased for a cash consideration of $200 and cancelled.
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 remaining outstanding options expired during the year ended February 28, 2021.
The table below summarizes the status of the Share Option Plan for the year ended on February 29, 2020.
Number
of shares
Weighted average exercise price
Weighted
average
contractual
life in
months
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 28, 2021, the Company had no PSUs outstanding since they all expired at the end of the prior
fiscal year.
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.
Additionally, a grant made to an independent director will be deemed immediately vested.
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Movements in outstanding DSUs and related expense were as follow:
In number of DSUs
Opening balance
Issued
Settled
Forfeited
Closing balance of outstanding DSUs
DSU expense for the years
Fair value of vested outstanding DSUs, end
of years
15 Foreign exchange
2021
2020
45,268
37,681
(2,072)
(3,952)
76,925
$134
27,748
24,347
-
(6,827)
45,268
$29
$261
$127
Foreign exchange gains (losses) realized on the translation of foreign currency balances, transactions and the fair
value of foreign currency financial 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
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
2021
$
(856)
(4,311)
(1,205)
2021
$
(15,041)
137,913
58,266
9,616
3,843
4,311
22,616
2020
$
109
(372)
(2)
2020
$
(7,292)
170,334
74,150
10,141
3,971
372
31,815
221,524
283,491
During the fiscal year ended February 28, 2021, the Company applied for the Canada Emergency Wage Subsidy of
which $7,024 was recorded in “Cost of sales”.
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
17 Administration cost
Employee expenses, excluding scientific research investment tax credits
Scientific research investment tax credits
Commissions
Freight to customers
Professional and related fees
Movement in loss allowance
Depreciation and amortization
Other
2021
$
40,148
(1,614)
3,720
4,039
16,344
(455)
2,869
15,040
80,091
2020
$
44,367
(2,280)
4,029
4,279
14,804
953
2,839
16,198
85,189
During the fiscal year ended February 28, 2021, the Company applied for the Canada Emergency Wage Subsidy of
which $5,659 was recorded in “Administration costs”.
18 Employee expense
Wages and salaries
Social security costs
Scientific research investment tax credits
Share-based compensation
Costs relating to workforce reduction
Other
2021
$
66,622
26,536
(1,614)
134
(1,208)
4,977
2020
$
85,318
27,520
(2,280)
(15)
6,760
5,175
95,447
122,478
During the fiscal year ended February 28, 2021, the Company applied for the Canada Emergency Wage Subsidy of
which $12,684 was included in “Employee expenses”.
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
2021
$
5,661
(1,614)
2020
$
8,263
(2,280)
4,047
5,983
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
During the fiscal year ended February 28, 2021, the Company applied for the Canada Emergency Wage Subsidy of
which $1,757 was included in “Research and development expenditures”. The scientific research and development
investment tax credits were recorded net of this government assistance.
20 Restructuring and transformation costs (income)
Restructuring and transformation costs
Gain on disposal of Montreal plant
2021
$
5,622
(9,552)
(3,930)
2020
$
9,566
-
9,566
Restructuring and transformation costs consist primarily of project resources as well as the moving costs related to
dismantling and transportation of machinery and equipment to reflect the optimized manufacturing footprint plan.
The prior year restructuring and transformation costs also included a severance provision expense (note 12)) of
$6,241.
On November 2, 2020, the Company sold one of its Montreal manufacturing plants. The sale was a vital part of the
North American manufacturing footprint optimization plan which was planned in the scope of the Company’s
restructuring and transformation plan. The Company’s production has gradually been reorganized from four North
American plants to three more specialized plants. The production of certain non-project valves produced in North
America, as well as less complex project valves has also been transferred to India. The net proceeds for the
disposition of the building and the land were $12,389, while the net book value of the assets was $2,837 which
resulted in a gain of $9,552.
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)
72
2021
$
5,476
-
2020
$
7,822
2,485
5,476
10,307
(5,776)
(522)
(1,923)
159
(6,298)
(1,764)
(822)
8,543
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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:
2021
$
2020
$
Income tax at statutory rate of 26.50% (2020 – 26.60%)
364
(2,143)
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Taxable foreign exchange gain
De-recognition of unused tax losses
Non-taxable portion of taxable capital gain
Losses not tax effected (losses utilized not previously tax effected)
Global Intangible Low-Taxed Income (“GILTI”)
Prior period adjustments and assessments
Benefit attributable to a financing structure
Other
Income tax expense (recovery)
469
(274)
-
(798)
478
(211)
(522)
(300)
(28)
(822)
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
2021
$
24,816
8,324
(2,248)
(297)
1,469
378
8,256
-
(1,227)
2,636
(536)
(253)
(37)
8,543
2020
$
18,447
8,255
(1,300)
(1,569)
Net deferred income tax asset
30,595
23,833
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 income (loss)
Exchange differences
2021
$
23,833
6,298
464
2020
$
22,209
1,764
(140)
Balance – End of year
30,595
23,833
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(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
2021
$
(3,246)
(1,196)
12,785
(1,571)
3,715
17,127
2,981
2020
$
(2,980)
(1,764)
13,705
(1,432)
3,574
10,462
2,268
30,595
23,833
The Company did not recognize deferred income tax assets of $10,115 (2020 – $10,312) in respect of non-capital
losses amounting to $40,735 (2020 – $40,611) that can be carried forward to reduce taxable profits in future years.
