2009 Annual Report
1 Letter to Shareholders
3 Sustainability Report
8 Management’s Discussion and Analysis
17 Management’s Report to the Shareholders
17 Auditors’ Report to the Shareholders
18 Consolidated Balance Sheets
19 Consolidated Statements of Operations
19 Consolidated Statements of Comprehensive Income (Loss)
20 Consolidated Statements of Shareholders’ Equity
21 Consolidated Statements of Cash Flows
23 Notes to Consolidated Financial Statements
37 Shareholder Information
ii Westport Innovations Inc. 2009 Annual Report
To our shareholders,
Fiscal 2009 was another growth year for Westport. In the first
six months we saw successful launch of natural gas heavy-duty
trucks from Sterling Truck Co. (“Sterling”) and Kenworth Truck
Co., and the rapid rise in oil prices brought many new fleets to try
natural gas. Westport listed its shares on the NASDAQ exchange
in August and, in an alliance with Clean Energy Fuels Corp., we
launched liquefied natural gas (“LNG”) fueled heavy-duty trucks
for port drayage at the Port of Los Angeles and the Port of Long
Beach (“the Ports”) under their Clean Trucks Program. We now
have about 225 natural gas trucks in daily operation at the Ports.
Then came the global financial collapse, which has taken a
terrible toll on both the transport industry and its suppliers.
Trucking businesses shrank more quickly than any time in
history. Many fleets did not survive the combined challenges
of highly volatile fuel prices and dramatically shrinking business
volume. Truck production shrunk to levels not seen since the
early 1970’s. Major brands like Sterling were closed completely.
On top of this crisis, the credit crunch made it difficult if not
impossible for many fleets to buy new trucks. Around the world,
major manufacturers have seen drops of 50% – 70% in year
over year volumes. Oil prices duly collapsed, creating further
confusion, and global currencies swung violently, creating
challenging supply chain and product pricing issues.
Although Westport was not unaffected, we have been able to
manage through the crisis to this point with relative strength.
For our fiscal year ended March 31, 2009—which included
two of the worst quarters for the global vehicle industry in
decades—Westport set another record for sales and we are well
positioned for further strong growth. Q4 revenues were up 72%
over Q4 last year and the year overall saw 70% revenue growth
over fiscal 2008.
Revenue for our new GX heavy-duty truck engines rose
substantially this year, from $3 million in fiscal 2008 to $11
million in fiscal 2009. We were targeting even more dramatic
growth but the combined obstacles of litigation against the
Ports’ Clean Trucks Program by the American Trucking
Association and the Federal Maritime Commission, the credit
crunch, and the collapse of the North American economy and
associated trucking business meant that we simply did not
ship this product in volume this year. We believe some of these
challenges may now be abating and we expect continued
strong growth in fiscal 2010 for the GX program.
During the year, we signed engine development agreements
with leading European manufacturers. We launched our new
products for small industrial applications in partnership with
OMVL SpA of Italy under the Juniper Engines Inc. (“Juniper”)
brand. Cummins Westport Inc. (“CWI”), our 50/50 joint venture
with Cummins Inc., through its licensee Cummins India Ltd.,
received its single largest order in history, for 3,125 natural gas
buses equipped with CWI’s B Gas Plus engine for Delhi Transport
Letter to SharehoLderS
Corporation. CWI continues to add new truck and bus brands
using its alternative fuel engines in their vehicles. Most recently,
Freightliner Trucks (a division of Daimler Trucks North America
LLC) and Mack Trucks (part of the Volvo Group) announced their
natural gas trucks with CWI engines.
So it’s been an interesting year and overall, despite the turmoil in
the markets, a very successful one for our company.
Looking ahead, though, we are positioning for what we believe
is an historic shift in global energy use. Our long term strategy
has always revolved around three major ideas:
First, we believe that the long term driver for adoption of
alternative fuels will be rising prices for oil-derived fuels
including gasoline and diesel fuel. We believe that the dominant
alternative fuels for transportation will be natural gas and
biomethane, because they are widely available in cities around
the world, they are cleaner than oil, and they are cheaper on an
energy equivalent basis.
Second, we believe the early and most important markets
for alternative fuel vehicles will be large fuel use applications
operating from central depots. Buses, refuse trucks, port
drayage, and regional trucking are all prime targets. We
want to deliver factory-produced vehicles with state of the art
performance, quality, emissions and reliability.
Third, Westport’s path to market will be through partnerships
with companies with existing production and distribution assets,
and we will work with them to develop new alternative fuel
products based on their current conventional fuel offerings and
with their current suppliers and partners.
What do we see ahead for fiscal 2010? That shift to
alternative fuels is, we believe, beginning to be visible in many
parts of the world.
As we move into what appears to be early stages of economic
recovery, we have already seen oil prices rebound sharply.
Gasoline and diesel prices are ticking up strongly around
the world despite the continued economic weakness. Fleet
customers tell us that fuel price volatility continues to be a major
management challenge. As natural gas prices continue to be
dampened by the large new supplies available at low costs, if
oil prices continue to rise, it is likely that the price gap between
diesel and natural gas will continue to widen. This should
encourage faster adoption of natural gas vehicles and this
would encourage our original equipment manufacturer (“OEM”)
partners to expand their commitment to alternative fuel products.
Clearly we haven’t yet run out of market. There are still millions
of diesel vehicles in our current markets, and CWI and the
Westport HD unit shipped only a few thousand engines in
2008. We also see considerable increase in capacity demand
in transit fleets around the world and several government
infrastructure announcements suggest support for deployment
Westport Innovations Inc. 2009 Annual Report 1
Letter to SharehoLderS
of new transit buses. On the trucking side, CWI has
established a strong market presence in refuse and delivery
vehicles and this shows strong long term promise. We expect
most of our business for Westport HD systems including the
GX engine will come from special situations like the Ports,
where we are working with our partners to deliver the 2009
Clean Trucks Program’s requirements.
We continuously examine potential new market opportunities
and niches and, if we can assemble what we feel are the right
partners for these opportunities, we will enter those markets.
As an example this year, Juniper worked with Hyundai Motor
Co. of Korea as a base engine supplier, to introduce 2.0- and
2.4-litre alternative fuel engines—liquefied petroleum gas (“LPG”)
and compressed natural gas (“CNG”)—for industrial applications
such as forklifts. Juniper announced its product plans in
January 2009 and it expects to be shipping engines this fall.
There are also a couple of upside wild cards for our business
prospects this year.
First, there seems to be widespread support for a new U.S.
government stimulus incentive targeting energy security, which
explicitly includes support for shifting heavy duty vehicles
to natural gas. The New Alternative to Give Americans
Solutions (“NATGAS”) Act has been introduced in the House
of Representatives and would offer substantial tax credits for
the purchase of natural gas trucks through 2027. The Senate
version of this bill is expected sometime in July. Of course, such
a substantial incentive would encourage more rapid adoption
of our products and create confidence in all of our partners that
this market will continue to show continued growth.
And second, with the progress on low carbon fuels standards
and the cap and trade system for carbon emissions, we expect
the transportation sector to begin to seriously consider low-
carbon solutions such as natural gas. This initiative may also
establish significant new opportunities for Westport. Simply
shifting to natural gas may offer fleets a 20% – 30% reduction in
their greenhouse gas footprint and the use of biomethane in the
fleets—which our vehicles support—offers substantial reductions
In conclusion, at this time of economic uncertainty we remain
confident in our future opportunities. We are on the right track
with well-positioned products, partners and markets. We’re
well positioned to scale up deliveries in a number of key global
markets. We intend to use this period of turmoil to continue
to strengthen our competitive position, while continuing to be
prudent managers of our resources. As the economy recovers,
we expect strong growth in product sales both as a result
of government incentives and environmental regulation, and
because of the compelling long term economic advantages of
natural gas over oil.
After such an extraordinary year I thought I might close this
letter with a few personal comments.
Although we have many large institutional shareholders now,
I know many of our shareholders are individuals who believe
2 Westport Innovations Inc. 2009 Annual Report
passionately in what Westport is trying to achieve. Our share
price has swung wildly this year, with up to 95% volatility. Your
patience and confidence in our ability to emerge successfully
from this storm is both humbling and empowering. I can assure
you that our entire company is intensely focused and working
hard. We hope that your patience will be rewarded in due course.
Second, Westport’s commitment to sustainability and social
responsibility is long-standing, well-entrenched and widely
recognized as a business imperative. As a clean technology
leader, we are pleased to share our progress in our second
sustainability report (following this letter) providing information
on our social and environmental impacts.
This report encompasses a range of social and environmental
performance indicators for our British Columbia based
operations. Data from four fiscal years have been included
to reflect both achievements and challenges. The exercise of
reporting and the establishment of internal systems to quantify
and analyze our social and environmental impacts have helped us
to capture, define and synthesize our approach to sustainability.
Lastly, and perhaps more important than our own success, it has
become clear this year that our world faces grave challenges.
Aside from economic recovery, we will need dramatic changes
in energy use and environmental sustainability. These are large
and daunting challenges. But I am confident these challenges
will simply bring out the best in our community—passion,
innovation, creativity, and commitment to creating a better world.
As the CEO of Westport, I have had the extraordinary fortune this
year to meet and work with some of the people who are creating
this new world. Our shareholders, customers, partners and of
course our employees are amazing people. I have no doubt that
these apparently insurmountable challenges will be overcome,
and that a better world is being created today.
On behalf of our Board of Directors and management team,
and our employees around the world, we thank you for your
continued support and confidence in our company.
Sincerely,
David R. Demers
Chief Executive Officer
J. Michael Gallagher
President and Chief Operating Officer
Elaine A. Wong
Executive Vice President and Chief Financial Officer
SuStaINabILIty rePort
CREAtINg A BEttER WORLD
The transition to a low-carbon, green, global economy will require vision,
new ideas and leadership. This is Westport’s second sustainability
report providing information on our economic, social and environmental
performance impacts. The reporting exercise has helped us to shape
and define our approach to mitigating the impacts of our operations
beyond the significant environmental benefits of our technology.
The Global Reporting Initiative (GRI) provides a consistent means for
companies to voluntarily report on the economic, social and environmental
impacts of their business. This report, prepared in accordance with the
GRI Third Generation Guidelines (G3), discloses data from April 2008 to
March 2009. Historical data from the past three fiscal years have been
included for comparative purposes, where appropriate.
Westport has self-declared this report to correspond to application Level
B in the six-level grid of the GRI G3 guidelines. The GRI has not verified
the contents of this report, nor does it take a position on the reliability of
information reported herein. For further information about the GRI, visit
www.globalreporting.org.
Application Level B requires us to disclose our performance on at least
twenty core economic, social and environmental indicators. Forthcoming
reports will include additional social and environmental indicators as well
as the sustainability performance of our joint venture operations.
Any questions or observations regarding Westport’s sustainability
performance may be directed to sustainability@westport.com.
SOCIAL PERFORMANCE
Community Impacts
Communities and the sustainability and livability of specific locales may
be significantly impacted by an organization’s activities. Westport’s
geographic location, with our technical facilities adjacent to homes,
schools and other businesses requires us to monitor and manage the
potentially adverse impacts our operations might have on our immediate
neighbours. Our Facilities Engineering Group maintains a preventative
maintenance schedule for key equipment to minimize the likelihood of
environmental releases and noise levels in excess of municipal by-laws.
It is important for us to respond to community concerns regarding
Westport facilities, infrastructure, noise levels and environmental impacts
in a timely manner. No formal community complaints were received
during this reporting period.
Human Rights
As our operations and partnerships expand internationally, Westport is
committed to the respect of all fundamental and universally recognized
human rights based on accepted international laws and practices such
as those set out in the United Nations Universal Declaration of Human
Rights and the International Labour Organization. Our commitment
to value and uphold human rights is stated in our Code of Conduct,
reviewed annually and signed by all employees.
Global reporting Initiative Sustainability Indicator Index
Social and environmental Performance
LeGeNd:
We report on this indicator
We partially report on this indicator
economic Performance Indicators
EC1
Direct economic value generated and distributed
EC2
Financial implications and risks and opportunities of climate change
Social Performance Indicators
(Human Rights, Labour Practices, Societal Impacts, and Product Responsibility)
HR3
Employee training on human rights
LA1
Total workforce by employment type, employment contract,
and region
LA3
Benefits provided to full-time, part-time and temporary employees
LA6
LA7
SO1
SO2
SO3
PR1
PR2
Workforce represented in Occupational Health and Safety
Committees
Rates of injury, occupational disease, lost days,
and work-related fatalities
Nature, scope and effectiveness of programs to manage impact on
communities
Percentage and total number of business units analyzed for risks
related to corruption
Percentage of employees trained on anti-corruption policies and
procedures
Life cycle stages in which health and safety impacts of products are
assessed for improvements
Total number of incidents of non-compliance with regulations and
voluntary codes concerning health and safety impacts of products
environmental Performance Indicators
EN3
Direct energy consumption by primary energy source
EN4
Indirect energy consumption by primary source
EN5
Energy saved due to conservation and efficiency efforts
EN6
EN7
Initiatives to provide energy-efficient or renewable based products
and reductions
Initiatives to reduce indirect energy consumption and reductions
achieved
EN8
Total water withdrawal by source
EN16
Total direct and indirect greenhouse gas emissions
EN18
Initiatives to reduce GHG emissions and reductions achieved
EN22
Total amount of waste by type and disposal method
EN23
Total number and volume of significant spills
EN28
Value of fines and non-monetary sanctions for environmental
non-compliance
Westport Innovations Inc. 2009 Annual Report 3
SuStaINabILIty rePort
SOCIAL PERFORMANCE (CONtINuED)
Anti-Corruption Efforts
All business units are analyzed for risks related to corruption and all
employees are trained in ethics and compliance. Our expectations for
individual integrity and ethical, moral and legal conduct are outlined in our
Code of Conduct.
In addition, we maintain an Ethics Hotline to provide an avenue for
employees to raise concerns about corporate conduct. The policy
includes the reassurance that they will be protected from reprisals or
victimization for “whistle blowing” in good faith.
Employee Development
We strive to provide a healthy work environment characterized by
respectful relationships, training and advancement opportunities,
respect for human rights and diversity and competitive salaries and
benefits. [1] A similar benefits package is offered to both full-time and
part-time employees. [2]
Occupational Health and Safety
The health and safety of our employees, facilities and communities is an
integral part of Westport’s daily business. When gauging world-class
safety performance, recordable injury rates and lost-time injury rates are
statistical, comparative industry measures. Our results are indicative
of our ongoing and significant commitment to injury prevention, risk
mitigation, regulatory compliance and continuous safety improvement.
A Health and Safety Committee can facilitate a positive safety culture
through its reliance on employee expertise and engagement. Westport
maintains two Health and Safety Committees in British Columbia
or approximately one Committee for every 90 employees. [3] Our
Committees are made up of cross-functional management and employee
representatives who advise and recommend action on any unresolved
workplace health and safety issues brought to them.
table one
Safety Incident rates
by fiscal years ended March 31 (unaudited)
Safety Incident
2009
2008
recordable Injury Frequency
recordable Injury rate [4]
Lost time Injury Frequency
Lost time Injury rate [5]
0
0
0
0
0
0
1
0.54
2007
2
1.24
0
0
2006
0
0
0
0
Product Responsibility
Quality and safety are imperatives across the product life cycle. In
March 2009, Westport announced its quality management system
(QMS) has been certified as compliant to International Organization of
Standardization (ISO) 9001:2008 standards for the design, assembly
and commercialization of its liquefied natural gas (LNG) fuel systems.
Registration by QMI-SAI Global addresses Westport’s needs, as a tier 1
automotive supplier, to provide truck original equipment manufacturers
(OEMs) with consistent products and support. [4] [5]
Westport’s QMS comprises the organization’s policies and procedures
that aim to ensure that customer requirements are met with consistency,
resulting in enhanced customer confidence and satisfaction. The QMS,
other internal requirements and engineering systems have contributed
to no incidents of non-compliance with regulations and voluntary codes
concerning the health and safety impacts of our products.
Internal systems and processes have been established to ensure that the
health and safety impacts of our products are assessed in each of the
following life-cycle stages: [6]
table two
health and Safety Impacts assessed at Life-Cycle Stage
development of product concept
research and development
Certification
Manufacturing and production
Marketing and promotion
Storage, distribution, and supply
use and service
disposal, reuse, or recycling
Status
YES
YES
YES
YES
YES
YES
YES
YES
1 As of June 1, 2009, Westport had a world wide total of 221 employees made
up mostly of engineers and technicians. Of that number, we had 197 full-time
employees and 13 contract or part-time staff in our offices in Vancouver, Canada
and throughout the United States, 2 employees in Australia and 9 full-time
employees in our Beijing office. CWI had 51 full-time employees, including
41 employees seconded from Cummins and 10 employees seconded from
Westport, as well as two contract staff.
2 Part-time employees must work at least three days per week to be eligible for the
same benefits package as full-time employees. Casual employees or contractors
are not eligible for benefits.
3 Health and Safety Committees are located at our main technical facility in
4 The recordable injury incident rate is the annualized rate of occupational injuries
and illness per 100 employees. It is a calculation of the number of injuries x
200,000/employee hours worked. First aid classified injuries are not included.
5 The lost time injury rate is a calculation of the total number of lost time injuries x
200,000/employee hours worked. Lost days refer to scheduled work days and
the count begins on the next scheduled work day immediately after the injury.
Vancouver and at the Westport Assembly Centre in Delta.
6 This list of life cycle stages is contained within the GRI G3 guidelines.
4 Westport Innovations Inc. 2009 Annual Report
It is important to identify improvements and goals beyond regulatory
compliance to further expand the life cycle analysis of our products.
Our efforts to build on industry best practice and further develop our
internal processes will be outlined in future sustainability reports.
To ensure the safety of truck operators and maintenance personnel,
our Field Service Team developed a for-credit course offered at Long
Beach City College in Long Beach, California. This course trains the
technicians and mechanics who work at the Ports of Los Angeles and
Long Beach to be able to service and repair LNG-fuelled trucks. The
goal of our partnership with the College is to create a curriculum for
other institutions in California to offer a program or certificate for LNG
heavy duty vehicle maintenance.
Community Engagement
Our employees make significant contributions to the communities in
which they live and work. Westport has supported the United Way of
the Lower Mainland with a spirited and employee-driven workplace
campaign since 2002. Since that time, Westport employees have
donated more than $300,000 to the United Way and our campaigns
have been recognized as leading workplace efforts.
IMPACT is an employee leadership team established to drive community
engagement and community enrichment. Launched in 2007, IMPACT
brings together the various volunteer activities, events and initiatives that
Westport employees were already involved with into one coordinated
effort. IMPACT’s vision of community is broad and encompasses the
actual communities in which we live and work, our immediate neighbours
in Vancouver and our workplace. IMPACT has an ambitious and inspiring
mandate to have its activities leave a positive and measurable impact on
the community.
A recent IMPACT survey indicates that Westport employees are
compelled to act on three significant community issues:
• Poverty facing children and seniors,
• Environmental challenges including climate change, air quality and
sustainability, and
• Education efforts related to science, technology, the environment and
business acumen.
IMPACT initiatives and its four platforms of Give, Learn, Help, and Teach
are profiled in more detail at www.westport.com. These four platforms
are the vehicles by which Westport can contribute to solutions related
to the alleviation of poverty, a more sustainable environment and the
dialogue on the importance of science and technology.
ENvIRONMENtAL PERFORMANCE
Environmental leadership is demonstrated every day by Westport
employees who apply their technical skills and expertise to the challenges
of low-carbon transportation, climate change, energy security and air
quality. As a clean-technology leader we recognize the importance of
safe, sustainable and energy-efficient operations. Much progress has
been made to date to mitigate the environmental impact of our facilities
and technology development.
SuStaINabILIty rePort
Energy
Efficiency is an essential element of our energy strategy. The
environmental footprint of an organization can be shaped in part by
its choice of energy sources. During the reporting period, the overall
consumption of direct energy remained relatively flat despite a decrease
in the consumption of diesel fuel, LNG and compressed natural gas
(CNG). This trend can be attributed to a number of factors. First,
Juniper engines have undergone performance and development work
within our test cells thereby accounting for a significant increase in
liquefied petroleum gas (LPG) consumption. Second, the Westport
Assembly Centre was opened creating additional office, storage, fuel
system assembly and engine testing space. Third, the percentage of
LNG returned to the Terasen pipeline via our gas injection system was
lower during the reporting period as our engineering trucks operated on
extended hours and increased mileage. [7]
table three
total direct energy Consumption
by fiscal years ended March 31 (unaudited) in gigajoules (GJ)
energy Source
2009
2008
2007
2006
diesel
2,050.02
2,200.89
1,252.17
other testing Fuels [7]
352.96
38.33
93.56
624.95
95.30
Liquefied Natural Gas
12,551.1
15,625.24
13,511.31
10,989.69
Compressed Natural Gas
19,707.5
20,508.94
12,503.98
10,234.06
LNG Sold to terasen
(7,167.4)
(11,122.11)
(10,803.40)
(9,736.92)
total energy Consumption
27,494.18
27,251.29
16,557.62
12,207.08
Liquefied Natural Gas
Compressed Natural Gas
Diesel
Other Testing Fuels [7]
LNG sold to Terasen
25
20
15
10
5
0
l
)
s
e
u
o
a
g
g
j
i
f
o
s
d
n
a
s
u
o
h
t
(
n
o
i
t
p
m
u
s
n
o
C
y
g
r
e
n
E
2006
2007
2008
2009
7 Other fuels used for engine testing or operations including propane, hydrogen,
butane and ethane.
Westport Innovations Inc. 2009 Annual Report 5
SuStaINabILIty rePort
ENvIRONMENtAL PERFORMANCE (CONtINuED)
Energy (continued)
Westport is a BC Hydro Power Smart Partner, one of the province’s
leading business customers working towards positively impacting their
bottom line via the adoption of energy efficient practices to manage
consumption in a more sustainable manner. Even with the addition of
the Westport Assembly Centre facility, electrical consumption decreased
by four percent during the reporting period due to a range of energy
efficiency and behavioural improvements.
The most significant energy efficiency improvement during the
reporting period was the installation and operation of a second
transient dynamometer to drive an engine within a test cell. A transient
dynamometer generates electricity during the engine test thereby
offsetting the amount we need to purchase. In the same way that
solar panels produce power for the building where they are installed,
a transient dynamometer enables our engine development activities to
generate electricity that can be used in the same technical facility.
table four
annual Indirect energy Consumption
by fiscal years ended March 31 (unaudited) in gigajoules (GJ)
electrical Consumption
8,114.5
8,403.5
6,870.58
7,603.17
2009
2008
2007
2006
Water
As global water resources will be impacted by climate change, water use
is becoming an increasingly critical component of each organization’s
sustainability performance. Despite this, only the largest industries in
British Columbia have water meters with data logging capability and the
city of Vancouver does not currently provide meters to light industrial or
commercial customers.
