WESTPORT FUEL SYSTEMS INC.
2017 ANNUAL REPORT
1750 West 75th Avenue, Suite 101
Vancouver, British Columbia V6P 6G2
Canada
T +1 604-718-2000
F +1 604-718-2001
www.wfsinc.com
Table of Contents
Table of Contents
LETTER TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION & ANALYSIS
BUSINESS OVERVIEW AND GENERAL DEVELOPMENTS
SELECTED ANNUAL FINANCIAL INFORMATION
RESULTS FROM OPERATIONS
CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY
SHARES OUTSTANDING
CRITICAL ACCOUNTING POLICIES & ESTIMATES
NEW ACCOUNTING PRONOUNCEMENTS & DEVELOPMENTS
DISCLOSURE CONTROLS & PROCEDURES
SUMMARY OF QUARTERLY RESULTS
RELATED PARTY TRANSACTIONS
BUSINESS RISKS & UNCERTAINTIES
AUDITOR REPORTS
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION FOR SHAREHOLDERS
1
2
2
5
6
11
12
12
13
14
16
18
18
19
21
21
22
23
24
25
44
Westport Fuel Systems strives to continuously improve our environmental management system and measure the environmental
impacts of our operations. We are extending the scope of our sustainability report to encompass all of our global operations and
are working to establish processes to achieve this goal. As a result, a global sustainability report covering key environmental
metrics for all of our worldwide locations is expected to be published in Q1 2019.
Letter to Shareholders
Letter To Shareholders
Dear Fellow Shareholders,
Calls for clean energy are becoming louder and increasingly more urgent. At last it feels like a clean energy future is inevitable.
The question is not if, but when.
The clean energy technology solutions we need to deploy are not in the future. They are ready now. Our Westport HPDI 2.0™
technology launched last year and, through our OEM partner, offers long-haul customers today an environmental solution that
doesn’t sacrifice performance.
As we advance our natural gas and hydrogen solutions we are working on parallel paths with other innovative leaders who are
advancing transportation solutions including electric vehicles. We welcome innovation across the alternative fuel industry. We
share the same goals and vision. Consumer choice and options will help quicken the pace of change and that can only be a
good thing, for Westport Fuel Systems and the planet.
In the year ahead, we will be focused on the smart, strategic use of our shareholders’ capital to ensure that we maximize our
impact for our customer and for sustainable value creation. We have proven our technology. Our job is now to prove that we
have a sustainable financial model and can move closer to profitability. I am confident we can.
We enter 2018 with a strengthened financial position and a fundamentally restructured business. We have deliberately realigned
our talent and resources to provide more focus and drive efficiency. Our strategic plan is built squarely around our customers
and their needs. We will broaden our product offering and respond to increasing demand by providing market-ready solutions.
I come to work every day inspired by the actions my team and others in the industry are taking to accelerate our clean energy
future. I see customers going the extra mile to ensure near-zero emissions by generating their own supply of renewable natural
gas. I see industry and government collaborating to create a Blue Corridor of refueling stations in Europe to support natural gas
as the main alternative fuel to diesel in European long-distance transport and trucking.
Initiatives like these, along with the work we are doing here every day, tells me that together we can and will leave the world a
better place. It will take a village and through our collaborative relationships with government, OEMs and industry partners, we
are proud of the role we can play. I am also proud to champion diversity at Westport Fuel Systems. With female leadership at
the management and board level, our company is in a unique position to set the tone from the top to champion diversity and
empower women and men to always speak up personally and professionally. We are building a positive and supportive working
environment that enables our people to realize their potential.
Thanks to our talented team at Westport Fuel Systems, we are ready now: ready to offer customers the clean energy solutions
they need; ready to support our industry partners; and ready to capitalize on the opportunities 2018 will bring.
On behalf of the management team, thank you for your continued support.
Sincerely,
Nancy S. Gougarty
Ashoka Achuthan
Chief Executive Officer
Chief Financial Officer
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 1
Management's Discussion and Analysis
Management's
Discussion and
Analysis
Basis of Presentation
for
This Management’s Discussion and Analysis (“MD&A”)
Westport Fuel Systems Inc. (formerly known as Westport
Innovations Inc.; “Westport Fuel Systems”, the “Company”, “we”,
“us”, “our”) is intended to assist readers in analyzing our financial
results and should be read in conjunction with the audited
consolidated financial statements, including the accompanying
notes, for the fiscal year ended December 31, 2017. Our
consolidated
in
accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”). The Company’s reporting currency
is the U.S. dollar. This MD&A is dated as of March 22, 2018.
Additional information relating to Westport Fuel Systems, 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. All
financial information is reported in U.S. dollars unless otherwise
noted.
financial statements have been prepared
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
orders or demand for our products, our investments, cash and
capital requirements, the intentions of partners and potential
customers, the performance of our products, our future market
opportunities, availability of funding and funding requirements, our
estimates and assumptions used in our accounting policies, our
accruals, including warranty accruals, our financial condition, timing
of when we will adopt or meet certain accounting and regulatory
standards and the alignment of our business segments. 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 activity,
performance or achievements expressed in or implied by these
forward looking statements. These risks include risks related to
revenue growth, operating results, liquidity, industry and products,
general economy, conditions of the capital and debt markets,
government or accounting policies and regulations, 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 AIF filed on SEDAR at www.sedar.com. The forward-
looking statements contained in this MD&A are based upon a
2 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
number of material factors and assumptions which include, without
limitation, market acceptance of our products, product development
delays in contractual commitments, the ability to attract and retain
business partners, competition from other technologies, price
differential between natural gas and liquefied petroleum gas,
unforeseen claims, exposure to factors beyond our control as well
as the additional factors referenced in our AIF. 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
applicable legislation.
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 Fuel Systems 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. The forward-
looking statements contained in this MD&A are expressly qualified
by this cautionary statement.
Business Overview
and General Developments
fuels
including
liquid petroleum gas
Westport Fuel Systems is the premier global company for the
engineering, manufacturing, and supply of alternative fuel systems
and components. Our diverse and complete product offering sold
under established global brands address a broad range of
alternative
(“LPG”),
compressed natural gas (“CNG”), liquid natural gas (“LNG”),
renewable natural gas (“RNG”), and hydrogen which have
environmental and economic advantages. We supply our products
and services through a global network of distributors and numerous
Original Engine Manufacture (“OEM”) and delayed OEM (“DOEM”)
customers in more than 70 countries. Today our products and
services are available for the passenger car and light-, medium-
and heavy-duty, HHP, cryogenics, and CNG refueling markets.
We are leveraging our scale, customer base, and global sales and
distribution networks to continue growing market share; a strategy
we believe will lead to a stronger financial position. In addition to
our significant operational competency
in well-established
automotive markets, our investment in new technologies is
expected to drive future growth. Westport Fuel Systems has a track
record of innovation, specialized engineering capabilities, and a
deep patent portfolio resulting in a strong intellectual property
position. We reached a significant milestone during 2017 with the
shipment of the first commercial Westport High Pressure Direct
Injection 2.0 ("Westport HPDI 2.0™") components to our European
OEM launch partner. Our fully integrated Westport HPDI 2.0™
system matches the “diesel-like” power, torque, and fuel economy
Management's Discussion and Analysis | Business Overview and General Developments
benefits of a true compression ignition engine powered by natural
gas, with reduced greenhouse gas emissions, and the capability to
run entirely on renewable fuels.
Westport Fuel Systems has a compelling value proposition. We
have a wide range of brands and products for diverse applications
and markets; we offer market-ready solutions
for global
environmental challenges; and we occupy a premier technology
leadership position. Our operationally focused leadership team has
deep expertise in successful organizational structure, customer
satisfaction, and financial discipline. We are building a sustainable,
profitable company that delivers value to customers, shareholders,
employees, and the environment.
CWI, our 50:50 joint venture with Cummins, Inc. ("Cummins"), had
record income before income taxes of $58.3 million in 2017. The
tax reform in the United States will significantly benefit CWI for 2018
and future years due to the lower corporate tax rate, despite
resulting in a $13.4 million tax charge in 2017.
The Company recorded revenues of $247.1 million in 2017, an
increase of 39% over 2016, primarily as a result of consolidating a
full year of Fuel Systems Solutions, Inc ("Fuel Systems") results
since the merger on June 1, 2016. Our Adjusted EBITDA (see non-
GAAP measures in this MD&A) decreased from a loss of $43.4
million in 2016 to a loss of $17.9 million in 2017, a 59% improvement.
The decreased loss is a result of strong operating performance,
merger synergies, record results from CWI and lower spending on
research and development,
During 2017 and through March 22, 2018, the Company completed
a number of significant undertakings to improve its liquidity position,
strengthen its balance sheet and simplify the number of businesses
that the Company will focus on.
• On April 28, 2017, the Company closed the transaction to sell
the Industrial segment's Auxiliary Power Unit ("APU")
business for total consideration of $70.0 million.
• On May 30, 2017, the Company sold additional Industrial
assets for total consideration of $17.5 million.
•
•
In July 2017, the Company completed an equity offering where
it issued 19,125,000 common shares for gross proceeds of
$28.7 million.
In September 2017, the Company repaid $CDN 55.0 million
of maturing debt. This debt was unsecured and carried a 9%
interest rate. Approximately $CDN 5.0 million of this debt was
tendered to the Company in August 2017 and a 1% premium
was paid.
•
In December 2017, the Company received $20.0 million as
part of a loan agreement with Export Development Canada.
Liquidity and Going Concern
In connection with preparing financial statements for each annual
and interim reporting period Management is required to evaluate
issued. When
whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the financial
statements are issued. This evaluation initially does not take into
consideration the potential mitigating effect of management’s plans
that have not been fully implemented as of the date that the financial
statements are
substantial doubt exists,
management evaluates whether the mitigating effect of its plans
sufficiently alleviates substantial doubt about the Company’s ability
to continue as a going concern. The mitigating effect of
management’s plans, however, is only considered if both (1) it is
probable that the plans will be effectively implemented within one
year after the date that the financial statements are issued, and (2)
it is probable that the plans, when implemented, will mitigate the
relevant conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after
the date that the financial statements are issued. Generally, to be
considered probable of being effectively implemented, the plans
must have been approved before the date that the financial
statements are issued.
At this time Management's evaluation has concluded that there are
no known or foreseeable conditions or events that raise substantial
doubt about the Company's ability to continue as a going concern
within one year after the date the financial statements were issued.
The Company's financial statements have therefore been prepared
on the basis that the Company will continue as a going concern.
At December 31, 2017, the Company's net working capital was
$80.5 million (2016 - $54.0 million) including cash and cash
equivalents of $71.8 million (2016 - $60.9 million), and its long-term
debt was $54.4 million of which $9.0 million matures in 2018. The
Company incurred a significant loss from continuing operations of
$61.1 million (2016 - $99.4 million) and negative cash flows from
continuing operating activities during 2017 of $47.5 million (2016 -
$80.4 million) and has accumulated a deficit of $966.9 million since
inception. In the course of 2017, the Company completed significant
non-core asset sales and a capital increase which allowed
repayment of long-term debt otherwise coming due in 2017, and
increased the Company’s cash available to fund future operations.
The Company continues to work towards its goals of increasing
revenues and reducing expenditures, which Management expects
will improve results from operations and operating cash flows in
2018. In particular, with the Westport HPDI 2.0TM product now in
production, management expects that the engineering and
development spend and the associated capital expenditures on this
product will decrease significantly in 2018 and this reduction will,
itself, improve cash flows. In addition, the Company continues to
examine non-core assets to determine whether it is in the best
interest of the Company to monetize these assets in the next year
or continue to hold or invest in these assets.
Management is confident that the cash on hand at December 31,
2017 and the improvements to the operations expected for 2018
will provide the cash flow necessary to fund operations over the
next year to March 31, 2019. The ability of the Company to continue
as a going concern beyond one year will be dependent on the
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 3
Management's Discussion and Analysis | Business Overview and General Developments
Company’s ability to generate positive results from operations and
cash flows or on its ability to raise additional financings to fund future
operations. If, as a result of future events, the Company was to
determine it was no longer able to continue as a going concern,
significant adjustments would be required to the carrying value of
its assets and liabilities in the accompanying financial statements
and the adjustments could be material.
Operating Business Units
The principal focus of the operating business units are summarized
below:
AUTOMOTIVE BUSINESS SEGMENT
The Westport Fuel Systems Automotive segment designs,
manufactures and sells CNG and LPG components and systems
for passenger cars, light-duty trucks and medium-duty vehicles
including OEM, delayed OEM
(“DOEM”) and Aftermarket
segments. The portfolio of products includes pressure regulators,
injectors, electronic control units, valves and filters, in addition to
complete bi-fuel, mono-fuel and dual-fuel LPG and CNG conversion
kits.
We serve more than 70 countries with a strong customer base in
Europe, the Americas, Asia, and a growing presence in Africa.
Products are either sold directly to the OEM or through a local
distributor under 11 well-recognized and well-established brands.
We supply a large number of global OEMs including Volkswagen,
Tata, GAZ, FCA, General Motors, Ford, Maruti Suzuki, Honda, Volvo
Car, Hyundai, and Kia as well as Aftermarket distributors and
customers.
The Automotive segment also designs, manufactures, and sells a
wide range of CNG compressors and refueling systems, from BRC
FuelMaker home appliance for individuals or small fleets, to
complete refueling stations branded CUBOGAS.
With effect from Q1 2017, the high pressure components and
electronics product lines, formerly classified under the Industrial
the Automotive
Business Segment, were consolidated
business and the comparative balances reclassified accordingly.
into
INDUSTRIAL BUSINESS SEGMENT
On April 28, 2017, the Company completed the sale of the APU
business, and on May 30, 2017, the Company sold additional assets
of the Industrial business. Effective from Q1 2017, the Industrial
Business Segment is no longer considered an operating segment
and has been
to discontinued operations
retrospectively.
reclassified
CORPORATE AND TECHNOLOGY
INVESTMENTS SEGMENT
The Corporate and Technology Investments segment is responsible
for current and advanced research and development programs,
4 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
corporate oversight, and general administrative duties. Examples
of our leading technologies include fully integrated combustion
solutions, fuel injectors, and fuel storage and delivery solutions
including cryogenics. The corporate oversight and general
administrative functions for the Company are grouped under this
unit.
Westport’s next generation of HPDI technology, Westport HPDI
2.0™, will provide global vehicle and engine OEMs with a vertically
integrated natural gas solution with attractive price, performance,
and fuel economy. Developed to OEM quality standards, Westport
HPDI 2.0™ system components are primarily manufactured in
partner facilities, and offer ready integration into OEM operations
globally. A key component of the Westport HPDI 2.0™ system is a
brand new family of high pressure fuel injectors, co-developed with
Delphi, designed to provide better cost, smaller size and improved
packaging compared to prior generation Westport™ HPDI injector
designs. Westport and Delphi have entered into a joint development
agreement which will combine our intellectual property and
engineering strengths to co-develop and manufacture high-
pressure natural gas fuel injectors designed for multiple engine
OEMs. The family of injectors are developed with core components
of Westport's HPDI 2.0™ fuel system.
Westport’s proprietary High Efficiency Spark ignited ("HESI")
technology is designed to provide vehicle and engine OEMs with a
natural gas solution that exceeds the power and torque of the diesel
engine upon which it is based. This allows for engine downsizing
resulting in a smaller, lighter, more powerful, more fuel efficient and
lower emissions package. Using 100% dedicated natural gas as
fuel, this technology optimizes the combustion system and thermal
management of the engine by taking full advantage of the ultra-high
octane performance fuel properties of natural gas. Developed to
meet the highest level of OEM quality standards, Westport's new
combustion system and components have been undergoing testing
and are being further developed to offer ready integration into OEM
applications globally.
CUMMINS WESTPORT INC.
JOINT VENTURE
CWI, our 50:50 joint venture with Cummins, Inc. ("Cummins"),
serves the medium and heavy-duty on-highway engine markets.
CWI engines are offered by many OEMs for use in transit, school
and shuttle buses, conventional trucks and tractors, and refuse
collection trucks, as well as specialty vehicles such as short-haul
port drayage trucks and street sweepers. CWI is the leading supplier
of natural gas engines to the North American medium- and heavy-
duty truck and transit bus industries.
All CWI natural gas engines are dedicated 100% natural gas
engines. The fuel for CWI engines can be carried in tanks on the
vehicle as CNG or LNG. All engines are also capable of operating
on up to 100% RNG.
CWI is a Delaware corporation owned 50% by Westport Power Inc.
("WPI"), a wholly-owned subsidiary of Westport Fuel Systems, and
Management's Discussion and Analysis | Business Overview and General Developments
50% by Cummins. The board of directors of CWI is comprised of
three representatives from each of Westport Fuel Systems and
Cummins. On February 19, 2012, Westport Fuel Systems,
Cummins and CWI entered into a Second Amended and Restated
Joint Venture Agreement (the "Amended JVA") governing the
operations of CWI which amended the focus of CWI's future product
development investments to North American markets, including
engines for on-road applications between the displacement range
of 5.9 litres through 12 litres, and to have these engines
manufactured in Cummins' North American plants.
The purpose of the joint venture is to engage in the business of
selling, marketing and developing spark-ignited natural gas or
propane engines for on-highway use. CWI utilizes Cummins' supply
chain, back office systems and distribution and sales networks. The
joint venture term is scheduled to end on December 31, 2021.
WEICHAI WESTPORT INC.
JOINT VENTURE
WWI is a joint venture between the Company, Weichai Holding
Group Co. Ltd. and Hong Kong Peterson (CNG) Equipment Ltd.
focusing on the Chinese market. In April 2016, the Company sold
a portion of its economic interest in WWI and the Company
discontinued reporting of WWI on an equity basis since the
Company no longer had significant influence in the joint venture
from that date. Accordingly, the Company has not considered WWI
a business segment subsequent to the first quarter of 2016.
CHANGE TO OPERATING
SEGMENTS IN Q1 2018
Effective January 2018, commensurate with the commercial launch
of Westport HPDI 2.0™, the company restructured its business
segments to allow for further integration of product offerings. The
Westport HPDI 2.0™ product line and all other Technology related
activities previously reported under the Corporate & Technology
segment will be combined with the Automotive business segment
and renamed Transportation.
Under the new organization structure, the Company will manage
and report the results of its business through three segments:
Transportation, the CWI Joint Venture, and Corporate:
• Transportation: consists of the previous Automotive segment
with the addition of the Westport HPDI 2.0™ product line,
technologies such as HESI and electronics, current and
advanced research and development programs, supply
chain, and product planning activities. This segment is
accountable for driving strategy, creating business value, and
delivering financial performance.
• CWI Joint Venture: represents Westport Fuel Systems 50%
share in the CWI joint venture.
• Corporate: responsible
for public company activities,
corporate oversight and general administrative duties.
Selected Annual
Financial Information
The following table sets forth a summary of our financial results for
2017, 2016 and 2015. The 2016 results include seven months
results from Fuel Systems as a result of the merger effective June
1, 2016.
