WESTPORT FUEL SYSTEMS INC.
2018 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
SUSTAINABILITY REPORT
REPORT SCOPE AND CONTENT
DEPLOYING CLEAN TRANSPORTATION SOLUTIONS
STAKEHOLDER ENGAGEMENT AND KEY COLLABORATIONS
DETERMINING MATERIALITY
SOCIAL PERFORMANCE
SUPPLY CHAIN RESPONSIBILITY
GLOBAL REPORTING INiTIATIVE INDICATOR (GRI) INDEX
THE UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS
FOOTNOTES
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
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
2
3
5
6
8
10
11
12
14
14
18
18
23
24
24
26
26
28
29
30
32
32
33
34
35
36
54
Letter To
Shareholders
Dear Shareholders,
I’m pleased to join and to lead Westport Fuel Systems at this pivotal
time for our industry and for our company. In my short time on the
job, I’ve met with our customers, employees, and key partners in
the
North America, Europe, and Asia.
opportunities we have and am inspired by our ability and plans to
address our challenges. I aim to accelerate our transformation into
a profitable, sustainable organization.
I’m excited about
We provide our original equipment manufacturers (“OEM”)
partners, customers, and fleets with market-ready solutions that
enable both emissions reductions and operating cost savings. Our
fuel systems, electronics,
broad portfolio of components,
cryogenics, and technology solutions are sold in 70 countries
through an extensive global distribution network. Cost-competitive
solutions to decarbonize the transportation sector and improve air
quality and public health outcomes in our cities are commercially
available now.
A number of fundamental market trends are driving our business:
1. A growing global demand for transportation. As population
increases and markets mature, the need to move goods and
people grows in lockstep;
2.
Increasingly urgent demands for healthy, breathable air in our
urban centres and for action to mitigate climate change mean
we must accelerate the deployment of more efficient, clean,
low carbon transportation solutions; and
3. The growing availability and the compelling economics of
cleaner fuels.
Globally, California and Europe continue to lead the way but both
China and India are accelerating their efforts. Europe for example,
has proposed aggressive CO2 emissions reduction standards for
commercial vehicles. The phrase “game changer” is often overused
but given the magnitude of the emissions reductions required and
the financial implications of these regulations, we believe it’s
applicable here. Westport HPDI 2.0TM provides a CO2 emission
reduction benefit of approximately 20% and is commercially
available, cost competitive, and on the road across Europe today.
Letter to Shareholders
EBITDA and also our first full year with positive adjusted
EBITDA; financial results that align with and fulfil our earlier
stated commitments.
2. Heavy-Duty OEM Developments: The launch of Westport
HPDI 2.0™ with our European OEM partner continues at pace.
In 2018, we entered into definitive development and supply
agreements to commercialize a heavy-duty natural gas engine
featuring Westport HPDI 2.0™ technology in China, another
key market taking serious action on climate change and air
quality.
3.
Independent Aftermarket: Our customers around the world
purchase systems and components through an extensive
network of global distributors to convert their passenger cars
to use liquefied petroleum gas (“LPG”) or compressed natural
gas (“CNG”) and realize fuel cost savings.
4. OEM Light-Duty Developments: Proposed diesel engine
bans and the creation of low emission vehicle zones in cities
have resulted in a greater deployment of LPG and CNG fuelled
vehicles. With more than 20 light-duty OEM partners, we are
well positioned in this space to capture growing market share.
5. Cummins Westport: Strong profitability in our Cummins
Westport (“CWI”) joint venture confirms that CWI’s products
have set the industry standard for class-leading, ultra-low NOx
emission engines in market segments demanding both
economic and environmental performance.
6. New Product Developments: Urban air quality and improved
public health outcomes remain critical challenges and OEMs
are looking for technology solutions. The Indian Government’s
new Bharat Stage VI (“BS-VI”) emission standards which
leapfrog the Bharat Stage V (“BS-V”) Standards entirely are
set to take effect in April of 2020. Tata announced earlier this
year that the first engine within our supply and development
agreement has been certified to meet the BS-VI standards,
more than a year in advance of the implementation of these
new standards.
I would like to take the opportunity to thank Nancy Gougarty for her
years of tireless dedication to the mission and vision of Westport
Fuel Systems. Her leadership and commitment have cemented our
market-leading position and I am honoured to take the helm of the
organization at this exciting time.
On behalf of the management team and Westport Fuel Systems
employees around the world, thank you for your continued support.
I would like to highlight a few of our significant business
accomplishments in 2018. We have made substantial progress in
improving our operating results and have achieved several key
milestones along the way.
Sincerely,
1. Revenue Growth and Financial Performance: 2018 was a
strong year for Westport Fuel Systems as our consolidated
revenues increased by 18% to $270 million. In Q4 2018, we
recorded our third consecutive quarter of positive adjusted
David M. Johnson,
Chief Executive Officer
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 1
Sustainability Report
Driving Innovation
to Power a
Cleaner Tomorrow
CEO Sustainability
Statement[1]
A disruptive energy and technology transition is underway in all
segments of the transportation market. Ever increasingly urgent
demands for healthy, breathable air and calls to action on
decarbonizing the sector are driving deployment in key jurisdictions.
More stringent regulatory frameworks to address fuel economy,
liveability
efficiency, environmental performance, and urban
considerations related to congestion and noise are advancing the
adoption of a range of alternative fuel engines and vehicles.
Westport Fuel Systems has been leading the shift to lower-carbon
and more economical fuels like natural gas, propane, and hydrogen
for more than twenty years. Our customers around the globe
demand new, economically competitive, sustainable and efficient
transport solutions. We provide customers and end users with
market-ready solutions that enable them to reduce emissions and
realize fuel cost savings.
Westport Fuel Systems is committed to take smart actions in pursuit
of our vision and mission and are committed to the driving principles
of customer excellence, ownership of results, thriving as one team,
and being socially responsible. We adhere to the core values of
integrity, respect, and perseverance.[2]
is Westport Fuel Systems’
This
first sustainability report
encompassing our entire global operating footprint and aligns with
earlier-stated commitments to provide a complete overview of our
activities, successes, and challenges in reaching our vision of a
sustainable transportation future. We appreciate your time in
reviewing our progress and welcome your feedback or inquiries.
Please
at
reach
sustainability@wfsinc.com.[3]
team
free
feel
our
out
to
to
Report Scope and Content
From fiscal years 2009 to 2016, Westport Innovations, the
predecessor corporation of Westport Fuel Systems Inc., had
published an external sustainability report capturing the strategy,
programs, and achievements related to social and environmental
performance for its Vancouver-based operations only.[4] Our last
sustainability report was published May 26, 2017.[5]
2 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
This report discloses data from January to December 2018 and will
serve as the baseline for the future annual reports.[6] We have
structured our data collection efforts by our operating entities.[7]
This report has been developed in accordance with the Global
Reporting Initiative ("GRI") Sustainability Standards 2016; a
standard effective for reports published after July 01, 2018.[8] The
GRI is an independent institution that provides a standard
framework for sustainability reporting across companies and
industries. We have applied the principles of materiality and
inclusiveness as recommended by the GRI to assess the relevance
of priorities to the Company and its stakeholders.
The Company has internal reviews and process in place to ensure
the integrity and the credibility of the data contained within this report
but we have not sought external assurance at this time.[9]
Deploying Clean
Transportation Solutions[10]
We strive to create leading edge technologies that meet or exceed
the requirements of regulation and industry codes and standards
to shift the transportation sector to alternative fuels. Working in
conjunction with our partners, we are committed to delivering low-
emission fuel solutions that will meet the demand for high-efficiency,
high-performance, and low-carbon transportation.
In accordance with the precautionary principle, we strive to be
proactive in managing risks and take sustainability into account in
our annual and long-range business, operational, and product
planning processes.[11]
Regulatory Developments
As an alternative fuel system and component developer, designer,
and manufacturer, the Company’s first priority is to ensure that our
products comply with the latest and most stringent safety, quality,
and environmental regulations. The recent enactment of regulatory
frameworks including fuel economy improvements, renewable fuel
mandates, carbon dioxide ("CO2") emission reductions, and
greenhouse gas emission ("GHG") reductions in key markets have
sent strong signals for the continued development of a range of new
technologies including efficiency, alternative fuels, and zero
emission vehicles.
Europe’s proposed CO2 regulations which set CO2 emission
reduction targets for heavy-duty vehicles is expected to be passed
in April 2019. Under the proposed legislation, heavy-duty truck
original equipment manufacturers ("OEMs") will be required to
achieve a fleet average reduction of CO2 emissions of 15% by 2025
and 30% by 2030 compared to a 2019 baseline emission level.
Heavy-duty natural gas vehicles featuring Westport HPDI 2.0™
technology provide a CO2 emission reduction benefit of
approximately 20% compared to an equivalent diesel-fuelled
vehicle and are commercially available, cost competitive, and on
the road in Europe today.
Climate Change
fundamental business challenge
Climate change, including the alteration of long-term weather
patterns and the increasing frequency of extreme weather events
represents a
for every
organization to understand and manage risks across its value chain,
now and in the future. While this global sustainability report
represents our commitment to quantifying our energy consumption
and associated greenhouse gas emission impact, we are working
to map carbon risk across all our activities and geographies and
increase disclosure of current and future risks and opportunities to
investors and other key stakeholders.[12]
We design, engineer, manufacture, and sell commercially available
and cost competitive alternative fuel products with well documented
emission reduction benefits. The extent and rate to which the
transport sector is able to make progress on the ambitious 80%-
by-2050 emission reduction targets incorporated within the Paris
Climate Agreement and diversify beyond oil, will be a function of
ongoing technology breakthroughs on both fuels and vehicles,
political action, shifting demographics, and a range of new public
policy considerations that will not only influence how people and
freight are moved, but how and where we live.
Public Health
and Urban Air Quality
The move to limit or ban diesel vehicles and the establishment of
low emission vehicle zones in major cities around the world
continues at pace. While almost all of the attention is currently
focused on the light-duty vehicle market, there is limited
commentary on the potential impacts for freight vehicles and trucks.
Although there are currently no regulations in place to ban diesel
vehicles, this is a fluid situation and the preferred approach is highly
dependent on the jurisdiction.[13] These restrictions can be in the
form of a pollution tax (London), a ban on pre-Euro VI diesel vehicles
(Stuttgart), or a temporary blanket ban (Oslo). There are also signs
of increasing momentum via evidence of repeated announcements
to ban diesel vehicles (Paris and Madrid) and/or the adoption of
minor restrictions to deter the sale of new diesel vehicles (Seoul
and Singapore).[14]
Stakeholder Engagement
and Key Collaborations
We have a range of diverse stakeholders and consider stakeholder
engagement to be an essential component of corporate governance
and good business practice. Regular and ongoing dialogue with
academia, customers and OEM partners, employees, government
agencies (including policy makers and regulators), industry
Sustainability Report | Deploying Clean Transportation Solutions
consortiums, investors, local communities, media, non-government
organizations ("NGOs") and think tanks, and suppliers through
formal and informal channels is essential to our business and our
sustainability strategies.[15]
Stakeholder Engagement
Over the past year we have worked to identify and map our
stakeholders and have an opportunity to better formalize our
stakeholder engagement processes across the Company. The
management team stays in regular contact with stakeholders on
emerging sustainability issues and trends and we periodically
receive inquiries and requests for further engagement from different
stakeholder groups.[16] Table 4‑1 contains an alphabetized list of
our stakeholders, the informal and formal mechanisms we use to
engage them, and our understanding of their expectations specific
to the Company.
Stakeholder
[17]
Engagement
Mechanism
Stakeholder
Expectations
Academia
Regular dialogue
Topic-specific,
Conferences and
events
Data-driven analysis,
Transparent and
defendable data
Customers
and OEM
Partners
Distributor network,
Key account
management, Reviews
and meetings, Market
research, Corporate
website, Digital media
Employees
Government,
Policy
Makers,
Regulators
Health and safety
committees,
Globalzone intranet,
Town hall meetings,
Internal
communication
channels, Union
representatives,
Performance
management
processes
Global advocacy and
relationship building,
Policy and regulatory
development, Facility
visits and targeted
outreach,
Collaborative
partnerships
Product quality and
performance,
Operational
excellence,
Technology
leadership,
Environmental
certifications,
Sustainability
leadership and
reporting
Competitive pay and
benefits, Clear
communication,
Training and
development, Career
and growth
opportunities, Work/life
balance
Product and
technology solutions to
address environmental
challenges, Job
creation, Economic
competitiveness
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 3
Sustainability Report | Stakeholder Engagement and Key Collaborations
Stakeholder
[17]
Engagement
Mechanism
Stakeholder
Expectations
Industry
Consortium
Industry working
groups, Corporate
membership spend,
Service on Board of
Directors and advisory
boards
Member direction and
input, Strategic input
on future of industry
Investors
Quarterly earnings
communications,
Analyst conference
calls, Shareholder
meetings, Annual
report and other
regulatory filings,
Investor relations
conference
Financial performance,
Return on investment,
Competitive
positioning,
Technology
investment,
Transparent reporting
with credible data
Local
Communities
Community outreach
mechanisms,
Emergency response
plans
Corporate citizenship,
No neighbourhood
disruption (noise,
congestion)
Media
Press releases, media
releases, Corporate
website, Access to
corporate
spokespeople, Digital
media
Clean technology
innovation, Corporate
performance,
Shareholder value
NGOs and
Think Tanks
Regular dialogue,
Topic-specific
conferences and
events
Private-sector
expertise and
resources,
Collaboration on
innovative solutions,
Transparent reporting
with credible data
Corporate Memberships
and Key Collaborations
to many
Industry leadership begins with outreach and dialogue and our
employees contribute
technical working groups,
committees, and advisory panels to learn, share our expertise, and
help build a body of knowledge about alternative fuel vehicles, their
benefits, and challenges with deployment. It is critical for us to
contribute sound, intelligent, data driven, and defensible analysis
to conversations on low-carbon transportation, sustainable mobility,
and the transition to alternative fuels.
Industry and Academic
Consortiums[20]
Business for Social
Responsibility Future
of Fuels
Canadian Chamber
of Commerce
Membership or
Governance Position
Occupied by Westport Fuel
Systems
Sponsor and Advisory
Board Member
Corporate Membership
Canadian Natural Gas
Vehicle Association
Vice-Chair of Board of Directors
CALSTART
Chair of Board of Directors
California Natural Gas
Vehicle Association
Board Director
European Natural Gas
Vehicle Association
Secretary of Board of Directors
Suppliers
Top supplier meetings,
Supplier manuals and
documentation, Global
supplier conference,
Supplier performance
audits
Sales growth, New
market penetration
Natural Gas Vehicles
America
Treasurer of Board of Directors
Natural Gas Vehicles
Global
Corporate Membership
World Liquefied Petroleum
Gas
(LPG) Association
Corporate Membership
University of California
Davis STEPS
(Sustainable Transportation
Energy Pathways)
Sponsor and Advisory Board
Member
Table 4‑2: Industry Associations and Position Occupied by
Westport Fuel Systems in Fiscal Year 2018 Ended December 31
Table 4‑1: Approach to Stakeholder Engagement Including
Outreach Mechanism and Expectations[18]
Collective Bargaining Agreements
Our employees are not represented by a labour union except in
Italy, Sweden, and Argentina.[19]
4 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Sustainability Report | Determining Materiality
Determining Materiality
The intent of the materiality review is to ensure that the content included in our annual sustainability report represents the key economic,
environmental, and social issues that are most critical to our stakeholders. In accordance with the GRI, we have identified and incorporated
the views and perspectives of our customers, shareholders, employees, and other key stakeholders as described in Section 4.1.
We have evaluated our own strategy and those of our industry peers to identify additional issues to guide and supplement our process for
determining materiality. This consolidated feedback has led to the establishment of a number of focus areas including:
i) Fairness and Concern for Employees,
ii) Environmental Responsibility and Leadership,
iii) Corporate Ethics and Compliance, and
iv) Supply Chain Responsibility.[21]
In subsequent reports we will publish indicators to track and measure our performance over time and demonstrate our ongoing commitment
to sustainable corporate performance.
The United Nations Sustainable Development Goals
The UN Sustainable Development Goals embrace a universal framework to advance both public and private sector action in building sustainable
societies. The Global Reporting Initiative encourages companies to highlight their efforts to align material topics to the Sustainable Development
Goals. The goals that align most closely to the strategic priorities of the Company include affordable and clean energy, sustainable cities and
communities, and climate action.
Material issue
Fairness and
Concern for
Employees
Corporate
Ethics and
Compliance
Overview
UN Sustainable Development
Goals Alignment
Workforce Diversity
5, 8
Recruitment and
Development
4, 5, 8
Employee Health and
Safety
3, 8
Corresponding GRI Standards Material Topic
Employment, Diversity and Equal Opportunity
Training and Education
Employment, Occupational Health and Safety
Ethical Conduct
12, 16
Anti-Corruption, Anti-Competitive Behaviour
Management of Third-
Party Representatives
8, 16
Supplier Environmental Assessment, Supplier Social
Assessment, Collective Bargaining, Anti-Corruption
Environmental
Responsibility
and Leadership
Greenhouse Gas
Impact
12, 13, 15
Energy, Emissions
Energy Consumption
and Efficiency
7, 9, 12, 13
Energy, Emissions
Supply Chain
Responsibility
Supply Chain Viability
8, 9, 11, 16
Supplier Environmental Assessment, Supplier Social
Assessment
Table 5‑1: Westport Fuel Systems Materiality Content
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 5
The Code of Conduct is disclosed on the Corporate Governance
section of our website at https://wfsinc.com/investors/corporate-
governance/ and posted on our employee intranet. A certificate
attesting compliance with the Code of Conduct is signed annually
by all directors, advisory board members, officers, and employees
and proposed amendments must be approved by the Board of
Directors of Westport Fuel Systems Inc.