These losses expire between 2031 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 profits 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 $383 (2020 – $368) in respect of capital losses
amounting to $2,892 (2020 – $2,745) that can be carried forward indefinitely against future taxable capital gains.
Deferred income tax liabilities of $5,025 (2020 – $5,391) have not been recognized for the withholding tax and other
taxes that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are not expected to
reverse in the foreseeable future. Unremitted earnings as at February 28, 2021 totalled $266,857 (2020 – $266,930).
22 Earnings (loss) per share
a) Basic and diluted
Basic earnings (loss) per share is calculated by dividing the net income (loss) attributable to the Subordinate and
Multiple Voting shareholders by the weighted average number of Subordinate and Multiple Voting Shares
outstanding during the year.
2021
2020
Net income (loss) attributable to Subordinate and Multiple Voting
shareholders
$2,867
$(16,390)
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings (loss) per share
21,585,635
21,614,875
$0.13
$(0.76)
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 had one category of dilutive potential Subordinate and Multiple Voting Shares: stock
options. The remaining outstanding options expired during the year ended February 28, 2021. As at
February 29, 2020, 30,000 stock options had an antidilutive effect.
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 28, 2021, the
aggregate maximum value of these guarantees, if exercised, amounted to $64,737 (2020 – $55,992). The
guarantees expire as follows:
February 28, 2022
February 28, 2023
February 29, 2024
February 28, 2025
February 28, 2026
Subsequent years
$
22,634
13,031
14,462
4,179
1,769
8,662
64,737
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year, amounting to
$3,590 (2020 – $3,550), which are covered by letters of credit.
c) Future minimum payments under low value / short term leases are as follows:
February 28, 2022
February 28, 2023
February 29, 2024
February 28, 2025
$
316
177
75
22
590
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. During the year ended February 28,
2021, legal and related costs for these matters amounted to $11,011 (2020 – $9,621). These costs are expensed
as incurred.
e) Lawsuits and proceedings or claims arising from the normal course of operations were pending or threatened
against the Company. 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”).
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 had recorded a final net settlement of $850 in regard to the claim.
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
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
2021
$
508
81
3,865
-
134
2020
$
708
91
4,532
(9)
(42)
1 Key management includes directors (executive and non-executive) and certain members of senior management.
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Segment reporting
The Company reflects its results under a single reportable operating segment. The geographic distribution of its sales
and assets is as follows:
Canada
$
United
States
$
As at February 28, 2021
Consolidated
France
$
Italy
$
Other
$
Adjustment Consolidated
$
$
Sales
Customers -
Domestic
Export
Intercompany (export)
15,264
33,900
24,142
81,902
-
10,381
41,285
43,997
99
1,470
54,219
8
13,137
16,889
57,245
-
-
(91,875)
153,058
149,005
-
Total
73,306
92,283
85,381
55,697
87,271
(91,875)
302,063
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
30,873
3,053
192,350
5,586
-
75,764
19,651
9,775
176,611
6,522
4,463
59,574
33,695
28
134,968
-
-
(172,080)
96,327
17,319
467,187
Total identifiable assets
226,276
81,350
206,037
70,559
168,691
(172,080)
580,833
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
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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).
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
78
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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 28, 2021 and February 29, 2020 are as follows:
Range of exchange rates
Fair value
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2021
February 29,
2020
February 28,
2021
$
February 29,
2020
$
February 28,
2021
February 29,
2020
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
Buy US$ for CA$ – 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
1.30
1.22
-
1.22-1.24
1.16-1.20
1.33-1.34
1.31-1.33
1.10-1.11
1.11-1.14
1.10-1.11
-
1,139-1,171
(135)
48
-
(168)
148
-
(923) US$22,000
US$22,000
357
(3)
-
€18,363
(174)
€18,363
198
-
(70)
US$68,000
US$68,000
US$1,205
€16,790
€16,790
US$1,647
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 (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 28, 2021 and February 29, 2020:
79
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Net income (loss)
2021
$
2020
$
Canadian dollar strengthening against the U.S. dollar
Euro strengthening against the U.S. dollar
(1,429)
593
(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.