SELECT CONSOLIDATED
STATEMENTS OF OPERATIONS DATA
(expressed in millions of USD,
except per share amounts
and shares outstanding)
2017
Years ended Dec 31
2016
(Adjusted
note 2)
2015
Revenue
Gross margin
GM %
$
247.1
$
177.4
$
103.3
64.2
26.0%
36.3
20.5%
18.1
17.5%
Net loss from
continuing operations1
Net income from
discontinued
operations2
Net loss
Net loss per share from
continuing operations -
basic and diluted
Net loss per share
Weighted average
basic shares
outstanding
Weighted average
diluted shares
outstanding
(61.1)
(99.4)
(99.2)
51.1
(10.0)
(0.51)
(0.08)
1.8
(97.6)
(1.09)
(1.07)
—
(99.2)
(1.55)
(1.55)
119,558,566
91,028,504
64,109,703
132,133,072
99,757,611
64,109,703
1. Significant items in comparative period: the comparative 2016 period
data include revenue from Fuel Systems' business for the seven-month
period since the June 1, 2016 acquisition, a bargain purchase gain of
$35.8 million, and a $19.0 million restructuring provision recorded for
severance and facility closures.
2. Sales of Industrial business: with effect from the first quarter of 2017,
the Industrial business segment was reclassified retrospectively as
discontinued operations and in the second quarter of the same year, the
majority of its assets were sold generating a net gain of $58.3 million
that is included in net income from discontinued operations and net
income for 2017. See note 6 in the consolidated financial statements.
The following table sets forth a summary of our financial position
as at December 31, 2017 and December 31, 2016:
SELECTED BALANCE SHEET DATA
Years ended Dec 31
(expressed in millions of United States dollars)
2017
2016
Cash and cash equivalents
Total assets
Debt, including current portion1
Royalty payable, including current
portion
Total liabilities
Shareholder's equity
$
$
$
$
$
$
71.8 $
313.6 $
54.4 $
19.0 $
195.6 $
118.0 $
60.9
331.5
79.0
21.6
246.0
85.4
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 5
Management's Discussion and Analysis | Selected Annual Financial Information
1. During the year, the Company repaid $CDN 55.0 million of maturing
debt. A new loan for $20.0 million was established with EDC with this
principal being repaid over four years. As a result of these transactions,
our current ratio has improved significantly.
REVENUE
Years ended
Dec 31
Change
The following table sets forth a summary of the financial results of
the CWI Joint Venture for 2017, 2016 and 2015.
(expressed in millions of U.S. dollars)
2017
2016
$
%
Automotive
$ 239.4 $ 172.3 $
67.1
39 %
SELECTED CWI STATEMENTS OF
OPERATIONS DATA
Years ended Dec 31
Corporate and
Technology Investments
CWI
WWI
7.7
5.1
317.3
276.5
2.6
40.8
51 %
15 %
—
29.9
(29.9)
(100 )%
(expressed in millions of United States dollars)
2017
2016
2015
Total segment revenues
564.4
483.8
80.6
17 %
Total revenue
Gross margin
GM %
$ 317.3
$ 276.5
$ 331.9
109.5
77.1
101.4
34.5%
27.9%
30.6%
Net income before income taxes
58.3
16.7
48.1
Net income attributable to the
Company1
12.5
5.6
14.9
1. As a result of the U.S. tax reform substantially enacted in the fourth
quarter of 2017, CWI recorded a deferred tax expense of $13.4 million
in 2017.
Results from Operations
The following tables summarize results by segment for 2017, 2016
and 2015.
Items Affecting Comparability of
Results from 2016 to 2017
(1) The year ended December 31, 2016 includes only seven months
of Fuel Systems' results and this is reported in the "Automotive"
segment in the tables below.
(2) WWI results are only included in total segment revenue for the
three months ended March 31, 2016, as WWI has no longer been
considered an operating segment in subsequent periods due to the
Company's reduced interest pursuant to a sale to the Cartesian
Capital Group ("Cartesian").
REVENUE 2017/2016
Total consolidated revenues increased $69.7 million, or 39% from
$177.4 million in 2016 to $247.1 million in 2017 largely due to 2016
only including seven months of Fuel Systems' results.
The following table summarizes revenues by segment for the year
ended December 31, 2017 compared to the year ended December
31, 2016:
6 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Less: Equity investees'
revenues
Total consolidated
revenues
317.3
306.4
10.9
4 %
$ 247.1 $ 177.4 $
69.7
39 %
Automotive
Automotive revenue for the year ended December 31, 2017 was
$239.4 million compared with $172.3 million for the year ended
December 31, 2016. The increase in revenue was primarily due to
the consolidation of Fuel Systems for twelve months as opposed
to seven months in 2016. Total Automotive revenue for the year
ended December 31, 2016 includes sales from the Fuel Systems'
business for the seven month period since the June 1, 2016
acquisition. In addition, there was a 2% appreciation in the Euro
compared to the US dollar, and strong sales in the European
aftermarket business.
Corporate and Technology Investments
Corporate and Technology Investments revenue for the year ended
December 31, 2017 was $7.7 million compared with $5.1 million for
the year ended December 31, 2016. The Company continues to
achieve revenue-generating milestones with its Westport HPDI
2.0TM launch customer and with various other customers, and in the
fourth quarter of 2017, the Company began selling its Westport
HPDI 2.0TM products.
CWI
CWI revenue for the year ended December 31, 2017 was $317.3
million compared with $276.5 million for the year ended December
31, 2016. Unit sales for the year ended December 31, 2017 were
7,955 compared to 7,232 for the year ended December 31, 2016.
The increase in revenue was primarily due to the increase in units
sold and an increase in parts revenue attributed to the increase in
the natural gas engine population in service.
GROSS MARGIN 2017/2016
Total consolidated gross margin increased $27.9 million, or 77%
from $36.3 million in 2016 to $64.2 million in 2017.
The following table presents gross margin by segment for 2017
compared to 2016:
GROSS MARGIN
RESEARCH & DEVELOPMENT
Management's Discussion and Analysis | Results from Operations
(expressed in
millions of U.S.
dollars)
Year
ended
Dec 31,
2017
% of
Revenue
Year
ended
Dec 31,
2016
Change
% of
Revenue
$
%
Automotive
$ 57.9
24% $ 32.2
19% $ 25.7
80 %
Corporate
and
Technology
Investments
CWI
WWI
6.3
82%
4.1
80% 2.2
109.5
35% 77.1
28% 32.4
54 %
42 %
—
—%
3.0
10% (3.0)
(100)%
Total
segment
gross margin $173.7
31% $ 116.4
24% $ 57.3
49 %
Less: equity
investees'
gross margin
Total
consolidated
gross
margin
109.5
35% 80.1
26% 29.4
37 %
$ 64.2
26% $ 36.3
20% $ 27.9
77 %
Automotive
Automotive gross margin increased by $25.7 million to $57.9 million,
or 24% of revenue, for the year ended December 31, 2017,
compared to $32.2 million, or 19% of revenue for the year ended
December 31, 2016. Gross margins increased due to higher
revenues, lower obsolescence charges, an acquisition-related
adjustment in the prior year and cost reductions resulting from the
restructuring activities beginning in the third quarter of 2016.
Corporate and Technology Investments
Corporate and Technology Investments gross margin for the year
ended December 31, 2017 was $6.3 million compared with $4.1
million for the year ended December 31, 2016. The Company
continues to achieve milestones with its Westport HPDI 2.0TM
launch customer and other partners.
CWI
CWI gross margin increased by $32.4 million to $109.5 million, or
35% of revenue from $77.1 million or 28% of revenue in the prior
year. The increase in gross margin and gross margin percentage
is driven by higher revenues, a favorable parts revenue mix
compared to the prior year. In addition, there was a positive
warranty adjustment of $9.9 million for the year ended December
31, 2017 compared to a negative warranty adjustment of $0.6 million
for the year ended December 31, 2016.
RESEARCH & DEVELOPMENT
EXPENSES 2017/2016
The following table presents details of research and development
(“R&D”) expense by segment for 2017 compared to 2016:
Years ended
Dec 31
Change
(expressed in millions of U.S. dollars)
2017
2016
$
%
Automotive
$ 16.0 $ 16.1 $ (0.1)
(1 )%
Corporate and Technology
Investments
Total Research and
Development
35.1
39.8
(4.7)
(12 )%
$ 51.1 $ 55.9 $ (4.8)
(9 )%
Automotive
Automotive R&D expenses for the year ended December 31, 2017
was $16.0 million compared with $16.1 million for the year ended
December 31, 2016. For the year ended December 31, 2016, total
Automotive R&D expenses only includes expenditures for the seven
month period since the June 1, 2016 acquisition. Overall, R&D
expenses decreased due to restructuring activities taken in 2016
with the closure of the Australian office and reduction of workforce
in the US Automotive business, offset by slightly higher charges
due to the strength of the Euro compared to the US dollar.
Corporate and Technology Investments
Corporate and Technology Investments R&D expenses for the year
ended December 31, 2017 were $35.1 million compared with $39.8
million for the year ended December 31, 2016. R&D expenses
decreased due to a reduction in headcount in Vancouver and China
due to restructuring activities beginning in third quarter of 2016,
offset by slightly higher charges due to the increase of the Canadian
dollar compared to the US dollar. R&D expenses are expected to
decrease in 2018 as the Company launched Westport HPDI 2.0TM
in the fourth quarter of 2017.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2017/2016
The following table presents details of Sales and Marketing, General
and Administrative (“SG&A”) expense by segment for 2017
compared to 2016:
SELLING, GENERAL &
ADMINISTRATIVE
Years ended
Dec 31
Change
(expressed in millions of U.S. dollars)
2017
2016
$
%
Automotive
$ 35.8 $ 28.5 $
7.3
26 %
Corporate and Technology
Investments
Total Selling, General and
Administrative
28.7
35.0
(6.3)
(18 )%
$ 64.5 $ 63.5 $
1.0
2 %
Automotive
Automotive SG&A expenses for year ended December 31, 2017
were $35.8 million compared with $28.5 million for the year ended
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 7
decrease is due to softness in the end markets of Europe, Argentina
and the United States as a result of low oil prices and other factors
impacting local economies.
Fuel Systems' Automotive revenue for the seven months period
since the acquisition through to December 31, 2016 was $85.4
million compared to $107.3 million for the same seven months
period from 2015. Sales in Europe and Argentina have been
impacted by lower exchange rates and softer end markets resulting
from the decline in oil prices. Sales in the final quarter of 2016 were
the strongest of the year as some stability returned to oil prices in
the latter half of the year.
Corporate and Technology Investments
Corporate and Technology Investments revenue for the year ended
December 31, 2016 increased $1.9 million, or 59% from $3.2 million
to $5.1 million. The increase is primarily driven by revenue
generated through new OEM partnerships related to the Company's
HPDI technology. The Company met several key milestones in
relation to Westport HPDI 2.0TM during 2016 with OEM partners.
CWI
CWI revenue for the year ended December 31, 2016 decreased
$55.4 million, or 17% from $331.9 million to $276.5 million. CWI
product revenue for the year ended December 31, 2016 decreased
$68.8 million, or 25%, to $205.2 million on sales of 7,232 units
compared to $274.0 million and 9,940 units for the year ended
December 31, 2015, which was primarily attributed to weak market
demand caused by sustained lower oil prices and competition with
higher efficiency diesel engines. CWI parts revenue for the year
ended December 31, 2016 was $71.2 million compared with $57.8
million for the year ended December 31, 2015 which was primarily
attributed to a higher engine population in service.
GROSS MARGIN 2016/2015
Total consolidated gross margin increased $18.2 million or 101%
from $18.1 million in 2015 to $36.3 million in 2016.
The following table presents gross margin by segment for 2016
compared to 2015:
Management's Discussion and Analysis | Results from Operations
December 31, 2016. For the year ended December 31, 2016, total
Automotive SG&A expenses only includes expenditures associated
with the Fuel Systems acquisition for the seven month period since
June 1, 2016. SG&A expense also increased in the year ended
December 31, 2017 due to the strong Euro as compared to the prior
year and an increase to the bonus accrual. .
Corporate and Technology Investments
Corporate and Technology Investments SG&A expenses for the
year ended December 31, 2017 were $28.7 million compared with
$35.0 million for the year ended December 31, 2016. The decrease
is due to merger related costs associated with the Fuel Systems
acquisition in 2016 which did not occur in 2017 and lower salary
expense due to restructuring activities that took place in 2016. The
decrease was offset by an increase to the bonus accrual and a
stronger Canadian dollar as compared to the prior year.
Items Affecting Comparability of
Results from 2015 to 2016
REVENUE 2016/2015
Total segment revenues decreased $137.4 million, or 22% from
$621.2 million in 2015 to $483.8 million in 2016.
The following table summarizes total revenue by segment for the
years ended December 31, 2016 compared to the year ended
December 31, 2015:
REVENUE
Years ended
Dec 31
Change
(expressed in millions of U.S. dollars)
2016
2015
$
%
Automotive - Westport
$
86.9 $ 100.1 $ (13.2)
(13)%
Automotive -
Fuel Systems
Total Automotive
Corporate and Technology
Investments
CWI
WWI
85.4
—
172.3
100.1
85.4
72.2
5.1
276.5
29.9
3.2
331.9
186.0
1.9
(55.4)
(156.1)
Total segment revenues
$ 483.8 $ 621.2 $ (137.4)
N/A
72 %
59 %
(17)%
(84)%
(22)%
Less: Equity investees'
revenues
Total consolidated
revenues
306.4
517.9
(211.5)
(41)%
$ 177.4 $ 103.3 $
74.1
72 %
Automotive
Automotive revenue for the year ended December 31, 2016 was
$172.3 million compared to $100.1 million for 2015. Total revenue
for 2016 includes sales from Fuel Systems' business for the seven-
month period since the June 1, 2016 acquisition. Excluding the
acquisition, Westport's automotive revenue declined 13% in 2016
compared to 2015. Approximately, 2% of this decrease is due to
the decline in the Euro against the U.S. dollar. The remaining
8 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
17.7
23%
—
—% 17.7
N/A
RESEARCH & DEVELOPMENT
GROSS MARGIN
(expressed in millions
of U.S. dollars)
Automotive -
Westport
Automotive -
Fuel Systems
Total
Automotive
Corporate and
Technology
Investments
CWI
WWI
Total segment
gross margin
Less: equity
investees'
gross margin
Total
consolidated
gross margin
Year
ended
Dec 31,
2016
% of
Revenue
Year
ended
Dec 31,
2015
Change
% of
Revenue
$
%
$ 14.5
17% $ 14.9
15% $ (0.4)
(3)%
32.2
19% 14.9
15% 17.3 116 %
4.1
77.1
3.0
80%
3.2
100%
0.9
28 %
28% 101.4
31% (24.3)
(24)%
10% 21.4
12% (18.4)
(86)%
$116.4
24% $140.9
23% $ (24.5)
(17)%
80.1
26% 122.8
24% (42.7)
(35)%
$ 36.3
20% $ 18.1
18% $ 18.2 101 %
Automotive
Automotive - gross margin increased $17.3 million to $32.2
million,or 19% of revenue, for the year ended December 31, 2016
compared to $14.9 million or 15% of revenue for the year ended
December 31, 2015. The increase in gross margin was a result of
the merger with Fuel Systems. Excluding the merger and the
decrease in 2016 inventory obsolescence provision compared to
2015, Automotive gross margin would have decreased by $3.6
million. The decrease is due to a 13% decrease in revenue and
changes in product mix in our European businesses.
Fuel Systems' gross margin includes $1.4 million for amortization
of the inventory fair value adjustment recorded on acquisition.
Excluding this adjustment, the gross margin and gross margin
percentage would have been $16.7 million and 21%, respectively
compared to $19.5 million and 20% for the seven months from the
prior year. The increase in the gross margin percentage was the
result of direct material cost reduction activities, restructuring of the
US automotive business and lower warranty charges.
The high pressure components and electronics product lines,
formerly classified under the Industrial business segment, were
consolidated into the Automotive business and attributed to $2.4
million of the increase in 2016 from 2015.
CWI
CWI gross margin decreased $24.3 million to $77.1 million, or 28%
of revenue for the year ended December 31, 2016, compared to
$101.4 million or 31% of revenue, for the year ended December 31,
2015 as a result of a 27% decrease in engines sold during the
period.
Management's Discussion and Analysis | Results from Operations
RESEARCH & DEVELOPMENT
EXPENSES 2016/2015
The following table presents details of research and development
(“R&D”) expense by segment for 2016 compared to 2015:
Years ended
Dec 31
Change
(expressed in millions of U.S. dollars)
2016
2015
$
%
Automotive - Westport
$
9.6 $
13.6 $
(4.0)
(29)%
Automotive - Fuel Systems
Automotive
Corporate and Technology
Investments
Total Research and
Development
6.5
16.1
—
13.6
39.8
39.2
6.5
2.5
0.6
N/A
18 %
2 %
$
55.9 $
52.8 $
3.1
6 %
Automotive
Automotive R&D expenses for the year ended December 31, 2016
increased by $2.5 million primarily due to the R&D costs associated
with Fuel Systems, offset by lower R&D costs of Westport. The
Westport R&D expense decreased $4.0 million as a result of closing
the Australia research facility in June 2016, reductions in program
expenses, decreased headcount, and favorable impacts of foreign
currency translation from the Euro and the Canadian to the US dollar
equivalent.
Corporate and Technology Investments R&D expenses increased
$0.6 million from $39.2 million to $39.8 million as the Company
prepares for the 2017 commercial launch of HPDI 2.0.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2016/2015
The following table presents details of Sales and Marketing, General
and Administrative (“SG&A”) expense by segment for 2016
compared to 2015:
SELLING, GENERAL &
ADMINISTRATIVE
(expressed in millions of U.S. dollars)
Years ended
Dec 31
2016
2015
Change
$
%
Automotive - Westport
$ 16.2 $ 18.3 $
(2.1)
(11)%
Automotive - Fuel Systems
Automotive
Corporate and Technology
Investments
Total selling, general and
administrative
12.3
28.5
—
18.3
12.3
10.2
N/A
56 %
35.0
34.4
0.6
2 %
$ 63.5 $ 52.7 $ 10.8
20 %
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 9
Management's Discussion and Analysis | Results from Operations
Automotive SG&A
Automotive SG&A expenses for the year ended December 31, 2016
increased by $10.2 million primarily due to the SG&A expenses from
Fuel Systems offset by lower SG&A expense of Westport. Westport
SG&A expenses decreased $2.1 million due to a reduction in
workforce.
Corporate and Technology Investments
Corporate and Technology Investments SG&A expenses increased
$0.6 million due to an increase of $2.5 million relating to merger
transaction costs compared to 2015, offset by lower salary
expenses from our restructuring activities.