Our calculations indicate that Westport facilities cumulatively have an
average daily rate of water use of approximately 13.5 m3 per day. Engine
and fuel system component testing activities use process water that
flows in a closed-loop thereby minimizing total water withdrawals. Water
conserving domestic appliances and fixtures have been installed at all
locations in an effort to further reduce our impact.
6 Westport Innovations Inc. 2009 Annual Report
greenhouse gas Emissions
The Greenhouse Gas Protocol developed by the World Business Council
on Sustainable Development (WBCSD) is the globally accepted standard
for greenhouse gas (GHG) emissions accounting. The organizational
boundary of this inventory includes all of Westport’s British Columbia-
based facilities and includes both scope one and scope two emissions. [8]
We have not measured scope three emissions to date. [9]
table five
Greenhouse Gas Inventory for Westport operations
by fiscal years ended March 31 (unaudited) in tonnes CO2 equivalent
[9]
total Scope 1 direct
emissions
total Scope 2 Indirect
emissions
2009
2008
2007
2006
1,383.25
1,563.59
948.13
693.21
244.00
253.00
206.00
223.00
total GhG Impact
1,627.25
1,816.59
1,154.13
916.21
A heavy-duty liquefied or compressed natural gas engine offers a range
of environmental benefits including a reduction in GHG emissions.
As a clean-technology leader we ask our customers to demonstrate
environmental leadership and therefore must do so ourselves. It is critical
that we understand the carbon impact of our operations and look for
efficiency and process improvements to minimize our own emissions.
Finding comparable organizations against which to benchmark our
GHG emissions remains a challenge. There are currently no regulatory
requirements for a company of our size to disclose its emissions. [10]
The process of compiling a GHG inventory is an important first step in
understanding reduction opportunities and measuring progress.
In 2003, we partnered with Terasen Gas to design and build a gas injection
system to return the quantity of LNG used for pump and tank testing back
to the pipeline. There was a strong business and environmental case to
support this installation as Terasen pays us for the returned natural gas
and it has resulted in the significant reduction of greenhouse gas emissions
from our operations. Since 2003, we estimate that this system has
resulted in the greenhouse gas emissions reductions of more than 19,000
tonnes CO2e and more than $300,000 in cost savings.
8 Scope One Direct Emissions encompass both liquefied and compressed natural
gas, diesel, propane, butane and ethane and fuel used in company vehicles.
Scope Two Indirect Emissions include emissions associated with the purchase
and use of electricity. Scope Three Indirect Emissions include emissions
associated with raw materials processing, employee travel, waste management
and materials production.
9 The GHG Protocol methodology used at this time only includes emissions
associated with fuel consumption and not energy and emissions associated with
fuel production, distribution and transport.
10 In Canada, Large Final Emitters (LFEs), those facilities that emit the equivalent of
100,000 tonnes (100 kT) or more of carbon dioxide (CO2) equivalents per year
are required to disclose their emissions.
SuStaINabILIty rePort
Waste generation and Diversion
Waste reduction, reuse and recycling programs are well-established
and well-maintained. Using generic formulas based on bin size and
frequency of collection, Westport generates approximately 200 tonnes
of waste annually. Reducing the amount of waste sent to landfill remains
a priority and we have launched employee education and awareness
efforts to communicate the importance of minimizing the amount of
waste generated.
Our Facilities Engineering Group tracks the amount of waste recycled
via our hazardous waste program, scrap materials collection and office
waste initiatives. [13]
table six
types of hazardous and Solid Waste recycled
Aluminum
Batteries
Coolant
Diesel
Beverage Containers
E-waste
Paper
Lube oil
Stainless steel
Other plastic
Tires
Viscor
Cardboard
Cellphones
Filters / rags
Plastic oil pails
Wastewater [13]
Light bulbs
Solvents
Wood
Environmental Compliance:
Compliance with applicable federal, provincial, and municipal regulations
is a baseline environmental performance standard and we believe
that leading organizations must go beyond minimum environmental
requirements. Since its inception in 1996, Westport has not received any
fines or non-monetary sanctions for environmental non-compliance.
gHg Emissions Reduction of the Westport HD System
Our testing and development efforts have created an efficient, robust
product with clear environmental benefits. In December 2008, a study
by California-based TIAX LLC [11] confirmed a 21% reduction in GHG
emissions in LNG trucks featuring the Westport HD System based on a
10 year, 400,000 mile scenario.
Under this scenario, a typical Westport HD-equipped natural gas truck
operating at the San Pedro Bay ports in California will realize reductions
of 21 tonnes of GHG emissions per year compared to an equivalent
diesel truck. Using the example of the San Pedro Bay Ports, operating
8,400 LNG container hauler trucks at the Ports could realize the
equivalent of removing more than 39 thousand cars from the road or
176,400 tonnes CO2e of annual GHG reductions.
TIAX was commissioned to develop a life-cycle cost and emissions
estimator for the comparison of current and future heavy-duty engines
fuelled by diesel or natural gas. The model includes three different heavy-
duty applications for California including urban buses, refuse haulers, and
heavy-duty (long-haul) trucks. Emissions from the well to the wheel are
factored, using models from California regulatory authorities.
The report [12] included a well to wheel emissions analysis for 11 different
natural gas fuel pathways. The results showed 18% to 25% less GHG
emissions for all North American natural gas supply as compared to the
cleanest available diesel fuel (ultra low sulphur diesel or ULSD). The main
pathway of natural gas supply for the south coast region of California,
which is North American gas liquefied in California and provided by Clean
Energy Fuels Corp. (NASDAQ: CLNE), has a GHG reduction of 21%.
Climate Change Risks
Climate change may yield multiple, interrelated business risk
encompassing physical, operational and regulatory dimensions.
Extreme weather events and changing weather patterns may result
in physical damage to Westport property and facilities. The physical
impacts of climate change may result in increased financial costs
such as higher insurance premiums for operations in areas prone to
flooding or other natural events. Property taxes may increase as local
governments identify infrastructure adaptation requirements. Energy
demands per facility are likely to increase due to extreme temperatures.
Carbon pricing mechanisms such as cap and trade regimes and/or a
carbon tax will result in higher energy costs.
Westport’s direct operations and actual greenhouse gas emissions are
considered low-impact so the actual and anticipated regulatory risks
associated with climate change mitigation or compliance obligations
are low.
11 TIAX (www.TIAXLLC.com) is a technology processingSM company who
transforms emerging innovations into robust technology platforms ready for
hand-off. Leveraging technologies, laboratories, and links to external innovation
sources, TIAX collaborates with customers in industry and government to create
new business opportunities.
12 The TIAX report is available at:
13 Wastewater includes ultrasonic cleaner solution and alkaline water from cooling
www.westport.com/pdf/GHG_and_Criteria_Pollutant_Emissions_Estimator.pdf
water towers.
Westport Innovations Inc. 2009 Annual Report 7
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
BASIS OF PRESENtAtION
This Management’s Discussion and Analysis (“MD&A”) for Westport Innovations
Inc. (“Westport”, “the Company”, “we”, “us”) is intended to assist readers in
analyzing our financial results and should be read in conjunction with the audited
annual consolidated financial statements, including the accompanying notes,
for the fiscal year ended March 31, 2009. Our consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
(“GAAP”) in Canada. The effect of significant differences between Canadian GAAP
and US GAAP has been disclosed in note 24 to our audited consolidated financial
statements for the year ended March 31, 2009. This MD&A is dated May 19, 2009.
Additional information relating to Westport, including our Annual Information Form
(“AIF”) and Form 40-F, is available on SEDAR at www.sedar.com and on EDGAR
at www.sec.gov., respectively. All financial information is reported in Canadian
dollars unless otherwise noted. Shares, share options, performance share units,
warrants and per share amounts have been adjusted on a retroactive basis to
reflect our three and one-half-to-one (3.5:1) share consolidation completed on
July 21, 2008.
FORWARD LOOKINg StAtEMENtS
This MD&A contains forward-looking statements that are based on the beliefs of
management and reflects our current expectations as contemplated under the
safe harbor provisions of Section 21E of the United States Securities Act of 1934
as amended. Such statements include but are not limited to statements regarding
the demand for our products, the future success of our business and technology
strategies, our investments, cash and capital requirements, the intentions of
partners and potential customers, the performance of our products, our future
market opportunities, our estimates and assumptions used in our accounting
policies, our accruals, including warranty accruals, our financial condition, and
timing of when we will adopt or meet certain accounting and regulatory standards.
These statements are neither promises nor guarantees, but involve known and
unknown risks and uncertainties that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activities, performance or achievements expressed in or implied
by these forward looking statements. These risks include risks related to revenue
growth, operating results, industry and products, general economy, conditions
of the capital and debt markets, government policies and regulation, technology
innovations, as well as other factors discussed below and elsewhere in this
report, including the risk factors contained in the Company’s most recent Annual
Information Form filed on SEDAR at www.sedar.com. Readers should not place
undue reliance on any such forward-looking statements, which speak only as of
the date they were made. We disclaim any obligation to publicly update or revise
such statements to reflect any change in our expectations or in events, conditions
or circumstances on which any such statements may be based, or that may
affect the likelihood that actual results will differ from those set forth in the forward
looking statements except as required by National Instrument 51-102.
The forward looking statements contained in this document speak only as of the
date of this MD&A. Except as required by applicable legislation, Westport does
not undertake any obligation to release publicly any revisions to these forward
looking statements to reflect events or circumstances after this MD&A, including
the occurrence of unanticipated events.
BuSINESS OvERvIEW
Headquartered in Vancouver, Canada, Westport is engaged in the research,
development and marketing of high performance, low-emission engines and
fuel injection systems that use gaseous fuels such as natural gas, liquefied
petroleum gas (“LPG”) or hydrogen. We expect increased demand for these
products for transportation, power generation and industrial applications
because of the performance, emissions and life-cycle cost characteristics when
compared to alternatives now available or known to be under development for
these applications.
To encourage customers to adopt natural gas solutions for their transportation
requirements, our strategy is to provide integrated solutions from fuel supply
and storage through to service and support in cooperation with the world’s
leading engine, component and vehicle manufacturers and fuel infrastructure
providers. We currently have one operating segment, which involves the research,
development, and related commercialization of engines and fuel systems, operating
8 Westport Innovations Inc. 2009 Annual Report
on gaseous fuels such as natural gas and hydrogen, for the on-road commercial
vehicle sector. Within that operating segment, we focus on the following strategic
pillars: continuing to profitably grow Cummins Westport Inc. (“CWI”), our 50:50
commercial joint venture with Cummins Inc. (“Cummins”); commercializing and
developing our Westport – HD liquefied natural gas (“LNG”) systems for heavy
duty (Class 8) trucks in North America and Australia, developing Juniper Engines
Inc. (“Juniper”) , which is focused on 2.0 litre and 2.4 litre industrial engines, and
launching Weichai Westport Inc. (“WWI”), which is focused on developing heavy-
duty engines in China. Outside of these four strategic pillars, Westport’s corporate
development efforts focus on the creation of new alliances and joint ventures,
market development projects, and monetization of our significant patent portfolio.
CWI
Our first strategic pillar, CWI, is focused on the development, marketing and sale
of a broad range of low-emission, alternate fuel engines for medium-duty and
heavy-duty truck, refuse truck, transit bus, shuttle and urban specialty vehicle
applications. Geographically, CWI’s revenues are derived primarily from North
America with developing markets in Asia, Europe, India and South America.
CWI produces engines in the United States and has license agreements in
place for local manufacturing in India and China through facilities operated
by Cummins and its affiliates. CWI has a dominant market share in the North
American natural gas transit market and is seeing increasing growth in the
medium-duty truck and refuse truck markets. During fiscal 2009, CWI saw
strong growth in demand for its products with 3,907 units shipped compared
to 2,684 units in fiscal 2008. The majority of sales in fiscal 2009 related to
ISL G engines sold in the United States. The ISL G was originally launched in
mid-2007 and meets 2010 emissions standards today. Outside of the United
States, during fiscal 2009, the Delhi Transport Corporation placed an order
with Cummins India Ltd. for 3,125 natural gas engines using CWI’s technology
for 230 horsepower B Gas Plus engines powered by compressed natural gas.
This order started shipping in the third quarter of fiscal 2009 and is expected to
complete by the fourth quarter of fiscal 2010.
CWI’s strategy is to grow profitably by leveraging its parents – Cummins for its
global manufacturing, distribution and service support network, and Westport for
its worldwide natural gas focus and expertise, industry relations and technology
leadership. Since January 1, 2004, when the joint venture was re-launched
to focus on spark ignited (“SI”) products, CWI revenues, expressed in U.S.
dollars to exclude foreign exchange distortions, have grown at more than 30%
compounded annually on a calendar year basis. For the years ended March
31, 2009 and 2008, in Canadian dollars and after taking into account Cummins’
50% share, CWI contributed, on a pre-tax basis, $6.0 million and $3.0 million,
respectively, to Westport. CWI’s assets, liabilities, revenue and expenses are
disclosed separately in note 19 of our consolidated financial statements.
Westport HD – LNg Systems for Heavy-Duty trucks
Our second strategic pillar focuses on the commercialization and development
of high-performance LNG systems for heavy duty trucks. This product line
incorporates our proprietary direct injection technologies which allow us to
deliver a natural gas-fuelled version of the latest original equipment manufacturer
(“OEM”) diesel engines and match the base engine’s efficiency and performance
without changing the base engine design, thereby minimizing the disruptions to
the manufacturer and to the customer in switching fuels. In order to deliver LNG
to our engines, we have developed proprietary integrated LNG fuel pumps and
storage tanks to form a complete system. In order to support the adoption of
LNG systems, we also work with engine, truck, component and fuel providers as
necessary to provide integrated solutions for customers. We are currently focused
on markets in North America and Australia and on fleets with high fuel usage,
return to depot fueling, and access to natural gas fuel at a discount to diesel.
We have an agreement in place with Kenworth Truck Company (“Kenworth”),
a division of PACCAR Inc. for factory production of our LNG fuel system
adapted for the Cummins ISX-15-liter engine in a Kenworth T800 truck. In
December, 2008, our agreement was expanded to include development and
commercialization of LNG Kenworth trucks for the Australian market. During
fiscal year 2009, we substantially completed our $3.8 million Assembly Centre
in Metro Vancouver, which will support factory production of our products with
Kenworth and other PACCAR companies such as Peterbilt in North America.
Juniper
We hold a 49% interest in Juniper, a 49:51 venture with OMVL SpA which offers
high-performance alternative fuel engines for the global industrial market. On
April 1, 2008, we invested $1.5 million as an initial contribution to Juniper. Juniper
will initially target the OEM liquefied petroleum gas forklift market, and will be
fully integrated, high performance and low-emission solutions. Juniper products
are based on Hyundai Motor Company’s 2.0 litre and 2.4 litre industrial engine
platforms, and OMVL’s multipoint fuel injection technology. The products are
designed to meet EPA and CARB standards for 2010 and will be available in the
second half of 2009. For the year ending March 31, 2009, the venture’s first year
of operations, we recorded an equity loss of $1.0 million related to Juniper.
Weichai Westport Inc. (“WWI”)
On July 16, 2008, we announced that we had entered into a 30-year joint
venture agreement with Weichai Power and Hong Kong Peterson to form a new
entity. WWI will research, develop, design, manufacture, market, distribute and
sell advanced, alternative fuel engines (and relevant parts and kits) for use in
automobiles, heavy-duty trucks, power generation and shipping applications.
Under the terms of the WWI joint venture agreement, our initial investment is
expected to be approximately $5.3 million (30 million RMB), equaling a 35%
equity interest in WWI. Weichai Power and Hong Kong Peterson will hold 40%
and 25% equity interests in WWI, respectively. As at the date of this MD&A, the
Company has not made its initial investment to WWI as our investment into the
joint venture is awaiting formal Chinese government approval.
Corporate Development and technology Activities
A significant area of focus for our Company is developing new OEM and
supply relationships and new innovative technologies. We cooperate or have
cooperated on fuel delivery system development programs with a number of
companies including Beijing Tianhai Industry Co. Ltd (“BTIC”), Cryostar SAS
(“Cryostar”), Ford, BMW, Isuzu, Cummins and Weichai Power Co. Ltd. (“Weichai
Power”) and are in various stages of negotiations to develop and commercialize
our technologies with other global leaders. On July 14, 2008, we announced
that we had entered into a development agreement with a leading European
engine manufacturer relating to our proprietary high-pressure direct injection
(“HPDI”) fuel system operating with natural gas and bio gas. We are working
together to integrate and test our HPDI fuel system on their engine platforms with
development work expected to last twelve to eighteen months.
We also hold a 50% interest in BTIC Westport Inc (“BWI”), a joint venture with
BTIC, which is headquartered in Beijing, China and sells and markets LNG
tanks for natural gas fuelled vehicles globally. The tanks can be installed on any
vehicle, regardless of the manufacturer. We originally contributed $0.4 million
to BWI. Through the joint venture agreement and related license and supply
agreements, we share equally in the profits on products developed and sold by
BWI. During fiscal 2009, BWI recorded net income of $0.6 million, of which our
share was $0.3 million.
External Market Conditions
During the second half of our fiscal year, we saw significant deterioration in the
credit and equity markets, falling energy prices, a lower Canadian dollar and
weakness in the worldwide economy. Some of our major OEM partners have
closed plants, consolidated product lines and / or have downsized. Many have
also implemented tighter credit procedures. Some of the wider economic issues
have negatively affected the natural gas vehicle market including significant
declines in the price of diesel fuel compared to last summer. Since much of our
revenues are earned through sales to government entities, or are at least partially
funded by government entities, we believe we may be less affected than others
in the automotive sector and may also see opportunities arising from government
stimulus packages.
In response to these challenging financial conditions, we have taken certain
actions to better position ourselves including revising our annual budget and
forecasts. We have also reduced or deferred operating expenditures to lower our
overhead and revised our hiring practices to reduce annual payroll costs and are
monitoring our working capital position.
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
SELECtED ANNuAL FINANCIAL INFORMAtION
Selected Statements of operations data for Fiscal years ended March 31, 2007 to 2009
expressed in thousands of Canadian dollars, except for per share amounts, shares outstanding, and units shipped
Units shipped
Total revenue
Gross margin
GM %
Net loss
Net loss per share—basic and diluted [1]
2009
4,038
121,837
30,817
2008
2,720
71,536
22,513
2007
2,001
60,480
22,099
25%
31%
37%
(24,425)
(0.81)
(10,315)
(0.41)
(11,307)
(0.53)
Weighted average shares outstanding
30,268,947
25,167,966
21,478,521
Cash and short-term investments
Total assets
Long-term financial liabilities [2]
82,619
135,504
28,543
22,762
78,940
5,762
23,081
59,633
22,648
Cash used in operations before changes in
non-cash working capital
(25,625)
(17,594)
(11,325)
CWI income for the year after taxes
JV Partner’s share of CWI income
7,832
3,916
11,632
5,816
12,114
6,057
[1] Fully diluted loss per share is not materially different as the effect of conversion of stock options, warrants,
and performance share units would be anti-dilutive.
[2] Excluding current portions of warranty liability and long-term debt obligations, and Joint Venture Partners’
share of net assets of joint ventures.
OvERvIEW OF FISCAL 2009 RESuLtS
Operating Results
In the fiscal year ended March 31, 2009, consolidated revenues increased to
$121.8 million from $71.5 million in fiscal 2008, a year over year increase of 70%.
There were 4,038 units shipped compared with 2,720 units shipped in the prior
fiscal year, with increased sales of CWI’s ISL G and Westport’s LNG systems.
CWI revenues increased from $67.3 million in fiscal 2008 to $109.9 million in fiscal
2009, an increase of 63%, on higher engine shipments and with parts revenue up
$2.7 million. Non-CWI revenues increased from $4.2 million to $11.9 million on 131
LNG units shipped in the fiscal 2009 year compared to 36 in the prior fiscal year.
LNG system shipments were primarily to customers associated with the Ports of
Los Angeles and Long Beach (“the Ports”). In U.S. dollar terms (our products are
priced in U.S. dollars), consolidated revenues increased by approximately 57%.
Our net consolidated loss for the year ended March 31, 2009 was $24.4 million, or
$0.81 per share, compared to $10.3 million, or $0.41 per share for the year ended
March 31, 2008. Our non-CWI loss increased by $12.2 million, while our share of
CWI net income decreased by $1.9 million. Non-CWI net loss from $16.1 million
to $28.3 million with non-CWI operating expenses (research and development,
general and administrative, and sales and marketing) up $12.6 million compared
with fiscal 2008. The increase relates primarily to higher expenses associated with
launching our LNG systems for the heavy duty market such as Kenworth integration
costs, production related operating costs, current product support, and sales and
marketing expenses. In addition, during the year, we listed on NASDAQ incurring
additional listing fees, board expenses, insurance, legal, accounting and other costs
and we also incurred higher legal costs related to our OEM engine development
agreements with our European partner and WWI. We also accrued approximately
$1.4 million in royalties payable to Industry Canada’s Industrial Technologies Office
(“ITO”) whereas funding associated with this program was recognized in prior
years. Other revenue and expenses included our 49% share of the loss from
Juniper of $1.0 million for in fiscal 2009. We also recognized $14.3 million in gains
and $2.3 million in future income tax expense from the sale of Clean Energy Fuels
Corp. (“Clean Energy”) shares compared to $10.7 million in gains and $1.2 million in
future taxes associated with the sale of Clean Energy shares and other long-term
investments in the previous year. We recorded $1.9 million in interest expense and
amortization of long-term debt compared with $1.0 million in the previous year. This
increase related to $15.0 million in subordinated debenture units discussed below.
Our share of CWI’s income decreased $1.9 million from $5.8 million in fiscal 2008
to $3.9 million in fiscal 2009 despite the increase in revenues, primarily as a result
of higher warranty accruals and income taxes. In fiscal 2009, CWI utilized its
remaining loss carryforwards and recognized income tax expense of $4.2 million
compared to a tax recovery of $5.6 million in the prior year. On a pre-tax basis,
CWI recognized income of $12.0 million compared to $6.0 million in fiscal 2008.
Westport Innovations Inc. 2009 Annual Report 9
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
OvERvIEW OF FISCAL 2009 RESuLtS (CONtINuED)
Capital Management
On July 3, 2008, we issued 15,000 debenture units for total gross proceeds
of $15 million. Each debenture unit consists of an unsecured subordinated
debenture in the principal amount of $1,000 bearing interest at 9% per annum
and 51 Common Share purchase warrants exercisable into common shares at
any time for a period of two years from the date of issue at $18.73 per share. We
have the option to redeem the debentures at any time after 12 months and before
18 months from the date of issue at 115% of their principal amount and at 110%
of their principal amount after 18 months. Interest is payable semi-annually and
the debentures mature on July 3, 2011. We also issued 46,118 broker warrants
which are exercisable into Common Shares at a price of $16.10 per share for a
period of two years from the date of issue.
