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Table of Contents
LETTER TO SHAREHOLDERS
2020 BUSINESS HIGHLIGHTS
INFORMATION FOR SHAREHOLDERS
MANAGEMENT'S DISCUSSION & ANALYSIS
FULL YEAR 2020 HIGHLIGHTS
BUSINESS OVERVIEW AND GENERAL DEVELOPMENTS
OVERVIEW OF FINANCIAL RESULTS FOR 2020
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
FORWARD-LOOKING STATEMENTS
1
3
5
7
8
8
10
11
12
18
19
19
20
20
21
24
24
28
28
29
30
31
31
53
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 1
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WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 3
4 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Information for Shareholders
Directors and Executive Officers
Committees are as follows: Audit Committee, Human Resources & Compensation (HRC) Committee; and Nominating & Corporate Governance
(NCG) Committee.
BOARD OF DIRECTORS
Information for Shareholders
Daniel (Dan) Hancock
Member Since: July 2017
Residence: Indianapolis, Indiana, USA
Michele Buchignani
Member Since: March 2018
Residence: Vancouver, BC Canada
Brenda Eprile
Member Since: October 2013
Residence: North York, ON Canada
Rita Forst
Member Since: April 2020
Residence: Doersdorf, Germany
Chair, Board of Directors
Chair, HRC Committee
Member, NCG Committee
Chair, NCG Committee
Member, HRC Committee
Chair, Audit Committee
Member, HRC Committee
Member, Audit Committee
Member, HRC Committee
Anthony (Tony) Guglielmin
Member Since: January 2021
Residence: Vancouver, BC Canada
David Johnson
Member Since: January 2019
Residence: Scottsdale, Arizona USA
Karl-Viktor Schaller
Member Since: April 2020
Residence: Munich, Germany
Eileen Wheatman
Member Since: April 2020
Residence: Petaluma, California USA
Member, Audit Committee
Member, NCG Committee
No Committee Membership
Member, Audit Committee
Member, NCG Committee
Member, HRC Committee
NAMED EXECUTIVE OFFICERS
Richard Orazietti
Chief Financial Officer
James (Jim) Arthurs
Executive Vice President
Massimiliano Fissore(1)
Executive Vice President
Transportation
Bart van Aerle
Vice President Product and
Business Strategy
Start Date: September 2019
Resides in: Vancouver, BC Canada
Start Date: May 2011
Resides in: Vancouver, BC Canada
Start Date: June 2019
Resides in: Cherasco, Italy
Start Date: December 2014
Resides in: Eindhoven, Netherlands
NOTES:
1.
Effective January 7, 2021, Mr. Fissore retired from the organization.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 5
Information for Shareholders
Corporate Information
STOCK LISTINGS
NASDAQ
Toronto Stock Exchange
Legal Counsel
Bennett Jones LLP, Calgary, Alberta, Canada
Auditors
WPRT
WPRT
KPMG LLP, Independent Registered Public Accounting Firm, Vancouver, British Columbia, Canada
Contact Information
1750 West 75th Avenue, Suite 101, Vancouver, BC, Canada V6P 6G2 | T 604-718-2000 F 604-718-2001 | invest@wfsinc.com
Annual General Meeting of Shareholders
VIRTUAL MEETING ACCESS
VOTING AT THE MEETING
Wednesday May 5th, 2021 at 10:00 am PT / 1:00pm ET
Webcast:
http://services.choruscall.ca/links/westportagm20210505.html
or
Phone: 1-800-319-4610 (Canada/USA)
+1-604-638-5340 (International)
Westport Shareholder Services
Registered Shareholders and Duly Appointed Proxy Holders are
required to preregister in order to vote telephonically at the
Meeting.
Pre-Registration Link:
https://tinyurl.com/agmpreregistration
Registration will remain open until 30 minutes before the meeting
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
Westport Fuel Systems Resources
Topics featured can be found on our websites:
WESTPORT FUEL SYSTEMS
INVESTOR RELATIONS
TWITTER
CUMMINS WESTPORT
wfsinc.com
investors.wfsinc.com
twitter.com/westportdotcom
cumminswestport.com
The information on these websites is not incorporated by reference into this Annual Report. Financial results, Annual Information Form, news,
services, and other activities can also be found on the Westport Fuel Systems website, on SEDAR at sedar.com, or at the SEC at www.sec.gov.
Shareholders and other interested parties can also sign up to receive news updates, stock quotes, events and presentations by email at:
investors.wfsinc.com/resources/investor-email-alerts
6 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
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”) for the three months and year ended December 31, 2020 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, 2020 ("Annual Financial Statements"). 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 United States dollar ("U.S. dollar"). This
MD&A is dated as of March 15, 2021.
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 forward-looking
statements include, but are not limited to, statements regarding the orders or demand for our products (including from our High Pressure
Direct Injection ("Westport HPDI 2.0TM" or "HPDI") supply agreement with Weichai Westport Inc. ("WWI")), the timing for the launch and
certification of WWI's HPDI engine, the impact of COVID-19 on future performance, earnings, supply and demand for our products, the
continuation of margin pressure through 2021, consumer confidence levels, conversion of existing convertible debt, the recovery of our
revenues and the timing thereof, our investments, cash and capital requirements, the intentions of our partners and potential customers,
monetization of joint venture intellectual property, the performance of our products, our future market opportunities, our ability to continue
our business as a going concern and generate sufficient cash flows to fund operations, the availability of funding and funding requirements, our
future cash flows, including cash flows specific to Cummins Westport Inc. ("CWI"), our estimates and assumptions used in our accounting
policies, our accruals, including warranty accruals, our financial condition, the timing of when we will adopt or meet certain accounting and
regulatory standards and the alignment of our business segments. These forward-looking 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, our industry and products, the general economy,
conditions of the capital and debt markets, government or accounting policies and regulations, regulatory investigations, climate change
legislation or regulations, technology innovations, as well as other factors discussed below and elsewhere in this report, including the risk
factors contained in the Company’s most recent AIF filed on SEDAR at www.sedar.com. In addition, the impacts of the COVID-19 pandemic
could cause actual results to differ materially from the forward-looking statements contained in this MD&A. 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, the impact of the COVID-19 pandemic, conditions or events affecting cash flows or our ability to continue as a going
concern, price differential between compressed natural gas, liquefied natural gas, and liquefied petroleum gas relative to petroleum-based
fuels, 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 are pertinent only as of the date they were made.