Other Significant Expense and
Income Items for 2017,
2016 and 2015
RESTRUCTURING
Restructuring expenses recognized for the year ended December
31, 2017 were $1.7 million compared to $19.0 million for the year
ended December 31, 2016. Beginning in the third quarter of 2016,
the Company initiated a series of restructuring activities which
include the consolidation of facilities in Argentina, Canada, China,
Italy and the United States. This resulted in an implementation of
a reduction in workforce resulting in employee severance, one-time
termination benefits and contract termination costs in the prior year.
Refer to the consolidated financial statements note 14 for additional
details.
FOREIGN EXCHANGE GAINS & LOSSES
Foreign exchange gains and losses reflect net realized gains and
losses on foreign currency transactions and the net unrealized gains
and losses on our net U.S. dollar denominated monetary assets
and liabilities in our Canadian operations that were mainly
composed of cash and cash equivalents, short-term investments,
accounts receivable and accounts payable. In addition, the
Company has foreign exchange exposure on Euro denominated
monetary assets and liabilities where the functional currency of the
subsidiary is not the Euro. For the year ended December 31, 2017,
we recognized a net foreign exchange loss of $0.6 million with the
strengthening in the Canadian dollar and Euro relative to the U.S.
dollar. A majority of the foreign exchange loss for the year ended
December 31, 2017 is unrealized.
For the year ended December 31, 2016, we recognized a net foreign
exchange loss of $6.6 million with the movement in the Canadian
dollar and Euro relative to the U.S. dollar. This compares to a net
foreign exchange gain of $11.6 million for the year ended December
31, 2015.
DEPRECIATION & AMORTIZATION
10 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Depreciation and amortization for the years ended December 31,
2017, December 31, 2016, and December 31, 2015 were $15.0
million, $15.4 million, and 13.7 million, respectively. The decrease
in expense is due to an overall decline in completed purchases of
property, plant and equipment, offset by an increase due to the
acquisition of Fuel Systems. The amount included in cost of product
revenue for the same periods were $5.2 million, $4.3 million and
$2.0 million. The increase in 2016 is due to the acquisition of Fuel
Systems in June 2016 and seven months of depreciation and
amortization expense.
INCOME FROM OUR INVESTMENTS
Income from investments primarily relates to our 50% interest in
CWI, accounted for by the equity method. Up until the end of the
first quarter of 2016, the Company also recorded its 35% interest
in WWI using the equity method; however, due to our sale of a
portion of our economic interest in WWI on April 20, 2016, we no
longer have the ability to exercise significant influence and,
therefore, with effect from the second quarter of 2016, we have
accounted for our interest using the cost method.
INCOME FROM INVESTMENTS
(expressed in millions of U.S. dollars)
Years ended Dec 31
2016
2015
2017
CWI - 50% interest income (loss)
$
12.4 $
5.6 $
16.4
WWI
Other
—
0.1
0.2
—
1.0
0.2
Income from investments
accounted for by the equity
method
$
12.5 $
5.8 $
17.6
As a result of the U.S. tax reform substantially enacted in the fourth
quarter of 2017, CWI recorded a deferred tax expense of $13.4
million in 2017 which reduced income from investments by $6.7
million.
INTEREST ON LONG-TERM DEBT AND
AMORTIZATION OF DISCOUNT EXPENSE
INTEREST ON LONG-TERM DEBT &
AMORTIZATION OF DISCOUNT
EXPENSE
Years ended Dec 31
(expressed in millions of U.S. dollars)
2017
2016
2015
Canadian debentures - 9% per annum
$
2.7 $
3.7 $
Senior financing facilities
Convertible note - 9% per annum
Amortization of discount and non-cash
interest expense
0.7
1.6
9.5
0.7
0.9
5.5
Total interest on long-term debt
$ 14.5 $ 10.8 $
3.9
0.9
—
0.7
5.5
Interest on long-term debt for the year ended December 31, 2017
of $14.5 million is higher by $3.7 million compared to the year ended
December 31, 2016. The sale of the APU business and the sale of
additional Industrial assets resulted in royalty prepayments to
Cartesian of approximately $10.9 million. The Company recorded
an additional finance charge of $5.2 million as a result of the
prepayment of the royalty payable on the completion of these
transactions in the second quarter of 2017. This was offset by lower
interest on the Canadian debentures due to maturity and repayment
of the debt in the third quarter of 2017.
Interest on long-term debt for the year ended December 31, 2016
of $10.8 million was higher compared to the year ended December
31, 2015 due to additional interest accrued on the convertible debt
and the accretion of the residual Cartesian long-term royalty
payable.
INCOME TAX RECOVERY
Income tax recovery for the year ended December 31, 2017 was
$4.4 million compared to an income tax expense of $4.0 million for
the year ended December 31, 2016 and an income tax expense of
$0.7 million for year ended December 31, 2015.
The tax recovery for 2017 relates to the use of tax losses to offset
the tax expense related to the gain on sale of Industrial assets. The
increase in tax expense for 2016 as compared to 2015 primarily
relates to higher distributable earnings from our investment in CWI.
DISCONTINUED OPERATIONS
Discontinued operations, as discussed in note 6 in the 2017
consolidated financial statements, substantially all of the Industrial
business segment (excluding the electronics and high pressure
product lines) was sold during the second quarter of 2017. The
Company recognized a net gain on sale of assets of $58.3 million.
Capital Requirements,
Resources and Liquidity
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 “Business Risks and Uncertainties”
section of this MD&A and of our AIF.
While the Company incurred significant recurring losses and
negative cash flows from operating activities during 2017 and prior
years, in the course of 2017 it completed significant asset sales and
a capital increase which allowed reimbursement of long-term debt
falling due in the year and continues to work towards its goals of
increasing
reducing expenditures, which
management expects will allow achievement of significantly
improved operating cash flows in 2018. In particular, with the
Westport HPDI 2.0TM product now in production, the engineering
revenues and
Management's Discussion and Analysis | Results from Operations
and development spend and the associated capital expenditures
on this product will decrease significantly in 2018 and this reduction
will improve cash flows. See the Business Overview and General
Developments section in this MD&A for further discussion on
liquidity and going concern.
Our cash and cash position has increased by $10.9 million during
2017 to $71.8 million from $60.9 million at December 31, 2016. The
increase is primarily the result of cash flows from the sale of the
APU and Industrial businesses, cash generated from the equity
issuance and a $20.0 million loan from EDC offset by the repayment
of maturing debt, capital expenditures and research and
development investment in our HPDI program, and restructuring
costs incurred. Cash and cash equivalents consist of guaranteed
investment certificates, term deposits and bankers acceptances
with maturities of 90 days or less when acquired.
The Company has sustained net losses since inception, and as at
December 31, 2017 has an accumulated deficit of $966.9 million.
Management believes that the cash balances available as of
December 31, 2017 and the improved cash flow expected in 2018
will provide sufficient funds for the Company to meet its obligations
beyond the next 12 months. The accompanying consolidated
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Cash Flow from
Operating Activities
We prepare our statement of cash flows using the indirect method.
Under this method, we reconcile net loss to cash flows from
operating activities by adjusting net loss for those items that impact
net loss but may not result in actual cash receipts or payments
during the period. These reconciling items include but are not limited
to depreciation and amortization, stock-based compensation
expense, unrealized
from
investments accounted for by the equity method, provisions for
inventory reserves and doubtful accounts, and changes in the
consolidated balance sheet for working capital from the beginning
to the end of the period.
foreign exchange gain,
income
In 2017, our net cash flow used in operating activities in continuing
operations was $47.5 million, a decrease of $32.9 million from net
cash flow used in operating activities in the year ended
December 31, 2016. The decreased cash flows was primarily driven
by improved net income loss from operations and stronger
management of working capital.
Cash Flow from
Investing Activities
Our net cash from investing activities consisted primarily of cash
acquired through the acquisition of Fuel Systems, dividends
received from joint ventures and the sale of assets and investments,
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 11
Management's Discussion and Analysis | Capital Requirements, Resources & Liquidity
offset by purchases of property, plant and equipment property
(“PP&E”).
During 2017, proceeds from the sale of assets classified as
discontinued operations were $77.1 million. In addition, dividends
from CWI increased by $3.2 million from $13.4 million in 2016 to
$16.6 million in 2017. This cash inflow was offset by significant
capital purchases mainly for the HPDI program of $25.3 million
compared to $8.7 million from the prior year. In 2016, the Company
acquired $45.3 million of cash when it acquired Fuel Systems and
the sales of the Weichai investment and Plymouth plant asset also
returned positive investment cash flows of $13.0 million and $11.7
million, respectively.
Cash Flow from
Financing Activities
In 2017, the Company's net cash flow from financing activities
decreased compared to 2016 by $45.7 million. In 2017, the
Company received proceeds of $46.1 million from the issuance of
shares and a new long-term debt facility. The Company also repaid
its subordinate debenture and a portion of its royalty payable of
$44.8 million and $11.5 million, respectively. In 2016, no debt was
repaid and the Company issued a convertible note and royalty
payable to Cartesian for proceeds of $35.0 million.
Cash Flow from
Discontinued Operations
In 2017, our net cash flows from discontinued operations was $83.1
million due to the sale of the Auxiliary Power Units and other
Industrial businesses.
Contractual Obligations
and Commitments
CONTRACTUAL CASH FLOWS
(expressed in millions of
U.S. dollars)
Carrying
Amount
Contractual
Cash Flows < 1yr
1-3
yrs
4-5
yrs
> 5
yrs
Accounts payable
and accrued
liabilities
Restructuring
obligations
Long-term debt,
principal1
Long-term debt,
interest1
Long-term royalty
payable2
Operating lease
commitments
$ 87.2 $
87.2 $87.2 $ — $ — $ —
3.0
3.0
3.0
—
—
54.4
54.4
9.0
14.5
30.9
—
14.2
5.6
7.2
1.4
—
—
—
19.0
35.0
2.0
11.1
14.1
7.9
—
17.8
9.0
6.5
2.2
0.1
$163.6 $ 211.6 $115.8 $ 39.3 $ 48.6 $ 8.0
12 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
1. For details of our long-term debt, principal and interest, see note 15 of
the consolidated financial statements. To the extent that our outstanding
debt bears interest at floating rates, contractual cash flows for interest
have been calculated based on interest rates at December 31, 2017.
2. For details of our long-term royalty payable, see note 16 of the
consolidated financial statements.
Shares Outstanding
For the year ended December 31, 2017, the weighted average
number of shares used in calculating the loss per share was
119,558,566. During the year ended December 31, 2017, we
granted 993,659 RSUs and PSUs (together the “Share Units”). The
Common Shares, share options and Share Units outstanding and
exercisable as at the following dates are shown below:
SHARES OUTSTANDING
(weighted average exercise
prices are presented in
Canadian dollars)
Dec 31, 2017
Mar 19, 2018
Shares / units WAEP Shares / units WAEP
Common Shares
outstanding
Share Units
Outstanding1
Exercisable
131,279,709
131,724,272
4,509,990
636,073
N/A
N/A
4,065,427
191,510
N/A
N/A
1. As at December 31, 2017, includes 1,460,000 (March 19, 2018 -
1,460,000) PSUs with the payout level expected to be at 50%.
Critical Accounting
Policies and Estimates
Our consolidated financial statements are prepared in accordance
with U.S. GAAP, which requires us to make estimates and
assumptions that affect the amounts reported in our consolidated
financial 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 judgment,
estimates and assumptions in determining their reported amounts,
include our warranty liability, revenue recognition, inventories, and
property, equipment, furniture and leasehold improvements. The
application of these and other accounting policies are described in
Note 3 of our calendar year 2017 annual consolidated financial
statements. Actual amounts may vary significantly from estimates
used.
Warranty Liability
Estimated warranty costs are recognized at the time we sell our
products and included in cost of revenue. 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 record adjustments to
our assumptions based on the latest information available at that
Management's Discussion and Analysis | Critical Accounting Policies & Estimates
time. Since a number of our 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 and our statement of operations. New
product launches require a greater use of judgment in developing
estimates until claims experience becomes available. Product
specific experience is typically available four or five quarters after
product launch, with a clear experience trend not evident until eight
to twelve quarters after launch. We generally record warranty
expense for new products upon shipment using a factor based upon
historical experience from previous engine generations in the first
year, a blend of actual product and historical experience in the
second year and product specific experience
thereafter.
Adjustments to and estimated future direct warranty costs are
accrued and charged to cost of revenue in the period when the
related revenues are recognized while indirect warranty overhead
salaries and related costs are charged to cost of revenue in the
period incurred.
Revenue Recognition
The Company recognizes revenue upon transfer of title and risk of
loss, generally when products are shipped, provided there is (1)
persuasive evidence of an arrangement, (2) there are no
uncertainties regarding customer acceptance, (3) the sales price is
fixed or determinable and (4) management believes collectibility is
reasonably assured.
The Company recognizes service revenue from research and
development arrangements based on the contracts and the ability
of the Company to measure its performance. Depending on the
contract, revenues may be recognized using the milestone,
percentage of completion, or completed contract methods of
accounting. All costs incurred related to revenue earned from
research and development contracts are recorded as research and
development expense as incurred.
Inventories
The Company’s inventories consist 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 or first-in, first-out and net realizable value.
The cost of fuel system product inventories, assembled parts and
work-in-progress
labour and production
overhead including depreciation. The Company provides inventory
write-downs based on excess and obsolete inventories determined
primarily by future demand forecasts. In addition, the Company
records a liability for firm, noncancelable, and unconditional
purchase commitments with manufacturers for quantities in excess
of the Company’s future demand forecast consistent with its
valuation of excess and obsolete inventory.
includes materials,
Property, Plant and Equipment
and Intangible Assets
We consider whether or not there has been an impairment in our
long-lived assets, such as equipment, furniture and leasehold
improvements and intangible assets, whenever events or changes
in circumstances indicate that the carrying value of the assets may
not be recoverable. If such assets 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.
Impairment of Property,
Plant and Equipment
During the year ended December 31, 2017, the Company recorded
an impairment charge of $1.6 million. The impairment resulted
primarily from the write-down of engineering test equipment. The
method used to determine the fair value of the equipment was based
on utilization of assets and was recorded in the Corporate and
Technology segment.
Intangible Assets
Based on the revenue and operating results, the Company
concluded there were impairment indicators as of November 30,
2017 and November 30, 2016 requiring the performance of a long-
lived assets impairment test for customer contracts, technology and
other intangibles. The Company completed its assessments at
November 30, 2017 and November 30, 2016, respectively, and
concluded that intangible assets were not impaired.
New Accounting
Pronouncements and
Developments
New Accounting
Pronouncements to be Adopted
in the Future
REVENUE
In May 2014, Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Updates ("ASU") 2014-09, Revenue
From Contracts With Customers (“Topic 606”). Topic 606 removes
inconsistencies and weaknesses
revenue accounting
requirements, provides a more robust framework for addressing
revenue issues, improves comparability of revenue recognition
in
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 13
Management's Discussion and Analysis | New Accounting Pronouncements & Developments
through
practices across entities, industries, jurisdictions and capital
markets, provides more useful information to users of financial
statements
improved disclosure requirements and
simplifies the preparation of financial statements by reducing the
number of requirements to which an entity must refer. The guidance
in this update supersedes the revenue recognition requirements in
Topic 605, Revenue Recognition, and most previously existing
industry-specific guidance throughout the Industry Topics of the
Accounting Standards Codification. Topic 606 is effective for public
entities with reporting periods beginning after December 15, 2017.
ASU 2014-09 and related ASUs may be adopted using either the
full retrospective method, in which case the standard would be
applied to each prior reporting period presented, or the modified
retrospective method, in which case the cumulative effect of
applying the standard would be recognized at the date of initial
application. We will adopt ASU 2014-09 and related ASUs on
January 1, 2018, using the modified retrospective method. The
Company completed its assessment at December 31, 2017, and
concluded that there is no material impact to its financial statements
on adoption. The Company implemented the necessary changes
to its business processes and controls to support revenue
recognition and disclosures under the new standard in the fourth
quarter of 2017.
STATEMENT OF CASH FLOWS (TOPIC
230): CLASSIFICATION OF CERTAIN
CASH RECEIPTS AND CASH PAYMENTS
In August 2016, the FASB issued ASU 2016-15, which provides
cash flow classification guidance on eight specific cash flow issues
to reduce diversity in practice for which authoritative guidance did
not previously exist. ASU 2016-15 is effective for public entities in
annual and interim periods in fiscal years beginning after December
15, 2017, with early adoption permitted. The Company does not
anticipate a material impact to the Company's financial statements
as a result of application of this guidance.
INCOME TAXES (TOPIC 740):
ACCOUNTING FOR INCOME TAXES ON
INTERCOMPANY TRANSFERS:
In October 2016, the FASB issued ASU 2016-16, which requires
entities to recognize the income tax consequences of intercompany
asset transfers in the period in which the transfer occurs, with the
exception of inventory transfer. ASU 2016-16 is effective for interim
and annual periods beginning after December 15, 2017. The
Company does not anticipate a material impact to the Company's
financial statements as a result of this change.
LEASES (TOPIC 842):
In February 2016, the FASB issued ASU 2016-02, which increases
transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. ASU
14 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
2016-02 is effective for annual and interim periods beginning after
December 15, 2018, and interim periods with early adoption
permitted. The Company's future minimum lease payments at
December 31, 2017 under operating leases are disclosed in note
21(a). The Company has not yet evaluated the impact of the
adoption of this new standard.
Regulatory Compliance
On June 15, 2017, the Enforcement Division of the SEC issued a
subpoena to Westport Fuel Systems for information concerning its
Weichai Westport Inc. joint venture and compliance with the FCPA
in connection with the Westport Fuel Systems operations in China.
The SEC Enforcement Division issued a follow up subpoena on
February 14, 2018. Westport Fuel Systems is cooperating with
these requests and cannot predict the duration, scope or outcome
of the SEC’s investigation. The investigation being conducted by
the SEC has required and will continue to require significant
resources.
Disclosure Controls
and Procedures and
Internal Controls Over
Financial Reporting
Evaluation of Disclosure
Controls and Procedures
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 such that appropriate decisions can be made regarding public
disclosures. As of the end of the period covered by this report, we
evaluated, under the supervision and with the participation of
management, including the CEO and CFO, the effectiveness of the
design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”).
The CEO and CFO have concluded that as of December 31, 2017,
our disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified therein and accumulated
and reported to management to allow timely discussions regarding
required disclosures.
Management's Discussion and Analysis | Disclosure Controls & Procedures
accounting for discontinued operations was not designed with
sufficient precision to prevent or detect a material error in its
accounting. Accordingly, a reasonable possibility existed that a
material misstatement in the Company’s financial statements
related to the accounting for discontinued operations would not be
prevented or detected on a timely basis as evidenced by the error
that occurred in the second quarter. In the third quarter of 2017, we
developed enhanced control and review procedures which detected
and remediated the control deficiency.
KPMG LLP, our independent registered public accounting firm, has
audited our consolidated financial statements and expressed an
unqualified opinion thereon. KPMG has also expressed an
unqualified opinion on the effective operation of our internal control
over financial reporting as of December 31, 2017. KPMG's audit
report on effectiveness of internal control over financial reporting is
included in the consolidated financial statements of this filing.