On August 14, 2008, we filed a final prospectus in Canada and a registration
statement on Form F-10 with the U.S. Securities and Exchange Commission
in connection with an initial public offering of Westport common shares in the
United States on NASDAQ. We started trading on NASDAQ on August 15th
and raised $53.0 million through the initial public offering, net of $4.9 million in
financing costs.
In October 2008, as required by the terms of our funding agreement with ITO,
we issued 790,614 warrants with a strike price of $10.65 to the Government
of Canada and a fair value of $4 million. The fair value was agreed upon in the
funding agreement and the number of warrants issued was determined using a
Black-Scholes option pricing model using the 5 day weighted stock price as at
September 30, 2008.
Cash and Investments
As at March 31, 2009, our cash and short term investments balance was $82.6
million compared to $22.8 million at March 31, 2008. For the year ended March
31, 2009, we raised approximately $53.0 million in net proceeds from our
NASDAQ initial public offering discussed above, $14.0 million, net of expenses,
from the issuance of debenture units discussed above, and $19.4 million from
the sale of shares in Clean Energy. Cash used in operations and for capital
expenditures was $15.2 million, with $9.3 million used in operations and $5.9
million in capital expenditures associated primarily with the establishment of our
assembly centre and expansion of office facilities. During the year ended March
31, 2009 we invested $1.5 million in Juniper, advanced Cummins $1.6 million
net of loan repayments and paid $5.4 million against our limited recourse loan
from Clean Energy. During the third quarter, CWI also paid out $9.3 million in
dividends to Cummins.
In fiscal 2008, we negotiated a limited recourse loan repayable only from certain
receipts of sales of LNG systems, from Clean Energy for U.S. $6.0 million to
allow us to produce approximately 75 LNG systems in anticipation of deliveries to
customers. Of the 75 LNG units included in this agreement, 59 have been sold
in fiscal 2009 with proceeds from the sale being used to draw down the non-
interest bearing loan. As at March 31, 2009, there was a balance of $1.6 million
with repayment of the loan only due and payable with payments from customers
on the remaining 16 units. The loan is denominated in U.S. dollars.
CRItICAL ACCOuNtINg POLICIES AND EStIMAtES
Our consolidated financial statements are prepared in accordance with Canadian
GAAP, which requires us to make estimates and assumptions that affect the
amounts reported in our consolidated financial statements. The Company’s
accounting policies are described in note 2 of the annual consolidated statements.
We have identified several policies as critical to our business operations and in
understanding our results of operations. These policies, which require the use
of estimates and assumptions in determining their reported amounts, include
our accounting of CWI as a variable interest entity, the valuation of long-term
investments, equipment, furniture and leasehold improvements, intellectual
property, revenue recognition, inventory, stock based compensation and warranty.
The application of these and other accounting policies are described in note 2 of
our fiscal 2009 annual consolidated financial statements. Actual amounts may
vary significantly from estimates used.
10 Westport Innovations Inc. 2009 Annual Report
variable Interest Entity Accounting
A variable interest entity (“VIE”) is any type of legal structure not controlled by
voting equity, but rather by contractual and/or other financial arrangements.
Interests in VIEs are consolidated by the company that is the primary beneficiary.
We have identified CWI, BWI and Juniper as VIEs and determined that we are
the primary beneficiary in the case of both CWI and BWI. Accordingly, we
consolidate CWI and BWI, reflecting 100% of their assets, liabilities, revenues and
expenses in our consolidated financial statements and showing the 50% interest
held by our joint venture partners, Cummins and BTIC, as “Joint Venture Partners’
share of net income from joint ventures”. We have concluded that we are not
the primary beneficiary in the case of Juniper and as a result, our investment in
Juniper is recorded as an equity investment with our 49% share of its net income
recorded as “loss from investment accounted for by the equity method”.
Warranty Liability
Estimated warranty costs are recognized at the time we sell our products and
included in cost of revenues. We use historical failure rates, and costs to repair
product defects during the warranty period, together with information on known
products to estimate the warranty liability. The ultimate amount payable and the
timing will depend on actual failure rates and the actual cost to repair. We review
our warranty provision quarterly and make adjustments to our assumptions
based on the latest information available at that time. Since a number of our
products are new in the market, including the ISL G, which was launched in mid-
2007, and our HPDI LNG systems, of which approximately 175 units have been
shipped as of March 31, 2009, historical data may not necessarily reflect actual
costs to be incurred and this exposes the Company to potentially significant
fluctuations in liabilities. Adjustments to the warranty provision are recorded in
cost of revenues. During the year, we increased our warranty reserves to reflect
new claims experience information received on CWI products. These changes
in estimates are discussed further in the “Cost of Revenue” and “Gross Margin”
sections under “Results of Operations”.
Revenue Recognition
Our primary source of revenue is the sale of CWI spark ignited engines, kits, LNG
systems, and parts. Product revenue is recognized, net of estimated costs of
returns, allowances, and sales incentives, when the products are shipped and
title passes to the customers and collection is reasonably assured. Product
revenue also includes kit sales, fees earned from performing test services,
research and development activities for third parties and revenues earned from
licensing our technologies to third parties. Revenue from testing and research
and development activities is recognized as the services are performed.
Amounts received in advance of revenue recognition are recorded as deferred
revenue. Parts revenue is recognized as the parts are sold.
Inventories
Inventory consists of fuel systems, component parts, work-in-progress, and
finished goods associated with our LNG systems. We carry inventory at the
lower of weighted average cost and net realizable value. In establishing whether
or not a provision is required for inventory obsolescence, we estimate the
likelihood that inventory carrying values will be affected by changes in market
demand for our products and by changes in technology, which could make
inventory on hand obsolete. We perform regular reviews to assess the impact of
changes in technology, sales trends and other changes on the carrying value of
inventory. If and when we determine that such changes have occurred and that
they would have a negative impact on the carrying value of inventory on hand,
adequate provisions would be made. Unforeseen changes in these factors could
result in the recognition of additional inventory provisions.
Long-term Investments
Long-term investments are designated as available for sale and recorded at their
fair value to the extent a reliable fair value is determinable. Changes in fair value
are recognized in accumulated other comprehensive income. A decline in value
that is considered other than temporary is recognized in net loss for the period.
Equipment, Furniture, and Leasehold Improvements and
Intellectual Property
Generally accepted accounting principles in Canada require that we consider
whether or not there has been an impairment in our long-lived assets, such as
equipment, furniture and leasehold improvements and intellectual property,
whenever events or changes in circumstances indicate that the carrying value
of the assets may not be recoverable. If such costs are not recoverable, we
are required to write down the assets to fair value. When quoted market values
are not available, we use the expected future cash flows discounted at a rate
commensurate with the risks associated with the recovery of the asset, as an
estimate of fair value to determine whether or not a write down is required.
Stock-Based Compensation
We account for stock-based compensation related to stock options and
performance share units granted to employees and directors using the fair value
method. The resulting compensation expense for stock options is calculated
using the Black-Scholes valuation method and estimated forfeitures and is
recognized in results from operations over the period in which the related
employee services are rendered. We account for performance based units by
calculating the fair value based on the market price of the Company’s common
shares on the date of grant and record compensation expense in the period
earned, which generally is the period over which the units vest.
Adoption of New Accounting Standards
On April 1, 2008, we adopted the Canadian Institute of Chartered Accountants
(“CICA”) Handbook Section 1400, General Standards of Financial Statement
Presentation; Section 1535, Capital Disclosures; Section 3031, Inventory; Section
3064, Goodwill and Other Intangible Assets; Section 3862, Financial Instruments
– Disclosures; and Section 3863, Financial Instruments – Presentation. In
accordance with the transitional provisions, prior periods have not been restated.
The principal changes resulting from these new standards are described below:
Financial Statement Presentation:
Section 1400 amended the guidance related to management’s responsibility
to assess the ability of the entity to continue as a going concern.
Management is required to make an assessment of an entity’s ability to
continue as a going concern and should take into account all available
information about the future, which is at least, but is not limited to 12
months from the balance sheet date. Disclosure is required of material
uncertainties related to events or conditions that may cast significant doubt
upon the entity’s ability to continue as a going concern. We adopted this
new guidance effective April 1, 2008 but the adoption had no impact on the
consolidated financial statements.
Capital Disclosures:
Section 1535 establishes standards for disclosing information about an
entity’s capital and how it is managed. The purpose of this standard is to
enable financial statement users to evaluate the Company’s policies and
procedures for managing capital. We adopted this standard on April 1,
2008, resulting in more extensive disclosures in our annual and interim
financial statements.
Inventory:
Section 3031 establishes standards for the determination of inventory cost
and its subsequent recognition as an expense, including any write-down
to net realizable value. In certain circumstances, the new section will also
permit the reversal of previous write-downs. We adopted this standard
effective April 1, 2008. This standard did not have a material impact on our
consolidated financial statements.
Financial Instruments:
Section 3862 and Section 3863 establish standards for the presentation
of financial instruments and non-financial derivatives and identify the
information that should be disclosed about them. The purpose of these
standards is to place enhanced emphasis about the nature and extent of
risks arising from financial instruments and how we manage those risks.
We adopted this standard on April 1, 2008, resulting in more extensive
disclosures in our annual and interim financial statements.
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
NEW ACCOuNtINg PRONOuNCEMENtS AND
DEvELOPMENtS
The following changes have been recently issued and will be adopted in future.
goodwill and Intangible Assets
Section 3064 replaces Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. Section 3064 establishes
standards for the recognition, measurement, presentation and disclosure of
goodwill and intangible assets. The new standard provides guidance for the
recognition of internally developed intangible assets, including assets developed
from research and development activities, establishing consistent treatment of
all intangible assets, whether separately acquired or internally developed. We
will adopt this standard effective April 1, 2009 and are currently assessing the
impact of this new standard on our consolidated financial position, results of
operations or cash flows.
International Financial Reporting Standards
In 2006, Canada’s Accounting Standards Board ratified a strategic plan that will
result in Canadian GAAP, as used by publicly accountable enterprises, being fully
converged with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board over a transitional period to be
completed by 2011.
Canadian GAAP will be fully converged with IFRS-IASB through a combination of
two methods: as current joint-convergence projects of the United States’ Financial
Accounting Standards Board and the International Accounting Standards Board
are agreed upon, they will be adopted by Canada’s Accounting Standards Board
and may be introduced in Canada before the publicly accountable enterprises’
transition date to IFRS-IASB; and standards not subject to a joint-convergence
project will be exposed in an omnibus manner for introduction at the time of the
publicly accountable enterprises’ transition date to IFRS-IASB.
We have considered the potential implementation of IFRS-IASB as well as the
possibility of adopting U.S. GAAP, as an alternative. In reviewing these two
options we have considered our shareholder base, conversion costs, recent
developments in the proposed convergence of IFRS-IASB with U.S. GAAP
and other factors. We have determined, at this time, that adopting U.S. GAAP
would be less disruptive and less costly as we currently prepare a U.S. GAAP
reconciliation in the notes to our consolidated financial statements and our
systems are set-up to capture U.S. GAAP information. Management expects to
transition to U.S. GAAP on or before January 1, 2011. We will continue to monitor
developments in IFRS-IASB standards and our intent will be to move IFRS-IASB if
and when adopted in the United States.
DISCLOSuRE CONtROLS AND PROCEDuRES AND
INtERNAL CONtROL OvER FINANCIAL REPORtINg
Our disclosure controls and procedures are designed to provide reasonable
assurance that relevant information is gathered and reported to senior
management, including the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be
made regarding public disclosures. We have also designed internal controls
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 Canadian GAAP. Under the supervision of
the CEO and CFO and based on the framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”), management
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures and assessed the design of the Company’s
internal control over financial reporting as of March 31, 2009. Based on this
evaluation, we have concluded that disclosure controls and procedures were
effective and internal controls over financial reporting have been adequately
designed to provide reasonable assurance regarding the reliability of our
financial statements and reports. Pursuant to Sarbanes-Oxley Rule 404 for the
fiscal year ended March 31, 2010, our independent auditors will be required to
furnish an audit report on our internal control over financial reporting.
Westport Innovations Inc. 2009 Annual Report 11
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
DISCLOSuRE CONtROLS AND PROCEDuRES AND
INtERNAL CONtROL OvER FINANCIAL REPORtINg
(CONtINuED)
During the year ended March 31, 2009, we implemented certain inventory
modules of our enterprise resource planning system to allow us to more
efficiently track cost of sales. We continue to refine our internal controls in
relation to inventory. Our primary internal controls and processes over inventory
remained unchanged. No material changes were made in our internal controls
over financial reporting during the year ended March 31, 2009. We expect that
our financial reporting policies, processes and systems will continue to evolve
as we continue to launch product at increasing volume levels and partner with
various OEMs and other partners.
FINANCIAL OvERvIEW
Results From Operations
revenue
expressed in thousands of Canadian dollars except for units
Engine shipments (units)
HPDI Fuel Systems (units)
Total unit shipments
Product revenue
Parts revenue
Product revenue by Geographic region
as a percentage of revenue
Americas
Asia
Rest of the World
Fiscal years ended March 31
2009
3,907
131
4,038
102,755
19,082
2008
2,684
36
2,720
55,238
16,298
2007
1,993
8
2,001
47,195
13,285
121,837
71,536
60,480
Fiscal years ended March 31
2009
84%
4%
12%
2008
66%
18%
16%
2007
72%
13%
15%
Product revenue for the year ended March 31, 2009 was $102.8 million, up
$47.6 million, or 86%, from $55.2 million in the prior fiscal year, on total CWI and
LNG product shipments of 4,038 units compared to 2,720 units in the prior year.
CWI product revenue was up 78% to $90.9 million compared to $51.0 million
in fiscal 2008. CWI product sales increased from 2,684 units in fiscal 2008 to
3,907 units in fiscal 2009. In U.S. dollar terms, CWI product revenue increased
by US$32.2 million, or by 65%, with Americas up by U.S.$36.6 million, primarily
because of increased deliveries of the ISL G for transit and refuse applications;
Asia down U.S.$5.8 million as fiscal 2008 saw deliveries of engines to China
in advance of the 2008 Olympics; and the rest of the world up U.S.$1.4 million
primarily because of shipments to India. The U.S. dollar strengthened against the
Canadian dollar by an average of 9% during the year, resulting in higher growth
in Canadian dollar terms. Kit revenues, which are included in product revenue,
increased to $6.3 million, from $1.4 million, primarily driven by the sales order
from Delhi Transport Corporation.
Non-CWI revenues grew from $4.2 million to $11.9 million with 131 LNG units
in the year compared to 36 in the prior year. In fiscal 2009, this included $11.0
million of product revenue associated with sales of heavy duty LNG systems
in North America and Australia as well as $0.9 million in other revenues related
primarily to testing services.
For the year ended March 31, 2008, product revenue was $55.2 million up 17%
from fiscal 2007 revenues of $47.2 million and units shipped increased to 2,720
from 2,001. In fiscal 2008, sales to Asia were driven primarily by shipments
to China for Beijing Public Transit and for export in Chinese buses. Americas
growth was driven primarily by the launch of the ISL G, which replaced the C Gas
Plus in North America, and increased demand for the product in refuse and truck
applications while revenues internationally increased due to activities in India and
increased sales to Europe. Non-CWI revenues increased to $4.2 million in 2008
from $2.4 million in 2007 with 36 LNG system shipments for heavy duty trucks
compared with eight in 2007.
12 Westport Innovations Inc. 2009 Annual Report
Parts revenue for the years ended March 31, 2009 and 2008 was $19.1 million
and $16.3 million, respectively. The 17% increase is attributable primarily to
foreign exchange. Engine population, reliability and age also impact parts
revenue. For the year ended March 31, 2008, parts revenue compared to fiscal
2007 increased $3.0 million to $16.3 million from $13.3 million as distributors
stocked up on new parts for the ISL G engine.
Cost of revenue for the year ended March 31, 2009 was $91.0 million
compared to $49.0 million in the prior year. CWI’s cost of revenues was $81.3
million and $45.5 million for fiscal years 2009 and 2008, respectively. The
$35.8 million increase is associated primarily with the $42.6 million increase in
revenues. However, in the year ended March 31, 2009, cost of revenue also
includes an unfavourable warranty adjustment of $4.3 million in 2009 associated
primarily with the ISL G and L Gas engines. Non-CWI cost of revenue was $9.7
million and $3.5 million, respectively, in the years ended March 31, 2009 and
2008. The change was related primarily to increasing sales revenue.
Cost of revenue for the year ended March 31, 2008 was $49.0 million compared
to $38.4 million in the prior year. Included in CWI’s cost of revenue of $45.5
million and $36.2 million for fiscal years 2008 and 2007 were net positive
adjustments to warranty of $1.3 million and $1.4 million respectively.
Non-CWI cost of revenues was $3.5 million and $2.2 million.
Gross margin was $30.8 million and $22.5 million for the years ended March
31, 2009 and 2008, respectively. Gross margin percentages were 25% and 31%
for those years, respectively. CWI gross margin and gross margin percentage
were $28.6 million and 26% in fiscal 2009 compared with $21.8 million and
32% in fiscal 2008. Gross margin percentage declined primarily because of
higher warranty reserves taken, and a higher accrual rate taken on new ISL
G units shipped in the year. To reflect warranty claims experience in the year,
CWI increased warranty reserves by $4.3 million, which negatively impacted
the margin percentage by 4%. The remaining change in the CWI margin is
attributable to product and geographic sales mix as well as an increase in kit
revenue which generates a lower margin. Non-CWI gross margin and gross
margin percentages were $2.2 million and 18.5% in fiscal 2009 compared to $0.7
million and 17.0% in fiscal 2008. Gross margins fluctuate with foreign exchange,
product mix and volumes.
Gross margin was $22.5 million and $22.1 million for the years ended March 31,
2008 and 2007, respectively. Gross margin percentage declined by six points on
a consolidated basis between fiscal 2007 and 2008 from 37% to 31% primarily
because of product and geographical mix with parts, kits and LNG systems
generally having a lower margin on a percentage basis relative to CWI engines.
CWI gross margin percentage also declined in the year with the launch of the
ISL G engine, which, being a new product, launched with more aggressive pricing
and conservative warranty estimates than its predecessors, the C Gas Plus and
L Gas. On non-CWI products, foreign exchange reduced LNG system margins in
the year with inventories purchased when the U.S. dollar was weaker.
Research and development expenses, net of program funding, increased
$8.0 million, or 35% in fiscal 2009 to $31.0 million from $23.0 million in the prior
year. CWI’s net research and development expenses increased by $2.2 million
during fiscal 2009. The increase relates to $1.1 million of technology royalty
fees to Cummins as the result of higher revenues and $1.1 million of increasing
costs relating to product development and product support. During fiscal 2009,
non-CWI net expenses increased by $5.7 million. Government and partner
funding decreased by $1.4 million with ITO contributions fully recognized in the
prior year and we also accrued $1.4 million in royalty payments to ITO as per
our funding agreement in the 2009 fiscal year. We also incurred $3.0 million in
increased current product engineering expenses and production and other costs
associated with the Westport Assembly Centre. In addition, we incurred $2.3
million in costs associated with new product development such as research and
testing associated with meeting 2010 emissions standards for our HPDI units
and work associated with our European OEMs and next generation fuel systems.
This was offset by completion of the 2007 LNG North America and Australia
product development program during fiscal 2009 reducing costs by $2.4 million
compared with fiscal 2008.
Research and development expenses, net of program funding, increased $1.1
million, or 5%, in fiscal 2008 to $23.0 million from $21.9 million in the prior year.
CWI net research and development expenses decreased by $0.5 million with the
launch of the ISL G during the year and the weaker U.S. dollar lowering the cost
of labour and materials. Non-CWI net expenses increased by $1.6 million with
investments made during the year in LNG North America and Australia product
development and current product support offsetting decreases in development
costs associated with our Isuzu program, which formally ended in fiscal 2007,
and costs related to getting our LNG tank and pump systems commercial ready
in fiscal 2007. Government funding also decreased from $5.2 million in fiscal
2007 to $3.7 million in fiscal 2008 with funding from ITO down $0.9 million as a
result of maximum funding levels reached in the year and with CWI funding down
$1.0 million with the ISL G product development completed. Funding related to
the Australian demonstration project increased by $0.6 million.
research and development expenses
expressed in thousands of Canadian dollars
Research and development expenses
Program funding
Research and development, net
Fiscal years ended March 31
2009
33,003
(2,021)
30,982
2008
26,684
(3,658)
23,026
2007
27,041
(5,150)
21,891
General and administrative expenses for the year ended March 31, 2009 and
2008 were $8.6 million and $6.0 million, respectively. The $2.6 million increase
relates primarily to $0.9 million associated with increased CWI expenses,
increased stock based compensation costs of $1.0 million, and $0.6 million in
increased public company costs, consulting costs and other costs.
For the year ended March 31, 2008, general and administrative expenses
decreased by $0.9 million from $6.9 million in fiscal 2007. The $0.9 million
decrease relates primarily to a $1.0 million decrease in stock based compensation.
Sales and marketing expenses for the years ended March 31, 2009 and 2008
were $15.1 million and $10.6 million, respectively. The $4.5 million increase
primarily relates to additional sales and support costs of $3.4 million associated
with our commercial launch of HPDI products and other promotional initiatives
and $1.9 million relating to business development and emerging markets
initiatives and OEM integration costs primarily relating to PACCAR offset by a $0.8
million decrease in CWI sales and marketing expenses.
In the year ended March 31, 2008, sales and marketing expenses increased
to $10.6 million from $7.1 million in fiscal 2007 primarily with CWI accruing $1.8
million to resolve customer issues, an increase in other CWI sales and marketing
expense relating to the launch of the ISL G engine and non-CWI business
development activities in California, Europe and China.
Foreign exchange gains and losses primarily reflect the realized net gains
and losses on foreign currency transactions and the net unrealized gains and
losses on our net U.S. dollar denominated assets and liabilities that are mainly
comprised of cash and cash equivalents, short-term investments, accounts
receivable and accounts payable. For the year ended March 31, 2009, we
recognized a foreign exchange loss of $0.7 million with the significant foreign
currency volatility during the year. On April 1, 2008, we determined that CWI
was a self sustaining foreign operation with a U.S. dollar functional currency for
accounting purposes. During fiscal 2009, $2.8 million of net unrealized foreign
exchange gains were recorded as cumulative translation adjustment, a separate
component of shareholders’ equity. Prior to April 1, 2008, CWI was an integrated
operation for accounting purposes such that foreign exchange gains and losses
relating to CWI were recorded in the consolidated statements of operations.