We have further supplemented the requirements of our Code of
Conduct through the adoption of policies covering: anti-corruption
and bribery, the disclosure of material information and external
communications, and the prohibition of insider trading.
Whistleblower Policy
Westport Fuel Systems is committed to the highest possible
standards of ethical, moral, and legal conduct through the behaviour
of our employees and the proper and effective functioning of
accounting and controls systems. We have an established
Whistleblower Policy and maintain a confidential and anonymous
Ethics hotline for employees to report concerns about corporate
conduct with the reassurance that they will be protected from
reprisals for “whistleblowing” in good faith.[23] The Whistleblower
Policy is available on our website in the Corporate Governance
section at wfsinc.com/investors/corporate-governance/
Anti-Corruption and Bribery
Our expectations for individual integrity and ethical, moral, and legal
conduct are outlined in our Code of Conduct and our Anti-Corruption
and Bribery Principles which mandate compliance with all
applicable laws in the jurisdictions where we operate. These policies
apply to everyone within the Company who act on behalf of the
Company in any business dealings and to those who working in
affiliates or joint ventures. We strive to maintain the highest
standards of behaviour while conducting Company business.
A global training initiative that consists of both structured classroom
and online components was launched in 2018 to ensure that
employees and others acting the Company’s behalf are aware of
and understand corporate policies and guidelines specific to anti-
corruption and bribery, can identify the roles and responsibilities of
key stakeholders, are able to identify red flags and risk management
techniques, and are aware of the process to report violations or
seek clarification.[24]
Sustainability Report | Social Performance
Social Performance
Corporate Ethics
and Compliance
The Company has demonstrated a strong history of commitment
to the values of quality, service, integrity, and respect as we deal
with our employees, customers, suppliers, and investors. These
values are fundamental to our business relationships, our continued
success in the marketplace, and are a true source of pride for our
teams.
firmly
Our corporate integrity is one of our most precious assets and in
this rapidly changing environment, with new laws and new stringent
focused on our
regulatory requirements we remain
compliance efforts. The Code of Conduct reflects our commitment
to a culture of honesty, integrity, and accountability and outlines the
basic principles and policies to which all directors, officers,
employees, contractors, agents, and consultants who act on behalf
of the Company in any business dealings must comply. The Code
of Conduct is there to help us uphold our values and establishes
our conduct in a number of specific areas including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Honesty and ethical conduct,
Fair dealing, including prohibition on giving or receiving
bribes,
Respect for communities and the environment,
Employment policies and employee rights,
Compliance with laws, rules and regulations, domestic and
foreign, recusal requirements,
Dealings with public officials,
Retention of agents and representatives,
Political and charitable contributions GRI Indicator 415-01
Political contributions - as per the Westport Fuel Systems
Code of Conduct political contributions by the Company are
prohibited in all circumstances.,
Integrity of books and records,
Protection and proper use of company assets,
Competitive business practices,
Communication with media and other outsiders,
Internal controls and the authority to make commitments,
and,
Compliance with corporate policies.
6 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Our Global Footprint
Westport Fuel Systems employs a highly educated and experienced team of engineers, manufacturing technicians, and commercial
professionals with expertise in alternative fuel systems, combustion technologies, and fuel storage and delivery systems, including cryogenics.
Sustainability Report | Social Performance
Geographic Region
North America
Operating Entity
Board of Directors and Advisors[27]
Headcount as of
December 31, 2018[25]
14
Westport Power Canada
227
Westport Fuel Systems Michigan
Westport Dallas
South America
TA Gas Technologies
Europe
Valtek
MTM[28]
Emer
Prins Autogassystemen
Westport AB Sweden
Asia
Westport Kunshan
Rohan BRC
TOTAL
Percentage
9
22
97
33
576
152
61
13
5
54
1,249
Gender
TOTAL
Gender
MANAGEMENT
POSITION[26]
Male
Female Male
Female
11
166
7
21
91
11
270
119
52
12
5
50
804
64%
3
61
2
1
6
22
306
33
9
1
—
4
445
36%
—
35
8
4
6
3
18
12
19
5
—
20
130
82%
—
16
1
—
—
2
1
3
5
—
—
1
29
18%
Table 6‑1: Global Employee Headcount in Fiscal Year 2018 Ended December 31 (Unaudited)
Our annual rate of new hires calculated as number of employees hired divided by average of beginning and end of year headcount is 9.58%[29]
Workplace Diversity and Inclusion
Our employees are the driving force for sustainable growth. We recognize the value in attracting and retaining a diverse workforce of talent
with varying skills, experiences, and viewpoints. Diversity and inclusion enriches discussion and debate and facilitates a broader exchange of
perspectives, which in turn, will enable innovation, enhance balanced decision making, and improve business performance leading to greater
organizational strength.
The greater diversity of the organization will better reflect our relationships with our customers, employees, shareholders, business partners,
and other stakeholders and supports sustainability and social responsibility objectives.
We will adhere to a respectful environment which appreciates differences in age, ethnicity, Indigenous origin or heritage, gender, physical
attributes, beliefs, language, sexual orientation, education, nationality, social background and culture, or other personal characteristics.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 7
Sustainability Report | Social Performance
Training and Development
Environmental Performance
A key element to our success remains our ability to attract, retain,
and develop a skilled team. Our business requires a broad range
of technical, operational, financial, and marketing skills as well as
appropriate industry experience from new product development, to
operations, to new business development. The Company needs to
attract, develop, and retain innovative and strategic thinkers who
have an entrepreneurial spirit and customer first focus. This rare
combination of skills, experience, and competency will require us
to continue to retain our employees, deliver on leadership
development and management succession planning, and
strengthen our global recruitment ability.[30] We will be fully reporting
on training activities and training hours for our global locations in
subsequent reports.
Health and Safety
The health and safety of our employees and their participation in
ensuring a safe and healthy workplace is an integral part of
Company operations. Our Joint Health and Safety Committee
members are champions for workplace safety and help to monitor,
collect feedback, and advise on programs and initiatives. Nearly
90% of employees work in facilities with a formal joint management-
employee health and safety committee. Our Committees are made
up of cross-functional management and employee representatives
who advise and recommend action on any workplace health and
safety issues brought to them.[31]
Employee health and safety is at the forefront of our operational
priorities. When gauging world-class safety performance,
recordable injury rates and lost-time injury rates are statistical,
comparative industry measures.[32] Our results are indicative of our
ongoing and significant commitment to injury prevention, risk
regulatory compliance, and continuous safety
mitigation,
improvement.
2018 Performance
17 Recordable Injuries
1.42 per 100 employees
3 Lost Time Injuries
0.25 per 100 Employees
Recordable Injury Frequency
Recordable Injury Rate [33]
The recordable injury incident rate is
the annualized rate of occupational
injuries and illness per 100 employees.
It is a calculation of the number of
injuries x 200,000 employee hours
worked. First aid classified injuries are
not included.
Lost Time Injury Frequency
Lost Time Injury Rate [34]
The lost time injury rate is a calculation
of the total number of lost time injuries
x 200,000 employee hours worked.
Lost days refer to scheduled work
days and the count begins on the next
scheduled work day immediately after
the injury.
Our Vancouver, Canada facilities have been certified as having met
the international standards of ISO 14001: 2015 for Environmental
Management Systems.[35] This certificate is evidence of our
commitment to develop, design, test and assemble engine and fuel
system components that meet or exceed the expectations of our
original equipment manufacturing partners and customers, and
formalizes the effective environmental practice and process at our
facilities.[36]
Direct Energy Consumption[37]
Compressed Natural Gas[38]
Liquefied Natural Gas (LNG)
Liquefied Petroleum Gas (LPG)
Diesel
Gasoline
Renewable Natural Gas
Net Direct Consumption
Gigajoules for the 12
Months Ended
December 2018
41,635 GJ
1,736 GJ
4,876 GJ
3,770 GJ
1,854 GJ
438 GJ
54,309 GJ
Table 7-1: Energy Consumption in Fiscal Year 2018 Ended
December 31 (Unaudited)
Indirect Energy Consumption
Gigajoules for the 12
Months Ended
December 2018
Electricity
49,015 GJ
Table 7‑2: Electricity Consumption in Fiscal Year 2018 Ended
December 31 (Unaudited)
Greenhouse Gas Emissions
The organizational boundary of this inventory includes all operating
entities and both scope one and scope two emissions.[39] We have
not measured scope three emissions to date.
Total Scope 1 Direct Emissions
Tonnes CO2 Equivalent
for the 12 Months Ended
December 2018
2,800 Tonnes CO2e
Total Scope 2 Indirect Emissions
1,266 Tonnes CO2e
Total GHG Impact
4,066 Tonnes CO2e
Table 6‑2: Global Health and Safety Performance in Fiscal Year
2018 Ended December 31 (Unaudited)
Table 7‑3: Greenhouse Gas Inventory in Fiscal Year 2018 Ended
December 31 (Unaudited)
8 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Community Impacts
Our locations and facilities around the world are adjacent to other
industrial operations, commercial activities, and in some cases
homes and schools. Our commitment to being a good neighbour is
captured within our Environmental Policy Statement and requires
us to monitor and manage the potentially adverse impacts our
operations might have on our neighbours. We will respond to
community concerns regarding our facilities, infrastructure, noise
levels, and environmental impacts in a timely manner. [40]
Environmental Compliance
Compliance with
international, national, and sub-national
regulations is a baseline environmental performance standard and
we believe that leading organizations must go beyond minimum
environmental requirements. The Company has not received any
fines or non-monetary sanctions for environmental non-compliance
during the reporting period.[41]
A significant spill is defined by the GRI as an “accidental release of
a hazardous substance that can affect human health, land,
vegetation, water bodies, and ground water” and regulatory bodies
generally identify quantity thresholds that provide clarity on how to
classify the significance of a spill. Our locations comply with all
regulations and best practice for environmental protection, risk
management, spill mitigation, containment, and spill response.
Company operating locations did not experience any significant
spills in the reporting year.[42]
Supply Chain Responsibility
The Code of Conduct and our Supplier Manual outlines the
corporate guiding principles we apply to our purchasing activities
and our expectations for every company that supplies goods or
services. This includes but is not limited to:
•
•
•
•
•
•
ethical business conduct, such as compliance with antitrust/
competition, anti-corruption/bribery and export controls
laws;
adherence to law and standard business ethics which
prohibit the use of child, underage, slave, or forced labour;
conflict minerals reporting;
avoidance and reporting of conflicts of interest;
protection of
information; and
intellectual property and confidential
compliance with every law such as specific requirements
towards the environment and employees.[43]
These requirements form an integral part of our overall contractual
relationship with our suppliers. We expect these standards to be
met by our suppliers, even in jurisdictions where meeting such
Sustainability Report | Environmental Performance
standards may not be considered part of the usual business culture.
A failure to do so can result in a severe impact on our business and
the supply relationship. Additional information can be found in our
Supplier Portal on our corporate website.
Supply Chain Management
Our supply chain management group focuses on a number of
elements that we believe are integral to world class supply chain
management, such as common global key performance indicators
(KPIs), specific roles and responsibilities, processes and standards,
global training, and risk management.
ratings,
supplier
supplier
savings,
KPIs are maintained at each of our facility and are focused on
quality
purchasing
measurements and supplier diversity. We also maintain a strong
financial and commercial risk management process focused on
supplier quality and financial risk. We use sourcing boards to help
ensure compliance with our internal standards when we place new
business within our supply base. From a risk management
standpoint, we audit all new production suppliers in order to assess
their overall quality, financial health, and compliance.
Product Responsibility
Quality and safety are imperatives across the product life cycle. We
will continuously strive to deliver high value, leading environmental
technology products
that meet or exceed our customers’
expectations. The Company and its affiliates quality management
systems (QMS) have been certified as compliant to the ISO
and
the
standards for
9001:2015
commercialization of LNG fuel systems.[44]
assembly
design,
Conflict Minerals Reporting
Consistent with the leadership approach taken by our customers,
suppliers, and other fellow members of the Automotive Industry
Action Group with respect to “conflict minerals”, we are engaged in
an annual process of determining whether any products which we
make or buy contain such “conflict minerals”. Our latest conflict
minerals report is available on our corporate website and on the
SEC’s EDGAR website (www.sec.gov/edgar). We continue to work
with our suppliers to increase awareness, and accuracy, of “conflict
minerals” reporting requirements and, through our membership in
the Responsible Minerals Initiative (RMI) (formerly the Conflict Free
Sourcing Initiative), support continuing cross-industry efforts to
identify and validate conflict-free smelters and refiners.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 9
Sustainability Report | Global Reporting Initiative Indicator (GRI) Index
Global Reporting Initiative Indicator (GRI) Index[41]
Annual Information Form (AIF) Sustainability Report (SR) Annual Report (AR)
GRI Indicator Index
Core Indicator
Description
Location/Section
102-1
102-2
102-3
102-4
102-5
102-6
102-7
102-8
102-9
102-10
102-11
102-12
102-13
102-14
102-15
102-16
102-17
102-40
102-41
102-42
102-43
102-44
102-46
102-47
102-49
102-50
102-51
102-52
102-53
102-54
102-55
102-56
Name of organization
Activities, brands, products, services
Location of headquarters
Location of operations
Ownership and legal form
Markets served
Scale of the organization
Employees and other workers
Supply chain
Significant changes to organization and supply chain
Precautionary principle or approach
External initiatives
Membership of associations
CEO statement re. sustainability
Key impacts, risks, and opportunities
AIF - Corporate Structure
AIF - Business Overview
AIF - Corporate Structure
AIF - Corporate Structure
AIF - Corporate Structure
AIF - Business Overview
AIF - Business Overview
SR - Social Performance
AIF - Operations
AIF - Operations
SR - Deploying Clean Transportation
SR - Environmental Performance
SR - Memberships and Collaborations
SR - CEO Sustainability Statement
SR - Deploying Clean Transportation
Values, principles, standards, norms of behaviour
SR - CEO Sustainability Statement
Mechanisms for advice and concerns re. ethics
SR - Whistleblower Policy
List of stakeholder groups
Collective bargaining agreements
Identify and selecting stakeholders
Approach to stakeholder engagement
Key topics and other concerns raised
Defining report content and topic boundaries
List of material topics
Changes in reporting
Reporting period
Date of most recent report
Reporting cycle
Organizational contact point
SR - Stakeholder Engagement
SR - Stakeholder Engagement
SR - Stakeholder Engagement
SR - Stakeholder Engagement
SR - Stakeholder Engagement
SR - Report Scope and Content
SR - Determining Materiality
SR - Report Scope and Content
SR - Report Scope and Content
SR - Report Scope and Content
SR - Report Scope and Content
SR - CEO Sustainability Statement
Claims of reporting in accordance with GRI standards
SR - Report Scope and Content
GRI content index
External assurance
SR - GRI Indicator Index
SR - Report Scope and Content
Economic Performance
201-01
201-02
201-04
205-01
205-02
Direct economic value generated and distributed
Risk/opportunity due to climate change
Annual Report (AR)
SR - Climate Change
Financial assistance received from government
AIF - Legal and Regulatory Proceedings
Operations assessed for risks related to corruption
Training on anti-corruption policies/procedures
SR - Anti-Corruption and Bribery
SR - Anti-Corruption and Bribery
10 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Sustainability Report | Global Reporting Initiative Indicator (GRI) Index
GRI Indicator Index
Environmental Performance
302-01
302-04
305-01
305-02
306-03
307-01
308-01
Energy consumption
Reduction of energy consumption
Direct energy GHG emissions (scope one)
Indirect energy GHG emissions (scope two)
Significant spills
SR - Direct Energy Consumption
SR - Environmental Performance
SR - Direct Energy Consumption
SR - Indirect Energy Consumption
SR - Environmental Compliance
Non-compliance with environmental laws/regulations
SR - Environmental Compliance
Suppliers screened using environmental criteria
SR - Supply Chain Responsibility
Social Performance
401-01
403-01
403-02
404-01
413-01
414-01
415-01
New employee hires and diversity
Worker representation in health and safety committees
Types of injuries and rates, including lost days
SR - Global Footprint
SR - Health and Safety
SR - Health and Safety
Average hours of training per year per employee
SR - Training and Development
Local community engagement programs
Social screening criteria for suppliers
Political contributions
SR - Community Impacts
SR - Supply Chain Responsibility
SR - Corporate Ethics and Compliance
Table 9‑1 Global Reporting Initiative (GRI) Indicator Index
The United Nations Sustainable Development Goals
The United Nations Sustainable Development Goals (SDGs) are considered the blueprint to achieve a better and more sustainable future for
all and call for coordinated public and private sector action to achieve each goal and target by 2030.[47]
United Nation Sustainable Development Goals
Goal One
End poverty in all its forms everywhere
Goal Two
Goal Three
Goal Four
Goal Five
Goal Six
Goal Seven
Goal Eight
Goal Nine
Goal Ten
Goal Eleven
Goal Twelve
Goal Thirteen
Goal Fourteen
Goal Fifteen
Goal Sixteen
End hunger, achieve food security and improved nutrition, and promote sustainable agriculture
Ensure healthy lives and promote well-being for all at all ages
Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
Achieve gender equality and empower all women and girls
Ensure availability and sustainable management of water and sanitation for all
Ensure access to affordable, reliable, sustainable, and modern energy for all
Promote sustained, inclusive and sustainable economic growth, full and productive employment and
decent work for all
Build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation
Reduce inequality within and among countries
Make cities and human settlements inclusive, safe, resilient, and sustainable
Ensure sustainable consumption and production patterns
Take urgent action to combat climate change and its impacts
Conserve and sustainably use the oceans, seas, and marine resources for sustainable development
Protect, restore, and promote sustainable use of terrestrial ecosystems, sustainably manage forests,
combat desertification, and halt and reverse land degradation and halt biodiversity loss
Promote peaceful and inclusive societies for sustainable development, provide justice for all and build
effective, accountable, and inclusive institutions at all levels
Goal Seventeen Strengthen the means of implementation and revitalize the global partnership for sustainable
development
Table 10‑1: United Nations Sustainable Development Goals
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 11
Sustainability Report | Footnotes
Footnotes
1. GRI Indicator 102-14 CEO statement re. sustainability
2. GRI Indicator 102-16 Values, principles, standards, and norms of behaviour
3. GRI Indicator 102-53 Contact point for questions regarding the report
4. GRI Indicator 102-49 Changes in reporting
5. GRI Indicator 102-51 Date of most recent report
6. GRI Indicator 102-50 Reporting period and 102-52 Reporting cycle
7. GRI Indicator 102-03 Location of headquarters and 102-04 Location of operations
8. GRI Indicator 102-54 Claims of reporting in accordance with GRI standards
9. GRI Indicator 102-56 External assurance
10. GRI Indicator 102-15 Key impacts, risks, and opportunities
11. GRI Indicator 102-11 Precautionary principle
12. GRI Indicator 201-02 Risk/opportunity due to climate change
13. Source: https://phys.org/news/2018-10-european-cities-diesel-polluted-air.html
14. Source: http://blog.luxresearchinc.com/blog/2017/06/ripple-effects-of-dieselgate-continue-to-negatively-impact-diesels-outlook/
15. GRI Indicator 102-40 List of stakeholder groups
16. GRI Indicator 102-42 Identifying and selecting stakeholders
17. List of stakeholders is organized alphabetically
18. GRI Indicator 102-34 Approach to stakeholder engagement and GRI Indicator 102-44 Key topics and concerns raised
19. GRI Indicator 102-41 Collective bargaining agreements. Employee headcount number as of December 31, 2018 (unaudited).