Management's Report
on Internal Control Over
Financial Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) promulgated under the
Exchange Act. Our internal control over financial reporting is
designed under our supervision, and affected by the Company’s
board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s consolidated financial
statements for external reporting purposes in accordance with U.S.
GAAP and the requirements of the SEC, as applicable. There are
inherent limitations in the effectiveness of internal control over
financial reporting, including the possibility that misstatements may
not be prevented or detected. Accordingly, even effective internal
controls over financial reporting can provide only reasonable
assurance with respect
financial statement preparation.
Furthermore, the effectiveness of internal controls can change with
circumstances.
to
All internal control systems, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues have been
detected. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under potential future conditions, regardless of how
remote. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial
statement preparation and presentation.
to criteria described
Management, including the CEO and CFO, has evaluated the
effectiveness of our internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, in
relation
Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on
this evaluation, management has determined that our internal
control over financial reporting was effective as of December 31,
2017.
in
During the year ended December 31, 2017, there were no changes
to our internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our internal
controls over financial reporting except as follows:
An error was identified in our financial statements for the period
ended June 30, 2017 relating to accounting for discontinued
operations. Accounting for discontinued operations was a new
requirement as the Company had not had discontinued operations
historically. Management concluded that its review control over the
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 15
Management's Discussion and Analysis | Summary of Quarterly Results
Summary of Quarterly Results and Discussion of
the Quarter Ended December 31, 2017
Our revenues and operating results can vary significantly from quarter to quarter depending on the timing of product deliveries, product mix,
acquisitions, product launch dates, research and development project cycles, timing of related government funding, impairment charges, stock-
based compensation awards 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, recognition of tax benefits and other similar events.
The following table provides summary unaudited consolidated financial data for our last eight quarters:
SELECTED CONSOLIDATED QUARTERLY OPERATIONS DATA
(expressed in millions of United States
dollars except for per share amounts)
2016
2017
Three months ended: Mar 31
Jun 30
(1) (2)
Sep 30
(2)
Dec 31
(1) (2)
Mar 31
Jun 30
(3)
Sep 30
Dec 31
(4)
Total revenue
Cost of product and parts revenue
Gross margin
Gross margin percentage
Net loss from continuing operations
Net income (loss) for the period
EBITDA (5)
Adjusted EBITDA (6)
Earnings (loss) per share
Basic
Diluted
CWI net income attributable to the Company
$
$
$
$
$
$
$
$
$
24.0
$
17.6
$
37.2
29.1
56.1
47.5
$
6.4
$
8.1
$
8.6
$
60.1
47.0
13.1
$
$
60.0
42.5
17.5
$
$
62.1
46.3
15.8
$
$
60.8
45.9
14.9
$
$
64.2
48.2
16.0
26.7%
22.5%
17.5%
23.1%
29.2%
25.4%
24.5%
24.9%
(24.6) $
(24.6) $
(19.3) $
3.3
3.7
9.7
$
$
$
(33.8) $
(44.4) $
(12.8) $
(13.4) $
(15.7) $
(19.2)
(33.5) $
(43.2) $
(12.5) $
32.3
$
(15.6) $
(14.2)
(25.7) $
(33.1) $
(6.5) $
(7.5) $
(10.5) $
(12.9)
(11.9) $
(11.5) $
(10.4) $
(10.6) $
(4.1) $
(5.3) $
(5.0) $
(3.5)
(0.38) $
(0.38) $
0.5
$
0.05
0.04
1.5
$
$
$
(0.31) $
(0.43) $
(0.11) $
(0.31) $
(0.43) $
(0.11) $
2.8
$
0.8
$
1.8
$
0.29
0.26
5.3
$
$
$
(0.12) $
(0.14)
(0.12) $
(0.14)
5.8
$
(0.4)
1.
Includes the one month period of results from the merger with Fuel Systems and a bargain purchase gain in net loss from continuing operations of $42.9
million for the three months ended June 30, 2016, which was reduced by $7.1 million to $35.8 million for the three months ended December 31, 2016.
2. The Company has modified information for Q2, Q3 and Q4 of 2016 to exclude substantially all of the Industrial business segment, which has been reclassified
as discontinued operations.
3. During the second quarter of 2017, the Company completed the sale of non-core assets from its Industrial business unit and recognized a gain on sale of
assets of $58.3 million.
4. During the fourth quarter of 2017, the CWI recorded a tax charge of $13.4 million due to the US tax reform. This redeuced the Company's income from
investments by $6.7 million. Excluding this tax charge, the net loss from continuing operations would have been $12.5 million and the net loss for the period
would have been $7.5 million.
5. The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to U.S. GAAP. See non-
GAAP measures for more information.
6. The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity presented in
accordance with U.S. GAAP. Westport Fuel Systems defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-based compensation, unrealized
foreign exchange gain or loss, and non-cash and other adjustments. See non-GAAP measures for more information.
Three Months Ended December 31, 2017 & 2016
Our total revenue for the three months ended December 31, 2017 was $64.2 million, an increase of $4.1 million, or 7% from $60.1 million for
the three months ended December 31, 2017. The increase in revenue was primarily the result of the stronger Euro and pre-production launch
of the Company's Westport HPDI 2.0TM product.
Our consolidated net loss for the three months ended December 31, 2017 was $14.2 million, or a loss of $0.14 per share compared to a net
loss of $43.2 million, or a loss of $0.43 per share, for three months ended December 31, 2016. The decrease in net loss primarily relates to
higher gross margins, lower operating costs, gain in unrealized foreign exchange translation and lower impairment costs in 2017, offset by
lower investment income from our CWI join venture due to our 50% equity interest in a $13.4 million tax charge recorded by the joint venture
related to the impact of the US tax reform on its valuation of deferred tax assets.
16 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Management's Discussion and Analysis | Summary of Quarterly Results
Non-GAAP Measures
We use certain non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized
meaning prescribed in U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.
EBITDA
The term EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. The Company defines
EBITDA as loss before income taxes adjusted for interest expense (net) and depreciation and amortization.
Management believes that EBITDA is an important indicator commonly reported and widely used by investors and analysts as an indicator of
the Company’s operating performance and ability. The intent is to provide additional useful information to investors and analysts and such
measures do not have any standardized meaning under U.S. GAAP. These measures should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with U.S. GAAP. Other issuers may define EBITDA differently.
QUARTERLY EBITDA DATA
Three months ended:
Mar 31
Jun 30
Sep 30
Dec 31
Mar 31
Jun 30
Sep 30
Dec 31
Loss before income taxes
Interest Expense, net (1)
Depreciation and amortization
EBITDA
$
$
(24.7) $
3.6 $
(33.6) $
(40.8) $
(13.6) $
(17.3) $
(15.3) $
(19.2)
2.3
3.1
2.6
3.5
3.2
4.7
4.3
3.4
3.4
3.7
6.3
3.5
0.9
3.9
2.5
3.9
(19.3) $
9.7 $
(25.7) $
(33.1) $
(6.5) $
(7.5) $
(10.5) $
(12.9)
2016
2017
1. Interest expense, net is calculated as interest and other income, net of bank charges and interest on long-term debt and other payables and amortization of
discount.
EBITDA decreased by $2.4 million from a loss of $10.5 million for the three months ended September 30, 2017 to a loss of $12.9 million in the
three months ended December 31, 2017 primarily as a consequence of a CWI tax charge which reduced investment income by $6.7 million,
offset by stronger operating income performance.
Adjusted EBITDA
The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity
presented in accordance with U.S. GAAP.
Adjusted EBITDA is used by management to review operational progress of its business units and investment programs over successive periods
and as a long-term indicator of operational performance since it ties closely to the unit’s ability to generate sustained cash flows.
Westport Fuel Systems defines Adjusted EBITDA as EBITDA from continuing operations adjusted for stock-based compensation, unrealized
foreign exchange gains or losses, and non-cash and other adjustments. Adjusted EBITDA has limitations as an analytical tool, and when
assessing the Company’s operating performance, investors should not consider Adjusted EBITDA in isolation, or as a substitute for net loss
or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Among other things, Adjusted EBITDA does not
reflect the Company’s actual cash expenditures. Other companies may calculate similar measures differently than Westport Fuel Systems,
limiting their usefulness as comparative tools. Westport Fuel Systems compensates for these limitations by relying primarily on its U.S. GAAP
results.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 17
Management's Discussion and Analysis | Summary of Quarterly Results
QUARTERLY ADJUSTED EBITDA DATA
Three months ended:
Mar 31
Jun 30
Sep 30
Dec 31
Mar 31
Jun 30
Sep 30
Dec 31
2016
2017
EBITDA
Stock based compensation
Unrealized foreign exchange (gain) loss
Asset impairment
Inventory impairment from product line closure
Bargain purchase gain
Merger and financing costs
Amortization fair value inventory adjustment
recorded on acquisition
(Gain) loss on sale of investments
Restructuring, termination and other exit costs
CWI US tax adjustment
Other
Adjusted EBITDA
$
(19.3) $
9.7 $
(25.7) $
(33.1) $
(6.5) $
(7.5) $
(10.5) $
(12.9)
4.0
1.3
—
—
—
2.1
—
—
—
—
—
2.3
4.1
—
—
(42.9)
4.5
0.4
6.3
—
—
4.1
2.9
(7.1)
—
4.3
—
0.4
1.0
(3.9)
17.5
—
0.2
1.2
8.1
2.7
1.3
7.1
—
—
(0.3)
1.5
—
0.9
1.1
(1.6)
—
—
—
—
—
—
1.6
—
1.3
3.1
1.0
—
—
—
—
—
—
(1.6)
—
(0.3)
2.1
2.5
—
—
—
—
—
—
(0.1)
—
1.0
0.7
(1.3)
0.6
—
—
—
—
—
1.8
6.7
0.9
$
(11.9) $
(11.5) $
(10.4) $
(10.6) $
(4.1) $
(5.3) $
(5.0) $
(3.5)
Related Party Transactions
The Company's related parties are CWI, Cartesian, directors, officers and shareholders which own greater than 10% of the Company's shares.
During 2017, Mr. Costamagna, the former Chief Executive Officer ("CEO") of Fuel Systems, left the Company's Board of Directors and was no
longer considered a related party. Mr. Costamagna and his associated companies continue to supply facilities, products and services to the
Company.
See Note 20 of the consolidated financial statements as at December 31, 2017 for details of related party transactions.
Business Risks and Uncertainties
An investment in our business involves risk and readers should carefully consider the risks described in our AIF 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 discussed in our AIF, 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
discussed in our AIF 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 AIF for the year ended December 31, 2017 under the heading “Risk
Factors” and is available on SEDAR at www.sedar.com.
18 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Reports
Report of Independent
Registered Public
Accounting Firm
To the Shareholders and Board of Directors of Westport Fuel
Systems Inc.
Opinion on the Consolidated
Financial Statements
We have audited the accompanying consolidated financial
statements of Westport Fuel Systems Inc. (the “Company”), which
comprise the consolidated balance sheets as at December 31, 2017
and December 31, 2016, the consolidated statements of operations
and comprehensive income (loss), shareholders’ equity and cash
flows for each of the years in the three-year period ended December
31, 2017, and the related notes, comprising a summary of significant
accounting policies and other explanatory information (collectively
referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the
Company as at December 31, 2017 and December 31, 2016, and
its consolidated results of operations and its consolidated cash flows
for each of the years in the three-year period ended December 31,
2017 in accordance with U.S. generally accepted accounting
principles.
Report on Internal Control Over
Financial Reporting
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December
31, 2017, based on the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our
report dated March 22, 2018 expressed an unqualified (unmodified)
opinion on the effectiveness of the Company’s internal control over
financial reporting.
Basis for Opinion
A - MANAGEMENT'S RESPONSIBILITY
FOR THE CONSOLIDATED FINANCIAL
STATEMENTS
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with U.S.
Reports
generally accepted accounting principles, and for such internal
control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
B - AUDITORS' RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”). Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material
misstatement, whether due to error or fraud. Those standards also
require that we comply with ethical requirements, including
independence. We are required to be independent with respect to
the Company in accordance with the ethical requirements that are
relevant to our audit of the consolidated financial statements in
Canada, the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and
the PCAOB. We are a public accounting firm registered with the
PCAOB.
in
the consolidated
An audit includes performing procedures to assess the risks of
material misstatements of the consolidated financial statements,
whether due to error or fraud, and performing procedures to respond
to those risks. Such procedures included obtaining and examining,
on a test basis, audit evidence regarding the amounts and
disclosures
financial statements. The
procedures selected depend on our judgment, including the
the
assessment of
consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control
relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances.
the risks of material misstatement of
An audit also includes evaluating the appropriateness of accounting
policies and principles used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a reasonable basis for our
audit opinion.
KPMG LLP, Chartered Professional Accountants,
We have served as the Company's auditors since 2015.
Vancouver, Canada
March 22, 2018
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 19
Reports
Report of Independent
Registered Public
Accounting Firm
To the Shareholders and the Board of Directors of Westport Fuel
Systems Inc.
Opinion on Internal Control
Over Financial Reporting
We have audited Westport Fuel Systems Inc.’s (the “Company”)
internal control over financial reporting as of December 31, 2017,
based on the criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2017, based on the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Report on the Consolidated
Financial Statements
We also have audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated financial statements of the Company, which
comprise the consolidated balance sheets as at December 31, 2017
and December 31, 2016, the consolidated statements of operations
and comprehensive income (loss), shareholders’ equity and cash
flows for each of the years in the three-year period ended December
31, 2017, and the related notes, comprising a summary of significant
accounting policies and other explanatory information (collectively
referred to as the “consolidated financial statements”), and our
report dated March 22, 2018 expressed an unmodified (unqualified)
opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, under the heading Management’s Report on Internal
Control over Financial Reporting,
the accompanying
Management’s Discussion and Analysis. Our responsibility is to
express an opinion on the Company’s internal control over financial
reporting based on our audit.
in
20 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission
and the PCAOB and in accordance with the ethical requirements
that are relevant to our audit of the financial statements in Canada.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
DEFINITION AND LIMITATIONS
OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes
in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
KPMG LLP, Chartered Professional Accountants,
Vancouver, Canada
March 22, 2018
Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET
(expressed in thousands of United States dollars, except share amounts)
Years ended Dec 31
2017
2016
Consolidated Financial Statements
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (note 7)
Inventories (note 8)
Prepaid expenses
Current assets held for sale (note 6)
Total current assets
Long-term investments (note 9)
Property, plant and equipment (note 10)
Intangible assets (note 11)
Deferred income tax assets (note 19(b))
Goodwill (note 12)
Other long-term assets
Long-term assets held for sale (note 6)
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (note 13)
Restructuring obligations (note 14)
Deferred revenue
Current portion of long-term debt (note 15)
Current portion of long-term royalty payable (note 16)
Warranty liability (note 17)
Liabilities held for sale (note 6)
Total current liabilities
Restructuring obligation (note 14)
Deferred revenue
Long-term debt (note 15)
Long-term royalty payable (note 16)
Warranty liability (note 17)
Deferred income tax liabilities (note 19(b))
Other long-term liabilities
Long-term liabilities held for sale (note 6)
Total long-term liabilities
Shareholders’ equity:
Share capital (note 18):
Authorized:
Unlimited common shares and preferred shares in series, no par value
Issued:
131,279,709 (2016 - 110,109,092) common shares issued
Other equity instruments
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments and contingencies (note 21)
$
$
$
71,842 $
67,160
50,743
4,726
6,164
200,635
9,302
70,366
20,943
1,848
3,324
7,204
—
60,905
66,660
53,300
4,572
28,325
213,762
13,422
54,576
21,832
1,640
2,923
14,532
8,773
313,622 $
331,460
87,150 $
2,969
2,164
8,993
2,390
3,956
12,500
120,122
—
50
45,429
16,641
2,830
4,616
5,902
—
195,590
79,943
5,408
3,544
48,097
1,500
6,032
15,216
159,740
8,715
590
30,935
20,062
6,207
5,909
5,657
8,207
246,022
1,078,280
16,247
10,079
(966,869)
(19,705)
118,032
$
313,622 $
1,042,410
20,926
10,079
(956,890)
(31,087)
85,438
331,460
See accompanying notes to consolidated financial statements
Approved on behalf of the Board
Brenda J. Eprile Director
Colin Johnston Director
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 21
Consolidated Financial Statements | Consolidated Statements of Operations & Comprehensive Income (Loss)
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
(LOSS)
(expressed in thousands of United States dollars, except share amounts)
2017
Years ended Dec 31
2016
(Adjusted, note 6)
2015
$
240,320 $
172,987 $
6,743
247,063
182,916
51,057
47,628
16,776
1,682
562
9,826
1,550
311,997
(64,934)
12,514
(14,487)
—
1,377
(65,530)
(2,780)
(1,644)
(4,424)
(61,106)
51,127
(9,979)
4,407
177,394
141,030
55,938
44,880
18,556
19,000
6,565
11,244
4,843
302,056
(124,662)
5,838
(10,773)
35,808
(1,656)
(95,445)
1,610
2,340
3,950
(99,395)
1,822
(97,573)
97,844
5,460
103,304
85,232
52,777
35,201
17,496
—
(11,601)
11,736
22,722
213,563
(110,259)
17,551
(5,529)
—
(186)
(98,423)
1,245
(514)
731
(99,154)
—
(99,154)
$
$
$
$
11,382
1,295
(16,889)
1,403 $
(96,278) $
(116,043)
(0.51) $
0.43 $
(0.08) $
(1.09) $
0.02 $
(1.07) $
(1.55)
—
(1.55)
119,558,566
91,028,504
64,109,703
Product revenue
Service and other revenue
Cost of revenue and expenses:
Cost of product revenue
Research and development
General and administrative
Sales and marketing
Restructuring costs (note 14)
Foreign exchange (gain) loss
Depreciation and amortization (notes 10 and 11)
Impairments on long lived assets, net (note 10)
Loss from operations
Income from investments accounted for by the equity method
Interest on long-term debt and amortization of discount
Bargain purchase gain from acquisition (note 5)
Interest and other income (expense), net of bank charges
Loss before income taxes
Income tax expense (recovery) (note 19):
Current
Deferred
Net loss from continuing operations
Net income from discontinued operations (note 6)
Net loss for the year
Other comprehensive income (loss):
Cumulative translation adjustment
Comprehensive (gain) loss
Income (loss) per share:
From continuing operations - basic and diluted
From discontinued operations - basic and diluted
Net loss per share
Weighted average common shares outstanding:
Basic and diluted
See accompanying notes to consolidated financial statements.