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.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 7
Management's Discussion and Analysis | Full Year 2020 Highlights
Full Year 2020 Highlights
•
Revenues of $252.5 million, down 17% compared to 2019 due to the COVID-19 pandemic's effect on customer demand, partially offset
by significant growth in HPDI sales volumes, which nearly doubled over 2019
• Net loss of $7.4 million and net loss per share of $0.05
•
•
•
•
•
•
•
$14.7 million adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA", see "Non-GAAP Measures"
section in this MD&A)
Strengthened balance sheet, improved overall liquidity, and reduced cost of capital
At-the-Market equity offering raised $27.6 million, of which $13.2 million was raised following the close of the current quarter
Joint venture with Weichai Power secured certification for WP12 natural gas engine powered by HPDITM 2.0 in China
Combined businesses with UNO MINDA, JV in India to better serve a growing market through cost efficiencies and greater product
choice
Published inaugural Environment, Social and Governance ("ESG") report, highlighting our commitment to ongoing ESG performance
improvements, and responsible corporate citizenship
Announced new product development work with current OEM partner to apply HPDITM 2.0 to an updated base engine platform
designed to meet Euro VI Step E emission regulations that take effect in 2024
• New development commenced on Hydrogen Internal Combustion Engine ("ICE") technology
Business Overview and General Developments
Westport Fuel Systems is focused on engineering, manufacturing, and supplying alternative fuel systems and components for transportation
vehicles. Our diverse product offering sold under a wide range of established brands enables the deployment of a range of alternative fuels
offering both environmental and economic advantages, including liquid petroleum gas ("LPG"), compressed natural gas ("CNG"), liquid natural
gas ("LNG"), renewable natural gas ("RNG"), and hydrogen (together known as "gaseous fuels"). We supply our products and services through a
network of distributors, directly to original equipment manufacturers ("OEMs") and to supplier 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.
The majority of our revenues are generated through the following businesses:
•
Independent aftermarket (“IAM”): We sell systems and components across a wide range of brands, primarily through a global network of
distributors that consumers can purchase and have installed onto their vehicles 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 directly from the OEM.
•
Light-duty OEM: We sell systems and components to OEMs that are used to manufacture new, direct off the assembly line LPG or CNG-
fueled vehicles.
• Heavy-duty OEM: We sell systems and components, including HPDI products, to engine OEMs and commercial vehicle OEMs. Our fully
integrated Westport HPDI 2.0TM system, powered primarily by LNG, matches the power, torque, and fuel economy benefits found in
traditional compression ignition engines using only diesel fuel, resulting in reduced greenhouse gas emissions and the capability to cost-
effectively run on renewable fuels.
•
Electronics: We design, industrialize and assemble electronic control modules.
• Hydrogen: We design, develop, produce and sell hydrogen components for transportation and industrial applications. Also, we are
adapting our HPDI system to use hydrogen or hydrogen/natural gas blends in internal combustion engines. This segment of our business
saw substantial growth in 2020.
8 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Business Overview and General Developments
HPDI
Our HPDI business is still in the early stages of commercialization. Meaningful increases in sales volumes are required for the HPDI business to
benefit from economies of scale. Sales volumes with our initial launch partner have grown in spite of COVID-19, and we anticipate additional
growth from our supply arrangement with WWI, as well as additional OEMs entering into supply agreements for our HPDI technology.
Production capacity of the LNG assembled tank for HPDI application was doubled in 2020 in order to accommodate expected ramp-up
volumes. In the third quarter of 2020, WWI's HPDI engine was certified to meet China VI emissions standards of the Ministry of Ecology and
Environment ("MEE") of the People's Republic of China, which is an important step in the commercialization of the HPDI technology in the
Chinese market. WWI has committed to purchase Westport HPDI 2.0TM components required to produce a minimum of 18,000 engines
between the launch date and the end of 2023. The next significant milestone in commercializing the HPDI technology into the Chinese market
is from an OEM vehicle certification operating with a WWI HPDI engine. We intend to allocate funds raised from recent financing actions to
fund the additional development of HPDI technology and for capital investment to meet growing HPDI demand.
Gross margin and gross margin percentage from our HPDI product will vary based on production and sales volumes, levels of development
work, successful implementation of material cost-reduction initiatives, and foreign exchange rates. Margin pressure is expected to continue
through 2021 as launch costs and price discounts are only partially offset by cost reductions of materials due to higher volumes.
Westport Fuel Systems also generates income from CWI, our 50:50 joint venture with Cummins, Inc. ("Cummins"), by selling spark-ignited
natural gas engines. The joint venture term is scheduled to end on December 31, 2021. Refer to the "Operating Segments" section of this
MD&A for more detail.
Impact of COVID-19 on our Business
The COVID-19 pandemic had an adverse impact on our business in 2020. The extent, duration and impact of COVID-19 is uncertain, however
in the second half of 2020, we saw a notable recovery in our business compared to the first half of the year. Sales and customer demand
rebounded in all geographies compared to first half of 2020. Our Brescia, Italy facility was closed from March 16, 2020 through May 4, 2020.
This facility produces components in the light-duty OEM business and assembles LNG tank systems for the heavy-duty OEM business. Our
Cherasco and Albinea Italian facilities were closed from March 22, 2020 through May 4, 2020. These facilities produce components and kits in
the IAM, DOEM, electronics and OEM businesses.
In addition to our production facilities, our initial HPDI launch partner temporarily closed its facilities in mid-March in response to safety
concerns and government restrictions arising from the spread of COVID-19. Our launch partner reopened its production facilities in late April
and has since exceeded pre-COVID-19 sales volume levels for the HPDI product in the second half of 2020.
Our light-duty OEM and DOEM businesses are dependent on new vehicle sales with gaseous fuel systems. Sales revenue in these businesses
declined significantly during the second quarter of 2020 due to the impact of the COVID-19 pandemic, but revenue increased in the second half
of 2020, albeit to levels still below the comparative period in the prior year as our business continues to recover. While revenue from these
businesses recovered during the fourth quarter of 2020, the rise in COVID-19 cases and recent new virus variants may reduce customer
demand for their products.
Our heavy-duty business was less impacted than the IAM and light-duty OEM businesses due to on-going need for freight transportation and
the growing demand for more climate-friendly vehicles in markets with favourable fuel price economics. Demand for essential goods remains
and consumer delivery of these goods has increased, resulting in stable demand for medium and heavy-duty trucks.
We are closely monitoring and making efforts to mitigate the impact of COVID-19 on our business. We have significant operations in Italy
where there has been many cases of COVID-19. We also source components from China. At this time, management does not see a material
impact to its business, however, the situation is evolving and could become material if the supply chain disruption is prolonged or end-customer
demand declines.
In response to the pandemic, we undertook numerous financing actions and implemented multiple austerity measures, including actions to
reduce costs, such as salary and other compensation deferrals and reductions, and delaying non-critical projects and capital expenditures to
secure liquidity and improve our ability to fund our operations. We also worked closely with our key lenders to strengthen our liquidity and
have made significant progress to reduce our cost of capital through the following measures:
• On March 25, 2020, we secured $6.0 million in principal deferrals on our term loan from Export Development Canada ("EDC");
• On May 20, 2020, we secured a €5.0 million government backed term loan from UniCredit S.p.A. ("UniCredit") to our Emer S.p.A.