20. GRI Indicator 102-13 Membership of associations
21. GRI Indicator 102-47 List of material topics
22. GRI Indicator 415-01 Political contributions - as per the Westport Fuel Systems Code of Conduct political contributions by the Company
are prohibited in all circumstances.
23. GRI Indicator 102-17 Mechanisms for advice and concerns re. ethics
24. GRI Indicator 205-01 Operations assessed for risks related to corruption and GRI Indicator 205-02 Training on anti-corruption policies
and procedures
25. GRI 401-01 New Employee Hires and Employee Turnover
26. A management position is a position with a Manager title or above, responsible for managing people and decision authority.
27. Excluded from total headcount
28. MTM includes Zavoli and OMVL
29. GRI Indicator 401-01 New employee hires unaudited as of December 31, 2018
30. GRI Indicator 404-1 Average hours of training per year per employee
12 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Sustainability Report | Footnotes
31. GRI Indicator 403-01 Worker representation in health and safety committees
32. GRI Indicator 403-02 Types of injuries and rates including lost days
33. The recordable injury incident rate is the annualized rate of occupational injuries and illness per 100 employees. It is a calculation of
the number of injuries x 200,000 employee hours worked. First aid classified injuries are not included.
34. The lost time injury rate is a calculation of the total number of lost time injuries x 200,000 employee hours worked. Lost days refer to
scheduled work days and the count begins on the next scheduled work day immediately after the injury.
35. GRI Indicator 102-12 External initiatives
36. GRI Indicator 302-01 Reduction of energy consumption We continually look for ways to improve the energy efficiency of our operations.
A capital investment of approximately $250,000 USD was made to upgrade the building heating system of our MTM operating location
in 2018
37. Direct and indirect energy consumption includes all operating locations with the exception of Westport Fuel Systems Michigan and
Westport Kunshan
38.
Includes renewable natural gas (RNG) used in Sweden operations
39. Greenhouse gas emissions impact does not include Westport Fuel Systems Michigan and Westport Kunshan
40. GRI Indicator 413-01 Local community engagement programs
41. GRI Indicator 307-01 Non-compliance with environmental laws and regulations
42. GRI Indicator 306-03 Significant spills
43. GRI Indicator 308-01 Suppliers screened using environmental criteria
44. GRI Indicator 102-12 External initiatives
45. Our latest conflict minerals report is available on our corporate website and on the SEC’s EDGAR website (www.sec.gov/edgar).
46. GRI Indicator 102-55 This report has been developed in accordance with the Global Reporting Initiative (GRI) Sustainability Standards
2016; a standard effective for reports published on or after July 01, 2018
47. https://www.un.org/sustainabledevelopment/sustainable-development-goals/
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 13
Management's Discussion and Analysis
Management's
Discussion and
Analysis
Basis of Presentation
This Management’s Discussion and Analysis (“MD&A”) for
Westport Fuel Systems 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, 2018.
Our consolidated financial statements have been prepared 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 19, 2019.
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.
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, regulatory
investigations, 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
14 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
at www.sedar.com. The forward-looking statements contained in
this MD&A are based upon a 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
Westport Fuel Systems is a global company focused on
engineering, manufacturing, and supply of alternative fuel systems
and components for transportation applications. Our diverse
product offering sold under a wide range of established brands
enables the deployment of a range of alternative fuels offering
environmental and economic advantages,
liquid
petroleum gas ("LPG"), compressed natural gas ("CNG"), liquid
natural gas ("LNG"), renewable natural gas ("RNG"), and hydrogen.
We supply our products and services through a network of
distributors and original equipment manufacturers ("OEMs") and
we provide delayed OEM ("DOEM") services. In total, we have
customers in more than 70 countries. Today, our products and
services are available for passenger car, light-, medium- and heavy-
duty truck, cryogenic, and hydrogen applications.
including
Westport Fuel Systems is well positioned to increase revenues and
market share as new stringent environmental regulations
mandating greenhouse gas emission reductions have been
introduced in key markets around the world. We are leveraging our
market-ready products and customer base to capitalize on these
opportunities. In addition to our operational competency in well-
established transportation markets, our development of new
technologies provides us a technology leadership position which is
expected to drive future growth. Westport Fuel Systems has a track
record of innovation, specialized engineering capabilities, and a
Management's Discussion and Analysis | Business Overview and General Developments
deep patent portfolio resulting in a strong intellectual property
position.
The majority of our revenues in 2018 were generated through the
following businesses:
•
•
•
Independent aftermarket (“IAM”): we sell systems and
components, primarily through a global network of distributors
and across a wide range of brands, that are used to enable
passenger cars to use LPG or CNG fuels in addition to gasoline.
DOEM: we directly or indirectly convert new passenger cars
for OEMs or importers, to address local market needs when a
global LPG or CNG bi-fuel vehicle platform is not available.
Light-duty OEM: we sell components to OEMs that are used
to manufacture new, direct off the assembly line LPG or CNG-
fueled vehicles.
During 2017, we reached a significant milestone with the shipment
of the first commercial Westport High Pressure Direct Injection 2.0
("Westport HPDI 2.0™" or "HPDI") components to our European
OEM launch partner. Our fully integrated Westport HPDI 2.0™
system matches the power, torque, and fuel economy benefits found
in traditional compression ignition engines using only diesel fuel but
powered primarily by natural gas, resulting in reduced greenhouse
gas emissions, and the capability to cost-effectively run on
renewable fuels. In 2018, our European OEM launch partner
commercially launched heavy duty trucks incorporating HPDI 2.0™
technology, and these truck models are available and on the road
in Europe today.
During 2018, Westport entered into definitive development and
supply agreements with Weichai Westport Inc. ("WWI") to develop,
market, and commercialize a heavy-duty, natural gas engine
featuring the Westport HPDI 2.0™ technology, based on one of
Weichai Power Co., Ltd.'s ("Weichai Power") heavy-duty engine
platforms. The new natural gas engine will be certified to meet China
VI emissions standards and is expected to be launched in late 2019.
WWI has committed to purchase Westport HPDI 2.0™ system
components required for a minimum of 18,000 Westport HPDI 2.0™
engines between the launch date and the end of 2023 (see
Operating Segments of this MD&A for additional details on WWI).
The HPDI business is still at the early stages of commercial
development, and, as a result, is currently generating losses.
Meaningful increases in component sales, compared to 2018 levels,
are expected to be required for the HPDI business to benefit from
economies of scale and become profitable. We anticipate growth
in volumes in 2019 and future years through sales to our initial
launch partner, our supply arrangement with WWI, and the
possibility of additional OEMs entering into supply agreements for
our HPDI technology.
Revenues for the year ended December 31, 2018 increased by 18%
to $270.3 million from $229.8 million in 2017, resulting from strength
in our independent aftermarket and light-duty OEM businesses, the
first full year of HPDI 2.0 component sales to a large European truck
OEM, and the stronger Euro. Our HPDI revenues were relatively
low during 2018, as expected during the first full year of commercial
sales, however based on orders to date and forecasts from our
launch partner, as well as the expected launch of sales to WWI in
2019, we expect a significant increase in 2019.
Westport Fuel Systems recorded a net loss from continuing
operations of $40.8 million for the year ended December 31, 2018
compared to a net loss from continuing operations of $62.9 million
for the year ended December 31, 2017. The decrease in the loss
from continuing operations is a result of higher gross margin, lower
research and development expenses, stronger contribution from
Cummins Westport Inc. ("CWI"), our 50:50 joint venture with
Cummins, Inc. ("Cummins"), and lower interest expense, offset
partially by higher legal costs and foreign exchange losses.
Westport Fuel Systems earned a positive $9.7 million Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA" see Non-GAAP Measures section in this
MD&A) during the year ended December 31, 2018 as compared to
a loss of $19.7 million for the year ended December 31, 2017. The
factors noted above were key contributors to the improvement in
Adjusted EBITDA.
We continue to co-operate with the SEC's investigation that
commenced in June 2017 regarding our investment in Weichai
Westport Inc. and compliance with the FCPA and securities law
related to disclosures in SEC filings. Legal costs increased
significantly during 2018 and has been a significant use of cash.
See the Regulatory Compliance section for additional details.
Liquidity and Going Concern
In connection with preparing financial statements for each annual
and interim reporting period management of the Company 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. Substantial
doubt exists when conditions and events, considered in the
aggregate, indicate that it is probable that the Company will be
unable to meet its obligations as they become due 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 issued.
When 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
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 15
Management's Discussion and Analysis | Business Overview and General Developments
being effectively implemented, the plans must have been approved
before the date that the financial statements are issued.
in the accompanying financial statements and the adjustments
could be material.
At this time management's evaluation has concluded that there are
no known or currently 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, 2018, the Company's net working capital was
$63.1 million including cash and cash equivalents of $61.1 million,
and its long-term debt, including the royalty payable, was $76.2
million, of which $16.4 million matures in 2019. The Company has
incurred a loss from continuing operations of $40.8 million and
negative cash flows from continuing operating activities of $27.4
million for the year ended December 31, 2018, and has accumulated
a deficit of $998.4 million since inception.
The Company continues to work towards its goals of increasing
revenues and reducing expenditures, which has improved results
from operations and operating cash flows in 2017 and 2018, and
this improvement in operating results is expected to continue in
2019. In particular, the commercial launch of Westport HPDI 2.0™
in 2018 has allowed the Company to significantly reduce
engineering and development spend and the associated capital
expenditures on this product and this reduction has improved
current and forecasted future cash flows. In addition, while the legal
fees related to the SEC investigation that began in 2017 (see note
20(b)) increased significantly in 2018, we anticipate these legal
expenditures to decrease in 2019. However, since the possible
outcomes of this proceeding remain uncertain at this time, it is also
necessary to acknowledge that any final determination that the
Company’s operations or activities are not, or were not, in
compliance with the FCPA and/or other U.S. securities laws could
result in significant civil and criminal financial penalties and other
sanctions, which could have a material adverse impact on our
financial condition. Lastly, the Company continues to examine non-
core assets to determine whether it is in the best interest of the
Company to monetize assets or to continue to hold and invest in
these assets. Connected with this activity of assessing its non-core
assets, on July 25, 2018 the Company closed the sale of its CNG
Compressor business announced in the second quarter of 2018,
which resulted in gross proceeds of approximately $14.7 million.
Based on currently known conditions and events, management
believes that the cash on hand at December 31, 2018 and the
improvements to the operations expected in 2019 will provide the
cash flow necessary to fund operations over the next year to March
31, 2020. 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. 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
16 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Operating Segments
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.
Accordingly, from that date, the Westport HPDI 2.0™ product line
and all other technology related activities previously reported under
the Corporate & Technology segment have been combined with the
Automotive business segment and renamed Transportation.
Under the new organization structure, the Company manages and
reports the results of its business through three segments:
Transportation, the CWI Joint Venture, and Corporate. This change
reflects the manner in which operating decisions and the
assessment of business performance is currently managed by the
Chief Operating Decision Maker ("CODM"). All comparative figures
presented have been revised to reflect this change.
The financial information for the Company’s business segments
evaluated by the 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.
TRANSPORATION BUSINESS SEGMENT
Westport Fuel Systems' Transportation segment designs,
manufactures, and sells alternative fuel systems and components
for transportation applications. Our diverse product offerings are
sold under established global brands and utilize a broad range of
alternative fuels, which have numerous environmental and
economic advantages including: LPG, CNG, LNG, RNG, and
hydrogen. We supply our products and services through a global
network of distributors and numerous OEMs and DOEMs in more
than 70 countries. Today, our products and services are available
for passenger cars, light-, medium- and heavy-duty trucks, high
horsepower engines, cryogenics, and hydrogen applications.
The Transportation group includes the IAM, OEM and DOEM
programs, the Westport HPDI 2.0™ product line, electronics,
current and advanced research and development programs, supply
chain, and product planning activities.
An agreement to sell the CNG Compressor business was
announced during the second quarter of 2018 and closed in the
third quarter of 2018, and as a result, the revenues and expenses
related to this business have been recorded in discontinued
operations for the current and prior years.
Management's Discussion and Analysis | Business Overview and General Developments
CUMMINS WESTPORT INC. ("CWI")
JOINT VENTURE
CWI 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 RNG.
CWI is a Delaware corporation owned 50% by Westport Power Inc.,
a wholly-owned subsidiary of Westport Fuel Systems, and 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 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
developing, marketing and selling 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.
CORPORATE BUSINESS SEGMENT
The Corporate business segment is responsible for public company
activities, corporate oversight and general administrative duties, as
well as R&D expenses relating to the protection of the Company's
intellectual property; in particular, the costs associated with
patenting our innovations and registering our trademarks, and
maintaining our patent and trademark portfolios.
WEICHAI WESTPORT INC. ("WWI")
The Company, indirectly through its wholly-owned subsidiary,
Westport Innovations (Hong Kong) Limited (“Westport HK”), is
currently the registered holder of a 23.33% equity interest in Weichai
Westport Inc. (“WWI”). Previously, the Company held a 35% indirect
equity interest in WWI. However, in April 2016 the company sold to
Pangaea Two Acquisition Holdings XIV, LLC and Pangaea Two
Acquisition Holdings Parallel XIV, LLC (collectively, the “Cartesian
Entities”) a derivative economic interest granting the Cartesian
Entities the right to receive an amount of future income received by
Westport HK from WWI equivalent to having an 18.78%
equity interest in WWI and concurrently granted Pangaea Two
Management, LP (an additional entity related to the Cartesian
Entities) an option to acquire all of the equity securities of Westport
HK for a nominal amount. The Company retained the right to
transfer any equity interest held by Westport HK in WWI that was
in excess of an 18.78% interest in the event that such option was
exercised. Then in August of 2016 the Company sold an aggregate
11.67% equity interest in the WWI joint venture for gross proceeds
of 48.2 million RMB (approximately US$7.2 million) to Weichai
Holding Group Co., Ltd. (to which the Company sold a 6.42% equity
interest) and Guanya (Shanghai) Private Equity Partnership
(Limited Partnership) (“Guanya”) (to which the Company sold a
5.25% equity interest). Public disclosures of this transaction made
by the Company prior to our Q3 2018 MD&A filing, referred to
Guanya as either “an additional undisclosed purchaser” or,
inadvertently, as “Weichai Power Co., Ltd.”, which was not a party
to the transaction but instead was a limited partner of Guanya. The
Company’s 23.33% equity interest in WWI remains held by the
Company’s subsidiary, Westport HK. As a result of such
transactions, the Company’s residual 23.33% equity interest in WWI
currently corresponds to an economic interest in WWI equivalent
to just 4.55%.
The Company has not considered WWI a business segment since
March 31, 2016 due to the Company's reduced interest pursuant
to a sale to the Cartesian Entities as noted above.