22 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Consolidated Financial Statements | Consolidated Statements of Shareholders' Equity
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(expressed in thousands of United States
dollars, except share amounts)
Common
shares
outstanding
Share capital
Other
equity
instruments
Additional
paid in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
January 1, 2015
63,480,722 $
930,857 $
7,767 $
9,837 $
(760,163) $
(15,493) $
172,805
Issuance of common shares:
On exercise of share units
In connection with acquisition
575,024
325,073
Stock-based compensation
Net loss for the year
Other comprehensive loss
—
—
—
5,010
1,162
—
—
—
(5,010)
—
13,703
—
—
—
—
—
—
—
—
—
—
(99,154)
—
December 31, 2015
64,380,819
937,029
16,460
9,837
(859,317)
Issuance of common shares:
On exercise of share units
845,491
In connection with acquisition
44,882,782
6,639
98,742
Beneficial conversion feature on
convertible debt
Stock-based compensation
Net loss for the year
Other comprehensive loss
—
—
—
—
—
—
—
—
(6,639)
655
—
10,450
—
—
—
—
242
—
—
—
—
—
—
—
(97,573)
—
December 31, 2016
110,109,092
1,042,410
20,926
10,079
(956,890)
Issuance of common shares:
On exercise of share units
2,045,617
9,917
(9,917)
On public offering, net of costs
incurred
19,125,000
25,953
Stock-based compensation
Net loss for the year
Other comprehensive income
—
—
—
—
—
—
—
5,238
—
—
—
—
—
—
—
—
—
—
(9,979)
—
—
—
—
—
(16,889)
(32,382)
—
—
—
—
—
1,295
(31,087)
—
—
—
—
11,382
—
1,162
13,703
(99,154)
(16,889)
71,627
—
99,397
242
10,450
(97,573)
1,295
85,438
—
25,953
5,238
(9,979)
11,382
December 31, 2017
131,279,709 $
1,078,280 $
16,247 $
10,079 $
(966,869) $
(19,705) $
118,032
See accompanying notes to consolidated financial statements.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 23
Consolidated Financial Statements | Consolidated Statements of Cash Flows
CONSOLIDATED STATEMENTS OF CASH FLOWS
)
Cash flows from (used in) operating activities:
Net loss for the year from continuing operations
$
(61,106) $
(99,395) $
(99,154)
(expressed in thousands of United States dollars)
2017
Years ended Dec 31
2016
(Adjusted, note 6)
2015
Items not involving cash:
Depreciation and amortization
Stock-based compensation expense
Unrealized foreign exchange (gain) loss
Deferred income tax (recovery) expense
Income from investments accounted for by the equity method
Accretion of long-term debt and long-term royalty payable
Impairments on long lived assets, net
Inventory write-downs to net realizable value
Bargain purchase gain from acquisition
Change in fair value of derivative liability and bad debt expense
Restructuring obligations
Changes in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
Warranty liability
Net cash from (used in) operating activities of continuing operations
Net cash from operating activities of discontinued operations
Cash flows from (used in) investing activities:
Purchase of property, plant and equipment
Acquisitions, net of acquired cash (note 5)
Proceeds on sale of assets and investments
Dividends received from joint ventures
Net cash from (used in) investing activities of continuing operations
Net cash from investing activities of discontinued operations
Cash flows from (used in) financing activities:
Drawings on operating lines of credit and long-term facilities
Repayment of operating lines of credit and long-term facilities
Proceeds from share issuance, net
Repayment of royalty payable
Issuance of convertible debt and royalty payable
Net cash from (used in) financing activities of continuing operations
Effect of foreign exchange on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Less: cash and cash equivalents from discontinued operations, end of year
Cash and cash equivalents from continuing operations, end of year
See accompanying notes to consolidated financial statements.
24 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
14,983
6,961
562
(1,644)
(12,514)
10,071
1,550
1,111
—
1,397
(14,187)
2,605
4,565
(93)
6,755
(2,143)
(6,330)
(47,457)
5,924
15,363
10,450
6,565
2,340
(5,838)
4,945
4,843
6,591
(35,808)
1,670
14,123
(4,930)
31,352
952
(22,836)
(4,974)
(5,855)
(80,442)
1,121
(25,288)
(8,654)
—
(85)
16,633
(8,740)
77,148
42,641
(71,387)
25,953
(11,467)
—
(14,260)
4,246
16,861
60,905
45,344
26,334
13,398
76,422
—
9,184
(12,789)
—
—
35,000
31,395
4,570
33,066
27,839
77,766 $
60,905 $
5,924
—
13,654
14,871
(11,601)
(514)
(17,551)
876
22,722
8,743
—
587
—
975
(5,997)
661
9,526
(1,507)
(5,359)
(69,068)
—
(4,845)
787
(27)
20,464
16,379
—
5,432
(8,308)
—
—
—
(2,876)
(10,601)
(66,166)
94,005
27,839
—
71,842 $
60,905 $
27,839
$
$
Consolidated Financial Statements | Consolidated Statements of Cash Flows
SUPPLEMENTARY CASH FLOW INFORMATION
)
(expressed in thousands of United States dollars)
2017
Years ended Dec 31
2016
2015
Supplementary information:
Interest paid
Taxes paid, net of refunds
Non-cash transactions:
Shares issued for acquisitions
Notes to Consolidated
Financial Statements
1. Company Organization
and Operations
Westport Fuel Systems Inc. (the “Company”, formerly known as
Westport Innovations Inc.) was incorporated under the Business
Corporations Act (Alberta) on March 20, 1995. On June 1, 2016,
the Company merged with Fuel Systems Solutions, Inc. The
Company engineers, manufactures and supplies alternative fuel
systems and components for use in the transportation and industrial
markets on a global basis. The Company 's components and
systems control the pressure and flow of gaseous alternative fuels,
such as propane and natural gas used in internal combustion
engines. As discussed in note 6, the Company's Industrial business
segment (excluding the electronics and high pressure product lines)
was sold in 2017. The Company reclassified the comparative figures
in the balance sheet as assets held for sale and reported the results
of the operations of the Industrial businesses sold as discontinued
operations in the consolidated statements of operations and
comprehensive income (loss).
2. Liquidity and Going Concern
In connection with preparing financial statements for each annual
and interim reporting period Management is required to evaluate
whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the financial
statements are issued. This evaluation initially does not take into
consideration the potential mitigating effect of management’s plans
that have not been fully implemented as of the date that the financial
statements are
substantial doubt exists,
management evaluates whether the mitigating effect of its plans
sufficiently alleviates substantial doubt about the Company’s ability
to continue as a going concern. The mitigating effect of
management’s plans, however, is only considered if both (1) it is
probable that the plans will be effectively implemented within one
year after the date that the financial statements are issued, and (2)
it is probable that the plans, when implemented, will mitigate the
relevant conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern within one year after
issued. When
$
4,416 $
722
4,339 $
2,479
—
98,742
4,551
1,238
1,162
the date that the financial statements are issued. Generally, to be
considered probable of being effectively implemented, the plans
must have been approved before the date that the financial
statements are issued.
At this time Management's evaluation has concluded that there are
no known or foreseeable conditions or events that raise substantial
doubt about the Company's ability to continue as a going concern
within one year after the date these financial statements were
issued. These financial statements have therefore been prepared
on the basis that the Company will continue as a going concern.
At December 31, 2017, the Company's net working capital was
$80,513 (2016 - $54,022) including cash and cash equivalents of
$71,842 (2016 - $60,905), and its long-term debt was $54,422, of
which $8,993 matures in 2018. The Company incurred a significant
loss from continuing operations of $61,106 (2016 - $99,395) and
negative cash flows from continuing operating activities during 2017
of $47,457 (2016 - $80,442) and has accumulated a deficit of
$966,869 since inception. In the course of 2017, the Company
completed significant non-core asset sales and a capital increase,
which allowed repayment of long-term debt otherwise coming due
in 2017, and increased the Company’s cash available to fund future
operations. The Company continues to work towards its goals of
increasing
reducing expenditures, which
Management expects will improve results from operations and
operating cash flows in 2018. In particular, with the Westport HPDI
2.0TM product now in production, management expects that the
engineering and development spend and the associated capital
expenditures on this product will decrease significantly in 2018 and
this reduction will, itself, improve cash flows. In addition, the
Company continues to examine non-core assets to determine
whether it is in the best interest of the Company to monetize these
assets in the next year or continue to hold or invest in these assets.
revenues and
Management is confident that the cash on hand at December 31,
2017 and the improvements to the operations expected for 2018
will provide the cash flow necessary to fund operations over the
next year to March 31, 2019. The ability of the Company to continue
as a going concern beyond one year will be dependent on the
Company’s ability to generate positive results from operations and
cash flows or on its ability to raise additional financings to fund future
operations. If, as a result of future events, the Company was to
determine it was no longer able to continue as a going concern,
significant adjustments would be required to the carrying value of
its assets and liabilities in the accompanying financial statements
and the adjustments could be material.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 25
Financial Statements | Notes | 3. Significant Accounting Policies
3. Significant Accounting Policies
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated on consolidation.
These consolidated
in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
financial statements are presented
B. FOREIGN CURRENCY TRANSLATION
The Company’s functional currency is in the Canadian dollar and
its reporting currency for its consolidated financial statement
presentation is the United States dollar. The functional currencies
for the Company's subsidiaries include the following: United States,
Canadian ("CDN") and Australian dollars, Euro, Argentina Peso,
Chinese Renminbi (“RMB”), Swedish Krona, Japanese Yen and
Indian Rupee. The Company translates assets and liabilities of
non-U.S. dollar functional currency operations using the period end
exchange rates, shareholders’ equity balances using historical
exchange rates, and revenues and expenses using the monthly
average
the resulting exchange
differences recognized in other comprehensive income.
the period with
rate
for
Transactions that are denominated in currencies other than the
functional currency of the Company’s operations or its subsidiaries
are translated at the rate in effect on the date of the transaction.
Foreign currency denominated monetary assets and liabilities are
translated to the applicable functional currency at the exchange rate
in effect on the balance sheet date. Non-monetary assets and
liabilities are translated at the historical exchange rate. All foreign
exchange gains and losses are recognized in the statement of
operations, except for the translation gains and losses arising from
available-for-sale instruments, which are recorded through other
comprehensive
through disposal or
impairment.
income until
realized
Except as otherwise noted, all amounts in these financial
statements are presented in U.S. dollars. For the periods
presented, the Company used the following exchange rates:
FOREIGN EXCHANGE RATES
(expressed in thousands of
United States dollars)
Year end
exchange rate
2016
2017
Avg. for yr. ended
2017
2016
2015
Canadian dollar
Australian dollar
Euro
Argentina Peso
RMB
Swedish Krona
Japanese Yen
Indian Rupee
0.80
0.78
1.20
0.06
0.15
0.12
0.01
0.74
0.72
1.06
0.06
0.14
0.11
0.01
0.77
0.77
1.13
0.06
0.15
0.12
0.01
0.76
0.74
1.11
0.07
0.15
0.12
0.01
0.78
0.75
1.11
0.11
1.16
0.12
0.01
0.0157
0.0147
0.0154
0.0150
0.0200
26 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash, term deposits, bankers
acceptances and guaranteed investment certificates 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.
D. ACCOUNTS RECEIVABLE, NET
Accounts receivable are measured at amortized cost. The
Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. Past due balances over 90 days are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting their
ability to make payments, additional allowances would be required.
Based on management’s assessment, the Company provides for
estimated uncollectible amounts through a charge to earnings and
a credit to a valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written
off through a charge to the allowance and a credit to accounts
receivable.
E. INVENTORIES
The Company’s inventories consist 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 or first-in, first-out. The cost of fuel system
inventories, assembled parts and work-in-progress
product
includes materials, labour and production overhead, including
depreciation. The Company records inventory write-downs based
on an analysis of excess and obsolete inventories determined
primarily by future demand forecasts. In addition, the Company
records a liability for firm, noncancelable, and unconditional
purchase commitments with manufacturers for quantities in excess
of the Company’s future demand forecast consistent with its
valuation of excess and obsolete inventory.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
provided as follows:
PROPERTY, PLANT AND EQUIPMENT
DEPRECIATION
Assets
Buildings
Basis
Rate
Straight-line
15 years
Computer equipment and software
Straight-line
Furniture and fixtures
Straight-line
3 years
5 years
Machinery and equipment
Straight-line
8-10 years
Leasehold improvements
Straight-line
Lease term
Depreciation expense on equipment used in the production and
manufacturing process is included in cost of sales. All other
depreciation is included in the depreciation and amortization
expense line on the statement of operations.
G. LONG-TERM INVESTMENTS
The Company accounts for investments in which it has significant
influence, including variable interest entities ("VIEs") for which the
Company is not the primary beneficiary, using the equity method of
accounting. Under the equity method, the Company recognizes its
share of income from equity accounted investees in the statement
of operations with a corresponding
long-term
investments. Any dividends paid or payable are credited against
long-term investments. The Company accounts for investments in
which it does not exercise significant influence using the cost
method of accounting.
increase
in
H. FINANCIAL LIABILITIES
Accounts payable and accrued liabilities, short-term debt and long-
term debt are measured at amortized cost. Transaction costs
relating to long-term debt are netted against long-term debt and are
amortized using the effective interest rate method.
I. RESEARCH AND DEVELOPMENT
COSTS
Research and development costs are expensed as incurred and
are recorded net of government funding received or receivable.
J. GOVERNMENT ASSISTANCE
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 property, plant and equipment 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.
K. INTANGIBLE ASSETS
Intangible assets consist primarily of the cost of intellectual property,
trademarks, technology, customer contracts and non-compete
agreements. Intangible assets are amortized over their estimated
useful lives, which range from 5 to 20 years.
L. IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment
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
Financial Statements | Notes | 3. Significant Accounting Policies
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. GOODWILL
Goodwill is recorded at the time of purchase for the excess of the
amount of the purchase price over the fair values of the identifiable
assets acquired and liabilities assumed. Goodwill is not amortized
and instead is tested at least annually for impairment, or more
frequently when events or changes in circumstances indicate that
goodwill might be impaired. This impairment test is performed
annually at November 30. Future adverse changes in market
conditions or poor operating results of underlying assets could result
in an inability to recover the carrying value of the goodwill, thereby
possibly requiring an impairment charge.
N. 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 ending
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 costs to repair defective products to
estimate the warranty liability. New product launches require a
greater use of judgment in developing estimates until claims
experience becomes available. Product specific experience is
typically available four or five quarters after product launch, with a
clear experience trend not evident until eight to twelve quarters after
launch. The Company records warranty expense for new products
upon shipment using a factor based upon historical experience from
previous engine generations in the first year, a blend of actual
product and historical experience in the second year and product
specific experience thereafter. The amount payable by the
Company and the timing will depend on actual failure rates and cost
to repair failures of its products.
O. REVENUE RECOGNITION
The Company recognizes revenue upon transfer of title and risk of
loss, generally when products are shipped provided there is (1)
persuasive evidence of an arrangement, (2) there are no
uncertainties regarding customer acceptance, (3) the sales price is
fixed or determinable and (4) management believes collectibility is
reasonably assured.
The Company recognizes service revenue from research and
development arrangements based on the contracts and the ability
of the Company to measure its performance. Depending on the
contract, revenues may be recognized using the milestone,
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 27
Financial Statements | Notes | 3. Significant Accounting Policies
percentage of completion, or completed contract methods of
accounting. All costs incurred related to revenue earned from
research and development contracts are recorded as research and
development expense as incurred.
P. INCOME TAXES
The Company accounts for income taxes using the asset and
liability method. Under this method, deferred income tax assets
and liabilities are determined based on the temporary differences
between the accounting basis and tax basis of the assets and
liabilities and for loss carry-forwards, tax credits and other tax
attributes, using the enacted tax rates in effect for the years in which
the differences are expected to reverse. The effect of a change in
tax rates on the deferred income tax assets and liabilities is
recognized in income in the period that includes the enactment date.
The Company recognizes deferred income tax assets to the extent
the assets are more-likely-than-not to be realized. In making such
a determination the Company considers all available positive and
negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax-
planning strategies, and results of recent operations. If it is
determined that, based on all available evidence, it is more-likely-
than-not that some or all of the deferred income tax assets will not
be realized, a valuation allowance is provided to reduce the deferred
income tax assets.
The Company uses a two-step process to recognize and measure
the income tax benefit of uncertain tax positions taken or expected
to be taken in a tax return. The tax benefit from an uncertain tax
position is recognized if it is more-likely-than-not that the position
will be sustained upon examination by a tax authority based solely
on the technical merits of the position. A tax benefit that meets the
more-likely-than-not recognition threshold is measured as the
largest amount that is greater than 50% likely to be realized upon
settlement with the tax authority. To the extent a full benefit is not
expected to be realized, an income tax liability is established. Any
change in judgment related to the expected resolution of an
uncertain tax position is recognized in the year of such a change.
4. Accounting Changes
A. NEW ACCOUNTING
PRONOUNCEMENTS TO BE
ADOPTED IN THE FUTURE
Revenue
In May 2014, Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09, Revenue From Contracts With Customers
(“Topic 606”). Topic 606 removes inconsistencies and weaknesses
in revenue accounting requirements, provides a more robust
framework for addressing revenue issues, improves comparability
of revenue recognition practices across entities, industries,
jurisdictions and capital markets, provides more useful information
28 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
to users of financial statements through improved disclosure
requirements and simplifies the preparation of financial statements
by reducing the number of requirements to which an entity must
refer. The guidance in this update supersedes the revenue
recognition requirements in Topic 605, Revenue Recognition, and
most previously existing industry-specific guidance throughout the
Industry Topics of the Accounting Standards Codification. Topic 606
is effective for public entities with reporting periods beginning after
December 15, 2017.
ASU 2014-09 and related ASUs may be adopted using either the
full retrospective method, in which case the standard would be
applied to each prior reporting period presented, or the modified
retrospective method, in which case the cumulative effect of
applying the standard would be recognized at the date of initial
application. We will adopt ASU 2014-09 and related ASUs on
January 1, 2018, using the modified retrospective method. The
Company completed its assessment at December 31, 2017, and
has concluded that there is no material impact to its financial
statements on adoption. The Company has implemented the
necessary changes to its business processes and controls to
support revenue recognition and disclosures under the new
standard in the fourth quarter of 2017.
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts
and Cash Payments
In August 2016, the FASB issued ASU 2016-15, which provides
cash flow classification guidance on eight specific cash flow issues
to reduce diversity in practice for which authoritative guidance did
not previously exist. ASU 2016-15 is effective for public entities in
annual and interim periods in fiscal years beginning after December
15, 2017, with early adoption permitted. The Company does not
anticipate a material impact to the Company's financial statements
as a result of this guidance.
Income Taxes (Topic 740): Accounting for
Income Taxes on Intercompany Transfers
In October 2016, the FASB issued ASU 2016-16, which requires
entities to recognize the income tax consequences of intercompany
asset transfers in the period in which the transfer occurs, with the
exception of inventory transfer. ASU 2016-16 is effective for interim
and annual periods beginning after December 15, 2017. The
Company does not anticipate a material impact to the Company's
financial statements as a result of this change.
Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, which increases
transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. ASU
2016-02 is effective for fiscal years beginning after December 15,
2018, and interim periods beginning after December 15, 2018, and
interim periods with early adoption permitted. The Company's future
minimum lease payments at December 31, 2017 under operating
leases are disclosed in note 21(a). The Company has not yet
evaluated the impact of the adoption of this new standard.