Depreciation and amortization for the years ended March 31, 2009, 2008 and
2007 were $2.0 million, $1.6 million and $1.4 million, respectively. Between 2008
and 2009, the increase in depreciation and amortization of $0.4 million related
primarily to depreciation of leasehold improvements and equipment related to
our new production facility, which was completed during the year. Between
2007 and 2008, depreciation increased by $0.2 million reflecting depreciation
and amortization of capital expenditures recorded in the period offset by assets
becoming fully depreciated.
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
Interest on long-term debt and amortization of discount of $1.9 million in
the year ended March 31, 2009 related to the interest and the accretion on the
subordinated debenture notes issued July 3, 2008. Interest on the debentures
was recorded at 9% per annum. Canadian GAAP also required us to separately
allocate the proceeds of the debenture units between the debt component and
the warrants. Accordingly, the value of the debt ($11.4 million) and the value of
the warrants ($3.6 million) were calculated based on each instruments relative
share value. The amount of the long-term debt is being accreted to its face value
using the effective interest rate method.
Interest on long-term debt and amortization of discount of $1.0 million and $1.7
million in the years ended March 31, 2008 and 2007, respectively, related to the
interest and the accretion on $22.1 million of convertible notes issued to funds
managed by Perseus LLC. Prior to the notes being fully converted in July, 2007,
interest was being accrued at 8% per annum and the amount of the debt was
being accreted to its face value using the effective interest rate method.
Interest and other income for the years ended March 31, 2009 and 2008 was
$1.9 million and $1.3 million, respectively. Amounts include interest income on
cash and short-term investments as well as gains from the sale of short-term
investments. The increase of $0.6 million from 2008 to 2009 relates to a higher
average balance in our cash and short-term investments subsequent to the
financing associated with our NASDAQ listing in July 2008 partially offset by lower
interest yields particularly in the third and fourth quarters.
For the years ended March 31, 2008 and 2007, interest and other income was
$1.3 million and $0.8 million. The amounts included interest on cash and short-
term investments as well as gains from the sale of equipment and income earned
from the sale of Clean Energy options.
Gain on sale of long-term investments in fiscal 2009 of $14.3 million relates
to the sale of Clean Energy shares. In 2008 the realized gain of $10.7 million
related to the sale of Clean Energy shares ($8.0 million) as well as a disposition
of substantially the remaining portion of our interest in Wild River Resources Ltd.
(“Wild River”), for a net gain on sale of $2.7 million. In fiscal 2007, the $8.1 million
related to the net gain on the sale of 45% of our interest in Wild River and the
dilution gain arising when we reduced our ownership from 55% to 16%.
Income tax expense for the year ended March 31, 2009 was $6.5 million while
for the years ended March 31, 2008 and 2007 we had income tax recoveries
of $4.5 million and $3.1 million, respectively. Current income tax expense,
representing cash taxes payable in the year, was $3.3 million, $0.2 million and
$0.4 million for fiscal 2009, 2008 and 2007, respectively. Future income tax
expense in fiscal 2009 was $3.2 million while in fiscal 2008 and 2007 income
tax recoveries were $4.7 million and $3.5 million, respectively. Future income
tax recoveries and expenses arise on the recognition of temporary differences
between the carrying amounts and the tax bases of our assets and liabilities. As
a result of utilizing all of the tax losses carried forward during the third quarter
of fiscal 2009, CWI incurred current tax expense of $3.0 million on its third and
fourth quarter taxable income.
During the year ended March 31, 2009, CWI utilized its remaining tax losses
carried forward from previous years of $14.7 million U.S. dollars. These losses
carried forward had previously been recognized as future tax assets and the
majority of the losses were utilized in the first and second quarters. The portion
of the future tax asset relating to losses carried forward was drawn down to offset
current tax expense. The draw down of the future tax asset for utilized losses
was offset by an increase in the warranty liability, which will result in future tax
deductions for CWI.
The remaining increase in future income tax expense relates to the sale of our Clean
Energy shares of $2.2 million as a result of reversing the future tax credit arising on
available for sale investments in 2007 when such investments were designated as
being previously recognized in accumulated other comprehensive income.
In the years ended March 31, 2008 and 2007, CWI recognized future income tax
recoveries of $5.9 million and $3.5 million, respectively, arising from the recognition
of future income tax assets associated with its loss carry-forwards. Prior to fiscal
2007, these losses were fully offset by a valuation allowance. However, as CWI had
shown a consistent history of profitability, a portion of its loss carry-forwards were
recognized in fiscal 2007 and the balance fully recognized in fiscal 2008.
In the year ended March 31, 2008, we also recognized a $1.3 million future
income tax expense associated with the gains on sale of available for sale
investments previously recognized in accumulated other comprehensive income.
Westport Innovations Inc. 2009 Annual Report 13
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
FINANCIAL OvERvIEW (CONtINuED)
Results From Operations (continued)
Joint Venture Partners’ share of income from joint ventures of $4.2 million
in fiscal 2009 reflects Cummins 50% share of CWI’s net income after tax and
also includes BTIC’s 50% share of BWI’s net operating income in the period.
In fiscal 2009, the Cummins share of CWI was $3.9 million and BTIC’s share of
BWI was $0.3 million. For the year ended March 31, 2008, $5.6 million reflects
Cummins’ 50% share of CWI’s net income after tax and also includes BTIC’s
50% share of BWI’s net operating loss in the period, or $0.3 million. For the
year ended March 31, 2007, Cummins’ share of CWI’s net income was $6.1
million representing 50% of CWI’s pre-tax income of $8.9 million and 50% of
CWI’s net tax recovery of $3.3 million
CAPItAL REQuIREMENtS, RESOuRCES AND LIQuIDItY
As at March 31, 2009, our cash, cash equivalents and short-term investment
position was $82.6 million, an increase of $59.8 million from the end of fiscal
2008. Cash and cash equivalents consist of guaranteed investment certificates
with maturities of 90 days or less when acquired. Short-term investments consist
of investment grade bankers’ acceptances, term deposits and commercial paper.
We invest primarily in short-term paper issued by Schedule 1 Canadian banks,
R1 high rated corporations and governments.
For the year ended March 31, 2009, our cash used in operations was $9.3
million. Cash used in operations before changes in non-cash working capital, a
non-GAAP measure, was $25.6 million. Changes in non-cash working capital for
the year contributed $16.3 million. The $16.3 million change in working capital
for the year ended March 31, 2009 was impacted positively by cash inflows from
higher accounts payable and accrued liabilities balance of $5.5 million, increases
in warranty liability of $12.2 million arising from increases in warranty accruals
recorded in the year, and increases in deferred revenue of $2.9 million. This
was offset by an additional investment in inventory of $5.0 million with changes
to accounts receivable and prepaid expenses accounting for the remaining
difference of $0.7 million. Cash used in investing activities included $5.9 million
spent on equipment, furniture and leasehold improvements, the majority of which
related to our new Westport Assembly Centre and expansion of office space. The
total cost for this new facility, including: equipment, leasehold improvements and
furniture was approximately $3.8 million. We also increased our net advances to
Cummins by $1.6 million and paid a dividend to them of $9.3 million. We expect
Cummins will continue to borrow funds from CWI’s excess cash each quarter. We
also repaid $5.4 million against our non-recourse loan with Clean Energy.
During the year ended March 31, 2009, we funded our operations and purchases
of equipment, furniture and leasehold improvements through proceeds from the
sale of our Clean Energy shares of $19.4 million, and through our equity financing
associated with our listing on NASDAQ resulting in cash of $53 million, net of $4.9
million of share issuance costs, as well as from our subordinated debenture units
of $14.0 million, net of expenses of $1.0 million, and our share of operating cash
flow from CWI.
Our plan is to use our current cash, cash equivalents and short-term investments,
our share of CWI profits, borrowings under our credit facility and proceeds from
the sale of our remaining investment in Clean Energy, valued at $1.4 million as at
March 31, 2009, to fund our committed milestones and obligations for our current
programs. We will also continue to seek third party and government funding on
commercially acceptable terms to offset costs of our investments; however, there
are no guarantees that we will be successful in obtaining third party funding on
acceptable terms or at all.
Our $13 million credit facility with our bank has been drawn down by our
demand installment loan of $4.6 million and is subject to and limited by financial
covenants, which may prevent us from drawing against the full amount of the
line. As at March 31, 2009, we had access to the full amount of the line. During
the year, our bank increased the interest rate payable on our credit facility from
prime minus 0.25% to prime plus 0.25% for borrowings up to $5 million due to
the current credit environment.
Westport’s capital requirements will vary depending on a number of factors,
including: the timing and size of orders for our LNG systems, our ability to
successfully launch products on time, our supply chain and manufacturing
requirements, our success in executing our business plan, relationships with
current and potential strategic partners, commercial sales and margins, product
reliability, progress on research and development activities, capital expenditures
and working capital requirements. We also review investment and acquisition
opportunities on a regular basis for technologies, businesses and markets that
would complement our own products or assist us in our commercialization plans.
Significant new orders, expanded engine programs, acquisitions or investments
could require additional funding. If such additional funding is not available to
us, if expected orders do not materialize or are delayed, or if we have significant
overspending in our programs, we may be required to delay, reduce or eliminate
certain research and development activities, reduce or cancel inventory orders,
and possibly forego new program, acquisition or investment opportunities. Any
of those circumstances could potentially result in a delay of the commercialization
of our products in development and could have an adverse effect on our
business, results of operations, liquidity and financial condition.
This “Capital Requirements, Resources and Liquidity” section contains certain
forward looking statements. By their nature, forward-looking statements require
us to make assumptions and are subject to inherent risks and uncertainties.
Readers are encouraged to read the “Forward Looking Statements and Basis
of Presentation” sections of this MD&A which discusses forward-looking
statements and the “Risks and Uncertainties” section of this MD&A and of our
Annual Information Form.
Shares Outstanding
For the years ended March 31, 2009, 2008 and 2007, the weighted average
number of shares used in calculating the loss per share was 30,268,947,
25,167,966 and 21,478,521, respectively. During the year ended March 31, 2009,
we granted 39,280 stock options and 667,815 performance share units relating to
our long-term incentive programs. As part of the debenture units issued on July
3, 2008, we also issued 771,428 warrants with a strike price of $18.73 and 46,118
broker warrants with a strike price of $16.10. We also issued 790,614 warrants
with a strike price of $10.65 to the Government of Canada, as required under
our funding agreement. Shares, share options and performance share units
outstanding and exercisable as at the following dates are shown below:
March 31, 2009
May 19, 2009
Weighted
average
exercise
price
Number
Weighted
average
exercise
price
Number
Shares outstanding
32,040,540
$
n/a
32,041,492
$
n/a
Share options
Outstanding
Exercisable
Performance share units
Outstanding
Exercisable
Warrants
Outstanding and
exercisable
1,136,163
786,282
1,729,970
597,560
7.32
7.53
n/a
n/a
1,131,132
782,203
1,729,970
597,560
7.29
7.48
n/a
n/a
1,608,160
14.68
1,608,160
14.68
SuMMARY OF QuARtERLY RESuLtS AND DISCuSSION
OF FOuRtH QuARtER 2009
Our revenues and operating results can vary significantly from quarter to quarter
depending on the timing of product deliveries, product mix, product launch
dates, research and development project cycles, timing of related government
funding and foreign exchange impacts. Net loss has and can vary significantly
from one quarter to another depending on operating results, gains and losses
from investing activities, stock-based compensation awards, recognition of tax
benefits and other similar events.
14 Westport Innovations Inc. 2009 Annual Report
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
The following table provides summary unaudited financial data for our last eight quarters:
Selected Quarterly operations data (unaudited)
expressed in thousands of Canadian dollars except per share and percentages
for the three months ended: 2007-Jun-30
2007-Sep-30
2007-Dec-31
2008-Mar-31
2008-Jun-30
2008-Sep-30
2008-Dec-31
2009-Mar-31
Units shipped
Average foreign exchange rate (C$:US$)
533
1.10
867
1.04
$
801
0.98
$
519
1.00
$
$
1,078
1,460
$
1.01
$
1.04
$
824
1.21
676
1.25
$
Product revenue
Parts revenue
Total revenue
Cost of sales
Gross margin
$ 11,842
$ 16,639
$ 15,488
$ 11,269
$ 21,428
$ 34,332
$ 25,448
$ 21,547
$ 3,888
$ 4,530
$ 3,822
$ 4,058
$ 4,081
$ 4,680
$ 5,606
$ 4,715
$ 15,730
$ 21,169
$ 19,310
$ 15,327
$ 25,509
$ 39,012
$ 31,054
$ 26,262
$ 10,392
$ 15,116
$ 12,756
$ 10,759
$ 17,170
$ 29,785
$ 24,733
$ 19,332
$ 5,338
$ 6,053
$ 6,554
$ 4,568
$ 8,339
$ 9,226
$ 6,321
$ 6,930
34%
29%
34%
30%
33%
24%
20%
26%
Net income (loss) for the period
$ (4,724)
$ (4,867)
$ 7,401
$ (8,125)
$ (3,463)
$
676
$ (8,928)
$ (12,710)
Earnings (loss) per share:
Basic
Diluted
$
$
(0.22)
(0.22)
$
$
(0.19)
(0.19)
$
$
0.28
0.26
$
$
(0.30)
(0.30)
$
$
(0.13)
(0.13)
$
$
0.02
0.02
$
$
(0.28)
(0.28)
$
$
(0.43)
(0.43)
Cash from (used in) operations before changes in
non-cash operating working capital
$ (3,372)
$ (2,645)
$ (3,339)
$ (8,238)
$ (2,548)
$ (3,947)
$ (8,288)
$ (10,842)
Company’s 100% share of CWI net income (loss)
$ 1,160
$ 2,412
$ 8,870
Joint Venture Partner’s share of CWI net income (loss)
$
580
$ 1,206
$ 4,435
$
$
(810)
(405)
$ 3,234
$ 2,800
$ 1,617
$ 1,400
$
$
258
129
$ 1,540
$
770
three Months Ended March 31, 2009 and 2008
Our total consolidated revenues for the three months ended March 31, 2009
were $26.3 million, an increase of $11.0 million or 72% from the same period
in fiscal 2008 ($15.3 million.) On a U.S. dollar basis, consolidated revenues
increased by 38%. CWI product revenues were up $10.7 million as the result of
increased volume of ISL G sales in the quarter and a delay in the completion of
the integration of the ISL G in the fourth quarter of fiscal 2008 at an OEM, which
caused planned deliveries to slip into fiscal 2009. CWI also had kit revenue
which is included in product revenue of $3.4 million in the fourth quarter of fiscal
2009 compared with $0.1 million in the fourth quarter of 2008 due to the Delhi
Transport Corporation order. Non-CWI product revenues also increased by $0.2
million with 5 LNG systems shipped in the fourth quarter of fiscal 2009 compared
with none in the previous year.
Net loss for the three months ended March 31, 2009 was $12.7 million compared
to net loss of $8.1 million in the three months ended March 31, 2008. Gross
margin increased by $2.4 million on higher revenues, and gross margin
percentages decreased from 30% in the fourth quarter of fiscal 2008 to 26% in
fiscal 2009 as the result of higher warranty accruals on the ISL G units, inventory
adjustments, and product mix. Our share of CWI’s net income increased by
$1.2 million from a loss of $0.4 million to a contribution of $0.8 million, primarily
because of increased revenues and lower sales and marketing expenses in the
period offset by increased taxes. In the fourth quarter of fiscal 2008, CWI made
a special $1.4 million accrual to support customer operational issues associated
with a discontinued product. In fiscal 2009, CWI fully utilized its remaining tax
loss carry-forwards, resulting in recognition of tax expense of $1.6 million versus
a tax recovery of $0.4 million in the fourth quarter of fiscal 2008.
Non-CWI net loss in the fourth quarter of fiscal 2009 was $13.5 million compared
to a net loss of $7.7 million in fiscal 2008. We incurred additional costs relating to
research and development of $1.8 million including royalty payments to TPC ($0.3
million), a reduction of government funding ($0.2 million), together with increased
production, OEM integration costs and 2010 product initiatives. We also incurred
increased general and administrative expenses relating primarily to costs
associated with being a dual-listed public company and accrued annual bonuses
and severance in the period. Sales and marketing expenses including our heavy
duty LNG sales activities and emerging market as well current product support
costs accounted for an increase of $0.8 million. We also incurred Kenworth
integration expenditures and new product-related costs of $0.7 million. Interest
expense increased by $0.6 million as a result of our $15 million of subordinated
debenture units. We also recognized a gain on sale of Clean Energy shares of
$0.5 million and a non-CWI foreign exchange gain of $0.6 million in the fourth
quarter of 2008, while there were no similar gains in the fourth quarter of 2009.
CONtRACtuAL OBLIgAtIONS AND COMMItMENtS
Minimum annual Payments due by Period
expressed in thousands of Canadian dollars
Carrying
amount
Contractual
cash flows
< 1 year
2 – 3 years 4 – 5 years > 5 years
Accounts payable
and accrued
liabilities
Demand instalment
loan
Short-term debt
Subordinated
$ 14,359 $ 14,359 $ 14,359 $
- $
- $
4,642
1,614
4,950
1,614
1,494
1,614
2,568
-
-
-
-
-
-
888
-
-
13
debenture notes
18,037
18,037
1,350
16,687
57
17
27
Other long-term debt
Operating lease
commitments
52
-
Royalty payments
1,350
5,795
28,189
1,734
1,350
2,594
2,700
1,402
2,700
65
21,439
Investment in Joint
Venture
-
5,273
5,273
-
-
-
$ 40,054 $ 78,274 $ 27,191 $ 24,576 $ 5,003 $ 21,504
Contractual Commitments
Capital lease obligations related primarily to office equipment, have terms of two
to five years and have interest rates ranging from 1.15% to 6.17%. Operating
lease commitments represent our future minimum lease payments under leases
related primarily to our operating premises and office equipment.
Demand Installment Loan
As of March 31, 2009, we had $4.6 million in a demand installment loan
outstanding, down $1.2 million from $5.8 million as at March 31, 2008. The
loan is drawn against our line of credit of $13 million and bears interest at prime
plus 0.25% for amounts under $5.0 million with further rate reductions applying
above $5.0 million.
Short-term Debt
Short-term debt is repayable on only on based on the sale of certain product.
The Company has assumed these sales will take place within one year.
Westport Innovations Inc. 2009 Annual Report 15
MaNaGeMeNt’S dISCuSSIoN aNd aNaLySIS
CONtRACtuAL OBLIgAtIONS AND COMMItMENtS
(CONtINuED)
Subordinated Debenture Notes
Subordinated debenture notes bear interest at 9% per annum and mature on July
3, 2011. Interest in payable semi-annually and the principal repayment amount is
repayable on maturity. The Company has the option to redeem at any time after
12 months and before 18 months from the date of issues at 115% of the principal
amount and at 110% of the principal amount after 18 months.
NON-gAAP MEASuRES
We use certain non-GAAP measures to assist in assessing our financial
performance and liquidity. Non-GAAP measures do not have any
standardized meaning prescribed by GAAP and are therefore unlikely to be
comparable to similar measures presented by other companies. Non-GAAP
measures and reconciliations to financial statement line items for the periods
indicated are as follows:
Cash Flows from operations before Changes in Non-Cash operating Working Capital
expressed in thousands of Canadian dollars
CONtINgENt OFF-BALANCE SHEEt ARRANgEMENtS
2009
2008
2007
Cash flows from operations:
Loss for the year
Items not involving cash:
$
(24,425)
$
(10,315)
$
(11,307)
Depreciation and amortization
Stock-based compensation expense
Accretion of TPC warrants
Future income tax recovery
Change in deferred lease inducements
1,978
2,246
-
3,245
(321)
Gain on sale of long-term investments
(14,275)
1,550
664
-
(4,691)
(251)
(10,659)
1,410
2,089
571
(3,455)
(164)
(8,120)
Joint Venture Partners’ share of net
income from joint ventures
Loss of investment accounted for by
the equity method
Interest on long-term debt and
amortization of discount
Other
4,221
1,021
866
(181)
5,564
6,057
-
690
(146)
-
1,663
(69)
Cash flows from operations before changes in
non-cash operating working capital
$
(25,625)
$
(17,594)
$
(11,325)
government Funding
We are continually exploring strategic opportunities to work with governments
to provide them with alternative fuel solutions. As a result of our government
partnerships, we recognized $2.0 million in government funding in 2009
compared with $3.7 million in fiscal 2008 and $5.2 million in fiscal 2007.
Under certain repayment terms, we are obligated to repay royalties as follows:
Agreement
Description
Royalties
Term
Industrial Technologies
Office (Formerly Technology
Partnerships Canada)
Department Of Natural
Resources Canada
Fund 30% of the eligible costs
of, among other research
projects, the adaptation of
Westport’s technology to diesel
engines, up to $18.9 million.
Funded $1 million for
demonstration of a low
emissions natural gas power
generator in Grande Prairie,
Alberta.
Annual royalties equal to
the greater of $1,350,000
or 0.33% of annual gross
revenues from all sources,
provided that gross revenues
exceed $13.5 million.
Fiscal 2009 to fiscal 2015,
inclusive; royalty period may
be extended until the earlier
of March 31, 2018 or until
cumulative royalties total
$28,189,000.
1% of revenues from future
sales of natural gas engines for
power generators.
Earlier of 10 years from project
completion date (August 30,
2004), or when cumulative
royalties total $1 million.
As at March 31, 2009, no royalties have been paid. An amount payable of $1.35
million relating to ITO has been accrued as at March 31, 2009 and may be due
and payable by July, 31, 2009, if we are not successful in our discussions with
TPC to extend the work phase of our agreement by another year. If we are
successful in our request, payment of royalties will commence in fiscal 2011.
BuSINESS RISKS AND uNCERtAINtIES
An investment in our business involves risk and readers should carefully consider
the risks described in our Annual Information Form and other filings on
www.sedar.com and www.sec.gov. Our ability to generate revenue and profit
from our technologies is dependent on a number of factors, and the risks
identified below, if they were to occur, could have a material impact on our
business, financial condition, liquidity, results of operation or prospects. While
we have attempted to identify the primary known risks that are material to our
business, the risks and uncertainties described below may not be the only ones
we face. Additional risks and uncertainties, including those that we do not know
about now or that we currently believe are immaterial may also adversely affect
our business, financial condition, liquidity, results of operation or prospects.
A full discussion of the risks impacting our business is contained in the Annual
Information Form for the year ended March 31, 2009 under the heading “Risks”
and is available on SEDAR at www.sedar.com.
16 Westport Innovations Inc. 2009 Annual Report
MaNaGeMeNt’S rePort to the SharehoLderS
The consolidated financial statements presented here have been
prepared by management in accordance with Canadian generally
accepted accounting principles. The integrity and objectivity of the data in
these consolidated financial statements are management’s responsibility.