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2021, five
(2020 – four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 15.6% (2020 – 15.0%) and the Company’s ten largest customers accounted for 63.5% (2020 – 61.2%)
of trade accounts receivable. In addition, one customer accounted for 13.7% of the Company’s sales (2020 – 13.4%).
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. 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 applies the IFRS 9 simplified approach to measure expected credit losses using a lifetime expected
credit loss allowance for trade receivables. The expected credit loss rates are based on the Company’s historical credit
losses experienced over the last fiscal year prior to period end. The historical rates are then adjusted for current and
forward-looking information on macroeconomic factors affecting the Company’s customers.
The lifetime expected loss allowance for trade receivables was determined as follows:
Past due more
Past due 31 to
Past due more
Current
than 30 days
than 90 days
Total
Expected loss rate
Gross carrying amount
Loss allowance
0.287%
76,407
219
0.606%
19,630
119
As at February 28, 2021
4.203%
17,653
742
123,362
1,146
As at February 29, 2020
3.820%
21,989
840
129,764
2,002
90 days
0.682%
9,672
66
90 days
1.289%
7,445
96
Past due more
Past due 31 to
Past due more
Current
than 30 days
than 90 days
Total
Expected loss rate
Gross carrying amount
Loss allowance
1.041%
83,711
871
1.173%
16,619
195
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.
80
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2021, five
(2020 – four) customers accounted for more than 5% each of its trade accounts receivable, of which one customer
accounted for 15.6% (2020 – 15.0%) and the Company’s ten largest customers accounted for 63.5% (2020 – 61.2%)
of trade accounts receivable. In addition, one customer accounted for 13.7% of the Company’s sales (2020 – 13.4%).
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. 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 applies the IFRS 9 simplified approach to measure expected credit losses using a lifetime expected
credit loss allowance for trade receivables. The expected credit loss rates are based on the Company’s historical credit
losses experienced over the last fiscal year prior to period end. The historical rates are then adjusted for current and
forward-looking information on macroeconomic factors affecting the Company’s customers.
The lifetime expected loss allowance for trade receivables was determined as follows:
Expected loss rate
Gross carrying amount
Loss allowance
Expected loss rate
Gross carrying amount
Loss allowance
Current
0.287%
76,407
219
Past due more
than 30 days
0.606%
19,630
119
Past due 31 to
90 days
0.682%
9,672
66
Past due more
than 90 days
4.203%
17,653
742
Total
123,362
1,146
As at February 28, 2021
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.
81
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
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.
The following tables present the Company’s financial liabilities identified by type and future contractual dates of
payment as at:
As at February 28, 2021
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
58,091
14,227
90,840
62,083
11,735
303
10,436
1,852
90,840
62,083
11,735
303
32,620
2,554
-
-
-
-
8,319
1,535
-
-
-
-
10,212
13,327
-
-
-
-
Total
$
61,587
19,268
90,840
62,083
11,735
303
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
82
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fair value of financial instruments
The fair value hierarchy has the following levels:
Level 1 – quoted market prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or
liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable
market data. The level in the fair value hierarchy within which the fair value measurement is
categorized in its entirety is determined on the basis of the lowest level input that is significant to
the fair value measurement in its entirety.
The fair value of financial assets and financial liabilities measured on the consolidated statements of financial
position are as follows:
As at February 28, 2021
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
196
303
-
-
196
303
-
-
As at February 29, 2020
Financial position classification
and nature
Total
$
Level 1
$
Level 2
$
Level 3
$
Assets
Derivative assets
Liabilities
Derivative liabilities
555
1,169
-
-
555
1,169
-
-
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.
83
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
27 Capital management
The Company’s capital management strategy is designed to maintain strong liquidity in order to pursue its organic
growth strategy, undertake selective acquisitions and provide an appropriate investment return to its shareholders
while taking a conservative approach to financial leveraging.
The Company’s financial strategy is designed to meet the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital
structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid to
shareholders or undertake any other activities it considers appropriate under the circumstances.
The Company monitors capital on the basis of its total debt-to-equity ratio. Total debt consists of all interest-bearing
debt, and equity is defined as total equity.
The total debt-to-equity ratio was as follows:
Bank indebtedness
Short-term bank loans
Current portion of long-term lease liabilities
Current portion of long-term debt
Long-term lease liabilities
Long-term debt
Total debt
Equity
Total debt-to-equity ratio
As at
February 28,
2021
$
As at
February 29,
2020
$
11,735
-
1,578
9,902
12,649
48,189
84,053
44,317
1,379
1,621
8,311
13,722
10,986
80,336
300,221
284,861
28.0% 28.2%
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.