5. Business Combinations
MERGER WITH FUEL SYSTEMS
On June 1, 2016 ("the acquisition date"), the Company completed
a merger with Fuel Systems Solutions, Inc. ("Fuel Systems"). Fuel
Systems shareholders received 2.4755 Westport common shares
for each share of Fuel Systems common stock owned. The
Company issued 44,882,782 common shares to former Fuel
Systems shareholders and 653,532 restricted stock units. The
Company determined the purchase price using the Nasdaq closing
share price on the acquisition date at $2.20 per share, which
resulted in total purchase consideration of $99,397. The Company
incurred total acquisition related costs of $9,890 in 2015 and 2016,
which were expensed as incurred.
This business combination resulted in a bargain purchase
transaction, as the fair value of assets acquired and liabilities
assumed exceeded the total of the transaction date fair value of
equity issued by $35,808. The Company believes it was able to
acquire the assets of Fuel Systems for less than their fair value due
to the weakness in the alternative fuel sector. The following table
summarizes the final allocation of the purchase price to the fair
values of assets acquired and liabilities assumed at the date of the
acquisition.
PURCHASE PRICE ALLOCATION
Consideration allocated to:
Cash and cash equivalents
$
Accounts receivable
Inventory
Property, plant and equipment
Intangible assets
Deferred income taxes, net
Other assets
Accounts payable and accrued liabilities
Other liabilities
Total net identifiable assets
Bargain purchase gain
Total consideration
$
PROFORMA RESULTS
Final Purchase
Price Allocation as
of Dec 31, 2016
45,344
42,954
73,560
37,792
4,240
(2,053)
12,962
(63,706)
(15,888)
135,205
(35,808)
99,397
The following unaudited supplemental proforma information
presents the consolidated financial results as if the acquisition of
Fuel Systems had occurred on January 1, 2015. This supplemental
proforma information has been prepared for comparative purposes
and does not purport to be indicative of what would have occurred
Financial Statements | Notes | 4. Accounting Changes
had the acquisition been made on January 1, 2015, nor are they
indicative of any future results.
PROFORMA RESULTS
Revenue
Revenue for the year
Fuel Systems
(prior to merger)
Proforma revenue for the year
Net loss
Net loss for the year
Fuel Systems, net of transaction
costs (prior to merger)
Proforma adjustments(1)
Years ended Dec 31
2015
2016
(Adjusted, Note 6)
$
$
$
177,394 $ 103,304
96,833
263,397
274,227 $ 366,701
(99,395) $
(99,154)
(6,249)
(47,135)
(28,951)
(1,575)
Proforma net loss for the year
$
(134,595) $ (147,864)
1. Includes adjustments for the bargain purchase gain, additional interest
expense for the convertible debt in all periods, and for transaction costs
related to the merger with Fuel Systems.
6. Sale of Assets
Consistent with the Company's strategy to simplify the number of
businesses to focus on, in the second quarter of 2017 the Company
sold substantially all of the Industrial business segment (excluding
the electronics and high pressure product lines) as described below.
These assets and liabilities were accounted for as held for sale at
March 31, 2017. The comparative balances of the discontinued
Industrial business segment were also reclassified as at December
31, 2016, with impact to the following balance sheets accounts:
accounts receivable, inventories, property, plant and equipment,
intangible assets, accounts payable and accrued liabilities,
warranty liability and segment information. The notes for these
comparative account balances have been adjusted for these
reclassifications in these financial statements.
On April 28, 2017, the Company sold the Industrial segment's
Auxiliary Power Unit ("APU") business for total consideration of
$70,000, and recorded a net gain of $60,151 during the year ended
December 31, 2017. The Company received proceeds of $62,864,
net of a $7,000 holdback and $136 working capital adjustment. The
Company will be entitled to receive payment from the purchaser in
the event that the contingent items are settled for less than $7,000,
with interim settlement reviews and payments occurring at nine,
eighteen and twenty four months after the closing date. Subsequent
to year end, $3,000 of the holdback was received.
On May 30, 2017, the Company sold additional assets held for sale
for total consideration of $17,500. The Company received proceeds
of $16,250, net of $1,250 holdback. This transaction resulted in a
net loss of $1,841 during the year ended December 31, 2017.
As discussed in note 16, 15% of the net consideration received on
these asset sales was paid to Cartesian against the royalty payable,
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 29
Financial Statements | Notes | 6. Business Held for Sale
as will 15% of any future payments received related to the
holdbacks.
7. Accounts Receivable
The carrying amount of the major classes of assets and liabilities
for the held-for-sale Industrial business segment at December 31,
2017 and December 31, 2016 are shown below:
ACCOUNTS RECEIVABLE
Years Ended Dec 31
2017
2016
Years ended Dec 31
Customer trade receivables
$
58,490 $
62,763
2017
2016
$
5,924 $
—
Due from related parties (note 20)
Holdback receivables (note 6)
Other receivables
Income tax receivable
156
6,750
4,337
1,232
488
—
4,982
1,638
Cash
Accounts receivable
Inventories
Other current assets
Property, plant, and equipment
Intangible assets
Deferred income tax assets
Other non-current assets
7
—
—
10,518
17,324
483
5,931
28,325
233
—
—
—
233
5,106
1,026
2,127
514
8,773
Total assets classified as held for sale
Accounts payable and accrued liabilities
$
$
6,164 $ 37,098
7,305 $ 13,302
Income taxes payable
Other current liabilities
Other non-current liabilities
3,448
269
—
1,914
11,022
15,216
1,478
8,207
Total liabilities classified as held for sale
$
12,500 $ 23,423
The Industrial business was acquired on June 1, 2016 as a result
of the acquisition of Fuel Systems and thus, there was only seven
months of discontinued operations disclosed for the year ended
December 31, 2016. The following table presents financial results
of the Industrial business segment which are included in net income
from discontinued operations for the years ended December 31,
2017 and 2016:
Years ended Dec 31
2017
2016
Product and service revenue
$
29,038 $
Cost of product revenue
Research and development
General and administrative
Sales and marketing
21,284
2,048
4,797
1,754
47,501
35,520
3,475
3,324
2,393
Operating income (loss) from
discontinued operations
Net gain on sale of assets
Other expenses (recovery)
Income from discontinued operations
before income tax
Income tax expense
Net income from discontinued
operations
29,883
44,712
(845)
(58,310)
220
57,245
6,118
2,789
—
(93)
2,882
1,060
$
51,127 $
1,822
30 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Allowance for doubtful accounts
(3,805)
(3,211)
$
67,160 $
66,660
8. Inventories
INVENTORIES
Years ended Dec 31
2017
2016
Purchased parts and materials
$
36,054 $
37,894
Work-in-process
Finished goods
Inventory on consignment
Total
2,409
11,587
693
3,794
11,095
517
$
50,743 $
53,300
During the year ended December 31, 2017, the Company recorded
write-downs to net realizable value of approximately $1,111 (year
ended December 31, 2016 - $6,591; year ended December 31,
2015 - $8,743).
9. Long-term Investments
LONG-TERM INVESTMENTS
Years Ended Dec 31
2017
2016
Cummins Westport Inc. (a)
Weichai Westport Inc.
Other equity accounted investees
Total long-term investments
$
$
6,799 $
10,950
1,824
679
1,824
648
9,302 $
13,422
A. CUMMINS WESTPORT INC.
The Company entered into a joint venture with Cummins Inc.
(Cummins) on March 7, 2001. The joint venture term is scheduled
to end on December 31, 2021 and can be terminated under certain
circumstances before the end of the term, including in the event of
a material breach of the agreement by, or in the event of a change
of control of, one of the parties.
On February 20, 2012, the joint venture agreement ("JVA") was
amended and restated to provide for, among other things,
clarification concerning the scope of products within CWI. In
addition, the parties have revised certain economic terms of the
JVA. Prior to February 20, 2012, the Company and Cummins shared
equally in the profits and losses of CWI. Under the amended JVA,
profits and losses are shared equally up to an established revenue
baseline, then any excess profit will be allocated 75% to the
Company and 25% to Cummins.
The Company has determined that CWI is a variable interest entity
("VIE"). Cummins and Westport each own 50% of the common
shares of CWI and have equal representation on the Board of
Directors. No one shareholder has the unilateral power to govern
CWI. The Board of Directors has power over the operating decisions
and to direct other activities of CWI that most significantly impact
CWI’s economic performance as set forth in the governing
documents. As decision-making at the Board of Directors’ level
requires unanimous approval, this power is shared. Accordingly
neither party is the primary beneficiary.
The Company recognized its share of CWI’s income and received
dividends as follows:
Years ended Dec 31
2017
2016
2015
Financial Statements | Notes | 9. Long-Term Investments
CWI ASSETS & LIABILITIES
Years ended Dec 31
2017
2016
Current assets:
Cash and short-term investments
Accounts receivable
Other current assets
$
91,720 $
10,925
—
95,623
5,018
209
Long-term assets:
Property, plant and equipment
Deferred income tax assets
Total assets
Current liabilities:
1,245
28,096
1,074
45,321
$ 131,986 $ 147,245
Current portion of warranty liability
Current portion of deferred revenue
$
25,866 $
22,157
Accounts payable and accrued liabilities
12,603
60,626
26,206
20,070
7,125
53,401
Long-term liabilities:
Warranty liability
Deferred revenue
Other long-term liabilities
16,253
38,321
3,175
57,749
27,282
41,788
2,863
71,933
$ 118,375 $ 125,334
Investment income under the
equity method
$ 12,482 $
5,606 $ 16,339
Total liabilities
Dividends received
16,633
10,198
20,464
The Company has not historically provided and does not intend to
provide financial or other support to CWI that the Company is not
contractually required to provide.
The carrying amount and maximum exposure to losses relating to
CWI were as follows:
Balance at Dec 31
2017
2016
Carrying
amount
Maximum
exposure to
loss
Carrying
amount
Maximum
exposure
to loss
$ 6,799 $
6,799 $ 10,950 $
10,950
150
150
236
236
Equity method
investment in CWI
Accounts receivable
in CWI
Assets, liabilities, revenue and expenses of CWI, as adjusted for
the change in accounting policy, are as follows:
CWI REVENUE AND EXPENSES
Years ended Dec 31
2016
2017
2015
Product revenue
Parts revenue
$ 235,220 $ 205,235 $ 274,033
82,077
71,230
57,849
317,297
276,465
331,882
Cost of revenue and expenses:
Cost of product and parts
revenue
Research and development
General and administrative
Sales and marketing
Foreign exchange
(gain) loss
Bank charges, interest and
other
207,840
199,317
30,733
1,113
19,675
36,066
1,136
23,047
51
609
8
695
230,508
30,165
1,414
21,236
28
817
260,021
260,269
284,168
Income from operations
57,276
16,196
47,714
Interest and investment income
982
552
367
Income before income taxes
58,258
16,748
48,081
Income tax expense (recovery):
Current
Deferred(1)
16,068
17,226
33,294
4,680
856
5,536
19,785
(1,565)
18,220
Income for the year
$ 24,964 $ 11,212 $ 29,861
1. As a result of the U.S. tax reform substantially enacted in the fourth
quarter of 2017, CWI recorded a deferred tax expense of $13,423 in
2017 arising from related adjustments to deferred income tax assets.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 31
Financial Statements | Notes | 10. Property, Plant and Equipment
10. Property, Plant & Equipment
11. Intangible Assets
PROPERTY, PLANT & EQUIPMENT
INTANGIBLE ASSETS
Cost
Accumulated
depreciation
Net
book
value
Cost
Accumulated
depreciation
Net
book
value
December 31, 2017
December 31, 2017
Land and buildings
$
4,947 $
1,412 $
3,535
Patents and trademarks
$ 22,031 $
6,995 $ 15,036
Computer equipment
and software
Furniture and fixtures
Machinery and
equipment
Leasehold improvements
7,742
5,844
91,995
14,079
7,438
4,085
304
1,759
33,543
58,452
7,763
6,316
Total 2017
$ 124,607 $
54,241 $ 70,366
December 31, 2016
Land and buildings
$
4,471 $
1,127 $
3,344
Computer equipment
and software
Furniture and fixtures
Machinery and
equipment
Leasehold improvements
8,682
6,004
72,992
13,597
6,970
2,544
1,712
3,460
33,893
39,099
6,636
6,961
Total 2016
$ 105,746 $
51,170 $ 54,576
impairment resulted primarily
During the year ended December 31, 2017, the Company recorded
an impairment charge of $1,550 (December 31, 2016 - $2,708).
The
the write-down of
engineering test equipment in Vancouver, Canada. The method
used to determine the fair value of equipment was based on
utilization of assets and the write-down was recorded in the
Corporate and Technology Investments segment.
from
Technology
Customer contracts
Other intangibles
5,400
12,964
351
4,059
8,404
345
1,341
4,560
6
Total 2017
$ 40,746 $
19,803 $ 20,943
December 31, 2016
Patents and trademarks
$ 19,679 $
5,028 $ 14,651
Technology
Customer contracts
Other intangibles
4,735
11,419
319
3,068
6,053
171
1,667
5,366
148
Total 2016
$ 36,152 $
14,320 $ 21,832
Based on declining revenue and operating results in one business
unit, the Company concluded there were impairment indicators as
of November 30, 2017 requiring the performance of a long-lived
assets impairment test for trademarks, customer contracts, and
technology for this business unit. The Company completed its
assessment at November 30, 2017, and concluded that intangible
assets were not impaired.
During the year ended December 31, 2017, amortization of $3,452
(December 31, 2016 - $3,059; year ended December 31, 2015 -
$2,951) was recognized in the statement of operations.
Total depreciation expense for the year ended December 31, 2017
was $11,531 (year ended December 31, 2016 - $12,305; year
ended December 31, 2015 - $10,703). The amount of depreciation
expense included in cost of sales for the year ended December 31,
2017 was $5,146 (year ended December 31, 2016 - $4,266; year
ended December 31, 2015 - $1,918).
12. Goodwill
A continuity of goodwill is as follows:
GOODWILL
Balance, beginning of year
Impact of foreign exchange changes
Balance, end of year
Years ended Dec 31
2017
2016
$
$
2,923 $
3,008
401
(85)
3,324 $
2,923
The Company completed its annual assessment at November 30,
2017 and concluded the remaining goodwill of $3,324 related to the
Netherlands reporting unit under the Automotive business segment
was not impaired.
32 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Financial Statements | Notes | 13. Accounts Payable and Accrued Liabilities
13. Accounts Payable and
Accrued Liabilities
ACCOUNTS PAYABLE & ACCRUED
LIABILITIES
Trade accounts payable
Accrued payroll
Accrued interest
Due to related parties (note 20)
Taxes payable
Other payables
Years ended Dec 31
2017
2016
$ 60,705 $ 59,096
11,617
1,977
1,191
695
5,367
17,188
1,567
—
511
7,179
$ 87,150 $ 79,943
14. Restructuring, Termination
and Other Exit Obligations
RESTRUCTURING, TERMINATION
AND OTHER EXIT OBLIGATIONS
Lease-exit
Termination
Total
Years ended Dec 31, 2017
Balance, beginning of period
$
3,278 $ 10,845 $14,123
Additions
Additions: Interest and other
Payments
Impact of foreign exchange
Change in estimate
Balance, end of period
Less: Current portion
Long-term portion
Years ended Dec 31, 2016
Balance, beginning of period
Additions
Additions: Interest and other
Payments
Impact of foreign exchange
Change in estimate
Balance, end of period
Less: Current portion
Long-term portion
5,785
—
69
698
(8,085)
(6,102)
5,854
698
)
(14,18
7
653
222
(24)
431
(4,148)
(4,172)
1,176
1,793
2,969
(1,176)
(1,793)
(2,969)
— $
— $ —
— $
— $ —
7,198
11,802
19,000
—
509
509
(3,876)
(1,196)
(5,072)
(44)
—
(270)
(314)
—
—
3,278 $ 10,845 $14,123
(2,903)
(2,505)
(5,408)
375 $ 8,340 $ 8,715
$
$
$
$
During the third quarter of 2016, the Company initiated a series of
restructuring activities which included the consolidation of facilities
in Argentina, Canada, China and the United States. This resulted
in an implementation of a reduction in workforce resulting in
employee severance, one-time termination benefits and contract
termination costs associated with the restructuring activities.
During 2017, the Company continued its restructuring activities and
further implemented reductions in workforce, resulting in employee
severance and termination benefits in Canada, Italy, China and
Argentina.
The remaining balance of the lease-exit obligations as at December
31, 2017 is related to a 10-year lease commitment for 116,000
square feet of office space located in Vancouver, Canada, which
the Company exited as part of the restructuring activities. The lease
commitment was renegotiated and a final settlement agreement
was signed in July 2017 at which time the Company reversed $4,148
of its lease-exit estimate. The remaining liability as at December
31, 2017 of $1,793 was paid in the first quarter of 2018.
15. Long-Term Debt
LONG-TERM DEBT
Term loan facility, net of debt issuance
costs (a)
Senior financing (b)
Convertible debt (c)
Other bank financing (d)
Capital lease obligations (e)
Subordinated debenture notes (f)
Balance, end of period
Current portion
Long-term portion
Years Ended Dec 31
2017
2016
18,987
10,901
17,335
6,562
637
—
—
10,553
17,286
9,949
781
40,463
$
$
54,422 $
79,032
(8,993)
(48,097)
45,429 $
30,935
A. TERM LOAN FACILITY, NET OF DEBT
ISSUANCE COSTS
On December 20, 2017, the Company entered into a loan
agreement with Export Development Canada ("EDC") for a $20,000
non-revolving term facility (the "Term Facility"). The loan bears
interest at 9% plus monitoring fees, payable quarterly, as well as
quarterly principal repayments. The Company incurred debt
issuance costs of $1,013 related to the Term Facility, which reduced
the carrying value to $18,987 at December 31, 2017. These costs
will be amortized over the term of the Term Facility using the effective
interest rate method.
The loan is secured by share pledges over Westport Power, Inc.,
Fuel Systems Solutions, Inc., and MTM S.r.L. and 85% of the
proceeds received from the holdback related the sale of APU
business (as discussed in note 6). On reaching certain milestones,
the Company has the opportunity to reduce the interest rate to 6%.
B. SENIOR FINANCING
The €10,000 senior financing facility was renewed on March 24,
2017. The loan bears interest at the 6-month Euribor plus 3.3%
and can increase or decrease by 30 basis points based on an annual
leverage ratio calculation. Interest is paid semi-annually. The
Company has pledged its interest in EMER S.p.A. as a general
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 33
Financial Statements | Notes | 15. Long-term Debt
guarantee for its senior revolving financing. The repayments are
summarized in the table below, where the last repayment is on
December 31, 2022.