As discussed in the Business Overview and General Developments
section of this MD&A, Westport Fuel Systems entered into
development and supply agreements with WWI on August 28, 2018.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 17
Management's Discussion and Analysis | Selected Annual Financial Information
Selected Annual
Financial Information
The following table sets forth a summary of our financial results for
2018, 2017 and 2016. The 2016 results include seven months
results from Fuel Systems Solutions, Inc. ("Fuel Systems") as a
result of the merger effective June 1, 2016.
SELECT CONSOLIDATED
STATEMENTS OF OPERATIONS DATA
SELECTED BALANCE SHEET DATA
Years ended Dec 31
(expressed in millions of United States dollars)
2018
2017
Cash and cash equivalents
$
61.1 $
Total assets
Debt, including current portion
Royalty payable, including
current portion
Total liabilities
Shareholder's equity
269.9
55.3
20.9
179.3
90.7
71.8
313.6
54.4
19.0
195.6
118.0
2018
(note 2)
Years ended Dec 31
2017
(Adjusted note 1
and note 2)
2016
(Adjusted note
1, note 2 and
note 3)
$
270.3
$
229.8
$
167.2
64.2
60.3
34.1
23.8%
26.2%
20.4%
(40.8)
(62.9)
(100.7)
We account for CWI using the equity method of accounting.
However, due to its significance to our operating results, we disclose
its assets, liabilities and income statement in notes 9(a) and 21 of
our consolidated financial statements and discuss revenue and
gross margins in this MD&A. The following table sets forth a
summary of the financial results of CWI for 2018, 2017 and 2016.
SELECTED CWI STATEMENTS OF
OPERATIONS DATA
9.3
52.9
3.1
Years ended Dec 31
(31.5)
(10.0)
(97.6)
Total revenue
Gross margin
(0.31)
(0.52)
(1.10)
GM %
$ 319.4
$ 317.3
$ 276.5
91.0
109.5
77.1
28.5%
34.5%
27.9%
(expressed in millions of United States dollars)
2018
2017
2016
(expressed in millions of USD,
except per share amounts
and shares outstanding)
Revenue
Gross margin
GM %
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
(0.24)
(0.08)
(1.07)
Weighted average
basic and diluted
shares outstanding
132,371,396
119,558,566
91,028,504
1.
2.
3.
2018: with effect from the second quarter of 2018, the CNG
Compressor business was reclassified retrospectively as discontinued
operations and in the third quarter of 2018, it was sold and generated
a net gain on sale of $9.9 million, which was recorded in discontinued
operations.
2017: the year ended December 31, 2017 included a $54.9 million gain
on sale of substantially all of the former Industrial business unit, which
was recorded in discontinued operations. See note 6 in the
consolidated financial statements.
2016: the comparative 2016 period data include revenue from Fuel
Systems' business for the seven-month period following 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. These items were recorded in net loss from continuing
operations.
Net income before income taxes
57.4
58.3
16.7
Net income attributable to the
Company1
22.7
12.5
5.6
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. The net income attributable to the Company has increased in
2018 as a result of the lower tax rates in the U.S.
Results from Operations
The following tables summarize results by segment for 2018, 2017
and 2016.
The 2017 and 2016 comparative periods have been revised to
reflect the change in business segments previously discussed in
the Operating Segments section and to reflect the reclassification
of the CNG Compressor business to discontinued operations.
Revenue 2018/2017
The following table sets forth a summary of our financial position
as at December 31, 2018 and December 31, 2017:
Total consolidated revenues increased by $40.5 million, or 18%
from $229.8 million for the year ended December 31, 2017 to $270.3
million during the year ended December 31, 2018.
18 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
The following table summarizes revenues by segment for the year
ended December 31, 2018 compared to the year ended December
31, 2017:
REVENUE
Years ended Dec 31
Change
2018
2017
$
%
(expressed in millions
of U.S. dollars)
Transportation
(consolidated) $
CWI (non-
consolidated)
Management's Discussion and Analysis | Results from Operations
REVENUE
Years ended Dec 31
(expressed in millions
of U.S. dollars)
2018
% of
revenue
2017
% of
revenue
Change
$
%
Transportation
(consolidated)
CWI (non-
consolidated)
$ 64.2
24% $ 60.3
26% $ 3.9
6 %
91.0
28% 109.5
35% (18.5)
(17 )%
270.3 $
229.8 $
40.5
18 %
319.4
317.3
2.1
1 %
TRANSPORTATION
TRANSPORTATION
Transportation revenue for the year ended December 31, 2018 was
$270.3 million compared with $229.8 million for the year ended
December 31, 2017. The increase in revenue was primarily due to
strong demand for our aftermarket products, strength in our light-
and medium-duty OEM business and sales from our newly released
Westport HPDI 2.0TM product. In addition, the Euro strengthened
versus U.S. dollar approximately 5% during 2018 which resulted in
an increase in U.S. dollar dominated revenues.
CWI
CWI revenue for the year ended December 31, 2018 was $319.4
million compared with $317.3 million for the year ended December
31, 2017. Unit sales for the year ended December 31, 2018 were
7,393 compared to 7,955 for the year ended December 31, 2017.
The decrease in unit sales in the year ended December 31, 2018
is mainly due to certain pre-buy activities in the fourth quarter of
2017 in advance of the 2018 on-board diagnostic compliant
engines.
Within total CWI revenue, parts revenue for the year ended
December 31, 2018 was $92.0 million compared to $82.1 million
for the year ended December 31, 2017. The increase in parts
revenue is mainly due to the cumulative increase in the natural gas
engine population in service, which offsets the decrease in units
sold during the year ended December 31, 2018 compared to the
prior year.
Transportation gross margin increased by $3.9 million to $64.2
million, for the year ended December 31, 2018, compared to $60.3
million for the year ended December 31, 2017. The increase in gross
margin is due to higher sales from our aftermarket and light- and
medium-duty OEM, and DOEM businesses. Gross margin
percentage decreased from 26% for the year ended December 31,
2017 to 24% for the year ended December 31, 2018 mainly because
of low unit sales of the Westport HPDI 2.0™ business and lower
service revenue.
CWI
CWI gross margin decreased by $18.5 million to $91.0 million, or
28% of revenue from $109.5 million or 35% of revenue in the prior
year. The decrease in gross margin and gross margin percentage
in 2018 is due to product mix and higher warranty adjustments.
There was a negative warranty adjustment of $1.1 million for the
year ended December 31, 2018 compared to a positive warranty
adjustment of $9.9 million for the year ended December 31, 2017.
Excluding the warranty adjustments, the gross margin percentage
in 2018 would have been consistent with 2017.
Research & Development
Expenses 2018/2017
The following table presents details of research and development
(“R&D”) expense by segment, excluding equity investees, for 2018
compared to 2017:
Gross Margin 2018/2017
RESEARCH & DEVELOPMENT
Total consolidated gross margin increased by $3.9 million, or 6%
from $60.3 million in 2017 to $64.2 million in 2018.
The following table presents gross margin by segment for 2018
compared to 2017:
Years ended
Dec 31
Change
(expressed in millions of U.S. dollars)
2018
2017
$
%
Transportation
$ 29.6 $ 48.4 $ (18.8)
(39 )%
Corporate
1.0
1.7
(0.7)
(41 )%
Total Research and
Development
$ 30.6 $ 50.1 $ (19.5)
(39 )%
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 19
Management's Discussion and Analysis | Results from Operations
TRANSPORTATION
Transportation R&D expenses for the year ended December 31,
2018 were $29.6 million compared with $48.4 million for the year
ended December 31, 2017. For the year ended December 31, 2017,
the decrease of $18.8 million during the year ended December 31,
2018 was due to the completion of various R&D programs as the
Company launched its Westport HPDI 2.0™ product in the fourth
quarter of 2017.
CORPORATE
Corporate R&D expenses for the year ended December 31, 2018
were $1.0 million compared with $1.7 million for the year ended
December 31, 2017. Corporate R&D expenses relate to costs
associated with protecting the Company's intellectual property; in
particular, the costs associated with patenting our innovations and
registering our trademarks, and maintaining our patent and
trademark portfolios.
Sales and Marketing, General,
and Administrative Expenses
2018/2017
insurance recoveries, compared to $1.8 million for the year ended
December 31, 2017.
Items Affecting Comparability of Results
from 2016 to 2017
1. The year ended December 31, 2016 includes only seven
months of Fuel Systems' results from the June 1, 2016
acquisition and this is reported in the Transportation 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
as previously noted.
Revenue 2017/2016
Total segment revenues increased $73.5 million, or 16% from
$473.6 million in 2016 to $547.1 million in 2017.
The following table summarizes total revenue by segment for the
year ended December 31, 2017 compared to the year ended
December 31, 2016:
The following table presents details of sales and marketing, general
and administrative (“SG&A”) expense by segment, excluding equity
investees, for 2018 compared to 2017:
REVENUE
SALES AND MARKETING, GENERAL
AND ADMINISTRATIVE
(expressed in millions of U.S. dollars)
Transportation
CWI
WWI
Years ended
Dec 31
2017
2016
Change
$
%
$ 229.8 $ 167.2 $62.6
317.3
276.5
40.8
37 %
15 %
— 29.9 (29.9)
(100)%
Years ended
Dec 31
Change
$
(expressed in millions of U.S. dollars)
Transportation
Corporate
2018
2017
$ 36.8 $ 43.4 $ (6.6)
%
(15 )%
30.2
19.8
10.4
53 %
Total Selling, General and
Administrative
$ 67.0 $ 63.2 $
3.8
6 %
TRANSPORTATION
Transportation SG&A expenses for the year ended December 31,
2018 were $36.8 million compared to $43.4 million for the year
ended December 31, 2017. SG&A expenses decreased mainly due
to restructuring activities that took place during 2017 that resulted
in lower SG&A expenses in 2018.
CORPORATE
Corporate SG&A expenses for the year ended December 31, 2018
were $30.2 million compared to $19.8 million for the year ended
December 31, 2017. The increase is largely due to legal costs
related to the ongoing SEC investigation of $10.0 million incurred
during the year ended December 31, 2018, net of expected
20 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Total segment revenues
$ 547.1 $ 473.6 $73.5
Less: Equity investees' revenues
317.3
306.4
10.9
Total consolidated revenues
$ 229.8 $ 167.2 $62.6
16 %
4 %
37 %
TRANSPORTATION
Transportation revenue for the year ended December 31, 2017 was
$229.8 million compared to $167.2 million for 2016. The increase
in revenue was primarily due to the consolidation of Fuel Systems
for twelve months as opposed to seven months in 2016. Strong
sales in the European aftermarket business and a 2% increase in
the Euro also contributed to the year over year revenue increase.
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 by $26.2 million or 77%
from $34.1 million in 2016 to $60.3 million in 2017.
The following table presents gross margin by segment for 2017
compared to 2016:
GROSS MARGIN
(expressed in
millions of U.S.
dollars)
Transportation
CWI
WWI
Total segment
gross margin
Less: equity
investees'
gross margin
Total
consolidated
gross margin
Year
ended
Dec 31,
2017
$ 60.3
109.5
—
% of
Revenue
Year
ended
Dec 31,
2016
26% $ 34.1
35% 77.1
3.0
—%
% of
Revenue
Change
$
%
20% $ 26.2
28% 32.4
10% (3.0)
77 %
42 %
(100)%
$169.8
31% $114.2
24% $ 55.6
49 %
109.5
35% 80.1
26% 29.4
37 %
$ 60.3
26% $ 34.1
20% $ 26.2
77 %
TRANSPORTATION
Transportation gross margin increased by $26.2 million to $60.3
million, or 26% of revenue, for the year ended December 31, 2017
compared to $34.1 million or 20% 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.
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, excluding equity investees, for 2017
compared to 2016:
Management's Discussion and Analysis | Results from Operations
RESEARCH & DEVELOPMENT
(expressed in millions of
Years ended
Dec 31
Change
U.S. dollars)
2017
2016
$
%
Transportation
Corporate
Total Research
and Development
$
$
48.4 $
52.7 $
1.7
2.7
(4.3)
(1.0)
(8)%
(37)%
50.1 $
55.4 $
(5.3)
(10)%
TRANSPORTATION
Transportation R&D expenses for the year ended December 31,
2017 decreased by $4.3 million, compared to $52.7 million for the
year ended December 31, 2016. For the year ended December 31,
2016, total Transportation R&D expenses only includes Fuel
Systems 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
Corporate R&D expenses year ended December 31, 2017 were
$1.7 million compared to $2.7 million for the year ended December
31, 2016. R&D expenses decreased due to a reduction in headcount
in Vancouver due to restructuring activities beginning in third quarter
of 2016.
Selling, General and
Administrative Expenses
2017/2016
The following table presents details of Sales and Marketing, General
and Administrative (“SG&A”) expense by segment, excluding equity
investees, for 2017 compared to 2016:
SELLING, GENERAL &
ADMINISTRATIVE
Years ended
Dec 31
2017
2016
Change
$
%
$ 43.4 $ 34.0 $
9.4
28 %
19.8
29.0
(9.2)
(32)%
$ 63.2 $ 63.0 $
0.2
0.3 %
(expressed in millions of U.S. dollars)
Transportation
Corporate
Total selling, general and
administrative
TRANSPORTATION
Transportation SG&A expenses for the year ended December 31,
2017 were $43.4 million compared to $34.0 million for the year
ended December 31, 2016. For the year ended December 31, 2016,
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 21
Management's Discussion and Analysis | Results from Operations
total Transportation 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
Corporate SG&A expenses for the year ended December 31, 2017
were $19.8 million compared with $29.0 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.
Other Significant Expense and Income Items
for 2018, 2017 and 2016
RESTRUCTURING
Restructuring expenses recognized for the year ended December
31, 2018 were $0.8 million compared to $1.7 million for the year
ended December 31, 2017. Restructuring costs incurred in 2018
related to charges from a reduction in workforce in Italy. For the
year ended December 31, 2017, a recovery of $4.1 million was
recognized due to a change in estimate relating to the termination
of a lease commitment in Vancouver, Canada. This recovery was
fully offset by termination and other exit costs recorded for the year
ended December 31, 2017 of $5.8 million, due to reductions in
workforce in Canada, Italy and Argentina.
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, 2018,
we recognized a net foreign exchange loss of $9.0 million primarily
due to fluctuations of the Euro and Canadian dollar relative to the
U.S. dollar during the year.
For the year ended December 31, 2017, we recognized a net foreign
exchange loss of $0.6 million with the movement in the Canadian
dollar and Euro relative to the U.S. dollar. This compares to a net
foreign exchange loss of $6.6 million for the year ended December
31, 2016.
DEPRECIATION & AMORTIZATION
22 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Depreciation and amortization for the years ended December 31,
2018, December 31, 2017, and December 31, 2016 were $16.5
million, $14.7 million, and $15.3 million, respectively. The amount
included in cost of revenue for the same periods were $7.7 million,
$4.9 million and $4.2 million. The increase in 2018 over 2017 is due
to the depreciation of fixed assets related to the Westport HPDI
2.0TM business, launched in the fourth quarter of 2017, and
recognized for the full year in 2018. The decrease in the total
depreciation and amortization expense for 2017 compared to 2016
was due to a decline in asset purchases, partially offset by an
increase due to the acquisition of Fuel Systems.
INCOME FROM INVESTMENTS
Income from investments primarily relates to our 50% interest in
CWI, accounted for by the equity method. The Company has not
considered WWI a business segment since March 31, 2016 due to
the Company's reduced interest pursuant to a sale to the Cartesian
Entities. See note 8 of the consolidated financial statements for
more details.
INCOME FROM INVESTMENTS
(expressed in millions of U.S. dollars)
Years ended Dec 31
2016
2017
2018
CWI - 50% interest
WWI
Income from investments
accounted for by the equity method $ 22.7 $ 12.5 $
$ 22.7 $ 12.5 $
—
—
5.6
0.2
5.8
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
INTEREST ON LONG-TERM DEBT &
AMORTIZATION OF DISCOUNT
(expressed in millions of U.S. dollars)
Years ended Dec 31
2016
2017
2018
Interest expense on long-term debt
$
4.2 $
6.1 $
6.7
Royalty payable accretion expense and
finance charge from prepayment
4.9
8.4
4.1
Total interest on long-term debt
$
9.1 $ 14.5 $ 10.8
Interest on our long-term debt and accretion on our royalty payable
for the year ended December 31, 2018 was $9.1 million, a decrease
of $5.4 million compared to the year ended December 31, 2017.
Interest on long-term debt decreased from $6.1 million in 2017 to
$4.2 million in 2018 due to a net reduction of high interest debt
during 2017. In addition, our average long-term debt balance was
lower during 2018 than 2017. Accretion and finance charges
associated with the royalty payable decreased from 2017, due to
an additional finance charge of $5.2 million in 2017 created by early
extinguishment of a portion of the royalty payable on the completion
of the sale of the Industrial business segment. This compared to an
additional finance charge of $0.8 million in 2018 created by early
extinguishment of a portion of the royalty payable on the sale of the
CNG Compressor business.
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 2018 was
$2.1 million and was primarily related to taxes payable in our Italian
operations. This compared to an income tax recovery of $4.4 million
for the year ended December 31, 2017 and an income tax expense
of $3.9 million for year ended December 31, 2016.
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
tax expense for 2016 primarily relates to taxes on the disposition
of a portion of our Weichai investment, a valuation allowance taken
against deferred tax assets, and taxes in certain profitable
jurisdictions (Canada/The Netherlands).