84
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
28 Adjustments to reconcile net income (loss) to cash provided (used) by operating activities
Depreciation of property, plant and equipment
Amortization of intangible assets
Amortization of financing costs
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
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
2021
$
10,148
2,337
177
(6,298)
-
(9,248)
(507)
(689)
2020
$
10,803
2,177
-
(1,764)
(9)
(117)
720
315
(4,080)
12,125
2021
$
8,441
(26,130)
(922)
(3,031)
13,638
(108)
11,009
(10,109)
2020
$
(1,251)
(7,360)
8,022
(711)
581
848
8,345
5,645
(7,212)
14,119
85
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2021 and February 29, 2020
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
30 Debt from financing activities reconciliation
Debt as at March 1, 2019
Cash flows
Foreign exchange adjustments
Other non-cash movements
Debt as at February 29, 2020
Cash flows
Foreign exchange adjustments
Other non-cash movements
Debt as at February 28, 2021
Short-term
bank loans
Long-term lease
liabilities
Long-term
debt
2,172
(793)
-
-
1,379
(1,379)
-
-
-
15,143
(1,575)
(468)
2,243
15,343
(1,711)
1,206
(611)
14,227
21,851
(1,774)
(780)
-
19,297
36,684
2,529
(419)
58,091
Total
39,166
(4,142)
(1,248)
2,243
36,019
33,594
3,735
(1,030)
72,318
86
Directors and officers
Corporate directors
J. Mannebach
Chairman of the Board
D. Granovsky Director
J. Latendresse Director
Y. Leduc
Director
W. Sheffield
Director
I. Velan
R. Velan
T. Velan
Director
Director
Director
Corporate officers
Y. Leduc
Chief Executive Officer
B. Carbonaro
President and Acting Executive Vice-President, General Manager, Project
J. Ball
Interim Chief Financial Officer and Executive Vice-President of Global Finance
P. Poirier
Executive Vice-President of Global Supply Chain and Industrial Operations
S. Bruckert
Executive Vice-President, Human Resources and General Counsel, Corporate Secretary
D. Tran
R. Velan
Executive Vice-President, General Manager, Severe Service
Executive Vice-President, General Manager, MRO and Aftermarket
V. Apostolescu Vice-President, Quality Assurance
J. Calabrese
Vice-President, Technical Sales, Multi-Turn Products
R. Chouinard
Vice-President, Global Supply Chain
J. Del Buey
Vice-President, Severe Service Applications
P. Dion
Y. Lauzé
G. Perez
Senior Vice-President, Sales, Process Industries
Vice-President, Engineering
Vice-President, Product Technology and Strategic Initiatives
P. Sabbagh
Vice-President, Project Management
D. Velan
S. Velan
Vice-President, Marketing
Vice-President, Transformation Office and Information Technology
87
Shareholder information
Head office
7007 Côte-de-Liesse
Montreal, Quebec, Canada H4T 1G2
Website
www.velan.com
Investor relations
John D. Ball
Interim Chief Financial Officer and Executive Vice-President of Global Finance
7007 Côte-de-Liesse, Montreal, Quebec, Canada H4T 1G2
Tel.: +1 438-817-7708
Fax: +1 514-748-8635
Auditors
PricewaterhouseCoopers LLP
Transfer agent
AST Trust Company
Shares outstanding as at February 28, 2021
6,019,068 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
High
Low
CA $9.20
CA $3.51
Closing on February 28, 2021: CA $7.80
Annual meeting
The Annual Meeting of Shareholders will be held July 14, 2021,
at 3:00 p.m. in a virtual only format, via online live webcast.
88
Velan worldwide
Head Office
An extensive global network
Montreal, QC, Canada
Velan Inc.
• 12 production facilities
• 3 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
Montreal, QC, Canada
Velan Inc.
Lyon, France
Velan S.A.S.
Plant 1: Ansan City, South Korea
Velan Ltd.
Willich, Germany
Velan GmbH
Granby, QC, Canada
Velan Inc.
Mennecy, France
Segault S.A.S.
Plant 2: Ansan City, South Korea
Velan Ltd.
Houston, TX, U.S.A.
VelTEX
Manufacturing
- U.S.A.
Williston, VT, USA
Velan Valve Corp.
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Taichung, Taiwan
Velan-Valvac
Lucca, Italy
Velan ABV S.r.l.
Suzhou, China
Velan Valve (Suzhou) Co. Ltd.
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
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