LONG-TERM DEBT REPAYMENT
SCHEDULE
Subordinated
debenture
notes
Senior
financing
Convertible
debt
Other
bank
financing
Capital
lease
obligations
Total
2018 $
1,747 $ 1,838 $
— $ 5,122 $
286 $ 8,993
2019
2020
2021
2022+
3,747
5,747
7,746
1,971
2,106
2,363
—
—
17,335
— 2,623
—
360
360
360
360
139
100
6,217
8,313
80 27,884
32
3,015
$ 18,987 $10,901 $ 17,335 $ 6,562 $
637 $54,422
16. Long-term Royalty Payable
On January 11, 2016, the Company entered into a financing
agreement with Cartesian to support the Company's global growth
initiatives. The financing agreement immediately provided $17,500
in cash (the “Tranche 1 Financing”). In consideration for the funds
provided to the Company, Cartesian is entitled to royalty payments
based on the greater of (i) a percentage of amounts received by
the Company on select high pressure direct injection systems and
joint venture products in excess of agreed thresholds through 2025
and (ii) stated fixed amounts per annum (subject to adjustment for
asset sales). The carrying value is being accreted to the expected
redemption value using the effective interest method, which is
approximately 23% per annum. Cartesian is secured by an interest
in the Company's HPDI intellectual property and a priority interest
in the Company's CWI joint venture interest.
In January 2017, the Company and Cartesian signed a Consent
Agreement which allows the Company to sell certain assets in
exchange for prepayment of the Cartesian royalty: Cartesian will
be paid 15% of the net proceeds from these asset sales to a
maximum of $15,000, with this payment being allocated on a non-
discounted basis to future years' minimum payments.
The sale of the APU business and the sale of additional Industrial
assets (as described in note 6) resulted in royalty prepayments to
Cartesian of $10,935. The Company recorded an additional finance
charge of $5,236 in the second quarter of 2017 on this early
extinguishment of a portion of the long-term royalty payable on the
completion of these transactions.
A continuity schedule of the long-term royalty payable is as follows:
C. CONVERTIBLE DEBT
On January 11, 2016, the Company entered into a financing
agreement ("Tranche 2 Financing") with Cartesian. As part of the
agreement, on June 1, 2016, convertible debt was issued in
exchange for 9.0% convertible unsecured notes due June 1, 2021,
which are convertible into common shares of the Company in whole
or in part, at Cartesian's option, at any time following the twelve
month anniversary of the closing at a conversion price of $2.17 per
share. Interest is payable annually in arrears on December 31 of
each year during the term. The convertible debt is held by a related
party as Peter Yu, founder and managing partner of Cartesian,
became a member of the Board of Directors of the Company in
January 2016. Cartesian is secured by an interest in the Company's
Westport HPDI 2.0TM intellectual property and a priority interest in
the Company's CWI joint venture interest.
D. OTHER BANK FINANCING
Other bank financing consists of various secured and unsecured
bank financing arrangements that carry rates of interest ranging
from 0.75% to 3.8% and have various maturities out to 2022.
Security includes a building owned by the Company in the
Netherlands and certain accounts receivable in one of our Italian
subsidiaries.
E. CAPITAL LEASE OBLIGATIONS
The Company has capital lease obligations that have terms of three
to five years at interest rates ranging from 3.1% to 12.0% (2015 -
2.3% to 11.0%).
F. SUBORDINATED DEBENTURE NOTES
The subordinated debenture notes were unsecured and, bore
interest at 9% per annum which was paid semi-annually. The
Company repaid these notes in full on their maturity in September
2017.
Throughout the entire term of these financing arrangements, the
Company is required to meet certain financial and non-financial
covenants. As of December 31, 2017, the Company is in compliance
with all covenants under the financing arrangements.
The principal repayment schedule of the long-term debt is as follows
for the years ending December 31:
34 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
LONG TERM ROYALTY PAYABLE
SCHEDULE
Years ended Dec 31
2017
2016
Balance, beginning of year
$
21,562 $
—
Issuance of debentures
Accretion expense
Repayment
Additional finance charge from
prepayment
Balance, end of year
Current portion
Long-term portion
—
17,500
3,168
4,062
(10,935)
5,236
—
—
19,031
21,562
(2,390)
(1,500)
$
16,641 $
20,062
The minimum repayments including interest are as follows, for the
years ending December 31:
MINIMUM REPAYMENTS INCLUDING
INTEREST
For years ending
Dec 31
2018
2019
2020
2021
2022
2023 and thereafter
$
$
2,390
4,682
6,240
7,572
6,240
7,920
35,044
17. Warranty Liability
A continuity of the warranty liability is as follows:
WARRANTY LIABILITY
Balance, beginning of year
$
12,239 $
13,991 $
23,109
Years ended Dec 31
2017
2016
2015
Warranty assumed on
acquisition
Warranty claims
Warranty accruals
Change in estimate
Impact of foreign exchange
changes
Balance, end of year
—
3,173
—
(3,022)
(8,002)
(9,438)
1,446
(2,963)
1,719
—
(914)
6,786
1,358
12,239
427
—
(107)
13,991
(5,554)
Less: Current portion
(3,956)
(6,032)
Long-term portion
$
2,830 $
6,207 $
8,437
Financial Statements | Notes | 16. Long-term Royalty Payable
18. Share Capital,
Stock Options & Other
Stock-based Plans
On June 1, 2016, the Company issued 44,882,782 common shares
to former Fuel Systems' shareholders and 653,532 restricted stock
units in connection with the merger described in note 5.
On July 19, 2017, the Company issued 16,700,000 common shares
at a price of $1.50 per share, for gross proceeds of $25,050. On
July 28, 2017, the Company issued an additional 2,425,000
common shares at $1.50 for gross proceeds of $3,638, when the
underwriters exercised their over-allotment option. Transaction
costs of $2,735 were incurred resulting in net proceeds from the
equity issuance of $25,953.
During the year ended December 31, 2017, the Company issued
2,045,617 common shares, net of cancellations, upon exercises of
share units and in connection with earn out payments, (year ended
December 31, 2016 – 845,491 common shares). The Company
issues shares from treasury to satisfy stock option and share unit
exercises.
A. SHARE UNITS
The compensation program sets out provisions where the restricted
share units ("RSUs") and performance share units ("PSUs")
(together, 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.
These performance milestones are focused on achievement of key
cash management, profitability and revenue growth objectives.
Vesting periods and conditions for each Unit granted pursuant to
the Westport Omnibus Plan are 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 or
vested and the underlying shares are issued from treasury of the
Company, the value is reclassified to share capital.
During the year ended December 31, 2017, the Company
recognized $6,961 (year ended December 31, 2016 - $10,450; year
ended December 31, 2015 – $14,871) of stock-based
compensation associated with the Westport Omnibus Plan and the
former Amended and Restated Unit Plan.
the
A continuity of the Units issued under the Westport Omnibus Plan
former Amended and Restated Unit Plan as of
and
December 31, 2017, December 31, 2016 and December 31, 2015
are as follows:
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 35
(stock option
values expressed
in Canadian
dollars)
Outstanding,
beginning of
period
Granted
Exercised
Forfeited/
expired
Outstanding,
end of period
Options
exercisable,
end of period
Financial Statements | Notes | 18. Share Capital, Stock Options & Other Stock-based Plans
UNIT ISSUED SUMMARY
STOCK-BASED COMPENSATION
Years ended Dec 31
2016
2017
2015
Years ended Dec 31
2016
2017
2015
#
WAEP
#
WAEP
#
WAEP
Research and development
6,664,591 $ 6.75
9,657,921 $ 7.62
5,337,873 $ 10.27
General and administrative
Sales and marketing
993,659
(2,045,617)
2.18
6.31
684,402
2.90
5,556,630
6.74
Total
(845,491)
10.26
(575,024)
11.49
$
$
$
$
1,182 $
6,010 $
5,450 $
2,334 $
329 $
2,106 $
9,915
2,224
2,732
6,961 $ 10,450 $ 14,871
(1,102,643)
6.51 (2,832,241)
6.60
(661,558)
10.34
4,509,990 $ 6.00
6,664,591 $ 6.75
9,657,921 $ 7.62
636,073 $ 5.38
1,891,008 $ 7.77
1,150,294 $ 9.58
WAEP = weighted average exercise price (C$)
During 2017, 993,659 (2016 - 684,402) restricted share units were
granted to directors, executives and employees. Values of RSU
awards are generally determined based on the fair market value of
the underlying common share on the date of grant. RSUs typically
vest over a three year period so the actual value received by the
individual depends on the share price on the day such RSUs are
settled for common shares, not the date of grant. Subsequent to
year end, there was a sufficient number of shares available in the
Westport Omnibus Plan to complete the awarding of the 1,460,000
remaining PSU's from the 2015 grant. Through December 31, 2017
these PSU's were being treated as a liability until this condition was
met.
19. Income Taxes
A. PROVISION
The Company’s income tax provision differs from that calculated by
applying the combined enacted Canadian federal and provincial
statutory income tax rate of 26% for the year ended December 31,
2017 (year ended December 31, 2016 – 26%; year ended
December 31, 2015 – 26%) as follows:
INCOME TAX PROVISION
2017
Years ended Dec 31
2016
(Adjusted,
Note 6)
2015
Loss before income taxes
$ (65,530) $ (95,445) $ (98,423)
Expected income tax recovery
(17,055)
(24,816)
(25,580)
Increase (reduction) in
income taxes resulting from
Non-deductible stock-based
compensation
786
2,176
3,553
As at December 31, 2017, $1,736 of compensation expense related
to Units has yet to be recognized in results from operations and will
be recognized over a weighted average period of 5 months.
Other permanent
differences
Withholding taxes
3,185
444
Change in enacted tax rates
22,960
5,543
1,109
—
(76)
1,429
—
B. AGGREGATE INTRINSIC VALUES
The aggregate intrinsic value of the Company’s share units at
December 31, 2017 and 2016 are as follows:
AGGREGATE INTRINSIC VALUES
OF SHARE UNITS
Years ended Dec 31
(values in CDN$)
2017
2016
Share units:
Outstanding
Exercisable
$
21,332 $
3,009
10,130
2,874
C. STOCK-BASED COMPENSATION
Stock-based compensation associated with the Unit plans and the
stock option plan is included in operating expenses as follows:
Foreign tax rate differences,
foreign exchange and other
adjustments
Non-taxable income from
equity investment
Change in valuation
allowance
Goodwill impairment
Change in uncertain tax
position
Bargain purchase gain
138
(4,560)
(138)
(3,245)
925
(4,313)
(11,637)
32,583
21,036
—
—
—
—
4,820
301
(9,311)
—
—
Income tax expense
(recovery)
$ (4,424) $
3,950 $
731
B. DEFERRED INCOME TAX
The significant components of the deferred income tax assets and
liabilities are as follows:
36 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
DEFERRED INCOME TAX ASSETS
& LIABILITIES
Deferred income tax assets:
Net loss carry forwards
$ 189,627 $ 190,885
Years Ended Dec 31
2017
2016
Intangible assets
Property, plant and equipment
Warranty liability
Foreign tax credits
Inventory
Research and development
Other
6,502
13,046
3,290
5,241
4,668
5,795
10,319
11,879
4,056
5,233
3,806
4,710
13,190
15,288
Total gross deferred income tax assets
241,359
246,176
Valuation allowance
(239,511)
(244,536)
Total deferred income tax assets
1,848
1,640
Deferred income tax liabilities:
Intangible assets
Property, plant and equipment
Other
(4,062)
(4,517)
(231)
(323)
(596)
(796)
Total deferred income tax liabilities
(4,616)
(5,909)
Total net deferred income tax liabilities
$
(2,768) $
(4,269)
Allocated as follows:
Deferred income tax assets
Deferred income tax liabilities
1,848
1,640
(4,616)
(5,909)
Total net deferred income tax liabilities
$
(2,768) $
(4,269)
The valuation allowance is reviewed on a quarterly basis to
determine if, based on all available evidence, it is more-likely-than-
not that some or all of the deferred income tax assets will not be
realized. The ultimate realization of deferred income tax assets is
dependent on the generation of sufficient taxable income during the
future periods in which those temporary differences are expected
to reverse. If the evidence does not exist that the deferred income
tax assets will be fully realized, a valuation allowance has been
provided.
The deferred income tax assets have been reduced by the uncertain
tax position presented in note 19(f).
C. INCOME TAX EXPENSE / RECOVERY
The components of the Company’s income tax expense (recovery)
are as follows:
Financial Statements | Notes | 19. Income Taxes
INCOME TAX EXPENSE (RECOVERY)
Net
income
(loss)
before
income
taxes
Years ended Dec 31
Current Deferred
Total
2017
Canada
United States
Italy
Other
2016 (Adjusted, note 6)
Canada
United States
Italy
Other
2015
Canada
United States
Italy
Other
$ (61,458)
(3,737)
(17) $ (3,754)
3,023
2,433
(9,528)
17
493
447
—
(1,470)
(157)
17
(977)
290
$ (65,530) $ (2,780) $ (1,644) $ (4,424)
$(104,060) $
56 $
120 $
176
14,926
(4,324)
7
192
(1,987)
1,355
—
1,440
780
7
1,632
2,135
$ (95,445) $ 1,610 $ 2,340 $ 3,950
$ (44,739) $
793 $
228 $ 1,021
(22,227)
(20,695)
(10,762)
9
389
54
—
(566)
(176)
9
(177)
(122)
$ (98,423) $ 1,245 $
(514) $
731
D. LOSS CARRY-FORWARDS
The Company has loss carry-forwards in the various tax jurisdictions
available to offset future taxable income as follows:
LOSS CARRY-FORWARDS
2020
2018
Expiring in:
2019
2021+
Total
$
— $
— $
— $ 482,755 $ 482,755
Canada
Italy
United States
Sweden
Other
Total
—
—
—
—
—
—
—
17,354
17,354
— 105,325
105,325
—
21,118
15,605
21,118
27,992
1,036
6,417
4,934
$
1,036 $
6,417 $
4,934 $ 642,157 $ 654,544
Certain tax attributes are subject to an annual limitation as a result
of the acquisition of Fuel Systems which constitutes a change of
ownership as defined under Internal Revenue Code Section 382.
E. DEFERRED INCOME
TAX LIABILITY
The Company has not recognized a deferred income tax liability for
certain undistributed earnings of foreign subsidiaries which are
essentially investments in those foreign subsidiaries and are
permanent in duration.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 37
Financial Statements | Notes | 19. Income Taxes
F. TAX RESERVES
The Company records uncertain tax positions in accordance with
ASC No. 740, Income Taxes. As at December 31, 2017, the total
amount of the Company’s uncertain tax benefits was $4,345 (year
ended December 31, 2016 - $2,745). If recognized in future periods,
the uncertain tax benefits would affect our effective tax rate. The
Company files income tax returns in Canada, the U.S., Italy, and
various other foreign jurisdictions. All taxation years remain open
to examination by the Canada Revenue Agency, the 2014 to 2017
taxation years remain open to examination by the Internal Revenue
Service and the 2012 to 2017 taxation years remain open to
examination by the Italian Revenue Agency, and various years
remain open in the other foreign jurisdictions.
20. Related Party Transactions
The Company's related parties are CWI, Cartesian, directors,
officers and shareholders which own greater than 10% of the
Company's shares. During 2017, Mr. Costamagna, the former Chief
Executive Officer ("CEO") of Fuel Systems, left the Company's
Board of Directors and was no longer considered a related party.
Mr. Costamagna and his associated companies continue to supply
facilities, products and services to the Company.
The following table sets forth amounts that are included within the
captions noted on the consolidated balance sheets, representing
related party transactions with the Company:
RELATED PARTY TRANSACTIONS
Years ended Dec 31
2017
2016
Receivables
Entities related to Mariano Costamagna
(a)
$ N/
A $
Cummins Westport Inc. (b)
Ideas & Motion S.r.L. (c)
Total
Payables
150
6
$
156 $
237
236
15
488
Entities related to Mariano Costamagna (a)
$ N/
A
$
1,191
A. ENTITIES RELATED TO MARIANO
COSTAMAGNA INCLUDE:
Bianco S.p.A, TCN S.r.L., Biemmedue S.p.A, MTM Hydro S.r.L.,
Immobiliare IV Marzo, Delizie Bakery S.r.L., Galup S.r.L., TCN Vd
S.r.L., Europlast S.r.L., A.R.S. Elettromeccanica S.r.L., Ningbo
Topclean Mechanical Technology Co. Ltd., and Erretre S.r.L..
B. CUMMINS WESTPORT INC.
Pursuant to the amended and restated Joint Venture Agreement,
Westport engages in transactions with CWI (see note 9). Amounts
receivable relate to costs incurred by the Company on behalf of
CWI. The amounts are generally reimbursed by CWI to the
38 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Company in the month following the month in which the payable is
incurred.
C. IDEAS & MOTION S.R.L
Ideas & Motion S.r.L Is an Italian consulting and services company
in which the Company owns an equity ownership interest of 14.28%.
2017
2016
Purchases Sales Purchases Sales
Related party company
Entities related to Mariano
Costamagna (a)
Cummins Westport Inc. (b)
Ideas & Motion S.r.L. (c)
$ N/A $ N/A $
2,592 $ 412
— 2,721
—
69
— 2,744
—
43
Total
$
— $ 2,790 $
2,592 $ 3,199
D. OTHER TRANSACTIONS WITH
RELATED PARTIES
Peter Yu, founder and managing partner of Cartesian, was elected
as a Director of the Company in January 2016 in connection with
the convertible debt (note 15(c)) and royalty payable (note 16),
which are related party balances. The Company made an interest
payment on the convertible debt of $919 in 2017 to Cartesian. In
addition, the Company made a payment of $10,935 to Cartesian
relating to the royalty payable during the year ended December 31,
2017 and has continued to accrue interest in accordance with the
terms of the agreements. In addition, fees of $250 were paid to
Cartesian during the year ended December 31, 2017.
21. Commitments and
Contingencies
A. CONTRACTUAL COMMITMENTS
The Company has obligations under operating lease arrangements
that require the following minimum annual payments during the
respective fiscal years:
CONTRACTUAL COMMITMENTS
2018
$
2019
2020
2021
2022
Thereafter
Total
7,165
4,518
3,129
1,319
1,129
555
$ 17,815
For the year ended December 31, 2017, the Company incurred
operating lease expense of $4,782 (year ended December 31, 2016
- $5,675; year ended December 31, 2015 - $3,763).
The Company is a party to a variety of agreements in the ordinary
course of business under which it is obligated to indemnify a third
party with respect to certain matters. Typically, these obligations
arise as a result of contracts for sale of the Company’s product to
customers where the Company provides indemnification against
losses arising from matters such as product liabilities. The potential
impact on the Company’s financial results is not subject to
reasonable estimation because considerable uncertainty exists as
to whether claims will be made and the final outcome of potential
claims. To date, the Company has not incurred significant costs
related to these types of indemnifications.
B. CONTINGENCIES
On June 15, 2017, the Enforcement Division of the SEC issued a
subpoena to Westport Fuel Systems for information concerning its
Weichai Westport Inc. joint venture and compliance with the U.S.
Foreign Corrupt Practices Act ("FCPA") in connection with the
Westport Fuel Systems operations in China. The SEC Enforcement
Division issued a follow up subpoena on February 14, 2018.