("Emer") subsidiary;
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 9
Management's Discussion and Analysis | Business Overview and General Developments
• On July 17, 2020, we secured a €15.0 million government backed term loan from UniCredit to our MTM S.r.l. ("MTM") subsidiary;
• On July 23, 2020, we secured a $10.0 million bridge loan secured from EDC at a 6.25% interest rate;
• On July 24, 2020, we announced the refinancing of our convertible notes held by funds affiliated with Cartesian Capital Group
("Cartesian"). Under the terms of the agreement with Cartesian, we agreed to pay down the principal amount of the existing convertible
notes from $17.5 million to $10.0 million. Concurrent with such repayment, the maturity of the remaining amended notes was extended
to three years from the date of the amendments, the coupon rate was reduced from 9.0% annually to 6.5% annually, and the conversion
price was revised from $2.17 per share to $1.42 per share;
• On August 11, 2020, we secured a €7.0 million government backed term loan from Deutsche Bank to our Emer subsidiary;
• On November 4, 2020, we amended the terms of our revolving financing facility with HSBC Bank Canada ("HSBC") to increase the
maximum draw amount from $10.0 million to $20.0 million;
•
•
Conversion of a total of $5.0 million convertible debt with Cartesian into common shares as of December 31, 2020; and
Issuance of $14.4 million gross proceeds in common shares from treasury to the public as of December 31, 2020 through the at-the-
market equity offering program (the "ATM Program") launched in November 2020.
We are also participating in government wage-subsidy and other support programs in the countries where we operate. We have received $6.1
million in the year ended December 31, 2020 related to these programs.
Liquidity to fund ongoing operations and growth opportunities is further discussed in the "Liquidity and Going Concern" section in the MD&A
below. Refer to notes 13, 14(a), 14(b), and 17 in our consolidated financial statements for more details.
Overview of Financial Results for 2020
Revenues for the year ended December 31, 2020 decreased 17%, to $252.5 million, compared to the prior year, as a result of the impact on
customer demand from COVID-19, partially offset by the significant growth in our HPDI sales volumes from our initial launch partner. Revenue
was most significantly impacted by the pandemic during the second quarter of 2020, with a $46.4 million reduction in revenue representing
88% of the full year decline, due to the facilities shutdowns discussed above. During the fourth quarter of 2020, our heavy-duty business
recovered as sales volumes of HPDI increased. Lower revenue was partially mitigated by a 2% foreign exchange rate gain of the Euro relative to
U.S. dollars compared to 2019. The majority of our sales are denominated in Euros.
A net loss of $7.4 million was recorded for the year compared to net income of $0.2 million for the year ended December 31, 2019. Earnings
declined by $7.6 million largely as a result of lower sales caused by the impact on demand from COVID-19, as discussed above, a $2.4 million
warranty charge related to a field service campaign, net of insurance recoveries (see the "Gross Margin" section of this MD&A), and a $2.7
million decrease in earnings from our CWI joint venture, partially offset by lower operating expenses, $6.1 million in government-sponsored
wage subsidies and a higher foreign exchange gain in the current year. The prior year results also included a $3.3 million gain recorded on the
forgiveness of government funding of HPDI.
Notwithstanding the challenges of COVID-19, we generated $14.7 million adjusted EBITDA during the year ended December 31, 2020,
compared to $28.4 million for the year ended December 31, 2019. The decrease is primarily due to lower gross margin during the current year
and the net warranty charge previously mentioned, partially offset by lower operating expenses.
Liquidity and Going Concern
In connection with preparing consolidated financial statements for each annual and interim reporting period, we are required to evaluate
whether there are conditions or events, considered in aggregate, that raise substantial doubt about our 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 a 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 and actions 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 its 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 company’s ability to continue as a
10 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Overview of Financial Results for 2020
going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively
implemented, the plans must have been approved before the date that the financial statements are issued.
Management's evaluation has concluded that there are no known or currently foreseeable conditions or events that raise substantial doubt
about our ability to continue as a going concern within one year after the date these consolidated financial statements are issued. These
consolidated financial statements have therefore been prepared on the basis that we will continue as a going concern.
At December 31, 2020, our net working capital was $70.9 million, including cash and cash equivalents (including restricted cash) of $64.3
million. We have another $2.2 million in restricted cash pledged to the repayment of the debt we hold in our Italian subsidiaries recorded in
other long-term assets. Our short-term and long-term debt, including the royalty payable, was $101.4 million, of which $39.7 million of this
debt matures in 2021 and $7.5 million of the royalty payable is due in 2021. We incurred loss of $7.4 million and negative cash flows from
operations of $35.1 million in the year ended December 31, 2020.
As part of our ongoing monitoring of Westport Fuel Systems' financial condition, we are evaluating foreseeable future cash flows from the CWI
joint venture investment, as the joint venture term is scheduled to end on December 31, 2021. The joint venture pays significant dividends to
the joint venture partners; we received $20.8 million as dividends in 2020. As per the joint venture agreement, both Cummins and Westport
Fuel Systems have equal rights to the joint venture's intellectual property. However, there is no certainty that we will be able to monetize the
intellectual property to the level of the current dividends received from the joint venture. See note 7(a) for additional details relates to the CWI
joint venture.
Management's Conclusion and Assessment
We believe that the cash on hand at December 31, 2020 and the continued recovery in operational performance, coupled with the additional
sources of capital already obtained, as noted above, will provide the cash flow necessary to fund operations over the next year to March, 2022.
The ability to continue as a going concern beyond March, 2022, will be dependent on our ability to generate sufficient positive cash flows from
operations, the successful conversion of or refinancing of the convertible debt, effective management of the CWI joint venture transition and
our ability to finance our long-term strategic objectives and operations (specifically the growth of the HPDI business). If, as a result of future
events, we were to determine that we were no longer able to continue as a going concern, significant adjustments would be required to the
carrying value of assets and liabilities in the accompanying, consolidated financial statements and the adjustments could be material.