DISCOUNTED OPERATIONS
Discontinued operations, as discussed in note 6 in the 2018
consolidated financial statements, the CNG Compressor business
was sold during the year ended December 31, 2018, which resulted
in a net gain on sale of $9.9 million. The assets and liabilities of the
CNG Compressor business were accounted as held for sale
effective from the second quarter of 2018. During the year ended
December 31, 2017, the Company recognized a net gain on sale
of assets of $58.3 million due to the sale of substantially all of the
Industrial business segment. An additional gain of $0.8 million was
recorded on this sale in the second quarter of 2018.
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.
Our cash and cash position has decreased by $10.7 million during
2018 to $61.1 million from $71.8 million at December 31, 2017. The
decrease is primarily the result of operating losses (including
increased legal expenses) and debt and royalty repayments,
partially offset by cash proceeds from the sale of the CNG
Compressor business and dividends from CWI. Cash and cash
equivalents consist of guaranteed investment certificates, term
Management's Discussion and Analysis | Results from Operations
deposits and bankers acceptances with maturities of 90 days or
less when acquired, and restricted cash.
the MD&A)
The Company continues to work towards its goals of increasing
revenues and reducing expenditures, which has improved results
from operations and operating cash flows in 2017 and 2018, and
this improvement in operating results is expected to continue in
2019. In particular, the commercial launch of Westport HPDI 2.0™
in 2018 has allowed the Company to significantly reduce
engineering and development spend and the associated capital
expenditures on this product and this reduction has improved
current and forecasted future cash flows. In addition, while the legal
fees related to the SEC investigation that began in 2017 (see
Regulatory Compliance section of
increased
significantly in 2018, we anticipate these legal expenditures to
decrease in 2019. However, since the possible outcomes of this
proceeding remain uncertain at this time, it is also necessary to
acknowledge that any final determination that the Company’s
operations or activities are not, or were not, in compliance with the
FCPA and/or other U.S. securities laws could result in significant
civil and criminal financial penalties and other sanctions, which
could have a material adverse impact on our financial condition.
Lastly, the Company continues to examine non-core assets to
determine whether it is in the best interest of the Company to
monetize assets or to continue to hold and invest in these assets.
Connected with this activity of assessing its non-core assets, on
July 25, 2018 the Company closed the sale of its CNG Compressor
business announced in the second quarter of 2018, which resulted
in gross proceeds of approximately $14.7 million.
Based on currently known conditions and events, management
believes that the cash on hand as of December 31, 2018 and the
improvements to the operations expected in 2019 will provide the
cash flow necessary to fund the operations over the next year to
March 31, 2020. The ability of the Company to continue as a going
concern beyond one year will be dependent on its ability to generate
positive results from operations and cash flows. 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. See the "Business Overview and General Developments"
section in the MD&A for further discussion on liquidity and 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
from
expense, unrealized
foreign exchange gain,
income
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 23
Management's Discussion and Analysis | Capital Requirements, Resources & Liquidity
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.
For the year ended December 31, 2018, our net cash flow used in
operating activities in continuing operations was $27.4 million, a
decrease of $22.1 million from net cash flow used in operating
activities in the year ended December 31, 2017. The improvement
in cash flow from operating activities is primarily due to improved
operations and working capital management, offset by higher legal
expenses in 2018.
Cash Flow from
Investing Activities
Our net cash from investing activities consisted primarily of cash
acquired through dividends received from joint ventures and the
sale of assets and investments, offset by purchases of property,
plant and equipment (“PP&E”).
For the year ended December 31, 2018, our net cash flows received
from investing activities of continuing operations was $19.9 million
compared to cash used of $8.7 million for the year ended December
31, 2017. As a result of the launch of Westport HPDI 2.0 in late
2017, lower capital expenditures were required during 2018. In
addition, dividends from CWI increased by $6.6 million from $16.6
million in 2017 to $23.2 million in 2018.
Cash Flow from
Financing Activities
For the year ended December 31, 2018, the Company's net cash
used in financing activities was $8.1 million, a decrease of $6.2
million compared to the year ended December 31, 2017. During
2018, the Company repaid royalty payable of $3.0 million and other
debts of $3.0 million. In 2017, the Company repaid subordinate debt
of $44.8 million and royalty payable of $11.5 million. These 2017
repayments were offset by proceeds of $26.0 million from the
issuance of shares.
Cash Flow from
Discontinued Operations
For the year ended December 31, 2018, our net cash flows from
discontinued operations was $12.6 million, which primarily reflects
the proceeds received from the sale of the CNG Compressor
business.
Contractual Obligations
and Commitments
24 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
CONTRACTUAL CASH FLOWS
1-3
yrs
(expressed in millions of
U.S. dollars)
Contractual
Carrying
Cash
Amount
Flows
$82.9 $82.9
> 5
< 1yr
yrs
$82.9 $— $— $—
4-5
yrs
Accounts payable
and accrued
liabilities
Long-term debt,
principal1
Long-term debt,
interest1
Long-term royalty
payable2
Operating lease
commitments
55.3
55.3
10.3
39.2 5.8 —
—
10.1
4.2
5.4
0.5 —
20.9
32.3
6.1
13.2 6.2
6.8
—
8.3
3.6
3.5
1.2 —
$159.1 $189.0
$107.1 $61.1 $13.7 $6.8
1.
For details of our long-term debt, principal and interest, see note 14 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, 2018.
2.
For details of our long-term royalty payable, see note 15 of the
consolidated financial statements.
Shares Outstanding
For the year ended December 31, 2018, the weighted average
number of shares used in calculating the loss per share was
132,371,396. During the year ended December 31, 2018, we
granted 1,009,230 RSUs. The Common Shares, share options and
Share Units outstanding and exercisable as at the following dates
are shown below:
SHARES OUTSTANDING
Dec 31, 2018
(weighted average exercise prices
are presented in Canadian dollars)
Common Shares
outstanding
Share Units
Outstanding
Exercisable
Mar 18, 2019
Shares / units WAEP Shares / units WAEP
133,380,899
133,491,669
2,667,403
2,076,684
N/A
N/A
2,553,633
2,111,176
N/A
N/A
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
Management's Discussion and Analysis | Critical Accounting Policies & Estimates
property, equipment, furniture and leasehold improvements. The
application of these and other accounting policies are described in
Note 3 of our calendar year 2018 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
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
In May 2014, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Codification ("ASC") 606, Revenue
from Contracts with Customers, a new accounting standard related
to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP
on revenue recognition and eliminated industry-specific guidance.
The underlying principle of ASC 606 is to recognize revenue when
a customer obtains control of promised goods or services at an
amount that reflects the consideration that is expected to be
received in exchange for those goods or services. At the beginning
of the first quarter of 2018, we adopted ASC 606 using the modified
retrospective method. There was no material financial impact to our
adoption of ASC 606.
The Company generates revenues primarily from product sales.
Product revenues are derived primarily from standard product sales
contracts and from long-term fixed price contracts. Under ASC 606,
revenue is recognized when a customer obtains control of the goods
or services. Determining the timing of the transfer of control, at a
point in time or over time, requires judgment. On standard product
sales contracts, revenues are recognized when customers obtain
control of the product, that is when transfer of title and risks and
rewards of ownership of goods have passed and when obligation
to pay is considered certain. Invoices are generated and revenue
is recognized at that point in time. Provisions for warranties are
made at the time of sale.
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, 2018, the Company recorded
an impairment charge of $0.7 million. The impairment resulted
primarily from the write-down of tooling equipment and was
recorded in the Transportation segment.
The Company has significant investments in property, plant and
equipment related to its Westport HPDI 2.0™ business. The HPDI
business is at the early stages of commercialization, and, as a result,
is currently generating losses. Based on the Company's current
projections, meaningful increases in component sales, compared
to 2018 levels, are expected, allowing the HPDI business to benefit
from economies of scale and become profitable. This growth in
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 25
Management's Discussion and Analysis | Critical Accounting Policies & Estimates
volumes in 2019 and future years is expected through sales with
our initial launch partner, our supply arrangement with WWI, and
the possibility of additional OEMs entering into supply agreements
for our HPDI technology. If these assumptions are not realized, the
Company may be required to record an impairment on these assets
in future periods.
Intangible Assets
Based on the revenue and operating results, the Company
concluded that there were no impairment indicators as of November
30, 2018 for the intangible assets. Therefore, no impairment on
intangible assets was recorded as at December 31, 2018.
New Accounting
Pronouncements and
Developments
New accounting pronouncements
adopted in 2018
REVENUE
In May 2014, Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09, Revenue From Contracts With Customers
(“Topic 606”). The Company adopted the guidance using the
modified retrospective method as at January 1, 2018 with no
material impact to the financial statements. The adoption of this
standard did not result in any impact on previously reported
amounts. In accordance with he standard, additional disclosures
have been provided.
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. The Company adopted this standard on
January 1, 2018 with no material impact to the Company's financial
statements.
New accounting pronouncements
to be adopted in 2019
LEASES (TOPIC 842):
26 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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 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, 2018 under operating leases are disclosed in note
21(a). The Company is finalizing its implementation of this new
standard and will use the modified retrospective method as at
January 1, 2019. The Company's significant leases relate to its
leasing of operating premises.
Regulatory Compliance
As disclosed in the Company’s previous management discussion
and analysis filings, on June 15, 2017, the Enforcement Division of
the SEC issued a subpoena to Westport Fuel Systems for
information concerning its investment in Weichai Westport Inc. and
compliance with the FCPA and securities laws related to disclosure
in SEC filings in connection with the Westport Fuel Systems
operations in China. The SEC Enforcement Division issued follow
up subpoenas on February 14, 2018, June 25, 2018, and August
2, 2018. The company has completed its response to those
subpoenas. No new subpoenas have been received since August
2, 2018. Westport Fuel Systems is cooperating with these requests
and cannot predict the duration, scope or outcome of the SEC's
investigation. To date our management has devoted significant time
and attention to these matters, and we may be required to devote
even more time, attention and financial resources to these matters
in the future. The SEC’s investigation and our requirements in
response thereto could have a material adverse impact on our
results of operations, financial condition, liquidity and cash flows.
While we cannot estimate our potential exposure, if any, in these
matters at this time, we have already expended significant amounts
investigating and responding to the subpoenas in respect of this
investigation, including funding the expense of independent legal
representation, and expect to continue to need to expend significant
amounts to conclude the SEC investigation. During the year ended
December 31, 2018, we recorded expenses related to the SEC
investigation of $10.0 million, net of expected insurance recoveries,
and to date have recorded aggregate net expenses related to such
investigation of $11.8 million. Although we maintain insurance that
may cover some of these expenses, and we have given notice to
our insurers of the matter, there is a risk that a substantial portion
of the overall expenses and costs relating to such SEC investigation
will not be covered by such policies. In the event of future
proceedings arising out of the SEC investigation, to the extent
covered, our ultimate liability may possibly exceed the available
insurance.
Management's Discussion and Analysis | Disclosure Controls & Procedures
Disclosure Controls
and Procedures and
Internal Controls Over
Financial Reporting
Evaluation of Disclosure Controls
and Procedures
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”), are designed to provide reasonable
assurance that information required to be disclosed in the reports
that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including
our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”) (our principal executive officer and principal financial officer,
respectively), as appropriate to allow timely decisions regarding
required disclosures. As of the end of the period covered by this
report, we evaluated, under the supervision and with the
participation of management, including our CEO and CFO, the
effectiveness of the design and operation of our disclosure controls
and procedures.
Based on that evaluation, our CEO and CFO have concluded that
as of December 31, 2018, our disclosure controls and procedures
were effective at a reasonable assurance level.
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) and 15d-15(f) under the
Exchange Act. Internal control over financial reporting is a process
designed by, or under the supervision of, our CEO and CFO and
effected 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.
Because of these inherent limitations 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, and 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.
Management, including the CEO and CFO, has evaluated the
effectiveness of our internal control over financial reporting, based
on the criteria in 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, 2018.
During the year ended December 31, 2018, 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.
KPMG LLP ("KPMG"), 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, 2018.
KPMG's audit report on effectiveness of internal control over
financial reporting is included in the consolidated financial
statements of this filing.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 27
Management's Discussion and Analysis | Summary of Quarterly Results
Summary of Quarterly Results and Discussion of the Quarter
Ended December 31, 2018
Our revenues and operating results can vary significantly from quarter to quarter depending on factors such as the timing of product deliveries,
product mix, product launch dates, research and development project cycles, timing of related government funding, impairment charges,
restructuring 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 Company has modified information from all prior quarters to exclude the financial results of the CNG Compressor business which has
been recorded as discontinued operations with effect from the second quarter of 2018. 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)
2017
2018
Three months ended:
Mar 31
Jun 30(1)
Sep 30
Dec 31(2)
Mar 31
Jun 30
Sep 30(3)
Dec 31
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[4]
Adjusted EBITDA[5]
Earnings (loss) per share
Basic
Diluted
$
$
$
$
$
$
$
$
CWI net income attributable to the Company $
57.3
$
58.6
$
56.4
$
57.5
$
63.8
$
80.5
$
65.5
$
39.9
43.4
42.7
43.5
49.2
58.8
49.9
17.4
$
15.2
$
13.7
$
14.0
$
14.6
$
21.7
$
15.6
$
60.5
48.2
12.3
30.4%
25.9%
24.3%
24.3%
22.9%
27.0%
23.8%
20.3%
(12.5) $
(13.4) $
(16.2) $
(20.8) $
(12.6) $
(5.7) $
(12.1) $
(10.4)
(12.5) $
32.3
$
(15.6) $
(14.2) $
(14.2) $
(4.9) $
(6.3) $
(3.9) $
(7.5) $
(11.1) $
(14.3) $
(5.3) $
(5.6) $
(4.9) $
(5.4) $
(3.4) $
0.2
8.6
$
$
(3.2) $
(3.0) $
4.3
$
(0.11) $
(0.12) $
(0.15) $
(0.14) $
(0.10) $
(0.04) $
(0.09) $
(0.11) $
1.8
$
0.29
5.3
$
$
(0.14) $
(0.14) $
(0.11) $
(0.04) $
(0.02) $
5.8
$
(0.4) $
1.5
$
7.8
$
7.7
$
(9.2)
(5.3)
0.2
(0.08)
(0.07)
5.7
1. 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 in discontinued operations of $58.3 million.
2. During the fourth quarter of 2017, the CWI recorded a tax charge of $13.4 million due to the US tax reform. This reduced the Company's income from
investments by $6.7 million. Excluding this tax charge, the net loss from continuing operations would have been $14.1 million and the net loss for the period
would have been $7.5 million.
3. During the third quarter of 2018, the Company completed the sale of the CNG Compressor business and recognized a gain on sale of assets in discontinued
operations of $9.9 million.
4.
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.
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 that the Company deems to be non-recurring in nature. See non-GAAP measures for
more information.
Three Months Ended December 31, 2018 & 2017
Our total revenue for the three months ended December 31, 2018 was $60.5 million, an increase of $3.0 million, or 5.2%, from $57.5 million
for the three months ended December 31, 2017. The increase in revenue was primarily a result of higher sales of the Company's HPDI product.
Our consolidated net loss for the three months ended December 31, 2018 was $9.2 million, or a loss of $0.08 per share compared to a net
loss of $14.2 million, or a loss of $0.14 per share, for the three months ended December 31, 2017. The decrease in net loss primarily relates
to higher gross margin, lower operating costs and an increase in investment income from our CWI joint venture, offset by unrealized foreign
exchange losses and higher legal expenses in 2018.
Non-GAAP Measures
28 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Management's Discussion and Analysis | Summary of Quarterly Results
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 net loss from continuing operations 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. 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
2017
2018
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
$(13.3) $(17.3) $(15.8) $(20.7) $(11.7) $ (5.6) $ (9.5) $(11.9)
3.4
6.3
0.9
2.5
2.1
1.7
2.3
2.6
3.6
3.5
3.8
3.9
4.2
4.1
4.2
4.0
EBITDA
$ (6.3) $ (7.5) $(11.1) $(14.3) $ (5.4) $ 0.2 $ (3.0) $ (5.3)
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 $2.3 million from a loss of $3.0 million for
the three months ended September 30, 2018 to a loss of $5.3
million in the three months ended December 31, 2018 primarily due
to lower gross margin and lower CWI net income attributed to the
Company.
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.
QUARTERLY ADJUSTED EBITDA
2018
2017
Three months ended:
EBITDA
Stock based
Unrealized foreign
exchange (gain) loss
Asset impairment
Restructuring,
CWI US tax
Legal costs associated
Other
Adjusted EBITDA
Mar
31
Jun
30
Sep
30
Dec
31
Mar
31
Jun
30
Sep
30
Dec
31
$(6.3) $(7.5) $(11.
1
2.1
3.1
1.1
) $(14.
3
0.7
) $(5.4) $ 0.2 $(3.0) $(5.3)
0.3
1.4
0.6
0.7
2.5
(1.3) — 5.2
2.2
1.6
1.0
—
(1.6)
—
1.6
—
—
— 0.6
(1.6)
(0.1)
1.8
—
— 6.7
— 0.9
0.9
—
0.6
—
0.9
—
0.2
—
2.5
1.3
(0.3)
0.1
— 0.2
(0.9)
— 0.6
—
—
3.5
1.0
—
—
3.1
(0.5)
$(3.9) $(5.3) $(5.6) $(4.9) $(3.4) $ 8.6 $ 4.3 $ 0.2
Adjusted EBITDA decreased by $4.1 million from $4.3 million for
the three months ended September 30, 2018 to $0.2 million in the
three months ended December 31, 2018 primarily due to lower
gross margin and lower CWI net income attributed to the Company.