The company has implemented a system of internal accounting and
administrative controls in order to provide reasonable assurance that
transactions are appropriately authorized, assets are safeguarded,
and financial records are properly maintained to provide accurate and
reliable financial statements.
The Board of Directors, through its Audit Committee, oversees
management’s responsibility for financial reporting and internal control.
The Audit Committee is comprised of four directors who are not
involved in the daily operations of the Company.
The duties of the committee include the review of the system of internal
controls, and of any relevant accounting, auditing and financial matters.
The Audit Committee meets on a regular basis with management and
the Company’s independent auditors to ensure itself that its duties have
been properly discharged. The Audit Committee reports its findings
to the Board for consideration in approving the financial statements for
issuance to the shareholders.
The consolidated financial statements have been audited by KPMG
LLP, Chartered Accountants, who were appointed by the shareholders,
and have full and unrestricted access to the Audit Committee. The
independent auditors’ report outlines the scope of their examination
and their opinion on the consolidated financial statements.
David R. Demers
Chief Executive Officer
May 14, 2009
J. Michael Gallagher
President and Chief Operating Officer
May 14, 2009
Elaine A. Wong
Executive Vice President and Chief Financial Officer
May 14, 2009
audItorS’ rePort to the SharehoLderS
We have audited the consolidated balance sheets of Westport
Innovations Inc. (the Company) as at March 31, 2009 and 2008 and
the consolidated statements of operations, comprehensive income
(loss), shareholders’ equity and cash flows for each of the years in the
three-year period ended March 31, 2009. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March
31, 2009 and 2008 and the results of its operations and its cash flows
for each of the years in the three-year period ended March 31, 2009 in
accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Vancouver, Canada
May 14, 2009
Westport Innovations Inc. 2009 Annual Report 17
CoNSoLIdated baLaNCe SheetS
expressed in thousands of Canadian dollars | as at March 31, 2009 and 2008
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Loan receivable [note 19(a)]
Inventories [note 4]
Prepaid expenses
Current portion of future income tax assets [note 18(b)]
Long-term investments [note 5]
Equipment, furniture and leasehold improvements [note 6]
Intellectual property [note 7]
Future income tax asset [note 18(b)]
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Deferred revenue
Demand instalment loan [note 8]
Short-term debt [note 9]
Current portion of long-term debt [note 10]
Current portion of warranty liability
Obligation to issue warrants [note 14]
Warranty liability
Long-term debt [notes 10(a) and (b)]
Other long-term liabilities [note 11]
Joint Venture Partners’ share of net assets of joint ventures [note 19]
Shareholders’ equity:
Share capital:
Authorized:
Unlimited common shares, no par value
Unlimited preferred shares in series, no par value
Issued:
32,040,540 (2008 – 27,416,993) common shares
Other equity instruments [note 16]
Additional paid in capital
Deficit
Accumulated other comprehensive income
Commitments and contingencies [notes 12 and 20]
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
March 31, 2009
March 31, 2008
$
39,043
43,576
6,417
11,234
13,982
1,387
4,451
120,090
1,935
7,712
430
5,337
$
7,560
15,202
7,028
6,774
9,020
1,033
4,944
51,561
18,754
3,685
574
4,366
$
135,504
$
78,940
$
14,359
546
4,642
1,614
17
12,222
-
33,400
12,369
11,353
4,821
12,603
74,546
311,855
12,319
5,263
(271,885)
3,406
60,958
$
8,470
205
5,776
5,995
54
4,899
4,000
29,399
4,258
8
1,496
13,983
49,144
258,202
3,079
5,097
(247,460)
10,878
29,796
$
135,504
$
78,940
Henry Bauermeister, Director
John A. Beaulieu, Director
18 Westport Innovations Inc. 2009 Annual Report
CoNSoLIdated StateMeNtS oF oPeratIoNS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
Product revenue
Parts revenue
Cost of revenue and expenses:
Cost of revenue
Research and development [notes 15(c) and 17]
General and administrative [note 15(c)]
Sales and marketing [note 15(c)]
Foreign exchange loss (gain)
Depreciation and amortization
Bank charges, interest, and other
Loss before undernoted
Loss from investment accounted for by the equity method
Interest on long-term debt and amortization of discount [notes 10(b) and (c)]
Interest and other income
Gain on sale of long-term investments [note 5]
Loss before income taxes and Joint Venture Partners’ share of income
from joint ventures
Income tax recovery (expense) [note 18]:
Current
Future
Loss before Joint Venture Partners’ share of income from joint ventures
Joint Venture Partners’ share of net income from joint ventures [note 19]
Loss for the year
Basic and diluted loss per share
$
2009
102,755
19,082
121,837
91,020
30,982
8,575
15,071
682
1,978
469
148,777
(26,940)
(1,021)
(1,879)
1,882
14,275
$
2008
55,238
16,298
71,536
49,023
23,026
6,033
10,550
1,287
1,550
280
91,749
(20,213)
-
(986)
1,316
10,659
$
2007
47,195
13,285
60,480
38,381
21,891
6,882
7,077
(102)
1,410
408
75,947
(15,467)
-
(1,718)
764
8,120
(13,683)
(9,224)
(8,301)
(3,276)
(3,245)
(6,521)
(20,204)
(4,221)
(24,425)
(0.81)
$
$
(218)
4,691
4,473
(4,751)
(5,564)
(10,315)
(0.41)
$
$
(404)
3,455
3,051
(5,250)
(6,057)
$
$
(11,307)
(0.53)
Weighted average common shares outstanding – Basic and diluted
30,268,947
25,167,966
21,478,521
See accompanying notes to consolidated financial statements.
CoNSoLIdated StateMeNtS oF CoMPreheNSIve INCoMe (LoSS)
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
Loss for the year
Other comprehensive income (loss)
Unrealized gain on available for sale securities,
net of tax of $323 (2008 – $181)
Reclassification of net realized gains on available for sale securities to net loss,
net of tax of $2,454 (2008 – $1,345)
Cumulative translation adjustment
Reclassification of realized foreign exchange gain on payment of dividend
by joint venture
2009
2008
2007
$
(24,425)
$
(10,315)
$
(11,307)
1,781
645
(12,119)
3,659
(793)
(7,472)
(6,799)
-
-
(6,154)
-
-
-
-
-
Comprehensive loss
$
(31,897)
$
(16,469)
$
(11,307)
See accompanying notes to consolidated financial statements.
Westport Innovations Inc. 2009 Annual Report 19
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20 Westport Innovations Inc. 2009 Annual Report
CoNSoLIdated StateMeNtS oF CaSh FLoWS
expressed in thousands of Canadian dollars | years ended March 31, 2009, 2008, and 2007
Cash flows from operations:
Loss for the year
Items not involving cash:
Depreciation and amortization
Stock-based compensation expense
Accretion of TPC warrants
Future income tax expense (recovery)
Change in deferred lease inducements
Gain on sale of long-term investments
Joint Venture Partners’ share of net income from joint ventures
Loss from investment account for by the equity method
Accretion of long-term debt
Other
Changes in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
Warranty liability
Cash flows from investments:
Purchase of equipment, furniture and leasehold improvements
Proceeds on disposition of equipment, furniture and leasehold improvements
Sale (purchase) of short-term investments, net
Purchase of long-term investments
Disposition of long-term investments
Advance on loans receivable
Repayment on loans receivable
Investment in joint venture
Sale of interest in subsidiary
Proceeds from joint venture partner
Deferred transaction costs incurred
Leasehold inducement
Cash flows from financing:
Issue of demand instalment loan
Repayment of demand instalment loan
Increase in short-term debt
Repayment of short-term debt
Increase in bank loan
Repayment of bank loan and other long-term debt
Issuance of debenture notes
Issuance of convertible notes
Finance costs incurred
Shares issued for cash
Share issue costs
Dividends paid to joint venture partner
Effects of foreign exchange on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2009
2008
2007
$
(24,425)
$
(10,315)
$
(11,307)
1,978
2,246
-
3,245
(321)
(14,275)
4,221
1,021
866
(181)
1,004
(4,962)
(354)
5,545
2,948
12,168
(9,276)
(5,904)
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(27,024)
-
19,379
(18,948)
17,307
(1,500)
-
-
-
325
(16,365)
500
(1,634)
170
(5,449)
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(103)
15,000
-
(1,006)
57,930
(4,906)
(9,259)
51,243
5,881
31,483
7,560
$
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$
1,550
664
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(4,691)
(251)
(10,659)
5,564
-
690
(146)
3,853
(6,204)
(250)
2,343
(133)
2,186
(15,799)
(1,690)
609
6,725
-
17,977
(6,774)
-
-
-
425
-
-
17,272
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(837)
5,995
-
-
(6,814)
-
-
-
1,205
(164)
-
4,385
-
5,858
1,702
7,560
1,410
2,089
571
(3,455)
(164)
(8,120)
6,057
-
1,663
(69)
(4,744)
(1,963)
(62)
2,353
129
1,201
(14,411)
(1,175)
12
(14,593)
(51)
605
-
-
-
4,198
-
(764)
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(11,768)
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(894)
-
-
7,346
(789)
-
22,092
(915)
-
(5)
-
26,835
-
656
1,046
1,702
$
Westport Innovations Inc. 2009 Annual Report 21
CoNSoLIdated StateMeNtS oF CaSh FLoWS (CoNtINued)
expressed in thousands of Canadian dollars | years ended March 31, 2009, 2008, and 2007
Supplementary information:
Interest paid
Taxes paid
Non-cash transactions:
Purchase of equipment, furniture and leasehold improvements by
assumption of capital lease obligation
Shares issued on exercise of performance share units
Shares issued for acquisition of intellectual property
Shares issued on conversion of debt [note 10(c)]
Shares issued for settlement of interest on convertible notes [note 10(c)]
Broker warrants issued with subordinated debt [note 10(b)]
Shares issued on cashless exercise of warrants
Warrants issued on obligation to settle warrants [note 14]
See accompanying notes to consolidated financial statements.
$
2009
956
1,771
50
23
-
-
249
284
-
4,000
$
2008
473
479
-
390
-
21,115
644
-
1,420
-
$
2007
379
15
-
555
602
-
498
-
-
-
22 Westport Innovations Inc. 2009 Annual Report
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
1. NATuRE oF oPERATIoNS:
(d) Accounts and loans receivable
Westport Innovations Inc. (the “Company”) was incorporated under the
Business Corporations Act (Alberta) on March 20, 1995.
The Company is involved in the research, development and
commercialization of environmental technologies, including high-pressure
direct injection (“HPDI”) combustion technology that allows diesel engines
to operate on cleaner burning gaseous fuels such as natural gas without
sacrificing performance or fuel economy. The Company also has a joint
venture interest in Cummins Westport Inc. (“CWI”), a joint venture with
Cummins Inc. (“Cummins”), formed in 2001 [note 19(a)]. CWI develops,
supports and markets a comprehensive product line of low-emission, high
performance engines and ancillary products using proprietary intellectual
property developed by the Company and Cummins.
These consolidated financial statements have been presented on a going
concern basis, which assumes the realization of assets and the settlement
of liabilities in the normal course of operations. To date, the Company
has financed its operations primarily by equity and debt financing, sale of
investments, its share of operating cash flows from CWI, and margins on the
sale of products and parts. If the Company does not have sufficient funding
from internal or external sources, it may be required to delay, reduce or
eliminate certain research and development programs and forego acquisition
of certain equipment. The future operations of the Company are dependent
upon its ability to produce, distribute and sell an economically viable product
to attain profitable operations.
2. SIGNIFICANT ACCouNTING PoLICIES:
(a) Basis of presentation:
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and variable interest entities
for which the Company is considered the primary beneficiary.
Intercompany balances and transactions have been eliminated.
Interests in variable interest entities are consolidated by the Company
if the Company is the primary beneficiary. The Company has identified
CWI and BTIC Westport Inc. (“BWI”) as variable interest entities and
determined that the Company is the primary beneficiary. Accordingly,
the Company has consolidated these entities. The other 50% interest
held by the Company’s joint venture partners is reflected as “Joint
Venture Partners’ share of net assets of joint ventures” in these
consolidated financial statements.
These consolidated financial statements are presented in accordance
with Canadian generally accepted accounting principles which conform
in all material respects with accounting principles generally accepted in
the United States, except as outlined in note 24.
Certain comparative amounts have been reclassified to conform with
the presentation adopted in the current period. Shares, share options,
performance share units, warrants and per share amounts have been
adjusted on a retroactive basis to reflect the three-and-one-half-to-one
share consolidation (3.5:1) completed on July 21, 2008.
(b) Cash and cash equivalents:
Cash and cash equivalents includes cash and term deposits with
maturities of ninety days or less when acquired. Cash equivalents are
considered as held for trading and recorded at fair value with changes in
fair value recognized in the consolidated statements of operations.
Accounts receivable and loans receivable are measured at amortized cost.
(e) Inventories:
The Company’s inventory consists of the Company’s fuel system
products (finished goods), work-in-progress, purchased parts and
assembled parts. Inventories are recorded at the lower of cost and net
realizable value. Cost is determined based on the lower of weighted
average cost and net realizable value. The cost of fuel system product
inventories, assembled parts and work-in-progress include materials,
labour and production overhead including depreciation. An inventory
obsolescence provision is provided to the extent cost of inventory
exceeds net realizable value. In establishing the amount of inventory
obsolescence provision, management estimates the likelihood that
inventory carrying values will be affected by changes in market demand
and technology, which would make inventory on hand obsolete.
(f) Equipment, furniture and leasehold improvements:
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation is provided as follows:
assets
basis
Computer equipment and software
Straight-line
Furniture and fixtures
Machinery and equipment
Straight-line
Straight-line
rate
3 years
5 years
8 years
Leasehold improvements
Straight-line
Lease term
(g) Long-term investments:
Long-term investments are designated as available for sale and recorded
at their fair value to the extent a reliable fair value is determinable.
Changes in fair value are recognized in accumulated other
comprehensive income (loss). A decline in value that is considered other
than temporary is recognized in net loss for the period. The Company
records investments in which it has significant influence using the equity
basis of accounting.
(h) Financial liabilities
Accounts payable and accrued liabilities, demand instalment loan,
short-term debt, and long-term debt are measured at amortized
cost. Transaction costs relating to long-term debt are netted against
the liability on initial recognition and are amortized using the effective
interest rate method. For debt instruments containing a debt and equity
component, the proceeds received are allocated between the debt and
equity components based on their relative fair values.
(i) Research and development costs:
Research costs are expensed as incurred and are recorded net of
government funding received or receivable. Development costs are
deferred only if they meet certain stringent criteria generally related
to technical feasibility, market definition and financing availability for
future development; otherwise they are expensed as incurred. Related
investment tax credits reduce research and development expenses in the
same year in which the related expenditures are charged to earnings or
loss, provided there is reasonable assurance the benefits will be realized.
As at March 31, 2009 and 2008, no development costs had been deferred.
(c) Short-term investments:
(j) government assistance:
Short-term investments, consisting of investment grade commercial
paper, banker acceptances, bearer deposit notes, guaranteed
investment certificates and other term deposits are considered available
for sale and recorded at fair value with changes in fair value recognized
in accumulated other comprehensive income until realized. A decline
that in value that is considered other than temporary is recognized in net
loss for the period.
The Company periodically applies for financial assistance under available
government incentive programs which is recorded in the period it is
received or receivable. Government assistance relating to the purchase
of equipment, furniture and leasehold improvements is reflected as a
reduction of the cost of such assets. Government assistance related to
research and development activities is recorded as a reduction of the
related expenditures.
Westport Innovations Inc. 2009 Annual Report 23
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
2. SIGNIFICANT ACCouNTING PoLICIES (CoNTINuED):
(q) Stock-based compensation plans:
The Company has a stock option plan, which is described in note 15(a).
The Company accounts for stock-based compensation related to stock
options granted to employees and directors using the fair value method.
The resulting compensation expense is calculated using the Black-
Scholes valuation method and estimated forfeitures and is recognized in
results from operations over the vesting period. The Company has an
employee share purchase plan, which is described in note 15(b). The
Company matches the employees’ contribution and recognizes this cost
as an expense in the period it is incurred.
The Company has a Performance Share Unit (“PSU”) Plan as described in
note 15(c). The value of the units is calculated based on the market price
of the Company’s common shares on the date of grant and is recorded as
compensation expense in the period earned, which generally is the period
over which the PSU’s vest.
(r) Post-retirement benefits:
The Company has implemented a group registered retirement savings
plan (“RRSP”) in which full-time employees of the Company are eligible
to participate. Eligible employees may make contributions up to their
personal eligible contribution room under the Canadian Income Tax
Act. The Company contributes up to a maximum combined total of 5%
of the employee’s regular base pay to the RRSP and/or the employee
share purchase plan and recognizes this cost as an expense in the
period it is incurred. During the year ended March 31, 2009, the
Company recognized $580 (2008 – $418; 2007 – $356) of expense
associated with the RRSP.
(s) Currency translation:
The functional currency of the Company is the Canadian dollar. Monetary
items denominated in foreign currency are translated into Canadian
dollars at exchange rates in effect at the balance sheet date and non-
monetary items are translated at rates of exchange in effect when the
assets were acquired or obligations incurred. Revenue and expenses
are translated at rates in effect at the time of the transactions. Foreign
exchange gains and losses are included in results from operations.
Effective April 1, 2008, the Company determined that CWI is
economically, financially and operationally independent of the Company
and the Company’s exposure to rate changes is now limited to the
Company’s net investment. As a result, the assets and liabilities of CWI
are translated at year-end rates of exchange. Revenue and expenses
are translated at the average rate of exchange for the year. The
resulting translation gains and losses are included in accumulated other
comprehensive income within shareholders’ equity.
(t) use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent liabilities at the date
of the financial statements, and the reported amounts of revenue and
expenses during the period. Significant areas requiring the use of
estimates include amortization of equipment, furniture and leasehold
improvements, the determination of future cash flows and discount
rates for impairment of long-lived assets, valuation of long-term
investments, valuation of future income tax assets and the determination
of warranty liability. Actual results could differ from estimates used in the
preparation of the consolidated financial statements.
(k) Intellectual property:
Intellectual property, consisting primarily of the cost of acquired patents,
licenses and other intellectual property, is amortized over their estimated
useful lives, which currently does not exceed seven years.
(l) Impairment of long-lived assets:
The Company reviews for impairment of long-lived assets, including
equipment, furniture, and leasehold improvements and intellectual
property, to be held and used whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. If such conditions exist, assets are considered impaired
if the sum of the undiscounted expected future cash flows expected to
result from the use and eventual disposition of an asset is less than its
carrying amount. An impairment loss is measured at the amount by
which the carrying amount of the asset exceeds its fair value. When
quoted market prices are not available, the Company uses the expected
future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the asset as an estimate of fair value.
(m) Warranty liability:
Estimated warranty costs are recognized at the time the Company sells
its products, and are included in cost of revenue. The Company provides
warranty coverage on products sold for a period of two years from the
date the products are put into service by customers. Warranty liability
represents the Company’s best estimate of warranty costs expected to
be incurred during the warranty period. Furthermore, the current portion
of warranty liability represents the Company’s best estimate of the costs
to be incurred in the next twelve month period. The Company uses
historical failure rates and cost to repair defective products together with
information on known product issues to estimate the warranty liability.
The ultimate amount payable by the Company and the timing will depend
on actual failure rates and cost to repair failures of its products. Since a
number of the companies products are new in the market, historical data
may not necessarily reflect actual costs to be incurred and this exposes
the Company to potentially significant fluctuations in liabilities.
(n) Extended warranty:
The Company sells extended warranty contracts which provide
coverage in addition to the basic two year coverage. Proceeds from the
sale of these contracts are deferred and amortized over the extended
warranty period commencing at the end of the basic warranty period.
On a periodic basis, management reviews the estimated warranty costs
expected to be incurred related to these contracts and recognizes a loss
to the extent such costs exceed the related deferred revenue.
(o) Revenue recognition:
Product and parts revenue is recognized, net of estimated costs of
returns, allowances, and sales incentives, when the products are shipped
and title passes to the customers. Revenue also includes fees earned
from performing research and development activities for third parties, as
well as technology license fees from third parties. Revenue from research
and development activities is recognized as the services are performed.
Revenue from technology license fees is recognized over the duration of
the licensing agreement. Amounts received in advance of the revenue
recognition criteria being met are recorded as deferred revenue.
(p) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under this method, future income tax assets and liabilities
are determined based on temporary differences between the accounting
and tax basis of the assets and liabilities and for loss carry forwards,
and are measured using the tax rates expected to apply when these
tax assets and liabilities are recovered or settled. The effect on future
tax assets and liabilities of a change in tax rate is recognized in income
in the period that includes the substantive enactment date. A valuation
allowance is recorded against any future income tax asset if it is not
“more likely than not” that the benefit of these assets will be realized.
24 Westport Innovations Inc. 2009 Annual Report
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
(u) Loss per share:
Basic loss per share is calculated using the weighted average number
of shares outstanding during the period. Diluted loss per share is
computed similarly to basic loss per share, except that the weighted
average number of shares outstanding is increased to include additional
shares from the assumed exercise of conversion options, stock options,
warrants, and performance share units, if dilutive. For stock options,
warrants and performance units, the number of additional shares is
calculated by assuming that outstanding stock options, warrants, and
performance share units were exercised at the beginning of the year or
when granted and that the proceeds from such exercises were used to
repurchase shares of common stock at the average market price during
the period. For conversion options, the Company uses the if-converted
method which assumes that the exercise of options occurs at the
beginning of the year or when granted. For all periods presented, diluted
loss per share does not differ from basic loss per share as the impact of
dilutive securities is anti-dilutive.
3. ACCouNTING CHANGES:
(a) Adoption of new accounting standards:
(b) Future accounting changes:
Goodwill and Intangible Assets:
Section 3064 replaces Section 3062, Goodwill and Other Intangible
Assets and Section 3450, Research and Development Costs. Section
3064 establishes standards for the recognition, measurement,
presentation and disclosure of goodwill subsequent to its initial
recognition and the recognition, measurement and presentation of
intangible assets. Standards concerning goodwill are unchanged from
the standards included in the previous Section 3062. This section is
effective for the Company on April 1, 2009. The Company is currently
evaluating the impact of the adoption of this new standard on its
consolidated financial statements.
International Financial Reporting Standards:
Canada’s Accounting Standards Board has ratified a strategic plan that
will result in Canadian GAAP, as used by publicly accountable enterprises,
being fully converged with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board over
a transitional period to be completed by 2011. The Company is currently
considering its options with respect to the timing for adoption of IFRS.