Selected Annual Financial Information
Selected Consolidated Statements of Operations Data
The following table sets forth a summary of our financial results:
SELECT CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(expressed in millions of U.S. dollars, except per share amounts and shares outstanding)
Revenue
Gross margin
Gross margin %
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Net income (loss) per share from continuing operations - basic and diluted
Net income (loss) per share from discontinued operations - basic and diluted
Weighted average basic shares outstanding (millions)
Weighted average diluted shares outstanding (millions)
$
$
$
$
$
$
$
Years ended Dec 31
2019
2020
252.5
39.5
$
$
305.3
68.2
$
$
2018
270.3
64.2
16 %
22 %
24 %
(7.4) $
0.2
$
(40.8)
—
$
(0.1) $
(7.4) $
(0.05) $
0.00
$
137.1
137.1
$
$
$
—
0.00
0.00
134.2
144.1
9.3
(31.5)
(0.31)
0.07
132.4
143.1
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 11
Management's Discussion and Analysis | Selected Annual Financial Information
SELECT CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(expressed in millions of U.S. dollars, except per share amounts and shares outstanding)
Revenue
Gross margin
Gross margin %
Net income
Net income per share - basic and diluted
Weighted average basic shares outstanding (millions)
Weighted average diluted shares outstanding (millions)
Selected Balance Sheet Data
The following table sets forth a summary of our financial position:
SELECTED BALANCE SHEET DATA
(expressed in millions of U.S. dollars)
Cash and cash equivalents
Net working capital1
Total assets
Short-term debt
Long-term debt, including current portion
Royalty payable, including current portion
Non-current liabilities2
Total liabilities
Shareholder's equity
Three months ended Dec 31
2020
2019
$
$
$
$
$
$
$
$
83.9
13.0
15 %
4.1
0.03
138.5
143.5
74.3
13.8
19 %
0.7
0.00
136.1
145.9
Years ended Dec 31
2020
2019
2018
$
64.3 $
46.0 $
53.8
346.3
23.4
62.0
16.0
40.9
242.2
104.1
27.1
279.9
3.6
45.3
18.3
28.3
190.6
89.4
61.1
19.7
269.9
—
55.3
21.0
14.8
179.3
90.7
1.
2.
Excluding cash and short-term investments, short-term debt, the current portion of long-term debt and the current portion of the royalty payable
Excluding long-term debt and the royalty payable
Results from Operations
Operating Segments
Effective January 2020, we modified the reporting of business segments to allow for increased transparency into our customer channels and
the respective products we sell to those customers. Accordingly, from that date, all product information and other technology related activities
previously reported under the Transportation segment have been disaggregated into two segments, OEM and IAM. All comparative figures
presented have been revised to reflect this change. Under this organizational structure, we manage and report the results of our business
through four segments: OEM, IAM, the CWI Joint Venture, and Corporate. This change reflects the way operating decisions and the assessment
of business performance is currently managed by the Chief Operating Decision Maker ("CODM"). The financial information for the business
segments evaluated by the CODM includes the results of CWI as if they were consolidated, which is consistent with the way we manage our
business segments.
OEM BUSINESS SEGMENT
Our OEM segment designs, manufactures, and sells alternative fuel systems, components and electronics, including the Westport HPDI 2.0TM
product and related engineering services, to OEMs and to supplier OEMs. 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. The OEM business segment's products and services are available for passenger cars, light-, medium- and heavy-duty
trucks, cryogenics, and hydrogen applications. The OEM group includes the light-duty and heavy-duty OEM product lines and the DOEM and
electronic businesses, as previously described.
12 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Results from Operations
IAM BUSINESS SEGMENT
Our IAM segment designs, manufactures, and sells alternative fuel systems and components that consumers can purchase and have installed
onto their vehicles to use LPG or CNG fuels in addition to gasoline. Distribution of such products is realized through a comprehensive
distribution network (in more than 70 countries) selling our products to the workshops that are responsible for conversion, maintenance and
service.
CWI JOINT VENTURE
CWI serves the medium and heavy-duty 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.
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. 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 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, financing, capital allocation and general
administrative duties, such as securing our intellectual property.
The 2019 comparative figures have been revised to reflect the change in business segments.
Revenue
Total consolidated revenues from operations for the three months and year ended December 31, 2020 were $83.9 million and $252.5 million,
respectively, compared to $74.3 million and $305.3 million for the three months and year ended December 31, 2019, respectively.
OEM revenue for the three months and year ended December 31, 2020 was $58.8 million and $149.6 million, compared with $44.7 million and
$164.7 million for the three months and year ended December 31, 2019, an increase of $14.1 million and decrease of $15.1 million,
respectively. Revenue growth in the current quarter largely reflected an increase in sales volumes in the heavy-duty OEM business from our
initial launch partner combined with a 7% increase in the Euro to U.S. dollar exchange rate, partially offset by the price reduction of our HPDI
product. The decrease in OEM revenue during the year ended December 31, 2020 compared to the year ended December 31, 2019 is mainly
due to the impact of plant shutdowns in response to the COVID-19 pandemic in the first half of the year, combined with lower light-duty OEM
sales to German and Russian OEMs.
IAM revenue for the three months and year ended December 31, 2020 was $25.1 million and $102.9 million, compared with $29.6 million and
$140.6 million for the three months and year ended December 31, 2019, respectively. Revenue for the IAM business segment decreased by
$4.5 million and $37.7 million, respectively, primarily due to the continuing impact of COVID-19 on customer demand in Western Europe and
the related shutdowns in the second quarter of 2020, partially offset by the stronger Euro to U.S. dollar during 2020.
REVENUE
Three months ended
December 31
Change
Years ended
December 31
Change
(expressed in millions of U.S. dollars)
OEM
IAM
Total revenue
2020
2019
$
%
2020
2019
$
%
$
$
$
58.8
25.1 $
83.9 $
44.7
29.6 $
74.3 $
14.1
(4.5)
9.6
32 %
(15) % $
149.6
102.9 $
164.7
140.6 $
13 % $
252.5 $
305.3 $
(15.1)
(37.7)
(52.8)
(9) %
(27) %
(17) %
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 13
Management's Discussion and Analysis | Results from Operations
Gross Margin for the Three Months Ended December 31, 2020
Total consolidated gross margin for the three months ended December 31, 2020 decreased by $0.8 million, or 6%, from $13.8 million in 2019,
to $13.0 million for the same period in 2020.
OEM gross margin increased by $1.3 million to $6.6 million, or 11% of revenue, for the three months ended December 31, 2020 compared to
$5.3 million, or 12% of revenue, for the three months ended December 31, 2019. The current quarter gross margin benefited from volume
discounts from HPDI component suppliers achieved at the end of the year and recognized during the quarter.
IAM gross margin decreased by $2.1 million to $6.4 million, or 25% of revenue, for the three months ended December 31, 2020 compared to
$8.5 million, or 29% of revenue, for the three months ended December 31, 2019. The decrease in gross margin and gross margin percentage
was due to lower sales caused by the impact of the COVID-19 pandemic on customer demand in higher-margin markets of Western Europe.