Westport Fuel Systems is cooperating with these requests and
cannot predict the duration, scope or outcome of the SEC’s
investigation. The investigation being conducted by the SEC has
required and will continue to require significant resources.
The Company is engaged in certain legal actions in the ordinary
course of business and believes that the ultimate outcome of these
actions will not have a material adverse effect on our operating
results, liquidity or financial position.
C. PURCHASE COMMITMENTS
The Company purchases components from a variety of suppliers
and contract manufacturers. During the normal course of business,
in order to manage manufacturing lead times and help ensure
adequate component supply, the Company enters into agreements
with suppliers and contract manufacturers. A portion of our reported
estimated purchase commitments arising from these agreements
are firm, noncancelable, and unconditional commitments. The
Company may be subject to penalties, and may lose important
suppliers, if it is unable to meet its purchase commitments.
22. Segment Information
The financial information for the Company’s business segments
evaluated by the Chief Operating Decision Maker ("CODM")
includes the results of CWI as if they were consolidated, which is
consistent with the way the Company manages its business
segments. As CWI is accounted for under the equity method of
accounting, an adjustment is reflected in the tables below to
reconcile the segment measures to the Company’s consolidated
measures.
AUTOMOTIVE BUSINESS SEGMENT
The Westport Fuel Systems Automotive segment designs,
manufactures and sells CNG and LPG components and systems
Financial Statements | Notes | 21. Commitments and Contingencies
for passenger cars, light-duty trucks and medium-duty vehicles
including OEM, delayed OEM
(“DOEM”) and Aftermarket
segments. The portfolio of products includes pressure regulators,
injectors, electronic control units, valves and filters, in addition to
complete bi-fuel, mono-fuel and dual-fuel LPG and CNG conversion
kits.
The Company serves more than 70 countries with a strong customer
base in Europe, the Americas, Asia, and a growing presence in
Africa. Products are either sold directly to the OEM or through a
local distributor under 11 well-recognized and well-established
brands. The Company supplies a large number of global OEMs
including Volkswagen, Tata, GAZ, FCA, General Motors, Ford,
Maruti Suzuki, Honda, Volvo Car, Hyundai, and Kia as well as
Aftermarket distributors and customers.
The Automotive segment also designs, manufactures, and sells a
wide range of CNG compressors and refueling systems, from BRC
FuelMaker home appliance for individuals or small fleets, to
complete refueling stations branded CUBOGAS.
With effect from the first quarter of 2017, the high pressure
components and electronics product lines, formerly classified under
the Industrial Business segment, were consolidated into the
Automotive business and
the comparative balances were
reclassified accordingly.
INDUSTRIAL BUSINESS SEGMENT
On April 28, 2017, the Company reached an agreement to sell its
APU business and on May 30, 2017, the Company sold additional
assets of the Industrial business. The Industrial Business segment
is no longer considered an operating segment and is reclassified
to discontinued operations in the first quarter of 2017 (see note 6).
CORPORATE AND TECHNOLOGY
INVESTMENTS SEGMENT
The Corporate and Technology Investments segment is responsible
for current and advanced research and development programs,
corporate oversight, and general administrative duties. Examples
of our leading technologies include fully integrated combustion
solutions, fuel injectors, and fuel storage and delivery solutions
including cryogenics. The corporate oversight and general
administrative functions for the Company are grouped under this
unit.
Westport’s HPDI technology, Westport HPDI 2.0™ will provide
global vehicle and engine OEMs with a vertically integrated natural
gas solution with attractive price, performance, and fuel economy.
Developed to OEM quality standards, Westport HPDI 2.0™ system
components are primarily manufactured in partner facilities, offer
ready integration into OEM operations globally. A key component
of the Westport HPDI 2.0™ system is a brand new family of high
pressure fuel injectors, co-developed with Delphi, designed to
provide better cost, smaller size and improved packaging compared
to prior generation Westport™ HPDI injector designs. Westport and
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 39
Financial Statements | Notes | 22. Segment Information
Delphi have entered into a joint development agreement which will
combine our intellectual property and engineering strengths to co-
develop and manufacture high-pressure natural gas fuel injectors
designed for multiple engine OEMs. The family of injectors are
developed with core components of Westport's HPDI 2.0 fuel
system.
Westport’s proprietary High Efficiency Spark ignited ("HESI")
technology is designed to provide vehicle and engine OEMs with a
natural gas solution that exceeds the power and torque of the diesel
engine upon which it is based. This allows for engine downsizing
resulting in a smaller, lighter, more powerful, more fuel efficient and
lower emissions package. Using 100% dedicated natural gas as
fuel, this technology optimizes the combustion system and thermal
management of the engine by taking full advantage of the ultra-high
octane performance fuel properties of natural gas. Developed to
meet the highest level of OEM quality standards, Westport's new
combustion system and components have been undergoing testing
and are being further developed to offer ready integration into OEM
applications globally.
CUMMINS WESTPORT INC.
JOINT VENTURE
CWI, our 50:50 joint venture with Cummins, serves the medium and
heavy-duty on highway engine markets. CWI engines are offered
by many OEMs for use in transit, school and shuttle buses,
conventional trucks and tractors, and refuse collection trucks, as
well as specialty vehicles such as short-haul port drayage trucks
and street sweepers.
WEICHAI WESTPORT INC.
JOINT VENTURE
WWI is a joint venture between Westport, Weichai Holding Group
Co. Ltd. ("Weichai") and Hong Kong Peterson (CNG) Equipment
Ltd. focusing on the Chinese market. In April 2016, the Company
sold a portion of its economic interest in WWI and the Company
discontinued reporting of WWI results on an equity basis. As the
Company no longer has significant influence in the joint venture,
the Company does not consider WWI a business segment
subsequent to the first quarter of 2016.
The accounting policies for the reportable segments are consistent
with those described in note 3. The CODM evaluates segment
performance based on the net operating income (loss), which is
before income taxes and does not include depreciation and
amortization, impairment charges, restructuring charges, foreign
exchange gains and losses, bank charges, interest and other
expenses, interest and other income, gain on sale of long-term
investments and bargain purchase gain.
Financial information by business segment as follows:
40 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
REVENUE
Years ended Dec 31
2017
2016
2015
Automotive
$ 239,393 $ 172,232 $ 100,108
Corporate and Technology
Investments
CWI
WWI
7,670
5,162
3,196
317,297
276,465
331,882
—
29,931
185,967
Total segment revenues
564,360
483,790
621,153
Less: equity investees' revenue
(317,297)
(306,396)
(517,849)
Consolidated revenue from
continuing operations
Consolidated revenue from
discontinuing operations
$ 247,063 $ 177,394 $ 103,304
$
29,038 $
47,501 $
—
OPERATING INCOME (LOSS)
Years ended Dec 31
2017
2016
2015
Automotive
$
(808) $ (18,136) $ (21,855)
Corporate and Technology
Investments
(60,332)
(76,118)
(77,283)
Restructuring
(1,682)
(19,000)
—
Foreign exchange gain (loss)
(562)
(6,565)
11,601
Impairment of long lived assets,
net
CWI
WWI
(1,550)
(4,843)
(22,722)
57,276
29,782
—
718
51,011
3,784
Total segment operating loss
(7,658)
(94,162)
(55,464)
Less: equity investees’ operating
income
Consolidated loss from
continuing operations
Consolidated income (loss)
from discontinued operations
(57,276)
(30,500)
(54,795)
$ (64,934) $ (124,662) $ (110,259)
$
(845) $
2,789 $
—
ADDITIONS TO LONG-LIVED ASSETS
Years ended Dec 31
2017
2016
2015
Total additions to long-lived assets,
excluding business combinations:
Automotive
$
3,388 $
3,364 $
1,350
Corporate and Technology
Investments
21,900
5,290
3,495
Total consolidated revenues
$
9,347 $
4,845 $ 10,249
It is impracticable for the Company to provide geographical revenue
information by individual countries; however, it is practicable to
provide it by geographical regions. Product and service and other
revenues are attributable to geographical regions based on location
of the Company’s customers and presented as a percentage of the
Company’s product and service revenues are as follows:
REVENUE BY REGION
LONG-LIVED ASSETS BY REGION
Financial Statements | Notes | 22. Segment Information
% of total product revenue and
service and other revenue,
years ended Dec 31
2016
2015
2017
Europe
Americas
Asia
Others
60%
20%
12%
8%
63%
23%
12%
2%
48%
40%
12%
—%
As at December 31, 2017, total goodwill of $3,324 (December 31,
2016 - $2,923) was allocated to the Automotive segment.
As at December 31, 2017, total long-term investments of $8,756
(December 31, 2016 - $12,996) was allocated to the Corporate and
Technology Investments segment and $546 (December 31, 2016 -
$426) to the Automotive segment.
Total assets are allocated as follows:
TOTAL ASSETS BY OPERATING
SEGMENT
Automotive
Industrial
Corporate and Technology Investments
and unallocated assets
CWI
Add: assets held for sale
Less: equity investees’ total assets
Total consolidated assets
Years ended Dec 31
2017
2016
$
257,374 $
270,594
—
—
50,084
131,986
$
439,444 $
6,164
(131,986)
$
313,622 $
23,768
147,245
441,607
37,098
(147,245)
331,460
The Company’s long-lived assets consist of property, plant and
equipment (fixed assets), intangible assets and goodwill.
Long-lived assets information by geographic area:
December 31, 2017
Italy
Canada
United States
Rest of Europe
Asia Pacific
Less: equity investees'
long lived assets
Total consolidated
long-lived assets
December 31, 2016
(Adjusted, note 6)
Italy
Canada
United States
Rest of Europe
Asia Pacific
Less: equity investees'
long lived assets
Total consolidated
long-lived assets
Fixed Assets
Intangible
Assets
Total
$
25,221 $
19,476 $
44,697
$
$
39,732
1,587
2,860
2,211
317
—
4,474
—
40,049
1,587
7,334
2,211
71,611
24,267
95,878
(1,245)
—
(1,245)
70,366 $
24,267 $
94,633
26,713 $
19,942 $
46,655
19,429
3,699
2,712
3,097
351
—
4,462
—
19,780
3,699
7,174
3,097
55,650
24,755
80,405
(1,074)
—
(1,074)
$
54,576 $
24,755 $
79,331
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 41
Financial Statements | Notes | 23. Financial Instruments
23. Financial Instruments
A. FINANCIAL RISK MANAGEMENT
The Company has exposure to liquidity risk, credit risk, foreign
currency 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 are due. The Company has
sustained losses and negative cash flows from operations since
inception. At December 31, 2017, the Company has $71,842 of
cash, cash equivalents and short-term investments.
The following are the contractual maturities of financial obligations
as at December 31, 2017:
CONTRACTUAL OBLIGATIONS
Years
Carrying
amount
Contractual
cash flows
< 1
1–3
4–5
5+
Accounts
payable and
accrued
liabilities
Restructuring
obligation
(note 14)
Term loan
facility
(note 15 (a))
Senior
revolving
financing
(note 15 (b))
Convertible
debt
(note 15 (c))
Other bank
financing
(note 15 (d))
Capital lease
obligations
(note 15 (e))
Long-term
royalty
payable
(note 16)
Operating
lease
commitments
$ 87,150 $
87,150 $ 87,150 $
— $
— $ —
2,969
2,969
2,969
—
—
18,987
26,868
5,362
13,116
8,390
10,901
11,742
2,195
4,475
5,072
17,335
22,711
1,575
3,150
17,986
6,562
6,645
5,191
732
722
637
675
309
253
113
—
—
—
—
—
—
19,031
35,044
2,011
11,056
14,057
7,920
—
17,815
9,032
6,458
2,186
139
$163,572 $ 211,619 $115,794 $ 39,240 $ 48,526 $ 8,059
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 and accounts receivable. The Company
manages credit risk associated with cash and cash equivalents 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. The
Company monitors its portfolio, and its policy is to diversify its
investments to manage this potential risk.
42 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
The Company is also exposed to credit risk with respect to
uncertainties as to timing and amount of collectability of accounts
receivable and other receivables. As at December 31, 2017, 81%
(December 31, 2016 - 89%) of accounts receivable relates to
customer receivables, and 19% (December 31, 2016 - 11%) relates
to amounts due from related parties and income tax authorities for
value added taxes and other tax related refunds. 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 days 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 on a customer-by-customer evaluation of collectability
at each balance sheet reporting date, taking into consideration past
due amounts and any available relevant information on the
customers’ liquidity and financial position.
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 and the Euro. Cash and cash
receivable,
equivalents, short-term
accounts payable, and long-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.
investments, accounts
The Company’s functional currency is the Canadian dollar. The U.S.
dollar amount of financial instruments subject to exposure to foreign
currency risk reflected in the consolidated balance sheet at
December 31, 2017 is as follows:
FOREIGN CURRENCY RISK IN
BALANCE SHEET
Cash and cash equivalents
Accounts receivable
Accounts payable
Long-term debt, including current portion
Long-term royalty payable, including current portion
U.S.
dollars
$ 30,859
10,624
3,594
36,322
19,031
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 certain
long-term debt with variable rates of interest. 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 December 31, 2017 had
increased or decreased by 50 basis points, with all other variables
held constant, net loss for the year ended December 31, 2017 would
have increased or decreased by $60.
F. FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to the short-
term period to maturity of these instruments.
The long-term investments represent our interest in CWI, which is
accounted for using the equity method, and WWI and other
investments, which are accounted for using the cost method.
The carrying value of the Term Facility included in the long-term
debt (note 15(a)) approximates its fair values as the loan was
executed shortly before the 2017 year end. The carrying value
reported in the balance sheet for the senior financing (note 15(b))
approximates its fair value as at December 31, 2017, as the interest
rates on the debt is floating and therefore approximates the market
rates of interest.
The Company categorizes its fair value measurements for items
measured at fair value on a recurring basis into three categories as
follows:
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
Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
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.
Financial Statements | Notes | 23. Financial Instruments
As at December 31, 2017, cash and cash equivalents and short-
term investments are measured at fair value on a recurring basis
and are included in Level 1.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 43
Computershare Trust Company of Canada
510 Burrard Street, 2nd Floor, Vancouver, BC, Canada V6C 3B9
T 604-661-9400 F 604-661-9401
Legal Counsel
Bennett Jones LLP, Calgary, Alberta, Canada
Auditors
KPMG LLP, Independent Registered Public Accounting Firm,
Vancouver, British Columbia, Canada
Annual Meeting Of
Shareholders
WHEN: Monday, May 7, 2018 at 10:00 AM (Eastern)
WHERE: 3400 One First Canadian Place, Toronto, ON
Westport Fuel Systems
on the Net
Topics featured can be found on our websites:
WESTPORT FUEL SYSTEMS
wfsinc.com
FUEL FOR THOUGHT (blog)
blog.westport.com
YOUTUBE
TWITTER
youtube.com/westportdotcom
twitter.com/westportdotcom
CUMMINS WESTPORT
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 on the
Westport Fuel Systems website, on SEDAR at sedar.com, or at the
SEC at www.sec.gov. Shareholders and other interested parties
can also sign up to receive news updates in a variety of formats
including email, Twitter, and RSS feeds: westport.com/contact/
subscriptions
Contact Information
1750 W 75th Avenue, Suite 101 Vancouver, BC, Canada V6P 6G2
T 604-718-2000 F 604-718-2001 invest@wfsinc.com
Information for Shareholders
Information for
Shareholders
DIRECTORS & EXECUTIVE OFFICERS
Committees
Name / position
Ashoka Achuthan
CFO
Andrea Alghisi
COO, Automotive
Jim Arthurs
EVP
Michele J. Buchignani
Director
Brenda J. Eprile
Chair & Director
Nancy S. Gougarty
CEO and Director
Daniel M. Hancock
Director
Anthony Harris
Director
Colin Johnston
Director
Scott Mackie
Director
Wade Nesmith
Director
Rodney T. Nunn
Director
Thomas G. Rippon
CTO & EVP
Peter M. Yu
Director
Residence
Chicago,
Illinois
Tortona,
Italy
North Vancouver,
British Columbia
Vancouver,
British Columbia
Toronto,
Ontario
Leesville,
South Carolina
Indianapolis,
Indiana
Alameda,
California
Turin,
Italy
Milford,
Michigan
Vancouver,
British Columbia
Chatham,
Ontario
White Rock,
British Columbia
New York City,
New York
Start
date
AU HR NC
Nov
2013
June
2016
Jan
2014
Mar
2018 •
2013 • •
Oct
Feb
2013
Jul
2017
Jun
Jun
2016 •
2016 • •
2016 •
2017 •
Sep
Jun
• •
•
•
•
• •
Mar
2016
Sep
2013
Jan
2016
Committees are as follows: AU = Audit; HR = Human Resources &
Compensation; NC = Nominating & Corporate Governance
Corporate Information
STOCK LISTINGS
NASDAQ
Toronto Stock Exchange
WPRT
WPRT
Westport Fuel Systems
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:
44 | WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT
Information for Shareholders
Forward-Looking Statements
Certain statements contained in this Annual Report constitute "forward-looking statements". When used in this document, the words "may",
"would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "project" and similar expressions, as they relate to us or
our management, are intended to identify forward-looking statements. In particular, this Annual Report contains forward-looking statements
pertaining to the following:
• Our efforts to capture operating efficiencies and reduce our expenses and the results of such efforts in the future;
• The broadening of our product offerings as Westport Fuel Systems implements its strategic plan;
• Future asset sales and right-sizing of Westport Fuel Systems cost structure and the results of such activities; and
• The timing and effect of the launch of Westport HPDI 2.0TM commercial components with OEM launch partners.
Such statements reflect management's current views with respect to future events and are subject to certain risks and uncertainties and are
based upon a number of factors and assumptions. Actual results may differ materially from those expressed in the foregoing forward-looking
statements due to a number of uncertainties and risks, including the risks described in Westport Fuel Systems Annual Information Form and
in the documents incorporated by reference into this Annual Report and other unforeseen risks. Such risks, uncertainties, factors and assumptions
include, without limitation:
• market acceptance of our products;
• product development delays and delays in contractual commitments;
• changing environmental regulations;
• the ability to attract and retain business partners;
• the success of our business partners and OEMs with whom we partner;
• future levels of government funding and incentives;
• limitations in our ability to successfully integrate acquired businesses;
• the ability to provide the capital required for research, product development, operations and marketing; and
• risks related to the merger with Fuel Systems Solutions Inc., including, but not limited to: failure to realize the anticipated benefits of the
merger with Fuel Systems and to successfully integrate the two companies.
You should not rely on any forward-looking statements. Any forward-looking statement is made only as of the date of this Annual Report. We
undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as otherwise required by law. The forward-looking statements in this Annual Report are expressly qualified by this cautionary statement.
WESTPORT FUEL SYSTEMS INC. 2017 ANNUAL REPORT | 45
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Westport Fuel Systems | 1750 West 75th Avenue, Suite 101, Vancouver, BC, Canada V6P 6G2 | +1 604-718-2000 | invest@wfsinc.com | wfsinc.com