On April 1, 2008, the Company adopted the Canadian Institute of
Chartered Accountants (“CICA”) Handbook Section 1400, General
Standards of Financial Statement Presentation; Section 1535, Capital
Disclosures; Section 3031, Inventory; Section 3862, Financial Instruments
– Disclosures; and Section 3863, Financial Instruments – Presentation. In
accordance with the transitional provisions, prior periods have not been
restated. The principal changes resulting from these new standards are
described below:
Financial Statement Presentation:
Section 1400 amended the guidance related to management’s
responsibility to assess the ability of the entity to continue as a going
concern. Management is required to make an assessment of an entity’s
ability to continue as a going concern and should take into account all
available information about the future, which is at least, but is not limited
to, 12 months from the balance sheet date. Disclosure is required of
material uncertainties related to events or conditions that may cast
significant doubt upon the entity’s ability to continue as a going concern.
The Company adopted this new guidance effective April 1, 2008 but
adoption had no impact on the consolidated financial statements.
Capital disclosures:
Section 1535 establishes standards for disclosing information about an
entity’s capital and how it is managed. The purpose of this standard is
to enable financial statement users to evaluate the Company’s policies
and procedures for managing capital. The Company adopted this
standard on April 1, 2008, resulting in more extensive disclosures in
the Company’s annual and interim financial statements. The required
disclosure is included in note 23.
Inventory:
Section 3031 establishes standards for the determination of inventory
cost and its subsequent recognition as an expense, including any write-
down to net realizable value. In certain circumstances, the new section
also permits the reversal of previous write-downs. The Company adopted
this standard effective April 1, 2008. This standard did not have a material
impact on the consolidated financial statements of the Company.
Financial instruments:
Section 3862 and Section 3863 establish standards for the presentation
of financial instruments and non-financial derivatives and identify the
information that should be disclosed about them. The purpose of these
standards is to place enhanced emphasis about the nature and extent of
risks arising from financial instruments and how the Company manages
those risks. The Company adopted this standard on April 1, 2008,
resulting in more extensive disclosures in the Company’s annual and
interim financial statements. The required disclosure is included in note
22 to these consolidated financial statements.
4. INVENToRIES:
Purchased parts
Assembled parts
Work-in-process
Finished goods
$
2009
9,976
2,051
638
1,317
2008
$
3,345
791
477
4,407
9,020
$
13,982
$
During the year ended March 31, 2009, the Company recorded write-downs
to net realizable value of approximately $146 (2008 – nil; 2007 – nil) for
obsolescence and scrap. There were no reversals of write-downs recorded
in any year presented.
During the year ended March 31, 2009, the Company recognized $66,755
(2008 – $43,252) related to inventoriable items in cost of sales.
5. LoNG-TERM INVESTMENTS:
Clean Energy Fuels Corp. (a)
$
Juniper Engines Inc. (b)
Other investments (c)
2009
1,416
479
40
2008
$
18,693
-
61
$
1,935
$
18,754
(a) As at March 31, 2009, the Company owned an approximate 0.4%
(2008 – 3%; 2007 – 6%) interest in Clean Energy Fuels Corp. (“CEFC”),
an owner and operator of natural gas refueling facilities. During the year
ended March 31, 2009, the Company sold 1,178,760 shares (2008 –
746,275 shares) of CEFC for net proceeds of $19,379 (2008 – $11,236;
2007 – nil) resulting in a gain on sale of $14,275 (2008 – $8,005; 2007 –
nil). As at March 31, 2009, the Company owned 184,311 shares of CEFC
(2008 – 1,363,071 shares) which have been valued at a closing quoted
market price of $7.68 per share (US$6.09 per share) on March 31, 2009.
Westport Innovations Inc. 2009 Annual Report 25
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
5. LoNG-TERM INVESTMENTS (CoNTINuED):
7. INTELLECTuAL PRoPERTy:
Cost
Accumulated amortization
2009
$ 4,321
(3,891)
$
430
2008
$ 4,321
(3,747)
$
574
The intellectual property will be amortized over its expected remaining useful
life of three years at an annual amortization rate of $145.
8. DEMAND INSTALMENT LoAN:
The Company has a credit facility for maximum borrowings of $13,000.
Borrowings may be drawn in the form of demand instalment loans, bankers
acceptances, lease financing, letters of credit, foreign exchange contracts,
corporate credit cards and operating lines of credit. Outstanding amounts
of the demand instalment loans drawn under this credit facility bear interest
at prime plus 0.25% for borrowings up to $5,000 with further rate reductions
for amounts in excess of $5,000. The principal amount is repayable over a
60-month period. At March 31, 2009, the outstanding amount payable of
$4,642 (2008 – $5,776) is included in current liabilities as it is repayable on
demand by the bank.
9. SHoRT-TERM DEBT:
The Company entered into an agreement with Clean Energy Finance, LLC
(“CEF”), a wholly owned subsidiary of CEFC, whereby CEF may advance
the Company up to US$6,000 to produce approximately 75 LNG systems.
The loan is non-interest bearing, unsecured and repayable on receipt
of proceeds from the sale of these units. As at March 31, 2009, $1,614
remained outstanding.
10. LoNG-TERM DEBT:
2009
2008
Capital lease obligations (a)
$
52
$
Subordinated debenture notes (b)
Current portion
11,318
11,370
17
$ 11,353
$
62
-
62
54
8
(a) The Company has capital lease obligations which have terms of two
to five years at interest rates ranging from 1.15% to 6.17%. The capital
lease obligations require the following minimum annual payments during
the respective fiscal years:
2010
2011
2012
2013
2014
Amount representing interest
$
$
17
15
12
12
1
57
5
52
(b) On October 26, 2007, the Company and OMVL SpA (“OMVL”) entered
into a joint venture agreement, engineering agreements and supply
agreements to design, produce and sell alternative fuel engines in the
sub-5 litre class for global applications. Based in Pernumia, Italy, OMVL
designs, manufactures and markets complete fueling systems for new
vehicles and for the aftermarket conversion of engines from gasoline
(petrol) to compressed natural gas and liquid petroleum gas. Under the
terms of the joint venture agreement, OMVL and the Company share
51% and 49%, respectively, of the profits or losses of the venture. The
jointly controlled company, Juniper Engines Inc. is headquartered in
Vancouver, Canada and will continue to exploit the global engineering,
production and distribution strengths of OMVL and its parent company,
SIT Group, to deliver engines worldwide. The Company supports the
new venture through supply of technology, design, testing and market
development services. On April 1, 2008, the Company contributed
$1,500 to the formation of the joint venture.
The Company has determined that Juniper is a variable interest entity.
However, the Company is not the primary beneficiary and has accounted
for its interest in Juniper using the equity method.
During the year ended March 31, 2009, the Company recognized a
loss of $1,021 (2008 – nil) as loss from investment accounted for by the
equity method.
(c) The Company has a 0.2% (2008 – 0.2%; 2007 – 15.86%) interest in Wild
River Resources Ltd. (“WRRL”), which was formerly a wholly-owned
subsidiary of the Company prior to June 13, 2006. During the year
ended March 31, 2007, the Company recorded a gain of $8,100 on the
sale and subsequent dilution of its interest in WRRL. During the year
ended March 31, 2008, the Company disposed of substantially all of its
remaining shares in WRRL for proceeds of $6,741, resulting in a gain on
disposal of $2,654. Effective February 8, 2007, the Company no longer
controlled WRRL and now accounts for this investment as an available
for sale investment.
6. EquIPMENT, FuRNITuRE AND LEASEHoLD
IMPRoVEMENTS:
2009
Computer equipment and
software
Cost
Accumulated
amortization
Net book value
$ 6,883
$ 5,550
$ 1,333
Furniture and fixtures
1,711
1,163
Machinery and equipment
20,555
16,047
Leasehold improvements
9,551
8,228
548
4,508
1,323
$ 38,700
$ 30,988
$
7,712
Cost
Accumulated
amortization
Net book value
2008
Computer equipment and
software
Furniture and fixtures
1,307
1,090
$ 5,670
$ 5,035
$
635
217
Machinery and equipment
17,434
14,984
2,450
Leasehold improvements
8,329
7,946
383
$ 32,740
$ 29,055
$ 3,685
As at March 31, 2009, equipment with a cost of $256 (2008 – $224) and a net
book value of $31 (2008 – $34) is held under capital lease.
26 Westport Innovations Inc. 2009 Annual Report
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
(b) On July 3, 2008, the Company completed the sale and issue of 15,000
debenture units of the Company for total gross proceeds of $15,000.
Each debenture unit consists of one unsecured subordinated debenture
note in the principal amount of $1 bearing interest at 9% per annum and
51 common share purchase warrants exercisable into common shares of
the Company at any time for a period of two years from the date of issue
at $18.73. The Company has the option to redeem the debentures at
any time after 12 months and before 18 months from the date of issue at
115% of their principal amount and at 110% of the principal amount after
18 months. Interest is payable semi-annually and the debentures mature
on July 3, 2011. A total of 771,428 warrants with an exercise price of
$18.73 were issued. The Company also issued 46,118 broker warrants
which are exercisable into common shares of the Company at $16.10
for a period of two years. Of the $15,000 gross proceeds received, the
Company assigned $11,436 to the subordinated debenture notes and
$3,564 to the warrants based on each instruments’ relative fair value.
The fair value of the subordinated debenture notes was determined
using a discounted cash flow model based on the total value of the debt
using interest rates effective at the time of issuance on similar debt, and
the fair value of the warrants was determined using the Black-Scholes
option pricing formula based on the following assumptions: expected
stock price volatility – 68.9%; risk free rate – 2.0%; expected life – 2
years; expected dividend yield – nil%. The amount assigned to the
subordinated debenture notes is being accreted to the principal amount
using the effective interest rate of 23.3% over the term to maturity and
the warrants are included in other equity instruments. The broker
warrants were recognized in other equity instruments at their fair value of
$284 determined using the Black-Scholes option pricing formula based
on the same assumption as for the warrants above. A corresponding
amount recognized as transaction costs. Transaction costs totaled
$1,289 of which $982 was allocated to debt and $307 to the warrants.
(c) On June 12, 2006, the Company agreed to issue up to $22,092 in five
year secured, subordinated convertible notes with a coupon rate of
8% to funds managed by Perseus, L.L.C. (“Perseus”), a private equity
fund management group. On July 26, 2007, Perseus exercised their
conversion option and converted the full $22,092 of the principal amount
of the subordinated convertible notes into 4,725,329 common shares.
During the year ended March 31, 2008, $968 (2007 – $553) of interest
relating to the subordinated convertible notes was paid to Perseus of
which $324 (2007 – $55) was paid in cash and $644 (2007 – $498) paid in
common shares. During the year ended March 31, 2009, the Company
paid $249 of accrued interest through the issuance of common shares.
In accordance with EIC-96, Accounting for early extinguishment of
convertible securities through (1) early redemption or repurchase and
(2) induced early conversion, in the year ended March 31, 2008, the
Company also recorded an inducement fee of $763 to accumulated
deficit and recorded an inducement fee payable along with $121 in
accrued interest in accounts payable. On conversion, $13,258 of long-
term debt, representing the carrying value of the notes on July 26, 2007,
and the carrying value of the conversion option of $7,569 previously
included in other equity instruments were reclassified to share capital.
As at March 31, 2008, this note had been fully extinguished.
11. oTHER LoNG-TERM LIABILITIES:
Deferred lease inducements (a)
Deferred revenue (b)
2009
$
284
4,537
$ 4,821
2008
$
280
1,216
$ 1,496
(a) Deferred lease inducements include leasehold improvements and other
costs funded by the lessor and amounts related to lease contracts
with escalating lease payments. The amounts related to leasehold
improvements funded by the lessor are amortized on a straight-line basis
over the term of the lease as a reduction to rent expense. For lease
contracts with escalating lease payments, total rent expense for the
lease term is expensed on a straight line basis over the lease term. The
difference between amounts expensed and amounts paid is recorded as
an increase or reduction in deferred lease inducements.
(b) The Company receives cash in advance of revenue recognition criteria
being met, including for upfront fees, customer deposits, fees for
research and development activities and extended warranty contracts.
These items are included in deferred revenue and are recognized
into earnings over the contract period, as research and development
activities are completed or over the warranty period as applicable.
12. GoVERNMENT ASSISTANCE:
From time to time, the Company enters into agreements for financial assistance
with government agencies. During the years ended March 31, 2009, 2008
and 2007, government assistance of $2,021, $3,658 and $5,150, respectively,
was received or receivable by the Company, which has been recorded as a
reduction of related research and development expenditures [note 17].
Included in the above amounts is funding of nil (2008 – $1,351; 2007 –
$2,205) from Industry Canada’s Industrial Technologies Office (formerly
Technology Partnerships Canada) (“TPC”) and $946 remains receivable from
TPC at March 31, 2009 (2008 – $946; 2007 – $3,779). Under the terms of
the original TPC funding agreement entered into on March 27, 2003, TPC
funded 30% of the eligible costs of, among other research projects, the
adaptation of the Company’s technology to diesel engines to the original
scheduled project completion date of March 31, 2006. In fiscal 2007, TPC
approved an extension of the completion date to March 31, 2008. The
Company has attained the maximum amount of eligible costs under the
agreement. From fiscal 2009 to fiscal 2015, inclusive, the Company is
obligated to pay annual royalties equal to the greater of $1.4 million or 0.33%
of the Company’s annual gross revenue from all sources, provided that gross
revenue exceeds $13.5 million in any of the aforementioned fiscal years. The
royalty payment period may be extended until the earlier of March 31, 2018
or until cumulative royalties total $28.2 million. As at March 31, 2009, $1.4
million in royalties owing to TPC have been recorded in accounts payable
and accrued liabilities. In addition, the Company was required to provide
TPC with common share purchase warrants having a value of $4,000 as at
September 30, 2008 calculated based on the Black-Scholes option pricing
model. These warrants were issued in October 2008.
The Company is also obligated to pay royalties to the Government of
Canada’s Department of Natural Resources relating to funding received in
prior years. The royalty to the Department of Natural Resources is 1% of
future revenue from engines for power generators until the earlier of ten years
from the project completion date (August 30, 2004) or when cumulative
royalties total $1,000. As at March 31, 2009, there has been no revenue
from the sales of engines for power generators and, therefore, no royalty
payments have been paid or are payable.
13. SHARE CAPITAL:
On August 14, 2008, the Company filed a prospectus in Canada and a
registration statement on Form F-10 with the U.S. Securities and Exchange
Commission in connection with its initial public offering of 4,500,000
common shares in the United States at approximately $12.74 (US$12.00) per
share. Gross proceeds totaled $57,348 (US$54,000). The Company also
incurred share issue costs of $4,906.
Shares, share options, performance share units, warrants and per share
amounts have been adjusted on a retroactive basis to reflect the three-and-
one-half-to-one share consolidation (3.5:1) completed on July 21, 2008.
14. oBLIGATIoN To ISSuE WARRANTS:
Under the terms of the agreement with TPC, the Company was obligated to
issue warrants as at September 30, 2008 with a fair value of $4,000 based
on the Black-Scholes option pricing model. The value of these warrants was
recognized on a straight-line basis from the date of the original agreement to
September 30, 2006, the original issuance date. In October, 2008, 790,614
warrants with an exercise price of $10.65 were issued to TPC. The fair value of
the warrants granted was calculated based on a Black-Scholes option pricing
model using the 5 day weighted stock price as at September 30, 2008.
Westport Innovations Inc. 2009 Annual Report 27
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
15. SToCk oPTIoNS AND oTHER SToCk-BASED PLANS:
(a) Share options:
The Company has an incentive share option plan for employees,
directors, officers and consultants. The options are granted with an
exercise price not less than the market price of the Company’s common
shares on the date immediately prior to the date of grant. The exercise
period of the options may not exceed eight years from the date of
grant. Vesting periods of the options are at the discretion of the board
of directors and may be based on fixed terms, achieving performance
milestones or reaching specified share price targets.
A summary of the status of the Company’s share option plan as of
March 31, 2009, 2008 and 2007 and changes during the years then
ended is presented as follows:
2009
2008
2007
Number of shares
Weighted average
exercise price
Number of shares
Weighted average
exercise price
Number of shares
Weighted average
exercise price
Outstanding, beginning of year
1,235,799
$
Granted
Exercised
Cancelled / expired
Outstanding, end of year
39,280
(104,669)
(34,247)
1,136,163
$
Options exercisable, end of year
786,282
$
6.96
13.73
5.57
7.66
7.32
7.53
1,493,998
$
71,428
(232,024)
(97,603)
1,235,799
$
833,296
$
6.68
9.31
5.28
8.22
6.96
7.77
1,419,589
$
167,392
-
(92,983)
1,493,998
$
7.17
4.13
-
9.87
6.68
422,704
$
10.43
Range of exercise prices
Number outstanding,
March 31, 2009
Weighted average
remaining contractual life
Weighted average
exercise price
Number exercisable,
March 31, 2009
Weighted average
exercise price
$ 3.22
to $
4.13
5.22
6.30
10.33
14.49
24.50
to
to
to
to
to
to
3.96
4.90
6.27
9.77
13.83
20.62
30.80
52,673
128,928
544,164
190,363
111,591
80,354
28,090
5.0
5.1
4.1
3.5
3.1
3.5
1.2
$ 3.22
to $ 30.80
1,136,163
3.92
During the year ended March 31, 2009, the Company recognized $523
(2008 – $558; 2007 – $530) in stock-based compensation related to
stock options. The fair value of the options granted was determined
using the Black-Scholes option pricing model using the following
weighted average assumptions: expected dividend yield – nil% (2008 –
nil%, 2007 – nil%); expected stock price volatility – 61.0% (2008 – 56.1%,
2007 – 59.0%); risk free interest rate – 2.74% (2008 – 3.71%, 2007
– 4.79%); expected life of options – 4 years (2008 – 4 years, 2007 – 5
years). The weighted average grant date fair value was $6.65 for options
granted for the year ended March 31, 2009 (2008 – $4.38, 2007 – $2.45).
(b) Employee share purchase plan:
The Company has an employee share purchase plan (“ESPP”) in
which full-time employees of the Company are eligible to participate.
Eligible employees may make contributions to the ESPP of up to
10% of their regular base pay. The Company contributes up to a
maximum combined total of 5% of the employee’s regular base pay
to the employee’s RRSP and/or ESPP. Shares contributed to the
ESPP are purchased by the Company on a semi-monthly basis on the
open market. Shares purchased on behalf of the employee with the
employee’s contribution vest with the employee immediately. Shares
purchased with the Company’s contribution vest on December 31st of
each year, so long as the employee is still employed with the Company.
(c) Performance share units:
At the Company’s 2006 annual general meeting, the shareholders of the
Company ratified and approved the Amended and Restated Unit Plan
28 Westport Innovations Inc. 2009 Annual Report
$
3.41
4.41
5.31
7.12
11.59
15.79
27.02
$
7.32
45,531
85,596
263,804
180,839
102,068
80,354
28,090
786,282
$
3.32
4.39
5.32
7.07
11.68
9.43
27.02
$
7.53
and reserved 2,142,857 common shares under this plan. The Amended
and Restated Unit Plan is in addition to the Performance Share Unit
Plan approved by the shareholders on September 10, 2001 (the “2001
PSU Plan”). Each performance share issued pursuant to the Amended
and Restated Unit Plan or the 2001 PSU Plan is exercisable into one
common share of the Company for no additional consideration. Any
employee, contractor, director or executive officer of the Company
who is selected by the Board of Directors of the Company is eligible to
participate in the Amended and Restated Unit Plan. The Executive and
Senior Management Total Compensation Program sets out provisions
where the Units will be granted to the Company’s executive management
if performance milestones are achieved as determined at the discretion of
the Human Resources and Compensation Committee of the Company’s
Board of Directors in consultation with the Company’s management.
These performance milestones are focused on achievement of key
cash management, profitability and revenue growth objectives. Vesting
periods for each Unit granted pursuant to the Amended and Restated
Unit Plan is at the discretion of the Board of Directors and may include
time based, share price or other performance targets.
The value assigned to issued Units and the amounts accrued are
recorded as other equity instruments. As Units are exercised and the
underlying shares are issued from treasury of the Company, the value
is reclassified to share capital. During the year ended March 31, 2009,
the Company recognized $1,723 (2008 – $106; 2007 – $1,559) of
stock-based compensation associated with the 2001 PSU Plan and the
Amended and Restated Unit Plan.
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
The stock-based compensation associated with the Unit plans and the
stock option plan [note 15(a)] is included in operating expenses as follows:
Research and development
$
283
$
87
$
2009
2008
2007
348
General and administrative
1,457
Sales and marketing
506
$ 2,246
$
465
112
664
1,494
247
$ 2,089
A summary of the status of the PSU’s issued under the 2001 PSU Plan
and the amended and restated Unit Plan as of March 31, 2009, 2008
and 2007, and changes during the years then ended is as follows:
Outstanding, March 31, 2006
Units exercised
Units granted
Outstanding, March 31, 2007
Units exercised
Units granted
Outstanding, March 31, 2008
Units exercised
Units granted
Units cancelled
Outstanding, March 31, 2009
Units
408,893
(81,052)
261,633
589,474
(60,383)
553,900
1,082,991
(3,947)
667,815
(16,889)
1,729,970
As at March 31, 2009, 597,560 PSU’s are vested and exercisable.
16. oTHER EquITy INSTRuMENTS:
Value assigned to Performance Share Units
[note 15(c)]
Value assigned to warrants
[note 10(b) and 14]
2009
2008
$ 4,778
$ 3,079
7,541
$ 12,319
-
$ 3,079
The value assigned to warrants represents 790,614 warrants issued to TPC
with a fair value of $4,000 and 771,428 warrants with an assigned value of
$3,564 and 46,118 broker warrants with an assigned value of $284 issued as
part of the debenture units net of transaction costs of $307.