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, 2018 under the heading “Risk
Factors” and is available on SEDAR at www.sedar.com.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 29
Reports
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 balance sheets of Westport Fuel Systems Inc. (the Company) as of December 31, 2018 and
2017, the related 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, 2018, and the related notes (collectively, the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and its financial performance and its cash flows for each of the years in the three‑year period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 19, 2019,
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in note 4 (a) to the consolidated financial statements, the Company has changed its accounting policies for revenue as of January
1, 2018 due to the adoption of ASC 606 - Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. 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.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
KPMG LLP, Chartered Professional Accountants,
We have served as the Company's auditors since 2015.
Vancouver, Canada
March 19, 2019
30 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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, 2018, based on
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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related 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, 2018,
and the related notes (collectively, the consolidated financial statements), and our report dated March 19, 2019 expressed an 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, included in the accompanying ”Management’s Annual Report on Internal Control Over
Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
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.
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 19, 2019
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 31
Consolidated Financial Statements
Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(expressed in thousands of United States dollars, except share amounts)
Years ended Dec 31
2018
2017
(Adjusted, note 6)
Assets
Current assets:
Cash and cash equivalents (including $5,095 restricted cash, note 3c and note 14a)
$
61,119 $
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 18b)
Goodwill (note 12)
Other long-term assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (note 13)
Current portion of long-term debt (note 14)
Current portion of long-term royalty payable (note 15)
Warranty liability (note 16)
Liabilities held for sale (note 6)
Total current liabilities
Long-term debt (note 14)
Long-term royalty payable (note 15)
Warranty liability (note 16)
Deferred income tax liabilities (note 18b)
Other long-term liabilities
Total long-term liabilities
Shareholders’ equity:
Share capital (note 17):
Authorized:
55,442
46,011
4,835
1,676
169,083
8,818
63,431
16,829
1,664
3,170
6,933
71,842
61,900
45,737
4,726
16,992
201,197
9,302
69,804
20,943
1,848
3,324
7,204
$
$
269,928 $
313,622
82,851 $
10,327
6,091
2,800
3,870
105,939
44,983
14,844
2,141
4,229
7,116
86,225
8,993
2,390
3,529
19,141
120,278
45,429
16,641
2,772
4,616
5,854
179,252
195,590
Unlimited common shares and preferred shares in series, no par value
Issued:
133,380,899 (2017 - 131,279,709) common shares issued
1,087,068
1,078,280
Other equity instruments
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments and contingencies (note 20)
12,948
10,079
(998,361)
(21,058)
90,676
$
269,928 $
16,247
10,079
(966,869)
(19,705)
118,032
313,622
See accompanying notes to consolidated financial statements
Approved on behalf of the Board
Brenda J. Eprile Director
Colin Johnston Director
32 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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)
Product revenue
Cost of revenue and expenses:
Cost of revenue
Research and development
General and administrative
Sales and marketing
Restructuring costs
Foreign exchange (gain) loss
Depreciation and amortization (note 10 and note 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 accretion on royalty payable
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 18):
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.
2018
Years ended Dec 31
2017
(Adjusted, note 6)
2016
(Adjusted, note 6)
$
270,283 $
229,833 $
167,181
206,059
30,619
51,075
15,923
808
8,957
8,824
736
323,001
(52,718)
22,728
(9,133)
—
465
169,552
50,133
47,399
15,817
1,682
562
9,826
1,550
296,521
(66,688)
12,514
(14,487)
—
1,377
(38,658)
(67,284)
3,950
(1,838)
2,112
(40,770)
9,278
(31,492)
(2,780)
(1,644)
(4,424)
(62,860)
52,881
(9,979)
$
$
$
$
(1,353)
(32,845) $
11,382
1,403 $
(0.31) $
0.07 $
(0.24) $
(0.52) $
0.44 $
(0.08) $
133,055
55,452
44,777
18,184
19,000
6,565
11,244
4,843
293,120
(125,939)
5,838
(10,773)
35,808
(1,656)
(96,722)
1,610
2,340
3,950
(100,672)
3,099
(97,573)
1,295
(96,278)
(1.10)
0.03
(1.07)
132,371,396
119,558,566
91,028,504
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 33
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, 2016
63,380,819 $
937,029 $
16,460 $
9,837 $
(859,317) $
(32,382) $
71,627
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 loss
—
—
—
—
—
—
—
5,238
—
—
—
—
—
—
—
—
—
—
(9,979)
—
—
—
—
—
—
1,295
(31,087)
—
—
—
—
11,382
—
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
Issuance of common shares:
On exercise of share units
2,101,190
8,788
Stock-based compensation
Net loss for the year
Other comprehensive income
—
—
—
—
—
—
(8,788)
5,489
—
—
—
—
—
—
—
—
(31,492)
—
—
—
—
(1,353)
—
5,489
(31,492)
(1,353)
December 31, 2018
133,380,899 $
1,087,068 $
12,948 $
10,079 $
(998,361) $
(21,058) $
90,676
See accompanying notes to consolidated financial statements.
34 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
)
Consolidated Financial Statements | Consolidated Statements of Cash Flows
(expressed in thousands of United States dollars)
Years ended Dec 31
2018
2017
(Adjusted, note 6)
2016
(Adjusted, note 6)
$
(40,770) $
(62,860) $
(100,672)
Cash flows from (used in) operating activities:
Net loss for the year from continuing operations
Items not involving cash:
Depreciation and amortization
Stock-based compensation expense
Unrealized foreign exchange 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 used in operating activities of continuing operations
Net cash from (used in) 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
Proceeds received from holdbacks
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
Long-term asset securing debt
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.
16,510
3,040
8,957
(1,838)
(22,728)
9,133
736
162
—
(433)
—
3,512
(78)
(170)
(1,367)
(851)
(1,252)
(27,437)
(1,435)
14,741
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)
(49,453)
7,920
(10,273)
(25,288)
—
—
23,191
6,968
19,886
14,050
12,612
(15,616)
—
(3,009)
—
(2,129)
(8,142)
(7,645)
(10,723)
71,842
—
(85)
16,633
—
(8,740)
77,148
42,641
(71,387)
25,953
(11,467)
—
—
(14,260)
4,246
16,861
60,905
$
$
61,119 $
77,766 $
—
5,924
61,119 $
71,842 $
15,322
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)
(81,760)
2,439
(8,654)
45,344
26,334
13,398
—
76,422
—
9,184
(12,789)
—
—
35,000
—
31,395
4,570
33,066
27,839
60,905
—
60,905
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 35
Consolidated Financial Statements | Consolidated Statements of Cash Flows
SUPPLEMENTARY CASH FLOW INFORMATION
)
(expressed in thousands of United States dollars)
2018
Years ended Dec 31
2017
2016
Supplementary information:
Interest paid
Taxes paid, net of refunds
Non-cash transactions:
Shares issued for acquisitions
See accompanying notes to consolidated financial statements.
Notes to Consolidated
Financial Statements
1. Company Organization
and Operations
Westport Fuel Systems Inc. (the “Company”) was incorporated
under the Business Corporations Act (Alberta) on March 20, 1995.
The Company engineers, manufactures and supplies alternative
fuel systems and components for use in transportation applications
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.
2. Liquidity and Going Concern
In connection with preparing the consolidated 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 consolidated financial statements are issued.
Substantial doubt exists when conditions and events, considered
in the aggregate, indicate that it is probable that the Company will
be unable to meet its obligations as they become due within one
year after the date that the consolidated 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 consolidated financial
substantial doubt exists,
statements are
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 consolidated financial statements are issued.
to be considered probable of being effectively
Generally,
issued. When
36 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
$
4,039 $
540
4,416 $
722
4,339
2,479
—
—
98,742
implemented, the plans must have been approved before the date
that the consolidated financial statements are issued.
At this time Management's evaluation has concluded that there are
no known or currently 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 consolidated financial
statements were issued. These consolidated financial statements
have therefore been prepared on the basis that the Company will
continue as a going concern.
At December 31, 2018, the Company's net working capital was
$63,144 (2017 - $80,919) including cash and cash equivalents of
$61,119 (2017 - $71,842), and its long-term debt, including the
royalty payable, was $76,245, of which $16,418 matures in 2019.
The Company has incurred a loss from continuing operations of
$40,770 (2017 - $62,860) and negative cash flows from continuing
operating activities of $27,437 (2017 - $49,453) for the year ended
December 31 ,2018, and has accumulated a deficit of $998,361
since inception.
The Company continues to work towards its goals of increasing
revenues and reducing expenditures, which has improved results
from operations and operating cash flows in 2017 and 2018, and
this improvement in operating results is expected to continue in
2019. In particular, the commercial launch of Westport HPDI 2.0™
in 2018 has allowed the Company to significantly reduce
engineering and development spend and the associated capital
expenditures on this product and this reduction has improved
current and forecasted future cash flows. In addition, while the legal
fees related to the Securities Exchange and Commission ("SEC")
investigation that began in 2017 (see note 20(b)) increased
significantly in 2018, we anticipate these legal expenditures to
decrease in 2019. However, since the possible outcomes of this
proceeding remain uncertain at this time, it is also necessary to
acknowledge that any final determination that the Company’s
operations or activities are not, or were not, in compliance with the
Foreign Corrupt Practices Act ("FCPA") and/or other U.S. securities
laws could result in significant civil and criminal financial penalties
and other sanctions, which could have a material adverse impact
on our financial condition. Lastly, the Company continues to
examine non-core assets to determine whether it is in the best
interest of the Company to monetize assets or to continue to hold
and invest in these assets. Connected with this activity of assessing
its non-core assets, on July 25, 2018 the Company closed the sale
of its CNG Compressor business announced in the second quarter
of 2018, which resulted in gross proceeds of approximately $14,729.
Based on currently known conditions and events, management
believes that the cash on hand at December 31, 2018 and the
improvements to the operations expected for 2019 will provide the
cash flow necessary to fund operations over the period from March
2019 to March 31, 2020. 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. 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 consolidated financial statements and
the adjustments could be material.
3. Significant Accounting Policies
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its 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
Cartesian Capital Group is a global private equity firm based in New
York that has investments in the Company. Various Cartesian
entities are associated with these investments including Pangaea
Two Management, LP; Pangaea Two Acquisition Holdings XIV, LLC;
Pangaea Two Acquisition Holdings Parallel XIV, LLC. Collectively,
these entities will be referred to as “Cartesian”. In addition, Peter
Yu, the founder and managing partner of Cartesian, was elected as
a Director of the Company in January 2016. See notes 9b, 14c and
15 for additional details of Cartesian’s investments in the Company.
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, 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 rate
for the period with the resulting exchange differences recognized
in other comprehensive income.
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.
Financial Statements | Notes | 2. Liquidity and Going Concern
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
through disposal or
comprehensive
impairment.
income until
realized
As at June 30, 2018, the Company concluded that Argentina's
economy is highly inflationary. As a result, the Company
remeasured the financial statements of the Argentinian subsidiary
in the Company's reporting currency beginning July 1, 2018.
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
Year end
exchange rate
Avg. for yr. ended
2018
2017
2018
2017
2016
0.73
0.70
1.14
0.03
0.15
0.11
0.80
0.78
1.20
0.06
0.15
0.12
0.77
0.75
1.18
0.04
0.15
0.12
0.77
0.77
1.13
0.06
0.15
0.12
0.76
0.74
1.11
0.07
0.15
0.12
Canadian dollar
Australian dollar
Euro
Argentina Peso
RMB
Swedish Krona
Indian Rupee
0.0143
0.0157
0.0156
0.0154
0.0150
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. The $5,095 of restricted cash forms part of the security
for the Export Development Canada ("EDC") loan (note 14a).
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
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 37
Financial Statements | Notes | 3. Significant Accounting Policies
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
product
inventories, assembled parts and work-in-progress
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 for 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.
increase
in
H. FINANCIAL LIABILITIES
Accounts payable and accrued liabilities, short-term debt and long-
term debt are measured at amortized cost. Transaction costs
38 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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. INTANGIBLE ASSETS
Intangible assets consist primarily of the estimated value of
intellectual property, trademarks, technology, customer contracts
and non-compete agreements acquired through acquisitions.
Intangible assets are amortized over their estimated useful lives,
which range from 5 to 20 years.
K. 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
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.
L. 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.
M. WARRANTY LIABILITY
Estimated warranty costs are recognized at the time the Company
sells its products and are included in cost of revenue. The Company
provides warranty coverage on products sold 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 using 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.
N. REVENUE RECOGNITION
In May 2014, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Codification ("ASC") 606, Revenue
from Contracts with Customers, a new accounting standard related
to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP
on revenue recognition and eliminated industry-specific guidance.
The underlying principle of ASC 606 is to recognize revenue when
a customer obtains control of promised goods or services at an
amount that reflects the consideration that is expected to be
received in exchange for those goods or services. At the beginning
of the first quarter of 2018, the Company adopted ASC 606 using
the modified retrospective method. There was no material financial
impact to our adoption of ASC 606.
The Company generates revenues primarily from product sales.
Product revenues are derived from standard product sales
contracts and from long-term fixed price contracts. Under ASC 606,
revenue is recognized when a customer obtains control of the goods
or services. Determining the timing of the transfer of control, at a
point in time or over time, requires judgment. On standard product
sales contracts, revenues are recognized when customers obtain
control of the product, that is when transfer of title and risks and
rewards of ownership of goods have passed and when obligation
to pay is considered certain. Invoices are generated and revenue
is recognized at that point in time. Provisions for warranties are
made at the time of sale.
O. 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
Financial Statements | Notes | 3. Significant Accounting Policies
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 ADOPTED IN 2018
Revenue
In May 2014, FASB issued Accounting Standards Updates ("ASU")
2014-09, Revenue From Contracts With Customers (“Topic 606”).
The Company adopted this standard on January 1, 2018, using the
modified retrospective method. The adoption of this standard did
not result in any impact on previously reported amounts. In
accordance with the standard, additional disclosures have been
provided in note 3n.
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. The Company adopted this standard on
January 1, 2018 with no material impact to the Company's financial
statements.
B. NEW ACCOUNTING
PRONOUNCEMENTS TO BE
ADOPTED IN 2019
Leases (Topic 842)
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 39
Financial Statements | Notes | 4. Accounting Changes
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 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, 2018 under operating leases are disclosed in note
21(a). The Company is finalizing its implementation of this new
standard and will use the modified retrospective method as at
January 1, 2019. The Company's significant leases relate to its
leasing of operating premises.
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.
6. Sale of Assets
The Company completed the sale of its CNG Compressor business
on July 25, 2018 for gross proceeds of $14,729 and recorded a net
gain of $9,910. The assets and liabilities of the CNG Compressor
business were accounted for as held for sale effective from the
second quarter of 2018. The comparative balances of the CNG
Compressor business were also reclassified as at December 31,
2017, with an impact to the following balance sheet accounts:
accounts receivable, inventories, property, plant and equipment,
accounts payable and accrued liabilities, warranty liability and other
long-term liabilities. The notes for these account balances have
been adjusted for these reclassifications in these financial
statements.
During the second quarter of 2017, substantially all of the former
Industrial business segment was sold resulting in a gain of $58,310.
40 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
As discussed in note 15, 15% of the net consideration received on
these asset sales was paid or will be payable against the royalty
payable due to Cartesian.
The carrying amount of the major classes of assets and liabilities
for the held-for-sale for both the CNG Compressor business and
Industrial business segment at December 31, 2018 and
December 31, 2017 are shown below:
Years ended Dec 31
2018
2017
$
$
$
Cash
Accounts receivable
Inventories
Property, plant, and equipment
Total assets classified as held for sale
Accounts payable and accrued liabilities
Restructuring obligations
Income taxes payable
Other current liabilities
Other non-current liabilities
Deferred income tax liabilities and other
liabilities
— $
1,676
—
—
5,924
5.267
50.006
233
1,676 $ 16,992
57 $ 12,597
467
2,054
—
—
—
3,448
1,462
11,022
1,292
1,634
Total liabilities classified as held for sale
$
3,870 $ 19,141
The following table presents the combined financial results of the
CNG Compressor business and Industrial business segments
which are included in net income from discontinued operations for
the years ended December 31, 2018, 2017 and 2016:
Years ended Dec 31
2018
2017
2016
Revenue
$
8,837 $ 46,268 $ 57,715
Cost of product revenue
7,548
34,647
43,495
Research and development
General and administrative
Sales and marketing
603
1,083
575
2,972
5,027
2,713
3,960
3,429
2,765
9,809
45,359
53,649
Operating income (loss) from
discontinued operations
Restructuring costs
(972)
1,268
909
—
Net gain on sale of assets
(10,710)
(58,310)
Other expenses (recovery)
—
220
Income from discontinued
operations before income tax
8,470
58,999
Income tax expense (recovery)
(808)
6,118
4,066
—
—
(93)
4,159
1,060
Net income from
discontinued operations
$
9,278 $ 52,881 $
3,099
On January 1, 2018, the Company exited the portion of the facility
related to the discontinued Industrial business segment and
recorded a $1,268 lease-exit restructuring obligation. The lease
terminates in August of 2019. During the second quarter of 2018,
the Company adjusted a provision related to the Industrial business
segment and recorded an additional gain of $800.