REVENUE
(expressed in millions of U.S. dollars)
OEM
IAM
Total gross margin
Three months ended Dec 31
Change
2020
$ 6.6
6.4
$ 13.0
% of revenue
2019
11 % $ 5.3
8.5
25%
% of revenue
$
12 % $ 1.3
(2.1)
29%
%
25 %
(25) %
15 % $ 13.8
19 % $ (0.8)
(6) %
Gross Margin for the Year Ended December 31, 2020
Total consolidated gross margin for the year ended December 31, 2020 decreased by $28.7 million, or 42%, from $68.2 million in 2019 to $39.5
million for the same period in 2020.
OEM gross margin decreased by $17.4 million to $12.3 million, or 8% of revenue, for the year ended December 31, 2020 compared to $29.7
million, or 18% of revenue, for the year ended December 31, 2019. The gross margin recorded in the current year period was impacted by lower
sales, a net warranty charge of $2.4 million related to the field service campaign of the pressure relief device for light-duty OEM vehicles, a
higher percentage of lower margin HPDI products sold, contractual HPDI price reductions and a lower proportion of high-margin service
revenue.
IAM gross margin decreased by $11.3 million to $27.2 million, or 26% of revenue, for the year ended December 31, 2020 compared to $38.5
million, or 27% of revenue, for the year ended December 31, 2019. The decrease in gross margin is mainly due to the 29% decrease in sales
caused by the factory shutdowns and lower sales volume due to the impact of COVID-19 during the year.
REVENUE
(expressed in millions of U.S. dollars)
OEM
IAM
Total gross margin
Years ended Dec 31
Change
2020
$ 12.3
27.2
$ 39.5
% of revenue
2019
8 % $ 29.7
26% 38.5
% of revenue
$
18 % $ (17.4)
27% (11.3)
%
(59) %
(29) %
16 % $ 68.2
22 % $ (28.7)
(42) %
Research and Development Expenses
OEM R&D expenses for the three months and year ended December 31, 2020 were $4.9 million and $16.4 million, compared to $4.0 million
and $17.9 million for the three months and year ended December 31, 2019, respectively. The decrease in R&D expenses of $1.5 million during
the year ended December 31, 2020 is primarily due to certain HPDI projects being paused due to factory shutdowns, lower compensation
expenses in response to the COVID-19 pandemic, and government wage subsidies received during 2020.
IAM R&D expenses for the three months and year ended December 31, 2020 were $1.4 million and $4.2 million, compared to $2.0 million and
$6.9 million for the three months and year ended December 31, 2019, respectively. The decrease in R&D expenses of $2.7 million during the
year ended December 31, 2020 is primarily due to lower compensation expense from austerity measures in response to the COVID-19
pandemic in Italy, government wage subsidies received and the completion of certain R&D projects in 2019.
Corporate R&D expenses for the year ended December 31, 2020 were $0.4 million compared to $0.4 million for the year ended December 31,
2019. 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.
14 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Results from Operations
RESEARCH & DEVELOPMENT
(expressed in millions of U.S. dollars)
OEM
IAM
Corporate
Total R&D
Three months ended
December 31
Change
Years ended December
31
Change
2020
2019
$
%
2020
2019
$
%
$
$
4.9 $
1.4
0.1
6.4 $
4.0 $
2.0
(0.1)
5.9 $
0.9
(0.6)
0.2
0.5
23 % $
(30) %
(200) %
8 % $
16.4 $
4.2
0.4
21.0 $
17.9 $
6.9
0.4
25.2 $
(1.5)
(2.7)
—
(4.2)
(8) %
(39) %
— %
(17) %
Selling, General and Administrative Expenses
OEM SG&A expenses for the three months and year ended December 31, 2020 were $3.8 million and $13.4 million, compared to $7.0 million
and $20.2 million for the three months and year ended December 31, 2019, respectively. The decreases of $3.2 million and $6.8 million for the
three months and year ended December 31, 2020, respectively, are mainly due to lower compensation expenses in response to the COVID-19
pandemic and $0.5 million in government wage subsidies received.
IAM SG&A expenses for the three months and year ended December 31, 2020 were $3.0 million and $13.6 million, compared to $3.1 million
and $16.4 million for the three months and year ended December 31, 2019, respectively. The decrease of $2.8 million for the year ended
December 31, 2020 is mainly due to lower compensation expenses in response to the COVID-19 pandemic and $0.5 million in government
wage subsidies received.
Corporate SG&A expenses for the three months and year ended December 31, 2020 were $4.2 million and $11.1 million compared to $3.8
million and $21.1 million for the three months and year ended December 31, 2019, respectively. The decrease of $10.0 million during the year
ended December 31, 2020 is reflective of our continuous efforts to optimize our cost structure and austerity measures. We also accessed $0.4
million in government COVID-19 relief wage subsidies. In addition, 2020 reflects a $6.3 million reduction in legal fees related to the SEC
investigation that settled in the third quarter of 2019 and a $1.0 million gain related to a reversal of a reserve for a legal matter which settled in
May 2020.
SALES AND MARKETING, GENERAL AND ADMINISTRATIVE
Three months ended
December 31
Change
Years ended December
31
Change
(expressed in millions of U.S. dollars)
OEM
IAM
Corporate
Total SG&A
2020
2019
$
%
2020
2019
$
%
$
3.8 $
3.0
4.2
7.0 $
3.1
3.8
$
11.0 $
13.9 $
(3.2)
(0.1)
0.4
(2.9)
(46) % $
(3) %
11 %
(21) % $
13.4 $
13.6
11.1
38.1 $
20.2 $
16.4
21.1
57.7 $
(6.8)
(2.8)
(10.0)
(19.6)
(34) %
(17) %
(47) %
(34) %
Selected CWI Statements of Operations Data
We account for CWI using the equity method of accounting. However, due to its significance to our operating results, we disclose CWI's assets,
liabilities and income statement in notes 7(a) and 21 of our consolidated Annual Financial Statements and discuss revenue and gross margins in
this MD&A. The following tables sets forth a summary of the financial results of CWI for the years ended December 31, 2020 and 2019, and
three months ended December 31, 2020 and 2019:
SELECT CWI STATEMENTS OF OPERATIONS DATA
(expressed in millions of U.S. dollars)
Unit sales
Total revenue
Gross margin
Gross margin %
Net income before income taxes
Net income attributable to the Company
Years ended Dec 31
2019
2020
7,065
323.5
87.3
27 %
62.0
23.8
$
$
$
$
7,883
361.8
104.1
29 %
70.8
26.6
$
$
$
$
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 15
Management's Discussion and Analysis | Results from Operations
SELECT CWI STATEMENTS OF OPERATIONS DATA
(expressed in millions of U.S. dollars)
Unit sales
Total revenue
Gross margin
Gross margin %
Net income before income taxes
Net income attributable to the Company
CWI Revenue
Three months ended Dec 31
2020
2019
2,288
96.0
28.5
30 %
24.5
9.4
$
$
$
$
2,407
102.5
28.3
28 %
20.6
6.7
$
$
$
$
CWI revenue for the three months and year ended December 31, 2020 was $96.0 million and $323.5 million, compared to $102.5 million and
$361.8 million for the three months and year ended December 31, 2019, respectively. Unit sales for the three months and year ended
December 31, 2020 were 2,288 and 7,065, compared to 2,407 and 7,883 for the three months and year ended December 31, 2019,
respectively. Unit sales were lower during the year ended December 31, 2020 compared to the prior year reflecting the impact of OEM factory
shutdowns in April and May in response to the COVID-19 pandemic. Parts revenue decreased to $25.1 million and $104.3 million in the three
months and year ended December 31, 2020, respectively, from $27.8 million and $115.3 million in the three months and year ended December
31, 2019.