17. RESEARCH AND DEVELoPMENT ExPENSES:
Research and development expenses are recorded net of program funding
received or receivable. For the years ending March 31, 2009, 2008 and
2007, the following research and development expenses had been incurred
and program funding received or receivable:
2009
2008
2007
Research and development
expenses
$ 33,003
$ 26,684
$ 27,041
Program funding [note 12]
(2,021)
(3,658)
(5,150)
Research and development
$ 30,982
$ 23,026
$ 21,891
18. INCoME TAxES:
(a) The Company’s income tax recovery differs from that calculated by
applying the combined Canadian federal and provincial statutory income
tax rates for manufacturing and processing companies of 30.8% (2008 –
33.3%; 2007 – 34.1%) as follows:
Loss before income taxes and
Joint Venture Partners’ share
of income from joint ventures $ 13,683 $ 9,224 $ 8,301
2009
2008
2007
Expected income tax recovery $ 4,207 $ 3,075 $ 2,831
Reduction (increase) in
income taxes resulting from:
Non-deductible interest
on long-term debt and
amortization of discount
Non-deductible stock-
based compensation
Non-deductible expenses
Withholding taxes and
other adjustments
Change in enacted rates
Foreign tax rate differences
Change in valuation
allowance
(273)
(690)
(54)
(218)
(2,341)
(1,279)
(141)
(221)
(45)
-
(211)
(713)
(375)
-
(1,508)
(5,692)
(426)
(527)
(5,873)
3,739
7,738
$ (6,521)
$ 4,473 $ 3,051
(b) The tax effects of the significant temporary differences which comprise
tax assets and liabilities, at March 31, 2009 and 2008, are as follows:
Future tax assets:
Net operating loss carry forwards
$ 16,220 $ 19,188
2009
2008
Long-term investments
Intellectual property
Equipment, furniture and leasehold
improvements
Financing and share issue costs
Warranty liability
Deferred revenue
Capital lease obligations
Total gross future tax assets
Valuation allowance
Total future tax asset
Allocated as follows:
Current future tax assets
Long term future tax asset
Total future tax asset
163
626
1,685
2,116
806
1,526
813
273
8,607
3,205
1,647
13
439
18
30,667
26,678
(20,879)
(17,368)
$ 9,788 $ 9,310
$ 4,451 $ 4,944
5,337
4,366
$ 9,788 $ 9,310
In determining the valuation allowance, management considers whether
it is more likely than not that some portion or all of the future tax assets
will not be realized. The ultimate realization of future tax assets is
dependent on the generation of income during the future periods in
which those temporary differences become deductible. Since evidence
does not exist that the future income tax assets will be fully realized, a
valuation allowance has been recorded. All of the valuation allowance
related to CWI was reversed in prior periods as CWI generated taxable
income for four consecutive tax years and the Company expects that
CWI will generate taxable income in the future.
Current tax expense for the year ended March 31, 2009 of $3,276 (2008
– $218, 2007 – $404) is payable outside of Canada, primarily in the
United States. Future income tax expense of $1,114 (2008 – recovery of
$5,855) relates to temporary differences in the United States and future
tax expense of $2,131 (2008 – $1,164) relates to tax expense in Canada
related to gains on sale of available for sale investments previously
recognized in AOCI.
Westport Innovations Inc. 2009 Annual Report 29
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
18. INCoME TAxES (CoNTINuED):
(c) The Company has non-capital loss carry forwards in Canada available to
offset future taxable income which expire as follows:
2010
2014
2015
2026
2027
2028
2029
$
2,235
2,703
2,508
2,354
9,668
21,508
17,714
$
58,690
The Company has non-capital loss carry forwards in the United States
available to offset future taxable income. The losses expire as follows:
2028 – $478; 2029 – $2,017.
19. INVESTMENT IN JoINT VENTuRES:
Cummins Westport Inc. (a)
BTIC Westport Inc. (b)
(a) Cummins Westport Inc.:
2009
2008
$ 12,124
$ 13,809
479
174
$ 12,603
$ 13,983
The Company entered into a joint venture with Cummins on March 7,
2001. The joint venture, CWI, was formed to explore a range of product
and technology opportunities using natural gas as the primary fuel.
The Company provided personnel, financing and key technologies
for the venture, while Cummins provided an existing product line,
manufacturing, product distribution and customer service functions, as
well as key management and engineering personnel.
From inception until December 31, 2003, the Company was responsible
for all capital contributions to fund operations. Initially and to December
31, 2003, the Company owned 100% of the common shares and
Cummins owned 100% of the non-participating preferred shares which
were convertible into common shares for no consideration at the option
of Cummins.
On December 16, 2003, the Company and Cummins amended the
joint venture agreement to have CWI focus on and develop markets
for alternative fuel engines. In addition, the two companies signed a
Technology Partnership Agreement that creates a flexible arrangement
for future technology development between Cummins and the Company.
Under the terms of the amended joint venture agreement, Cummins
exercised the conversion feature of the preferred shares effective
January 1, 2004. However, the Company remained responsible for
funding the profit and loss of CWI through CWI’s fiscal 2004 year which
ran from January 1 to December 31, 2004. Based on its economic
interest in CWI, the Company continued to consolidate 100% of the
results of operations from CWI until December 31, 2004. Cummins has
agreed to manufacture engines for CWI’s business and transfer them
to CWI at cost. In consideration for this service, CWI agreed to pay
Cummins a technology royalty access fee equal to 2.75% to a cumulative
maximum of US$10.4 million. As at March 31, 2009, the Company had
paid royalties totaling US$5.5 million.
Subsequent to December 31, 2004, Cummins shares equally in the
profits and losses of CWI. However, the Company has determined
that CWI is a VIE and that the Company is the primary beneficiary.
Accordingly, the Company continues to consolidate CWI with Cummins’
share of CWI’s income and losses included as “Joint Venture Partners’
share of net income from joint ventures”.
CWI has provided a loan to Cummins under a demand loan agreement.
The loan receivable bears interest monthly at a rate equal to the Bank of
Canada prime corporate paper one-month rate in effect on the last day of
30 Westport Innovations Inc. 2009 Annual Report
each month. As at March 31, 2009, this rate was 1.05%. All outstanding
interest is payable in United States dollars on or before December 15, 2009.
Interest begins accruing on the date in which monies are advanced under
the loan agreement. The loan is uncollateralized and is renewed annually.
Assets, liabilities, revenue and expenses of CWI included in the
consolidated financial statements of the Company as at and for the
periods presented are as follows:
2009
2008
Current assets:
Cash and cash equivalents
$ 17,061 $
137
Short-term investments
Accounts receivable
Loan receivable
Prepaid expenses
Current portion of future income tax
asset
-
13,713
2,101
3,503
11,234
162
6,774
108
4,451
4,944
35,009
29,179
Future income tax asset
5,337
4,366
Equipment, furniture and leasehold
improvements
467
166
$ 40,813 $ 33,711
Current liabilities:
Accounts payable and accrued liabilities $
2,171 $
2,131
Deferred revenue
360
69
Current portion of warranty liability
11,656
4,689
Long-term liabilities:
Warranty liability
Deferred revenue
14,187
6,889
10,976
3,985
3,141
386
14,117
4,371
$ 28,304 $ 11,260
Product revenue
Parts revenue
2009
2008
2007
$ 90,916
$ 50,999
$ 44,746
18,990
16,298
13,285
109,906
67,297
58,031
Cost of revenue and expenses:
Cost of revenue
81,301
45,490
36,195
Research and development
9,841
7,562
8,074
General and administrative
1,983
1,088
856
Sales and marketing
5,679
6,447
4,216
98,804
60,587
49,341
Income before undernoted
11,102
6,710
8,690
Interest and investment income
903
793
Effect of foreign currency
translation
-
(1,518)
112
61
Income before income taxes
12,005
5,985
8,863
Income tax recovery (expense):
Current
Future
(3,059)
(208)
(204)
(1,114)
5,855
3,455
(4,173)
5,647
3,251
Income for the year
7,832
11,632
12,114
Joint Venture Partner’s share of
net income from joint venture
(3,916)
(5,816)
(6,057)
Company’s share of income
$ 3,916
$ 5,816
$ 6,057
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
(b) BtIC Westport Inc.:
On July 21, 2006, the Company and Beijing Tianhai Industry Co.
Ltd. (“BTIC”) of Beijing, China formed BWI to market liquefied natural
gas (“LNG”) fuel tanks for vehicles. Through the 50:50 joint venture
agreement and related license and supply agreements, BTIC and
Westport share equally in the profits on products developed and sold
by the joint venture. Headquartered in Beijing, China, BWI sells tanks
for installation on any vehicle, regardless of the natural gas engine
manufacturer. During the year ended March 31, 2008, the Company
contributed $425 (US$400) to the formation of this joint venture.
The consolidated financial statements include 100% of the assets,
liabilities, revenue and expenses of BWI since the Company has
determined that BWI is a variable interest entity and that the Company
is the primary beneficiary. Accordingly, the Company consolidates
BWI and BTIC’s share of BWI’s income and losses is included in “Joint
venture partners’ share of income from joint ventures”. For the year
ended March 31, 2009, the BTIC’s share of net income from BWI was
$305. In 2008, BTIC’s share of the net loss from BWI was $252.
22. FINANCIAL INSTRuMENTS:
(a) Financial risk management:
The Company has exposure to liquidity risk, credit risk, foreign currency
risk, equity price risk and interest rate risk.
(b) Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company has sustained losses
and negative cash flows from operations since inception. At March 31,
2009, the Company has $82,619 of cash, cash equivalents and short-
term investments.
The following are the contractual maturities of financial obligations as at
March 31, 2009:
Carrying
amount
Contractual
cash flows < 1 year 1–3 years 4–5 years > 5 years
20. CoMMITMENTS AND CoNTINGENCIES:
(a) The Company has obligations under operating lease arrangements
which require the following minimum annual payments during the
respective fiscal years:
2010
2011
2012
2013
2014
Thereafter
$
1,734
1,329
1,265
814
588
65
$
5,795
For the year ended March 31, 2009, the Company incurred operating
lease expense of $1,295 (2008 – $876; 2007 – $795).
(b) The Company has an outstanding letter of credit of $600.
(c) On July 16, 2008, the Company announced that it had entered into a
joint venture agreement with Weichai Power Co., Ltd. (“Weichai Power”),
China’s largest heavy duty engine manufacturer, and Hong Kong
Peterson (CNG) Equipment Limited (“Hong Kong Peterson”) to form a
new entity, Weichai Westport Inc. (“WWI”). WWI will research, develop,
design, manufacture, market, distribute and sell advanced, alternative fuel
engines (and relevant parts and kits) for use in automobiles, heavy duty
trucks, power generation and shipping applications. Under the terms of
the 30-year joint venture agreement, the Company’s initial investment to
acquire a 35% share of the joint venture is expected to be approximately
$5,273 (RMB30,000). Weichai Power and Hong Kong Peterson will
hold a 40% and 25% interest, respectively, in WWI. The joint venture
is currently awaiting approval by the Chinese government and the
Company’s investment will be made when such approval is received.
21. SEGMENTED INFoRMATIoN:
The Company currently operates in one operating segment which involves
the research and development and the related commercialization of
engines and fuel systems operating on gaseous fuels. The majority of the
Company’s equipment, furniture and leasehold improvements are located
in Canada. For the year ended March 31, 2009, 84% (2008 – 66%; 2007 –
72%) of the Company’s revenue was from sales in North America, 4% (2008
– 18%; 2007 – 13%) from sales in Asia, and 12% (2008 – 16%; 2007 – 15%)
from sales elsewhere.
Accounts
payable and
accrued
liabilities
Demand
instalment
loan (1)(2)
Short-term
debt (3)
Subordinated
debenture
notes (4)
Other long-
term debt
Operating lease
$ 14,359 $ 14,359 $ 14,359 $
-
$
-
$
4,642 4,950 1,494 2,568
888
1,614 1,614 1,614
-
11,318 18,037 1,350 16,687
-
-
52
57
17
27
13
-
-
-
-
-
commitments
-
5,795 1,734 2,594 1,402
65
Royalty
payments (5)
1,350 28,189 1,350 2,700 2,700 21,439
Investment
in Joint
Venture (6)
-
5,273 5,273
-
-
-
$ 33,335 $ 78,274 $ 27,191 $ 24,576 $ 5,003 $ 21,504
(1) Includes interest at the interest rate in effect on March 31, 2009.
(2) Demand instalment loan is repayable over five years unless the bank demands
early payment.
(3) Short-term debt is repayable only from the sale of certain LNG systems.
The Company has assumed these systems will be sold within a year.
(4) Includes interest at 9%
(5) From fiscal 2009 to 2015, inclusive, the Company is obligated to pay annual
royalties equal to the greater of $1,350 or 0.33% of the Company’s gross
annual revenue from all sources, provided that gross revenue exceeds $13,500
in any aforementioned fiscal year, up to a maximum of $28,189. The Company
has assumed the minimum required payments.
(6) See note 20.
The Company expects to be able to meet its future financial obligations
with its current source of funds. However, there are uncertainties
related to the timing of the Company’s cash inflows and outflows,
especially around the sale of inventories, and amounts required for
market and product development costs. These uncertainties include
the volume of commercial sales related to its natural gas engines and
fuel system products and the development of markets for, and customer
acceptance of, these products. As a result, the Company may need to
seek additional equity or arrange debt financing, which could include
additional lines of credit, in order to meet its financial obligations.
Westport Innovations Inc. 2009 Annual Report 31
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
22. FINANCIAL INSTRuMENTS (CoNTINuED):
(c) Credit risk:
Credit risk arises from the potential that a counterparty to a financial
instrument fails to meet its contractual obligations and arises principally
from the Company’s cash and cash equivalents, short-term investments,
accounts receivable and loan receivable. The Company manages
credit risk associated with cash and cash equivalents and short-term
investments by regularly consulting with its current bank and investment
advisors and investing primarily in liquid short-term paper issued by
Schedule 1 Canadian banks, R1 rated companies and governments.
While the Company does not hold asset-backed securities directly, these
parties may be exposed in varying degrees to asset-backed securities
and U.S. sub-prime mortgages. The Company monitors its portfolio and
its policy is to diversify its investments to manage this potential risk.
The Company is also exposed to credit risk with respect to uncertainties
as to timing and amount of collectibility of accounts receivable and
loan receivable. As at March 31, 2009, 31% (March 31, 2008 – 14%) of
accounts receivable relates to customer receivables, 46% (March 31,
2008 – 30%) relates to government grants receivable and 23% (2008
– 56%) relates to amounts due from partners and indirect and value
added taxes receivable. The loan receivable is due from Cummins Inc.,
a large U.S. based engine manufacturer and the Company’s joint venture
partner. In order to minimize the risk of loss for customer receivables the
Company’s extension of credit to customers involves review and approval
by senior management as well as progress payments as contracts are
executed. Most sales are invoiced with payment terms in the range of 30
to 90 days. The Company reviews its customer receivable accounts and
regularly recognizes an allowance for doubtful receivables as soon as the
account is determined not to be fully collectible. Estimates for allowance
for doubtful debts are determined by a customer-by-customer evaluation
of collectibility at each balance sheet reporting date, taking into account
the amounts that are past due and any available relevant information on
the customers’ liquidity and going concern problems.
The carrying amount of cash and cash equivalents, short-term
investments, accounts receivable and loan receivable of $100,270 at
March 31, 2009 represents the Company’s maximum credit exposure.
(d) Foreign currency risk:
Foreign currency risk is the risk that the fair value of future cash flows of
financial instruments will fluctuate because of changes in foreign currency
exchange rates. The Company conducts a significant portion of its
business activities in foreign currencies, primarily the United States dollar
(“U.S.”). Cash and cash equivalents, short-term investments, accounts
receivable, accounts payables and short-term debt that are denominated
in foreign currencies will be affected by changes in the exchange rate
between the Canadian dollar and these foreign currencies.
The Company’s objective in managing its foreign currency risk is
to minimize its net exposures to foreign currency cash flows by
transacting with third parties in U.S. dollars and Canadian dollars to
the maximum extent possible and practical. The Company attempts
to limits its exposure to foreign currency risk by holding a combination
of Canadian and U.S. denominated cash and cash equivalents and
short-term investments based on forecasted Canadian or U.S. dollar net
expenditures. The Company currently does not enter into any forward
foreign currency contracts to further limit its exposure.
The U.S. dollar carrying amount of assets and liabilities subject to
exposure to foreign currency risk in the consolidated statement of
operations at March 31, 2009 is as follows:
Cash and cash equivalents
Accounts receivable
Long-term investments
Accounts payable
Short-term debt
32 Westport Innovations Inc. 2009 Annual Report
U.S. dollars
$
14,292
1,898
1,122
2,148
1,280
If foreign exchange rates on March 31, 2009 had changed by 25 basis
points, with all other variables held constant, net loss for the year ended
March 31, 2009 would have changed by $63 and other comprehensive
income by $3. The Company’s exposure to currencies other than U.S.
dollars is not material.
(e) Interest rate risk:
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates. The Company is subject to interest rate risk on its loan receivable
and demand instalment loans. The Company limits its exposure to
interest rate risk by continually monitoring and adjusting portfolio
duration to align to forecasted cash requirements and anticipated
changes in interest rates.
If interest rates for the year ended March 31, 2009 had changed by 50
basis points, with all other variables held constant, net loss for the year
ended March 31, 2009 would have changed by $4.
(f) Equity price risk:
The value of our equity investment in CEFC, a publicly traded company, is
subject to market price volatility. This investment is classified as available
for sale. As of March 31, 2009, every dollar change in the stock price of
CEFC, would result in a change in other comprehensive income of $184.
(g) Fair value of financial instruments:
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, loan receivable and accounts payable
and accrued liabilities approximate their fair values due to the short
terms to maturity of these instruments.
The Company’s short- and long-term investments are recorded at fair
value except for its interest in Juniper Engines Inc. which is accounted for
using the equity method and other investments which are carried at cost
[note 5] due to the lack of a readily available market for these securities.
The carrying value reported in the balance sheets for obligations under
capital lease, which is based upon discounted cash flows, approximates
its fair value. The fair values of the Company’s demand instalment loan
and short-term debt are not materially different from its carrying value
based on market rates of interest.
The carrying value reported in the balance sheets for the subordinated
debenture notes [note 10(b)] is recorded at amortized cost using the
effective interest rate method and the gross proceeds have been
allocated between debt and equity based on the relative fair values of the
subordinated debenture notes and the warrants on the issue date. As
at March 31, 2009, the fair value of the subordinated debenture notes is
higher than its carrying value by $2,884 based on market interest rates.
23. MANAGEMENT oF CAPITAL:
As at March 31, 2009, the Company’s capital is composed of share capital,
its $13,000 line of credit with a Schedule 1 Canadian bank, and $15,000 in
debenture units, the primary terms of which are described in note 10(b).
The Company’s objectives when managing capital are as follows:
• to safeguard the entity’s ability to continue as a going concern, so that
it can continue to provide returns for shareholders and benefits for other
stakeholders;
• to maintain sufficient cash, cash and cash equivalents on hand to service
debt payments as they come due and to meet externally imposed capital
requirements (the Company must maintain cash and cash equivalents and
short term investments of at least 1.5 times the amount drawn against its
line of credit and outstanding letters of credit); and
• to have sufficient cash, cash equivalents, short-term investments and
available for sale marketable securities on hand to fund the Company’s
business plans.
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
The Company’s primary uses of capital are to finance product development,
market development, working capital, capital expenditures, and operating
losses. The Company currently funds these requirements from the proceeds
from offerings of equity or debt securities, internally generated cash flows,
primarily from its 50% share of CWI and non-CWI revenues, sales of Clean
Energy shares, amounts drawn against its line of credit, and government or
partner funding.
There were no changes to the Company’s approach to capital management
during the year ended March 31, 2009.
24. RECoNCILIATIoN To uNITED STATES GENERALLy
ACCEPTED ACCouNTING STANDARDS:
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada (“Canadian GAAP”)
which differ in certain respects with accounting principles generally accepted
in the United States (“US GAAP”) as follows:
(a) Convertible notes:
On June 12, 2006, the Company agreed to issue up to $22,092 in five
year secured, subordinated convertible notes [note 10(c)] with a coupon
rate of 8% to funds managed by Perseus, L.L.C. (“Perseus”), a private
equity fund management group. The notes were issued in two tranches
of $13,807 and $8,285, respectively. At the time of issuance of the
notes, Perseus also received warrants to acquire, at an exercise price
equal to the conversion price of the accompanying notes, common
shares of the Company equal to 25% of the number of common
shares into which the notes were convertible. On July 26, 2007 the
subordinated convertible notes were converted to common shares.
For Canadian GAAP purposes, on issue of the convertible notes
described above, the Company allocated certain amounts to the value of
the warrants and conversion options based on their estimated fair value
with the difference between the gross proceeds and the value of the
warrants and conversion options allocated to the debt. For US GAAP
purposes, the allocation between the debt and the warrants would
be done on a relative fair value basis. In addition, under US GAAP, an
amount is allocated only to a beneficial conversion option when the
market price of the shares into which the debt is convertible exceeds
the effective exercise price. For US GAAP purposes, of the two original
tranches, only the second tranche of the debt issued in January 2007
was deemed to have a beneficial conversion option.
Accordingly, for US GAAP purposes, the amount assigned to the debt
and the warrants was increased by $3,540 and $1,590, respectively as
at March 31, 2007 and the amount assigned to the conversion option
was reduced by $5,130.
On conversion, the carrying value of the debt, which is net of any
unamortized discount and debt issuance costs was reclassified to share
capital for Canadian GAAP purposes together with the value assigned
to the conversion options. The related inducement fee of $763 was
charged to deficit. For US GAAP, the accounting for the first tranche
was the same. However, for the second tranche which had a beneficial
conversion option, the unamortized debt discount was expensed for US
GAAP purposes. The inducement fee also was expensed for US GAAP
purposes. Accordingly, as at March 31, 2008, share capital under US
GAAP was increased by $3,204 and interest expense for the year ended
March 31, 2008 was increased by $4,424.
(b) Debt issuance costs and the effective interest method:
Effective April 1, 2007, the Company began amortizing debt issuance
costs and debt discounts using the effective interest method under
Canadian GAAP and classified debt issuance costs as reductions of the
carrying value of the debt to which it relates. Prior to April 1, 2007, debt
issuance costs were classified as deferred charges and debt issuance
costs and debt discounts were amortized on a straight-line basis.
Under US GAAP, debt issuance costs are presented as deferred
charges and debt issuance costs and debt discounts are amortized
using the effective interest method for all years presented. In addition,
the difference between transaction costs allocated to the debt and debt
discounts for Canadian GAAP purposes compared to US GAAP as
described in note 24(a) resulted in a difference in interest expense for
US GAAP purposes. Accordingly, the adjustment to opening deficit of
$113 made for Canadian GAAP purposes would not be made under US
GAAP and interest expense for the years ended March 31, 2009, March
31, 2008 and 2007 was reduced by $Nil, $147 and $423, respectively. In
addition, unamortized financing costs of $764 relating to the issuance of
debenture units which are deducted against the liability and amortized
using the effective interest rate method are reclassified as deferred
charges under US GAAP.
(c) Investments:
On April 1, 2007, the Company changed its accounting for “available-for-
sale” securities under Canadian GAAP to be consistent with US GAAP.
However, prior to April 1, 2007, the Company carried its investments
in debt and equity securities at cost. For US GAAP purposes, the
Company’s investments in debt and equity securities that have quoted
market prices would have been classified as “available for sale” securities
with unrealized gains and losses recognized in other comprehensive
income (loss) for all periods presented. Accordingly, cumulative
adjustments at April 1, 2008 of $20,402 to investments, $3,370 to
opening deficit and $17,032 to accumulated other comprehensive income
(“AOCI”) under Canadian GAAP would not be made under US GAAP. For
US GAAP purposes, the Company recognized an increase in investments
and AOCI of $20,402 for the year ended March 31, 2007.