7. Accounts Receivable
ACCOUNTS RECEIVABLE
Years Ended Dec 31
2018
2017
Customer trade receivables
$
50,867 $
51,719
Holdback receivables
Other receivables
Income tax receivable
Due from related parties (note 19)
—
6,775
717
122
6,750
4,337
1,232
156
Allowance for doubtful accounts
(3,039)
(2,294)
$
55,442 $
61,900
8. Inventories
INVENTORIES
Years ended Dec 31
2018
2017
Purchased parts and materials
$
31,735 $
32,352
Work-in-process
Finished goods
Inventory on consignment
Total
2,297
11,367
612
2,187
10,505
693
$
46,011 $
45,737
9. Long-term Investments
LONG-TERM INVESTMENTS
Years Ended Dec 31
2018
2016
Cummins Westport Inc. (a)
Weichai Westport Inc. (b)
Other equity accounted investees
Total long-term investments
$
$
6,309 $
1,824
685
8,818 $
6,799
1,824
679
9,302
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 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
Financial Statements | Notes | 7. Accounts Receivable
baseline, then any excess profit will be allocated 75% to the
Company and 25% to Cummins.
The Company has determined that CWI is a 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
2018
2017
2016
Investment income under the
equity method
$ 22,701 $ 12,482 $
5,606
Dividends received
23,191
16,633
10,198
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. As at December 31, 2018, the
Company has a related party accounts receivable balance of $122
(2017 - $150) due from CWI. During the year ended December 31,
2018, total sales to CWI were $1,855 (2017 - $2,721; 2016 - $2,744).
The carrying amount and maximum exposure to losses relating to
CWI were as follows:
Balance at Dec 31
2018
2017
Carrying
amount
Maximum
exposure to
loss
Carrying
amount
Maximum
exposure
to loss
$ 6,309 $
6,309 $ 6,799 $
6,799
122
122
150
150
Equity method
investment in CWI
Accounts receivable
due from CWI
Assets, liabilities, revenue and expenses of CWI, are as follows:
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 41
Financial Statements | Notes | 9. Long-Term Investments
CWI ASSETS & LIABILITIES
B. WEICHAI WESTPORT INC.
The Company, indirectly through its wholly-owned subsidiary,
Westport Innovations (Hong Kong) Limited (“Westport HK”), is
currently the registered holder of a 23.33% equity interest in Weichai
Westport Inc. (“WWI”). Previously, the Company held a 35% indirect
equity interest in WWI. However, in April 2016, the Company sold
to Cartesian entities a derivative economic interest granting it the
right to receive an amount of future income received by Westport
HK from WWI equivalent to having an 18.78% equity interest in
WWI and concurrently granted a Cartesian entity an option to
acquire all of the equity securities of Westport HK for a nominal
amount. The Company retained the right to transfer any equity
interest held by Westport HK in WWI that was in excess of an
18.78% interest in the event that such option was exercised. Then
in August 2016, the Company sold an aggregate 11.67% equity
interest in the WWI joint venture for gross proceeds of $7,372 (RMB
48,185) to Weichai Holding Group Co., Ltd. (to which the Company
sold a 6.42% equity interest) and Guanya (Shanghai) Private Equity
Partnership (Limited Partnership) (“Guanya”) (to which the
Company sold a 5.25% equity interest). Public disclosures of this
transaction made by the Company prior to the third quarter of 2018
filing of our financial statements referred to Guanya as either “an
additional undisclosed purchaser” or, inadvertently, as “Weichai
Power Co., Ltd.”, which was not a party to the transaction but instead
was a limited partner of Guanya. The Company’s 23.33% equity
interest in WWI remains held by the Company’s subsidiary,
Westport HK. As a result of such transactions, the Company’s
residual 23.33% equity interest in WWI currently corresponds to an
economic interest in WWI equivalent to just 4.55%.
On August 28, 2018, the Company entered into definitive
development and supply agreements with WWI to develop, market,
and commercialize a heavy-duty, natural gas engine featuring the
Westport HPDI 2.0™ technology, based on one of Weichai Power
Co. Ltd.'s ("Weichai Power") heavy-duty engine platforms. Under
the new development program, the Company will support the
adaptation of the Westport HPDI 2.0™ technology onto one of
Weichai Power's heavy-duty engine platforms.
Years ended Dec 31
2018
2017
Current assets:
Cash and short-term investments
Accounts receivable
Other current assets
$
85,812 $
2,336
120
91,720
10,925
—
Long-term assets:
Property, plant and equipment
Deferred income tax assets
Total assets
Current liabilities:
934
22,851
1,245
28,096
$ 112,053 $ 131,986
Current portion of warranty liability
Current portion of deferred revenue
$
19,829 $
21,299
Accounts payable and accrued liabilities
4,348
45,476
25,866
22,157
12,603
60,626
Long-term liabilities:
Warranty liability
Deferred revenue
Other long-term liabilities
Total liabilities
16,253
22,995
38,321
27,009
3,175
3,943
53,947
57,749
99,423 $ 118,375
$
CWI REVENUE AND EXPENSES
Product revenue
Parts revenue
Cost of revenue and expenses:
Cost of product and parts
revenue
Research and development
General and administrative
Sales and marketing
Foreign exchange loss
Bank charges, interest and
other
Income from operations
Interest and investment income
Income before income taxes
Income tax expense (recovery):
Current
Deferred(1)
Years ended Dec 31
2018
2017
2016
$ 227,408 $ 235,220 $ 205,235
91,997
82,077
71,230
319,405
317,297
276,465
228,452
207,840
199,317
18,000
1,474
15,350
12
706
30,733
1,113
19,675
51
609
36,066
1,136
23,047
8
695
263,994
260,021
260,269
55,411
1,939
57,350
8,397
3,552
11,949
57,276
16,196
982
552
58,258
16,748
16,068
17,226
33,294
4,680
856
5,536
Income for the year
$ 45,401 $ 24,964 $ 11,212
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.
42 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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, 2018
December 31, 2018
Land and buildings
$
4,765 $
1,474 $
3,291
Patents and trademarks
$ 21,142 $
7,978 $ 13,164
7,079
3,553
6,043
2,975
1,036
578
Technology
Customer contracts
Other intangibles
5,150
12,355
334
4,369
9,476
329
781
2,879
5
87,151
33,476
53,675
Total 2017
$ 38,981 $
22,152 $ 16,829
Computer equipment
and software
Furniture and fixtures
Machinery and
equipment
Leasehold
improvements
Total 2018
December 31, 2017
11,578
6,727
4,851
$ 114,126 $
50,695 $
63,431
Land and buildings
$
4,947 $
1,412 $
3,535
Computer equipment
and software
Furniture and fixtures
Machinery and
equipment
Leasehold
improvements
Total 2017
7,742
5,322
7,438
3,585
304
1,737
90,570
33,007
57,563
14,261
7,596
6,665
$ 122,842 $
53,038 $
69,804
During the year ended December 31, 2018, the Company recorded
an impairment charge of $736 (year ended December 31, 2017 -
$1,550; year ended December 31, 2016 - $2,708). The impairment
resulted primarily from the write-down of tooling equipment and was
recorded in the Transportation segment.
The Company has significant investments in property, plant and
equipment related to its Westport HPDI 2.0™ business. The HPDI
business is at the early stages of commercialization, and, as a result,
is currently generating losses. Based on the Company's current
projections, meaningful increases in component sales, compared
to 2018 levels, are expected, allowing the HPDI business to benefit
from economies of scale and become profitable. If these
assumptions are not realized, the Company may be required to
record an impairment on these assets in future periods.
Total depreciation expense for the year ended December 31, 2018
was $13,090 (year ended December 31, 2017 - $11,289; year
ended December 31, 2016 - $12,305). The amount of depreciation
expense included in cost of sales for the year ended December 31,
2018 was $7,685 (year ended December 31, 2017 - $4,915; year
ended December 31, 2016 - $4,266).
December 31, 2017
Patents and trademarks
$ 22,031 $
6,995 $ 15,036
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
Based on revenues and operating results, the Company concluded
that there were no impairment indicators as of November 30, 2018
related to the intangible assets. Therefore, no impairment on
intangible assets was recorded as at December 31, 2018.
During the year ended December 31, 2018, amortization of $3,420
- $3,452; year ended
(year ended December 31, 2017
December 31, 2016 - $3,059) was recognized in the statement of
operations.
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
2018
2017
$
$
3,324 $
2,923
(154)
401
3,170 $
3,324
The Company completed its annual assessment at November 30,
2018 and concluded that the remaining goodwill of $3,170 related
to the Netherlands reporting unit under the Transportation business
segment was not impaired.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 43
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
Taxes payable
Deferred revenue
Restructuring obligation
Other payables
Years ended Dec 31
2018
2017
$ 59,970 $ 56,309
16,292
1,567
511
1,398
2,969
7,179
13,723
1,568
2,244
996
—
4,350
$ 82,851 $ 86,225
14. 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)
Balance, end of period
Current portion
Long-term portion
Years Ended Dec 31
2018
2017
24,023
8,645
17,382
3,744
1,516
18,987
10,901
17,335
6,562
637
$
$
55,310 $
54,422
(10,327)
(8,993)
44,983 $
45,429
A. TERM LOAN FACILITY, NET OF DEBT
ISSUANCE COSTS
On December 20, 2017, the Company entered into a loan
agreement with EDC for a $20,000 non-revolving 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 this loan, which reduced
the carrying value to $18,987 at December 31, 2017. These costs
are amortized over the term of this loan using the effective interest
rate method. As at December 31, 2018, the amount outstanding for
this loan was $16,860, net of issuance costs.
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 to the sale of a portion
of the Industrial business segment (as discussed in note 6). As at
December 31, 2018, this holdback security of $5,095 is held as
restricted cash. On March 1, 2019, as a result of achieving certain
44 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
milestones, the restricted cash was released and the interest rate
on the loan was reduced to 6%.
On October 9, 2018, the Company entered into a Euro denominated
loan agreement with UniCredit S.p.A. ("UniCredit"). The loan bears
interest at the 3-month Euribor plus 2.3% and interest is paid
quarterly. As at December 31, 2018, the amount outstanding for this
loan was $7,163 and was secured by a pledge of $2,129, with these
restricted funds being recorded in other long-term assets.
B. SENIOR FINANCING
The 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
guarantee for its senior revolving financing.
C. CONVERTIBLE DEBT
In January 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 HPDI 2.0
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 four years at interest rates ranging from 1.3% to 12.0% (2017 -
3.1% to 12.0%).
Throughout the entire term of these financing arrangements, the
Company is required to meet certain financial and non-financial
covenants. As of December 31, 2018, 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:
LONG TERM ROYALTY PAYABLE
SCHEDULE
Financial Statements | Notes | 14. Long-term Debt
LONG-TERM DEBT REPAYMENT
SCHEDULE
Subordinated
debenture
notes
Senior
financing
Convertible
debt
Other
bank
financing
Capital
lease
obligations
2019
2020
2021
2022
5,234
7,166
8,785
1,880
2,009
2,254
1,419
2,502
2023+
1,419
—
— 2,714
—
17,382
—
—
344
343
343
—
Total
10,327
9,994
29,182
4,388
499
475
418
124
— 1,419
$ 24,023 $ 8,645 $ 17,382 $ 3,744 $ 1,516 $55,310
15. Long-term Royalty Payable
In January 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 HPDI systems and CWI joint venture income 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's debt 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 Company's divestiture of the Industrial business segment
during 2017 and the CNG Compressor business in 2018 resulted
in royalty prepayments of $9,435 in 2017 and $1,045 in 2018. Due
to the early extinguishment of a portion of the royalty payable, the
Company recorded an additional finance charge of $5,236 in 2017
and $778 in 2018.
As of December 31, 2018, the total royalty prepayments paid or
payable to Cartesian as a result of the Consent Agreement,
including the prepayment arising from the sale of the CNG
Compressor business to be made in 2019, was $12,204.
Years ended Dec 31
2018
2017
Balance, beginning of year
$
19,031 $
21,562
Accretion expense
Repayment
Additional finance charge from
prepayment
Balance, end of year
Current portion
Long-term portion
4,135
3,168
(3,009)
(10,935)
778
5,236
20,935
19,031
(6,091)
(2,390)
$
14,844 $
16,641
The minimum repayments including interest are as follows, for the
years ending December 31:
MINIMUM REPAYMENTS INCLUDING
INTEREST
For years ending
Dec 31
2019
2020
2021
2022
2023
2024 and thereafter
6,091
5,926
7,258
5,065
1,162
6,758
32,260
$
16. Warranty Liability
A continuity of the warranty liability is as follows:
WARRANTY LIABILITY
Years ended Dec 31
2018
2017
2016
Balance, beginning of year
$ 6,301 $ 11,612 $ 13,991
Warranty assumed on acquisition
—
—
2,454
Warranty claims
Warranty accruals
Change in estimate
Impact of foreign exchange
changes
(2,787)
(2,627)
(7,684)
2,112
1,232
1,493
(1,443)
(2,949)
—
758
(967)
1,358
Balance, end of year
4,941
6,301
11,612
Less: Current portion
(2,800)
(3,529)
(5,499)
A continuity schedule of the long-term royalty payable is as follows:
Long-term portion
$ 2,141 $ 2,772 $ 6,113
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 45
Financial Statements | Notes | 17. Share Capital, Stock Options & Other Stock-based Plans
As at December 31, 2018, $2,074 of compensation expense related
to Units has yet to be recognized in results from operations and will
be recognized over a weighted average period of approximately 1
and a half years.
B. AGGREGATE INTRINSIC VALUES
The aggregate intrinsic value of the Company’s share units at
December 31, 2018 and 2017 are as follows:
AGGREGATE INTRINSIC VALUES
OF SHARE UNITS
Years ended Dec 31
(values in CDN$)
2018
2017
Share units:
Outstanding
Exercisable
$
4,828 $
3,759
21,332
3,009
C. STOCK-BASED COMPENSATION
Stock-based compensation associated with the Unit plans is
included in operating expenses as follows:
STOCK-BASED COMPENSATION
Years ended Dec 31
2017
2018
2016
Research and development
$
778 $
1,182 $
6,010
General and administrative
Sales and marketing
1,952
310
5,450
329
2,334
2,106
Total
$
3,040 $
6,961 $ 10,450
During the first quarter of 2018, the Performance Stock Units
("PSUs") that had been conditionally approved were finalized and
granted. As a result, the stock-based compensation of $2,449
related to 730,000 PSUs was reclassified from a liability to
shareholders' equity.
17. Share Capital, Stock Options
& Other Stock-based Plans
During the year ended December 31, 2018, the Company issued
2,101,190 common shares upon exercises of share units (year
ended December 31, 2017 - 2,045,617 common shares). The
Company issues shares from treasury to satisfy share unit
exercises.
During the year ended December 31, 2017, the Company issued
19,125,000 common shares at $1.50 per share, for gross proceeds
of $28,688. Transaction costs of $2,735 were incurred for net
proceeds of $25,953.
A. SHARE UNITS ("UNITS")
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, 2018, the Company
recognized $3,040 (year ended December 31, 2017 - $6,961; year
ended December 31, 2016 - $10,450) of stock-based compensation
associated with the Westport Omnibus Plan and the former
Amended and Restated Unit Plan.
A continuity of the Units issued under the Westport Omnibus Plan
and the former Amended and Restated Unit Plan as of
December 31, 2018, December 31, 2017 and December 31, 2016
are as follows:
UNIT ISSUED SUMMARY
(stock option
values expressed
in Canadian
dollars)
Outstanding,
beginning of
period
Granted
Exercised
Forfeited/
expired
Outstanding,
end of period
Options
exercisable,
end of period
Years ended Dec 31
2018
2017
2016
#
WAEP
#
WAEP
#
WAEP
4,509,990 $ 6.00
6,664,591 $ 6.75
9,657,921 $ 7.62
1,009,230
3.50
993,659
(2,101,190)
5.44 (2,045,617)
2.18
6.31
684,402
2.90
(845,491)
10.26
(750,627)
3.61 (1,102,643)
6.51 (2,832,241)
6.60
2,667,403 $ 4.41
4,509,990 $ 6.00
6,664,591 $ 6.75
2,076,684 $ 4.66
636,073 $ 5.38
1,891,008 $ 7.77
WAEP = weighted average exercise price (C$)
During 2018, 1,009,230 (2017 - 993,659) restricted share units
("RSUs") 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.