REVENUE
(expressed in millions of U.S.
dollars)
CWI
3 months ended Dec 31
Change
Years ended Dec 31
Change
2020
2019
$
%
2020
2019
$
%
$
96.0 $
102.5 $
(6.5)
(6) % $
323.5 $
361.8 $
(38.3)
(11) %
CWI Gross Margin for the Three Months Ended December 31, 2020
CWI gross margin of $28.5 million, or 30% of revenue, for the current quarter was comparable to the same period in the prior year. The
increase in gross margin and gross margin percentage during the three months ended December 31, 2020 was driven largely by product mix,
which more than offset lower revenues in the current year quarter.
Gross Margin
(expressed in millions of U.S. dollars)
CWI
Three months ended Dec 31
Change
% of revenue
2019
% of revenue
$
%
30 % $ 28.3
28 % $ 0.2
1 %
2020
$ 28.5
CWI Gross Margin for the Year Ended December 31, 2020
CWI gross margin decreased by $16.8 million to $87.3 million, or 27% of revenue, for the year ended December 31, 2020, from $104.1 million,
or 29% of revenue, for the year ended December 31, 2019. The decrease in gross margin and gross margin percentage in 2020 is primarily
related to lower revenues and, to a lesser extent, a lower proportion of high-margin part sales.
Gross Margin
(expressed in millions of U.S. dollars)
CWI
Years ended Dec 31
Change
% of revenue
2019
% of revenue
$
%
27 % $ 104.1
29 % $ (16.8)
(16) %
2020
$ 87.3
Other Significant Expense and Income Items
Restructuring costs were $0.8 million for the year ended December 31, 2019, which related to reductions in workforce to optimize cost
structure. There were no restructuring charges recorded in the year ended December 31, 2020.
Foreign exchange gains and losses reflect net realized gains and losses on foreign currency transactions and net unrealized gains and losses on
our net U.S. dollar denominated monetary assets and liabilities in our Canadian domiciled Corporate Business Units that were mainly
16 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Results from Operations
comprised of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. In addition, we have 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, 2020, we recognized a foreign exchange gain of $4.3 million compared to a foreign exchange gain of $2.5 million for
the year ended December 31, 2019. The gain recognized in the current year primarily relates to unrealized foreign exchange gains that resulted
from the translation of U.S. dollar denominated debt in our Canadian legal entities. The Canadian dollar increased by 1% against the U.S. dollar
in 2020 compared to 2019.
Depreciation and amortization for the years ended December 31, 2020 and December 31, 2019 were $14.0 million and $16.3 million,
respectively. The amounts included in cost of revenue for the same periods were $7.8 million and $8.6 million, respectively. The decreases in
depreciation and amortization in 2020 from 2019 was due to certain assets reaching the end of their useful life.
Income from investments primarily relates to our 50% interest in CWI, accounted for by the equity method. See the "Selected CWI Statements
of Operations Data" section in this MD&A for more detail.
Interest on debt and amortization of discount
Interest on our short-term and long-term debt and accretion on our royalty payable for the three months and year ended December 31, 2020
was $3.3 million and $8.0 million, respectively, compared to $1.9 million and $7.3 million for the three months and year ended December 31,
2019. Interest on short-term and long-term debt increased from $1.1 million and $3.9 million for the three months and year ended December
31, 2019, respectively, to $1.7 million and $4.3 million in the same period in 2020, reflecting higher debt levels and an additional finance charge
resulting from the conversions of our convertible debt into common shares, more than offsetting a lower cost of borrowing across the three
months and year ended December 31, 2020.
Accretion and finance charges associated with the royalty payable increased in the three months and year ended December 31, 2020,
compared to the same periods in 2019, primarily due to an additional finance charge of $0.9 million in 2020, more than offsetting a lower
outstanding royalty balance.
INTEREST ON LONG-TERM DEBT AND AMORTIZATION OF DISCOUNT
(expressed in millions of U.S. dollars)
Interest expense on short-term and long-term debt
Royalty payable accretion expense
Total interest on short-term and long-term debt and accretion on royalty payable
INTEREST ON LONG-TERM DEBT AND AMORTIZATION OF DISCOUNT
(expressed in millions of U.S. dollars)
Interest expense on short-term and long-term debt
Royalty payable accretion expense
Total interest on short-term and long-term debt and accretion on royalty payable
Interest and other income
Years ended Dec 31
2020
2019
$
$
4.3 $
3.7
8.0 $
3.9
3.4
7.3
Three months ended Dec 31
2020
2019
$
$
1.7 $
1.6
3.3 $
1.1
0.8
1.9
In September 2019, we settled a $3.9 million payable related to the residual balance of government contributions received between 2003 and
2006 in connection with HPDI technology development. A final payment of $0.6 million was made in September 2019 and all further
repayment obligations were terminated. The prior year contributions no longer repayable, totaling $3.3 million, were credited to other income
during the year.
Income tax expense for the year ended December 31, 2020 was $1.4 million and was primarily related to taxes payable in our operations in
Italy and the Netherlands. This compared to an income tax expense of $2.0 million for the year ended December 31, 2019. The net decrease of
$0.6 million was primarily attributable to lower income in our operations in Italy due to the one-time charge related to the field service
campaign of the pressure relief device for light-duty OEM vehicles and lower income in the Netherlands, as well as recoveries of prior period
income tax expense as a result of favourable tax rulings and government COVID-19 relief programs.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 17
Management's Discussion and Analysis | Capital Requirements, Resources & Liquidity
Capital Requirements, Resources and Liquidity
Year-over-year cash and cash equivalents, including restricted cash, increased by $18.3 million to $64.3 million from $46.0 million at December
31, 2019. The increase is primarily the result of our efforts to improve liquidity as discussed in the "Business Overview and General
Developments" section of this MD&A and is partially offset by the repayment of convertible debt and other debt services.
COVID-19 materially impacted our business. We were able to access various government supports, and we have significantly strengthened our
balance sheet by negotiating more attractive financing rates, and extending maturity of our debt to ensure sufficient liquidity to meet
obligations. See the "Liquidity and Going Concern" section in this MD&A for further discussion.