Under Canadian GAAP, the income tax recovery generated by a reversal
of a previously recognized future income tax valuation allowance
to reduce future income tax liabilities generated by mark to market
adjustments on available for sale securities is recognized in net loss
for the year. The valuation allowance is reversed while the related tax
expense is included in AOCI until the shares are sold at which time the
tax expense is included in net loss. Under US GAAP, the reversal of
the valuation allowance would be recognized in other comprehensive
income (loss). Accordingly, for US GAAP purposes, future income tax
expense of $2,362 (2008 – $1,164) recognized under Canadian GAAP
would not be recognized in the years ended March 31, 2009 and 2008.
For Canadian and US GAAP purposes, the cost and the related amounts
included in AOCI related to securities sold are reclassified to net loss
based on weighted average amounts of the shares sold.
(d) Acquired in-process research and development costs:
Under Canadian GAAP, acquired in-process research and development
costs are capitalized and amortized to net income or loss. For US
GAAP purposes, such in-process research and development costs
are expensed immediately if there is no alternative use for the research
and developments. Accordingly, amortization of in-process research
and development recorded under Canadian GAAP for the years ended
March 31, 2009, 2008 and 2007 of $144, $145 and $144, respectively,
would not be recognized under U.S. GAAP. As at March 31, 2009, the
carrying value of intellectual property would be reduced by $430 (2008 –
$574) with a corresponding increase in deficit.
(e) Cumulative translation adjustment
In 2009, CWI paid a dividend to its joint venture partners of $18.6 million.
The transaction between CWI and Company resulted in a reduction in
the Company’s net investment in CWI. For Canadian GAAP purposes,
the Company recognized a foreign exchange gain on the reduction
of the net investment and reduced AOCI by a corresponding amount.
Under U.S. GAAP, foreign exchange gains or losses arising from a net
investment in a foreign operation are recognized in other comprehensive
income until the investment is sold. Accordingly, for U.S. GAAP
purposes, a foreign exchange gain of $793 recognized in net loss for
Canadian GAAP is not recognized under U.S. GAAP.
Westport Innovations Inc. 2009 Annual Report 33
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
24. RECoNCILIATIoN To uNITED STATES GENERALLy
ACCEPTED ACCouNTING STANDARDS (CoNTINuED):
(f) Stock-based compensation:
As described in note 15, the Company has granted stock options
to certain directors, consultants and employees. These options are
granted for services provided to the Company. For Canadian GAAP
purposes, only options granted on or after April 1, 2002 are accounted
for using the fair value method. In addition, on April 1, 2004, the
Company recognized a cumulative adjustment to deficit for stock based
compensation related to stock options granted to employees on or after
April 1, 2002 that would have been recognized prior to April 1, 2004 had
the Company applied the fair value method since April 1, 2002.
For US GAAP purposes, effective April 1, 2004, the Company changed
its accounting policy for recognizing stock-based compensation from
the intrinsic value method to the fair value method using the transition
provisions of Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation – Transition and Disclosure
(“SFAS 148”). As permitted by SFAS 148, the Company adopted the
fair value method retroactively without restatement using the modified
prospective method. For U.S. GAAP purposes, all options granted
subsequent to December 15, 1995 are measured using the fair value
method but, for the Company, only the effect of those options outstanding
and unvested as of April 1, 2004 on the results from operations in the year
in which SFAS 148 is adopted would be recognized.
Accordingly, on adoption of the fair value method for US GAAP
purposes, adjustments to deficit of $2,493, share capital of $68, and
additional paid in capital of $2,425 recognized for Canadian GAAP
purposes are not recognized for US GAAP purposes. In addition, for
US GAAP purposes in years prior to 2005, the Company recognized
stock-based compensation of $2,165 relating to stock options issued to
non-employees prior to April 1, 2002.
Under US GAAP, an additional $211 would be recognized prior to 2002
as a result of certain option modifications.
Additional information about the PSU’s issued under the 2001 PSU Plan
are as follows:
Weighted average
grant date fair value
Units
Unvested, March 31, 2007
Units granted
Units vested
Unvested, March 31, 2008
Units granted
Units vested
Units cancelled
$
85,713
553,900
(111,043)
528,570
667,815
(47,087)
(16,888)
Unvested, March 31, 2009
1,132,410
$
5.25
7.91
5.46
6.69
9.01
8.09
8.29
7.56
The aggregate intrinsic value of the Company’s stock option awards and
PSUs at March 31, 2008 are as follows:
Stock options:
Outstanding
Exercisable
PSUs:
Outstanding
Exercisable
2009
2008
$ 3,259 $ 5,454
1,313
3,302
$ 1,302 $ 4,366
813
2,909
The total intrinsic value of options and PSUs exercised for the year
ended March 31, 2009 was $131 (2008 – $1,508; 2007 – $310). As at
March 31, 2009, $6,777 of compensation cost relating to share-based
payment awards has yet to be recognized in results from operations and
will be recognized over a weighted average period of four years.
34 Westport Innovations Inc. 2009 Annual Report
(g) Income taxes:
Under both Canadian and U.S. GAAP, future income tax assets and
liabilities are measured using the income tax rates and income tax laws
that, at the balance sheet date, are expected to apply when the assets
are realized or the liabilities are settled. In Canada, announcements of
changes in income tax rates and tax laws by the government can have
the effect of being substantially enacted at the balance sheet date even
though they are not yet proclaimed into law. When persuasive evidence
exists that the government is able and committed to enacting proposed
changes in the foreseeable future, the substantively enacted rate is used
to measure the future tax assets and liabilities. Under U.S. GAAP, only
the income tax rates and income tax laws enacted at the balance sheet
date are used to measure the future income tax assets and liabilities. For
the years ended March 31, 2009, 2008, and 2007, enacted rates for U.S.
GAAP purposes were equal to rates used for Canadian GAAP purposes.
Income tax recovery (expense) consists of:
Net income (loss)
before taxes and
Joint Venture
Partners’ share of
net income from
joint ventures
Income tax recovery (expense)
Current
Deferred
Total
Year ended Mar. 31, 2009:
Canada
$
(32,739)
$
(460)
$
(2,131)
$
(2,591)
United States
18,958
Germany
China
Australia
(48)
(268)
414
(3,059)
243
-
-
(1,114)
-
-
-
(4,173)
243
-
-
$
(13,683)
$
(3,276)
$
(3,245)
$
(6,521)
Year ended Mar. 31, 2008:
Canada
United States
Germany
China
Year ended Mar. 31, 2007:
Canada
United States
Germany
$
(14,760)
$
-
$
(1,164)
$
(1,164)
5,862
(14)
(312)
(218)
5,855
5,637
-
-
-
-
-
-
$
(9,224)
$
(218)
$
4,691
$
4,473
$
(18,028)
$
(16)
$
-
$
(16)
8,937
790
(189)
(199)
3,455
-
3,266
(199)
$
(8,301)
$
(404)
$
3,455
$
3,051
For US GAAP purposes, the Company accounts for uncertainties
using FASB Interpretation No. 48, Uncertainty in Income Taxes – An
Interpretation of SFAS Statement No. 109 (“FIN 48”). This interpretation
provides guidance on recognition and measurement of uncertainties in
income taxes. Under FIN 48, a company would recognize the benefit
of tax positions when it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. A
tax position that meets the more-likely-than-not recognition threshold is
measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit
that is greater than 50 percent likely of being realized upon settlement.
For all periods presented, there is no difference between Canadian
and US GAAP as the Company does not believe that any income tax
positions taken in its filings are subject to material uncertainty if reviewed
by the Canada Revenue Agency, Internal Revenue Service or other
tax jurisdiction in which the Company operates. In cases where the
Company is charged interest and penalties on uncertain tax positions
which do not meet the recognition criteria, the Company includes these
in interest expense and other operating expenses, respectively.
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
The following is a summary of the tax years that remain subject to
examination by tax jurisdiction:
Canada
United States
Germany
China
Fiscal year 2004 to 2009
Fiscal year 2005 to 2009
Fiscal year 2003 to 2009
Fiscal year 2007 to 2009
However, in Canada and the United States, if the Company utilizes tax
loss carry forwards in the future, those losses may be challenged in the
year they are used even though the year in which they were incurred is
barred by statute.
(h) Effect of uS gAAP differences:
The effect of the previously discussed accounting differences on total
assets, total liabilities and shareholders’ equity, net loss, comprehensive
loss and loss per share under US GAAP are as follows:
Total assets, Canadian GAAP
Difference in accounting for:
Intellectual property (d)
Reclassification of unamortized transaction costs (a)
2009
2008
$ 135,504
$ 78,940
(430)
763
(574)
-
Total assets, US GAAP
$ 135,837
$ 78,366
Total liabilities, Canadian GAAP
Reclassification of unamortized transaction costs (a)
$ 74,546
763
$
49,144
-
There are no differences between Canadian GAAP and US GAAP in total
cash flows from operations, investments and financing presented in the
consolidated statement of cash flows in any of the years presented.
(i) Additional financial information and disclosures required
under uS gAAP:
(i) Accounts receivable:
A summary of the components of accounts receivable is as follows:
Customer trade receivable
$ 2,002 $ 1,014
Government funding receivable
2,968
2,077
Due from Joint Venture Partner
-
3,344
2009
2008
Other receivables
1,447
593
$ 6,417 $ 7,028
(ii) Accounts payable and accrued liabilities:
A summary of the components of accounts payable and accrued
liabilities is as follows:
Trade accounts payable
Accrued payroll
Accrued interest
Income taxes payable
Other
2009
2008
$ 8,802 $ 6,641
2,670
1,176
403
2,236
248
378
211
64
$ 14,359 $ 8,470
Total liabilities, US GAAP
Shareholders’ equity, Canadian GAAP
Difference in accounting for:
Intellectual property (d)
$ 75,309
$
49,144
$ 60,958
$ 29,796
(iii) Warranty liability:
(430)
(574)
A continuity of the warranty liability is as follows:
Shareholders’ equity, US GAAP
$ 60,528
$ 29,222
Loss for the year, Canadian GAAP
Difference in amortization of discount
on convertible notes and debt
issuance costs (a)(b)
Difference in accounting for
inducement fee and unamortized
discount on conversion of
convertible notes (a)
Difference in accounting for
reclassification of cumulative
translation adjustment on dividend
paid to joint venture (f)
Reversal of tax expense on
realized gain on available for sale
securities (c)
Amortization of intellectual property (d)
2009
2008
2007
$ (24,425)
$ (10,315)
$ (11,307)
147
423
-
-
(4,424)
-
-
(793)
-
2,362
144
1,164
145
-
144
Loss for the year, US GAAP
$ (22,712)
$ (13,283)
$
(10,740)
Other comprehensive income (loss):
Cumulative translation
adjustment on CWI dividend (f)
Unrealized gain on available for
sale securities (c)
Reversal of tax expense on
realized gain on available for
sale securities (c)
793
-
-
-
-
20,402
(2,362)
(1,569)
(1,164)
(1,164)
-
20,402
Comprehensive income (loss) US GAAP
$ (24,281)
$ (14,447)
$
9,662
Basic and dilutes loss per share,
US GAAP
$
(0.75)
$
(0.53)
$
(0.50)
2009
2008
2007
Balance, beginning of
year
$ 9,157 $ 6,971 $ 5,770
Warranty claims
(9,254)
(2,333)
(2,270)
Warranty accruals
17,105
6,534
4,924
Change in warranty
estimates
Impact of foreign
exchange
4,317
(1,292)
(1,387)
3,266
(723)
(66)
Balance, end of year
$ 24,591 $ 9,157 $ 6,971
(iv) Cost of revenue:
Cost of revenue related to product revenue for the year ended
March 31, 2009 was $78,290 (2008 – $37,157; 2007 – $28,961)
and cost of revenue related to parts revenue was $12,730 (2008 –
$11,866; 2007 – $9,420).
(v)
Investments and fair value
Effective April 1, 2008, the Company adopted SFAS No. 157,
Fair Value Measurements (“SFAS No. 157”), which defines fair
value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
SFAS No. 157 also establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The
adoption of this statement did not have a material impact on the
Company’s results of operations or financial condition.
Westport Innovations Inc. 2009 Annual Report 35
NoteS to CoNSoLIdated FINaNCIaL StateMeNtS
expressed in thousands of Canadian dollars except share and per share amounts | years ended March 31, 2009, 2008, and 2007
24. RECoNCILIATIoN To uNITED STATES GENERALLy
ACCEPTED ACCouNTING STANDARDS (CoNTINuED):
(i) Additional financial information and disclosures required
under uS gAAP (continued):
(v)
Investments and fair value (continued):
The Company also adopted Financial Accounting Standards Board
(“FASB”) Staff Position No. FAS 157−2, Effective Date of FASB
Statement No. 157, which defers for one year the effective date of
SFAS No. 157 for non-financial assets and liabilities measured at
fair value on a nonrecurring basis, except those that are recognized
or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The purpose of this deferral is to allow
the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or may arise, for the
application of SFAS No. 157.
SFAS No. 157 describes three levels of inputs used to measure and
categorize fair value. The following is a brief description of those
three levels:
Level 1 – Unadjusted quoted prices in active markets for identical
assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities. These inputs may reflect management’s own
assumptions about the assumptions a market participant would use
in valuing the asset or liability.
When available, the Company uses quoted market prices to determine
fair value and classify such items in Level 1. When necessary, Level
2 valuations are performed based on quoted market prices for similar
instruments in active markets and/or model-derived valuations with
inputs that are observable in active markets. Level 3 valuations are
undertaken in the absence of reliable Level 1 or Level 2 information.
The following table presents certain information for the Company’s
financial assets and liabilities that are measured at fair value on a
recurring basis at March 31, 2009:
Total
Level 1
Level 2
Level 3
Assets:
Short-term investments
$ 43,576
$ 43,576
$
Long-term investments
1,456
1,416
Balance as of Mar. 31, 2009 $ 45,032
$ 44,992
$
-
-
-
$
$
-
40
40
(vi) other disclosures:
Deferred revenue is included in other long-term liabilities on the
balance sheet for Canadian GAAP purposes and disclosed in note
11. Under US GAAP, this amount would be presented separately on
the balance sheet.
From time to time, the Company performs research and development
for unrelated parties. The Company receives revenue for such
research and development activities from these parties based on
contractual arrangements. These arrangements generally require
the Company to perform certain specific activities and revenue is
received as the activities are performed. Revenue received is not
repayable, irrespective of the outcome of the activities. There were
no material research and development arrangements in progress as
at March 31, 2009 or 2008. During the year ended March 31, 2009,
the Company earned revenue of $793 (2008 – $1,172; 2007 – $1,622)
related to such activities. Costs expensed related to these activities
were $442 (2008 – $721; 2007 – $1,503).
36 Westport Innovations Inc. 2009 Annual Report
(j) Recently issued accounting pronouncements:
In February 2007, the FASB issued Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities – including an
amendment to FAS 115 (“SFAS 159”). SFAS 159 permits a company to
choose to measure certain financial assets, financial liabilities and firm
commitments at fair value. The standard is effective for the Company on
April 1, 2008. The adoption of SFAS 159 did not have a material impact on
the Company’s consolidated financial statements for US GAAP purposes.
In December 2007, the FASB issued Statement of Financial Accounting
Standards 141(R), Business Combinations (“SFAS 141(R)”). The statement
broadens the scope of SFAS 141 to all transactions in which an entity
obtains control over another entity. The statement provides further
guidance on the recognition of identifiable assets and liabilities and the
measurement of goodwill. The statement is effective for the Company on
April 1, 2009. SFAS 141(R) will only affect the Company if an acquisition
occurs after adoption of SFAS 141(R).
In December 2007, the FASB issued Statement of Financial Accounting
Standards 160 Non-Controlling Interests in Consolidated Financial Statements
– an amendment of ARB No. 51 (“SFAS 160”). The statement clarifies the
definition of a non-controlling interest, requires non-controlling interests to
be presented as part of equity on the balance sheet, changes the way the
consolidated income statement is presented and establishes a single method
of accounting for a change in a parent’s ownership interest in a subsidiary.
The statement also provides for further disclosures in the consolidated
financial statements. The statement is effective for the Company on April
1, 2009 and is not expected to materially impact the consolidated financial
statements for US GAAP purposes although the Company will be required to
reclassify the amount for Joint Venture Partners’ share of net assets of joint
ventures to equity and provide certain additional disclosures.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS
161 requires enhanced disclosures about an entity’s derivative and hedging
activities. FAS 161 is effective for the Company on April 1, 2009. SFAS
161 encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. The Company is evaluating the impact of the
new statement.
In May 2008, FASB issued FSP No. APB 14-1, Accounting for Convertible
Debt Instruments that may be Settled in Cash Upon Conversion (Including
Partial Settlement), which will change the accounting treatment for
convertible debt securities that may settle fully or partly in cash. FSP No.
APB 14-1 requires bifurcation of convertible debt securities into a debt
component that is initially recorded at fair value and an equity component
that represents the difference between initial proceeds from the issuance
of the instrument and the fair value allocated to the debt component.
The debt component is then subsequently accreted to par value over its
expected life. The standard is effective for fiscal years and interim periods
beginning after December 15, 2008, and must be retroactively applied to
all periods presented, even if the instrument has matured, converted or has
been otherwise extinguished as of the effective date of the standard. The
Company is evaluating the impact of FSP No. APB 14-1.
In October 2008, FASB issued FSP No. FAS 157-3, Determining the Fair
Value of a Financial Asset when the Market for that Asset is not Active which
clarifies the application of SFAS No. 157 in a market that is not active and
provides key considerations in determining the fair value of the financial
asset. FSP FAS 157-3 is effective upon issuance, including prior periods.
Revisions in a valuation technique shall be accounted for as a change in
accounting estimate. The Company does not anticipate that the adoption
of this standard for US GAAP purposes will have a material impact on the
consolidated financial statements.
In June 2008, FASB ratified EITF No. 07-05, Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock
(“EITF 07-05”). EITF 07-05 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. EITF 07-05
is effective for the Company on April 1, 2009. The Company is currently
evaluating the impact of the adoption of EITF 07-05.
WEStPORt DIRECtORS
John A. Beaulieu [1] [2] [3] [5]
Chairman of the Board of Directors, Westport Innovations Inc.
Vancouver, Washington, U.S.A.
Warren J. Baker [3] [4]
President, California Polytechnic State University
Avila Beach, California, U.S.A.
Henry F. Bauermeister Jr. [1] [2] [5]
Corporate Director, previously President of Cummins Mid-America
Lee’s Summit, Missouri, U.S.A.
M.A. (Jill) Bodkin [1] [2]
Chair and Chief Executive Officer, Golden Heron Enterprises
Vancouver, British Columbia, Canada
David R. Demers [4]
Chief Executive Officer and Director, Westport Innovations Inc.
West Vancouver, British Columbia, Canada
J. Michael Gallagher [5]
President, Chief Operating Officer, and Director,
Westport Innovations Inc.
Vancouver, British Columbia, Canada
Dezsö J. Horváth [1] [2] [3] [4]
Dean of the Schulich School of Business, York University
Toronto, Ontario, Canada
Sarah Liao Sau Tung [4]
Member of the Executive Council of Hong Kong (2002–2007)
Hong Kong, China
Andrew J. Littlefair [4]
President and Chief Executive Officer, Clean Energy Fuels Corp.
Newport Beach, California, U.S.A.
Albert Maringer [5]
President and Chief Executive Officer, Maringer Consulting Alberta Ltd.
Canmore, Alberta, Canada
WEStPORt MANAgEMENt
David R. Demers
Chief Executive Officer
West Vancouver, British Columbia, Canada
J. Michael Gallagher
President and Chief Operating Officer
Vancouver, British Columbia, Canada
Elaine A. Wong
Executive Vice President and Chief Financial Officer
Vancouver, British Columbia, Canada
Nicholas C. Sonntag
Executive Vice President, Corporate Development and President,
Westport Asia
Gibsons, British Columbia, Canada / Beijing, China
[1] Member of Audit Committee
[2] Member of the Human Resources and Compensation Committee
[3] Member of Nominating and Corporate Governance Committee
[4] Member of the Strategy Committee
[5] Member of the OEM Committee
SharehoLder INForMatIoN
CORPORAtE INFORMAtION
Westport Shareholder Services
Shareholders with questions about their account—including change of address,
lost stock certificates, or receipt of multiple mail-outs and other related inquiries—
should contact our Transfer Agent and Registrar:
Computershare Investor Services Inc.
510 Burrard Street, 3rd Floor
Vancouver, British Columbia, Canada V6C 3B9
Tel: 604-661-9400
Fax: 604-661-9549
Legal Counsel
Bennett Jones LLP – Calgary, Alberta, Canada
Auditors
KPMG LLP Chartered Accountants
Vancouver, British Columbia, Canada
Stock Listing
NASDAQ: WPRT
Toronto Stock Exchange: WPT
Annual Meeting
The Westport Innovations Inc. Annual Meeting of Shareholders will be held on
Tuesday, July 16th, 2009 at 2:00 p.m. (Pacific) at the Pan Pacific Hotel, 999
Canada Place, Vancouver, British Columbia.
Westport on the Internet
Topics featured in this Annual Report can be found via the Westport website at
www.westport.com. More information on the Cummins Westport line of products
can be found at www.cumminswestport.com. The information on these websites
is not incorporated by reference into this Annual Report. Financial results, Annual
Information Form, news, services, and other activities can also be found via
that address or on SEDAR at www.sedar.com or at the SEC at www.sec.gov.
Shareholders and other interested parties can also sign up to receive regular
email bulletins at www.westport.com/investor/email.php.
Contact Information / Corporate Offices
101 – 1750 West 75th Avenue
Vancouver, British Columbia, Canada V6P 6G2
Tel: 604-718-2000
Fax: 604-718-2001
Email: invest@westport.com
Web: www.westport.com
This document contains forward-looking statements about Westport’s business,
operations, technology development, and/or about the environment in which it
operates, which are based on Westport’s estimates, forecasts, and projections.
These statements are not guarantees of future performance and involve risks
and uncertainties that are difficult to predict, or are beyond Westport’s control
and may cause actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance
or achievements expressed in or implied by these forward looking statements.
These risks include risks relating to the timing and demand for our products,
future success of our business strategies and other risk factors described in our
most recent Annual Information Form and other filings with securities regulators.
Consequently, readers should not place any undue reliance on such forward-
looking statements. In addition, these forward-looking statements relate to the
date on which they are made. Westport disclaims any intention or obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Westport Innovations Inc. 2009 Annual Report 37
www.westport.com
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