46 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
Other permanent differences
3,762
3,624
5,875
Total deferred income tax liabilities
1,585
138
(4,560)
Total net deferred income tax liabilities
$
(2,565) $
(2,768)
18. 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 27% for the year ended December 31,
2018 (year ended December 31, 2017 - 26%; year ended
December 31, 2016 - 26%) as follows:
INCOME TAX PROVISION
Years ended Dec 31
2018
2017
(Adjusted,
Note 6)
2016
(Adjusted,
Note 6)
Loss before income taxes
$(38,658) $(67,284) $ (96,722)
Expected income tax recovery
(10,438)
(17,494)
(25,148)
Increase (reduction) in income
taxes resulting from
Non-deductible stock-based
compensation
433
786
2,176
Withholding taxes
657
444
1,109
Change in enacted tax rates
135
22,960
—
Foreign tax rate differences,
foreign exchange and other
adjustments
Non-taxable income from equity
investment
(6,834)
(3,245)
925
Change in valuation allowance
12,812
(11,637)
32,583
Change in uncertain tax position
Bargain purchase gain
—
—
—
301
— (9,311)
Income tax expense (recovery)
$ 2,112 $ (4,424) $ 3,950
B. DEFERRED INCOME TAX
The significant components of the deferred income tax assets and
liabilities are as follows:
Financial Statements | Notes | 18. Income Taxes
DEFERRED INCOME TAX ASSETS
& LIABILITIES
Deferred income tax assets:
Net loss carry forwards
$ 197,585 $ 189,627
Years Ended Dec 31
2018
2017
Intangible assets
Property, plant and equipment
Warranty liability
Foreign tax credits
Inventory
Research and development
Other
5,655
6,502
12,779
13,046
3,251
620
4,223
5,961
3,290
5,241
4,668
5,795
11,135
13,190
Total gross deferred income tax assets
241,229
241,359
Valuation allowance
(239,565)
(239,511)
Total deferred income tax assets
1,664
1,848
Deferred income tax liabilities:
Intangible assets
Property, plant and equipment
Other
(2,456)
(4,062)
(106)
(1,667)
(4,229)
(231)
(323)
(4,616)
Total net deferred income tax liabilities
$
(2,565) $
(2,768)
Allocated as follows:
Deferred income tax assets
Deferred income tax liabilities
1,664
1,848
(4,229)
(4,616)
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 18f.
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 47
Financial Statements | Notes | 18. Income Taxes
C. INCOME TAX EXPENSE / RECOVERY
F. TAX RESERVES
The components of the Company’s income tax expense (recovery)
are as follows:
INCOME TAX EXPENSE (RECOVERY)
Year ended Dec 31
2018
Canada
United States
Italy
Other
Year ended 2017
Canada
United States
Italy
Other
Year ended 2016
Canada
United States
Italy
Other
Net income
(loss)
before
income
taxes
Current Deferred
Total
$
(61,933)
17,161
7,445
(1,331)
214
803
1,741
1,192
— $
—
(1,188)
(650)
214
803
553
542
$
$
(38,658) $ 3,950 $ (1,838) $ 2,112
(61,458) $ (3,737) $
(17) $ (3,754)
3,023
679
(9,528)
17
493
447
—
(1,470)
(157)
17
(977)
290
$
(67,284) $ (2,780) $ (1,644) $ (4,424)
$
(104,060) $
56 $
120 $
176
14,926
(5,601)
7
192
(1,987)
1,355
—
1,440
780
7
1,632
2,135
$
(96,722) $ 1,610 $ 2,340 $ 3,950
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
2021
2019
Expiring in:
2020
2022+
Total
$
— $
— $
— $ 518,696 $ 518,969
Canada
Italy
United States
Sweden
Other
Total
—
—
—
—
—
—
—
2,976
2,976
— 103,673
103,673
—
19,155
14,009
19,155
26,847
4,668
4,039
4,131
$ 4,668 $ 4,039 $ 4,131 $ 658,782 $ 671,620
The Company records uncertain tax positions in accordance with
ASC No. 740, Income Taxes. As at December 31, 2018, the total
amount of the Company’s uncertain tax benefits was $4,704 (year
ended December 31, 2017 - $4,345). 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 2015 to 2018
taxation years remain open to examination by the Internal Revenue
Service and the 2013 to 2018 taxation years remain open to
examination by the Italian Revenue Agency, and various years
remain open in the other foreign jurisdictions.
19. 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.
A. CUMMINS WESTPORT INC.
Pursuant to the amended and restated Joint Venture Agreement,
Westport engages in transactions with CWI (see note 9a). Amounts
receivable relate to costs incurred by the Company on behalf of
CWI. The amounts are generally reimbursed by CWI to the
Company in the month following the month in which the payable is
incurred.
B. 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 14c) and royalty payable (note 15), which
are related party balances. The Company made an interest payment
on the convertible debt of $1,575 in 2018 (2017 - $919) to Cartesian.
In addition, the Company made a payment of $3,009 (2017 -
$10,935) to Cartesian relating to the royalty payable during the year
ended December 31, 2018 and has continued to accrue interest in
accordance with the terms of the agreements. In addition, fees of
$250 (2017 - $250) were paid to Cartesian during the year ended
December 31, 2018.
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.
20. Commitments
and Contingencies
E. DEFERRED INCOME TAX LIABILITY
A. CONTRACTUAL COMMITMENTS
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.
The Company has obligations under operating lease arrangements
that require the following minimum annual payments during the
respective fiscal years:
48 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
CONTRACTUAL COMMITMENTS
2019
2020
2021
2022
2023
Thereafter
Total
$
3,594
2,545
903
762
452
—
$
8,256
For the year ended December 31, 2018, the Company incurred
operating lease expense of $3,269 (year ended December 31, 2017
- $4,782; year ended December 31, 2016 - $5,675).
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
As disclosed in the Company’s previously filed interim financial
statements and management's discussion and analysis, on June
15, 2017, the Enforcement Division of the SEC issued a subpoena
to the Company for information concerning its investment in WWI
and compliance with the FCPA and securities laws related to
disclosure in SEC filings in connection with the Company's
operations in China. The SEC Enforcement Division issued follow
up subpoenas on February 14, 2018, June 25, 2018, and August
2, 2018. The Company has completed its response to those
subpoenas. No new subpoenas have been received since August
2, 2018. Westport Fuel Systems is cooperating with these requests
and cannot predict the duration, scope or outcome of the SEC's
investigation. To date our management has devoted significant time
and attention to these matters, and we may be required to devote
even more time, attention and financial resources to these matters
in the future. The SEC’s investigation and our requirements in
response thereto could have a material adverse impact on our
results of operations, financial condition, liquidity and cash flows.
While we cannot estimate our potential exposure, if any, in these
matters at this time, we have already expended significant amounts
investigating and responding to the subpoenas in respect of this
investigation, including funding the expense of independent legal
representation, and expect to continue to need to expend significant
amounts to conclude the SEC investigation. During the year ended
December 31, 2018, the Company recorded expenses related to
the SEC investigation of $9,977, net of insurance recoveries, and
to date has recorded aggregate net expenses related to such
Financial Statements | Notes | 20. Commitments and Contingencies
investigation of $11,794. Although the Company maintains
insurance that may cover some of these expenses, and has given
notice to the insurers of the matter, there is a risk that a substantial
portion of the overall expenses and costs relating to such SEC
investigation will not be covered by such policies. In the event of
future proceedings arising out of the SEC investigation, to the extent
covered, our ultimate liability may possibly exceed the available
insurance.
The Company is also engaged in certain legal actions and tax audits
in the ordinary course of business and believes that, based on the
information currently available, the ultimate outcome of these
actions will not have a material adverse effect on our operating
results, liquidity or financial position.
21. Segment Information
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.
Accordingly, from that date, the Westport HPDI 2.0™ product line
and all other technology related activities previously reported under
the Corporate & Technology segment have been combined with the
previously reported Automotive business segment and renamed
Transportation.
Under the organization structure in effect from January 2018, the
Company manages and reports the results of its business through
three segments: Transportation, the CWI Joint Venture, and
Corporate. This reflects the manner in which operating decisions
and the assessment of business performance is currently managed
by the Chief Operating Decision Maker ("CODM"). All comparative
figures presented have been revised to reflect this change.
The financial information for the Company’s business segments
evaluated by the 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.
TRANSPORTATION BUSINESS SEGMENT
Westport Fuel Systems' Transportation group designs,
manufactures, and sells alternative fuel systems and components
for transportation applications. The Company's diverse product
offerings are sold under established global brands and include a
broad range of alternative fuels which have environmental and
economic advantages including: liquefied petroleum gas (“LPG”),
compressed natural gas ("CNG"), liquefied natural gas (“LNG”),
renewable natural gas (“RNG”), and hydrogen. The Company
supplies its products and services through a global network of
distributors and original equipment manufacturers (“OEMs”) and
delayed OEMs ("DOEMs") in more than 70 countries. Today, our
products and services are available for passenger cars, light-,
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 49
Financial Statements | Notes | 21. Segment Information
medium- and heavy-duty trucks, high horsepower, cryogenics, and
hydrogen applications.
costs associated with patenting our innovations and registering our
trademarks, and maintaining our patent and trademark portfolios.
The Transportation segment includes the independent aftermarket
("IAM"), OEMs and DOEMs, the Westport HPDI 2.0™ product line,
electronics, current and advanced research and development
programs, supply chain, and product planning activities.
An agreement to sell the CNG Compressor business was
announced during the second quarter of 2018 and closed in the
third quarter of 2018, and as a result, the revenues and expenses
related to this business were reclassified to discontinued operations
with effect from the second quarter of 2018 and all comparative
figures presented have been revised to reflect this reclassification.
CUMMINS WESTPORT INC. ("CWI")
JOINT VENTURE
CWI 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 RNG.
CWI is a Delaware corporation owned 50% by Westport Power Inc.,
a wholly-owned subsidiary of Westport Fuel Systems, and 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 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
developing, marketing and selling 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.
CORPORATE BUSINESS SEGMENT
The Corporate business segment is responsible for public company
activities, corporate oversight and general administrative duties, as
well as research and development expenses relating to the
protection of the Company's intellectual property; in particular, the
50 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
WEICHAI WESTPORT INC. ("WWI")
The Company has not considered WWI a business segment since
March 31, 2016 due to the Company's reduced interest pursuant
to a sale to the Cartesian Entities as discussed in note 9(b).
Financial information by business segment as follows:
REVENUE
Years ended Dec 31
2018
2017
2016
Transportation
$ 270,283 $ 229,833 $ 167,181
CWI
WWI
319,405
317,297
276,465
—
—
29,931
Total segment revenues
$ 589,688 $ 547,130 $ 473,577
Less: equity investees' revenue
(319,405)
(317,297)
(306,396)
Consolidated revenue from
continuing operations
Consolidated revenue from
discontinuing operations
$ 270,283 $ 229,833 $ 167,181
$
8,837 $
46,268 $
57,715
OPERATING INCOME (LOSS)
Transportation
CWI
Corporate
Years ended Dec 31
2018
2017
2016
$ (10,706) $ (40,638) $ (63,608)
55,411
57,276
29,782
(31,511)
(22,256)
(31,923)
Restructuring costs
(808)
(1,682)
(19,000)
Foreign exchange loss
(8,957)
(562)
(6,565)
Impairment of long lived assets,
net (note 10)
WWI
Total segment operating income
(loss)
Less: equity investees’ operating
income
Consolidated loss from
continuing operations
Consolidated income (loss)
from discontinued operations
(736)
(1,550)
(4,843)
—
—
718
2,693
(9,412)
(95,439)
(55,411)
(57,276)
(30,500)
$ (52,718) $ (66,688) $ (125,939)
$
(972) $
909 $
4,066
ADDITIONS TO LONG-LIVED ASSETS
Years ended Dec 31
2018
2017
2016
Total additions to long-lived assets,
excluding business combinations:
Transportation
Corporate
$ 10,062 $ 25,177 $
8,181
211
111
473
Total consolidated revenues
$ 10,273 $ 25,288 $
8,654
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
% of total product revenue and
service and other revenue,
years ended Dec 31
2017
2016
2018
Europe
Americas
Asia
Others
62%
18%
10%
10%
60%
20%
12%
8%
63%
23%
12%
2%
As at December 31, 2018, total goodwill of $3,170 (December 31,
2017 - $3,324) was allocated to the Automotive segment.
As at December 31, 2018, total long-term investments of $8,269
(December 31, 2017 - $8,756) were allocated to the Corporate
segment and $549 (December 31, 2017 - $546)
the
Transportation segment.
to
Total assets are allocated as follows:
TOTAL ASSETS BY OPERATING
SEGMENT
Transportation
Corporate
CWI
Add: assets held for sale
Less: equity investees’ total assets
Total consolidated assets
Years ended Dec 31
2018
2017
236,340
31,912
112,053
254,037
42,593
131,986
$
380,305 $
428,616
1,676
16,992
(112,053)
(131,986)
$
269,928 $
313,622
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:
Financial Statements | Notes | 21. Segment Information
LONG-LIVED ASSETS BY REGION
December 31, 2018
Italy
Canada
United States
Rest of Europe
Asia Pacific
Less: equity investees'
long lived assets
Total consolidated
long-lived assets
December 31, 2017
(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 and
Goodwill
Total
$
23,470 $
16,067 $
39,537
$
$
35,089
1,210
2,870
1,726
64,365
237
—
3,695
—
35,326
1,210
6,565
1,726
19,999
84,364
(934)
—
(934)
63,431 $
19,999 $
83,430
24,660 $
19,476 $
44,136
39,732
1,587
2,859
2,211
71,409
317
—
4,474
—
40,049
1,587
7,333
2,211
24,267
95,316
(1,245)
—
(1,245)
$
69,804 $
24,267 $
94,071
22. 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, 2018, the Company has $61,119 of
cash, cash equivalents and short-term investments, including of
$5,095 restricted cash (see note 3c).
The following are the contractual maturities of financial obligations
as at December 31, 2018:
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 51
due amounts and any available relevant information on the
customers’ liquidity and financial position.
< 1
1–3
4–5
5+
D. FOREIGN CURRENCY RISK
Financial Statements | Notes | 22. Financial Instruments
CONTRACTUAL OBLIGATIONS
Years
Carrying
amount
Contractual
cash flows
Accounts
payable and
accrued
liabilities
Term loan
facility
(note 14a)
Senior
revolving
financing
(note 14b)
Convertible
debt
(note 14c)
Other bank
financing
(note 14d)
Capital lease
obligations
(note 14e)
Long-term
royalty
payable
(note 15)
Operating
lease
commitments
(note 20a)
$ 82,851 $
82,851 $ 82,851 $
— $
— $ —
24,023
28,794
7,561
18,340
2,893
—
8,645
10,027
2,161
4,918
2,948
17,382
21,302
1,575
19,727
—
3,744
3,751
2,714
649
343
1,515
1,566
495
917
154
—
—
—
—
20,935
32,260
6,091
13,184
6,227
6,758
—
8,256
3,594
3,448
1,214
—
$159,096 $ 188,807 $107,042 $ 61,228 $ 13,779 $ 6,758
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.
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, 2018, 87%
(December 31, 2017 - 80%) of accounts receivable relates to
customer receivables, and 13% (December 31, 2017 - 20%) 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
52 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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
equivalents, short-term
receivable,
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, 2018 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
8,973
$
1,229
5,519
34,243
20,935
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, 2018 had
increased or decreased by 50 basis points, with all other variables
held constant, net loss for the year ended December 31, 2018 would
have increased or decreased by $92.
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, WWI and
other investments. CWI is accounted for using the equity method.
WWI and other investments are accounted for at fair value.
The carrying value of the EDC loan included in the long-term debt
(note 14a) approximates its fair value as the loan was executed
shortly before the 2017 year end. The UniCredit term loan facility
was executed in October 2018 and the interest rates on debt is
floating, therefore, the carrying amount as at December 31, 2018
of this loan approximates its fair value. The carrying value reported
in
financing (note 14b)
approximates its fair value as at December 31, 2018, as the interest
rates on the debt is floating and therefore approximate the market
rates of interest.
the balance sheet
the senior
for
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.
As at December 31, 2018, cash and cash equivalents and short-
term investments are measured at fair value on a recurring basis
and are included in Level 1.
Financial Statements | Notes | 22. Financial Instruments
WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT | 53
Information for Shareholders
Information for
Shareholders
DIRECTORS & EXECUTIVE OFFICERS
Committees
Start
date
AU HR NC
Name / position
Residence
Jim Arthurs
Executive Vice President
North Vancouver,
British Columbia
May
2011
Michele Buchignani
Director
Vancouver,
British Columbia
Brenda J. Eprile
Chair & Director
Massimiliano Fissore
Senior Vice President
Dan Hancock
Director
Anthony Harris
Director
David Johnson
CEO and Director
Colin Johnston
Director
Jim MacCallum
Acting CFO
Scott Mackie
Director
Wade Nesmith
Director
Rodney T. Nunn
Director
Peter M. Yu
Director
North York,
Ontario
Cherasco, Italy
Indianapolis,
Indiana
Alameda,
California
Scottsdale,
Arizona
Turin,
Italy
Mar
2018 • •
2013 • •
Oct
Jun
2016
Jul
2017
June
2016 •
Jan
2019
• •
•
June
2016 • •
West Vancouver,
British Columbia
Aug
2014
Milford,
Michigan
Vancouver, British
Columbia
Chatham,
Ontario
New York City,
New York
Sept
2016 •
2017 •
Jun
Mar
2016
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:
Computershare Trust Company of Canada
510 Burrard Street, 2nd Floor,
Vancouver, BC, Canada V6C 3B9
T 604-661-9400 F 604-661-9401
54 | WESTPORT FUEL SYSTEMS INC. 2018 ANNUAL REPORT
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 6, 2019 at 10:00 AM (Eastern Time)
WHERE: 3400 One First Canadian Place, Toronto, ON
Westport Fuel Systems
on the Net
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wfsinc.com
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The information on these websites is not incorporated by reference
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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
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Contact Information
1750 W 75th Avenue, Suite 101
Vancouver, BC, Canada V6P 6G2
T 604-718-2000 F 604-718-2001
invest@wfsinc.com
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:
Information for Shareholders
•
•
•
•
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; and
the ability to provide the capital required for research, product development, operations and marketing;
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. 2018 ANNUAL REPORT | 55
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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