Cash Flow from Operating Activities
For the year ended December 31, 2020, net cash flow used in operating activities increased by $19.4 million to $35.1 million, from the $15.7
million in the year ended December 31, 2019. The increase in cash used in operating activities is primarily due to lower earnings and a decrease
in operating working capital in the current year as a result of COVID-19.
Cash Flow from Investing Activities
Our net cash flows from investing activities consisted primarily of cash acquired through dividends received from joint ventures, offset by
purchases of property, plant and equipment and other assets.
For the year ended December 31, 2020, our net cash flows received from investing activities of continuing operations was $13.8 million
compared to $16.2 million for the year ended December 31, 2019. The decrease in 2020 is due to lower CWI dividends in current year, partially
offset by lower capital expenditures due to delays in activities as a result of the COVID-19 pandemic.
Cash Flow from Financing Activities
For the year ended December 31, 2020, the Company's net cash flows from financing activities was $39.7 million, an increase of $54.5 million
compared to cash used in financing activities of $14.8 million during the year ended December 31, 2019. During 2020, the Company received a
total of $30.0 million from government backed loans to our Italian subsidiaries, withdrew $6.0 million from the term credit facility with EDC
and received $13.9 million net proceeds (gross proceeds of $14.4 million, net of transaction costs of $0.5 million including commission of $0.3
million) from issuance of 3,215,970 common shares through our ATM Program at a weighted average share price of $4.47, offset by repayment
of the royalty payable of $5.9 million (2019 - $6.0 million) and paying down the principal amount of our existing convertible notes with
Cartesian from $17.5 million to $10.0 million. Draws on the revolving financing facility with HSBC increased to $17.4 million during 2020.
Subsequent to the year ended December 31, 2020, we issued an additional 1,819,712 common share at a weighted average share price of
$7.26 per share for gross proceeds of $13.2 million, net of transaction costs of $0.4 million including commission of $0.3 million resulting in net
proceeds of $12.8 million.
Contractual Obligations and Commitments
CONTRACTUAL CASH FLOWS
Contractual Cash
Flows
< 1yr
1-3 yrs
4-5 yrs
> 5 yrs
Carrying Amount
(expressed in millions of U.S. dollars)
Accounts payable and accrued liabilities $84.6
Short-term debt1
Long-term debt, principal2
Long-term debt, interest3
Long-term royalty payable3
Operating lease commitments4
16.0
23.4
62.0
28.0
—
$84.6
23.4
62.0
4.2
21.7
32.5
$84.6
23.4
16.3
1.7
7.4
4.5
$214.0
$228.4
$137.9
$—
—
29.7
2.3
7.5
7.5
$47.0
$—
—
13.3
0.2
3.9
4.6
$22.0
$—
—
2.7
—
2.9
15.9
$21.5
1.
2.
3.
4.
For details of our short-term debt, see note 13 of the Annual Financial Statements.
For details of our long-term debt, principal and interest, see note 14 of the Annual Financial Statements.
For additional information on the long-term royalty payable, see note 15 of the Annual Financial Statements.
For additional information on operating lease obligations, see note 12 of the Annual Financial Statements.
18 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Shares Outstanding
Shares Outstanding
For the year ended December 31, 2020, the weighted average number of shares used in calculating the income per share was 137,092,854.
During the year ended December 31, 2020, 525,807 share units were granted to directors, executives and employees (2019 - 1,877,101 share
units). This included 504,907 Restricted Share Units ("RSUs") (2019 - 971,051 RSUs) and 20,900 Performance Share Units ("PSUs") (2019 -
906,050 PSUs). The common shares, share options and share units outstanding and exercisable as at the following dates are shown below:
SHARES OUTSTANDING
(weighted average exercise
prices are presented in
Canadian dollars)
Common Shares outstanding
Share Units
Outstanding
Exercisable
Dec 31, 2020
Mar 15, 2021
Shares / units
WAEP
Shares / units
WAEP
144,069,972
1,452,378
22,588
3.29
5.69
147,848,018
1,254,987
41,667
N/A
N/A
Critical Accounting Policies and Estimates
Our Annual 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 Annual 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 the assessment of liquidity and going concern, warranty liability, revenue recognition, inventories, and property,
equipment, furniture and leasehold improvements. The application of these and other accounting policies are described in note 3 of the Annual
Financial Statements. Actual amounts may vary significantly from estimates used.
We believe that we have taken into account all the possible impacts of known events arising from the COVID-19 pandemic in the preparation
of our Annual Financial Statements. However, changes in circumstances due to COVID-19 could impact our judgments and estimates
associated with our liquidity and going concern assessment, and other critical accounting assessments.
Assessment of Liquidity and Going Concern
The assessment of liquidity and going concern requires us to make judgments about the existence of conditions or events that raise substantial
doubt about the our ability to continue as a going concern within one year after the date that the Annual Financial Statements are issued. This
includes judgments about our future activities and the timing thereof and estimates of future cash flows. Significant assumptions used in our
forecasted model of liquidity include forecasted sales, including forecasted increases in sales of our heavy-duty OEM business, forecasted costs
and capital expenditures, amongst others. Changes in our assumptions could have a material impact on our forecasted liquidity and going
concern assessment.
Warranty Liability
Estimated warranty costs are recognized at the time we sell our products and are included in cost of revenue. We provide warranty coverage on
products sold from the date the products are put into service by customers. Warranty liability represents our best estimate of warranty costs
expected to be incurred during the warranty period. Furthermore, the current portion of warranty liability represents our best estimate of the
costs to be incurred in the next twelve-month period. We use historical failure rates and cost 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. We generally record 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 us and the timing will depend on actual failure rates and cost to repair failures of our products.
Revenue Recognition
We generate 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
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 19
Management's Discussion and Analysis | Critical Accounting Policies & Estimates
passed and when the 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
Our inventories consist of our 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. We record inventory write-downs based on an analysis of excess and obsolete inventories determined primarily by future
demand forecasts. In addition, we record a liability for firm, non-cancelable, and unconditional purchase commitments with manufacturers for
quantities in excess of our future demand forecast consistent with our valuation of excess and obsolete inventory.
PP&E and Intangible Assets
We consider whether or not there has been an impairment in our long-lived assets, such as plant and 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 PP&E
During the year ended December 31, 2020, we recorded an impairment charge of $0.5 million related to the write-down of property, plant and
equipment ("PPE") in Rohan BRC, our India subsidiary. We concluded that there were no other impairment indicators as of December 31, 2020
related to PP&E.
We have significant investments in PP&E related to our Westport HPDI 2.0™ business. The HPDI business is still in the early stages of
commercialization, and, as a result, is currently generating losses. Based on our current projections, meaningful increases in component sales
are expected compared to 2020 levels, allowing the HPDI business to benefit from economies of scale and become profitable. If these
assumptions are not realized, we may be required to record an impairment on these assets in future periods.
Intangible Assets
We concluded that there were no impairment indicators as of December 31, 2020 related to intangible assets. Therefore, no impairment on
intangible assets was recorded in the year ended December 31, 2020.
New Accounting Pronouncements and Developments
New accounting pronouncements adopted in 2020:
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" which
requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaced the
former incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU
2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The adoption of
this guidance in the first quarter of 2020 did not result in any material impact to our consolidated financial statements.
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 and applicable Canadian securities law requirements is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and applicable Canadian securities law requirements, and that such information is accumulated
20 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Disclosure Controls & Procedures
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, 2020, our disclosure controls and procedures were
effective at a reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our 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 our board of directors, management, and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our 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. Based
on this evaluation, management has determined that our internal control over financial reporting was effective as of December 31, 2020.
During the year ended December 31, 2020, 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, 2020. KPMG's audit report on effectiveness of internal control over financial reporting is included in the Annual
Financial Statements.
Summary of Quarterly Results and Discussion of the Quarter Ended
December 31, 2020
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, R&D 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.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 21
Management's Discussion and Analysis | Summary of Quarterly Results
The following table provides summary unaudited consolidated financial data for our last eight quarters:
SELECTED CONSOLIDATED QUARTERLY OPERATIONS DATA(
(expressed in millions of U.S. dollars, except for
per share amounts)
2019
2020
Three months ended: Mar 31
Jun 30
Sep 30
Dec 31
Mar 31 (1)
Jun 30 (2)
Sep 30
Dec 31
Total revenue
Cost of product and parts revenue
Gross margin
Gross margin percentage
$
$
73.2
$
82.4
$
75.4
$
74.3
$
67.2
$
36.0
$
65.4
$
56.0
63.1
57.5
60.5
62.9
23.8
55.4
17.2
$
19.3
$
17.9
$
13.8
$
4.3
$
12.2
$
10.0
$
83.9
70.9
13.0
23.5 %
23.4 %
23.7 %
18.6 %
6.4 %
33.9 %
15.3 %
15.5 %
Net income (loss) from continuing operations $
(3.0) $
(2.3) $
Net income (loss)
EBITDA (3)
Adjusted EBITDA (4)
U.S. dollar to Euro average exchange rate
U.S. dollar to Canadian dollar average
exchange rate
Earnings (loss) per share
Basic and diluted from continuing operations
Basic and diluted
$
$
$
$
$
(3.0) $
(2.6) $
$
$
4.2
7.3
0.88
1.33
$
$
4.0
8.1
0.89
1.33
(0.02) $
(0.02) $
(0.02) $
(0.02) $
CWI net income attributable to the Company $
8.6
$
5.9
$
4.9
5.0
11.7
9.4
0.90
1.32
0.04
0.04
5.4
$
$
$
$
$
$
$
0.6
0.7
5.0
3.6
0.90
1.32
0.00
0.00
6.7
$
$
$
$
$
$
$
(15.3) $
(15.3) $
(11.1) $
(3.6) $
0.91
1.35
(0.11) $
(0.11) $
5.3
$
3.0
3.0
9.2
6.2
0.91
1.39
0.02
0.02
4.2
$
$
$
$
$
$
$
0.8
0.8
4.9
4.0
0.85
1.33
0.01
0.01
4.9
$
$
$
$
$
$
$
4.1
4.1
13.1
8.1
0.84
1.30
0.03
0.03
9.4
(1) During the first quarter of 2020, we recorded a $10.0 million expense related to a field service campaign as discussed in the "Gross Margin"
section of this MD&A.
(2) During the second quarter of 2020, we recorded a $7.7 million insurance recovery related to the field service campaign as discussed in the
"Gross Margin" section of this MD&A.
(3) 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.
(4) The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity
presented in accordance with U.S. GAAP. Westport Fuel Systems defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-
based compensation, unrealized foreign exchange gain or loss, and non-cash and other adjustments. See non-GAAP measures for more
information.
Three Months Ended December 31, 2020 & 2019
Our consolidated net income for the three months ended December 31, 2020 was $4.1 million, resulting in earnings of $0.03 per share,
compared to net income of $0.7 million, or $0.00 per share, for the three months ended December 31, 2019. The improvement in net income
was driven primarily by lower operating costs, an increase in investment income from our CWI joint venture and higher unrealized foreign
exchange gain curing the current year quarter.
Non-GAAP Measures
We have included certain non-GAAP performance measures throughout this MD&A. These performance measures are employed by us
internally to measure operating and economic performance and to assist in business decision-making, as well as providing key performance
information to senior management. We believe that, in addition to conventional measures prepared in accordance with U.S. GAAP, certain
investors and other stakeholders also use this information to evaluate our operating and financial performance; however, these non-GAAP
performance measures do not have any standardized meaning. Accordingly, these performance measures are intended to provide additional
information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.
Non-GAAP Measures - EBITDA and Adjusted EBITDA
Our financial statements are prepared in accordance with U.S. GAAP. These U.S. GAAP financial statements include non-cash charges and
other charges and benefits that may be unusual or infrequent in nature or that we believe may make comparisons to our prior or future
performance difficult. In addition to conventional measures prepared in accordance with U.S. GAAP, Westport Fuel Systems and certain
investors use EBITDA and Adjusted EBITDA as an indicator of our ability to generate liquidity by producing operating cash flow to fund
22 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Management's Discussion and Analysis | Summary of Quarterly Results
working capital needs, service debt obligations and fund capital expenditures. Management also uses these non-GAAP measures in its review
and evaluation of the financial performance of Westport Fuel Systems. EBITDA is also frequently used by investors and analysts for valuation
purposes whereby EBITDA is multiplied by a factor or "EBITDA multiple" that is based on an observed or inferred relationship between
EBITDA and market values to determine the approximate total enterprise value of a company. We believe that these non-GAAP financial
measures also provide additional insight to investors and securities analysts as supplemental information to our U.S. GAAP
results and as a basis to compare our financial performance period-over-period and to compare our financial performance with
that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from
period to period and to other companies by, in the case of EBITDA, removing the effects of our capital structure (net interest income on cash
deposits, interest expense on outstanding debt and debt facilities), asset base (depreciation and amortization) and tax consequences. Adjusted
EBITDA provides this same indicator of Westport Fuel Systems' EBITDA from continuing operations and removing such effects of our capital
structure, asset base and tax consequences, but additionally excludes any unrealized foreign exchange gains or losses, stock-based
compensation charges and other one-time impairments and costs which are not expected to be repeated in order to provide greater insight into
the cash flow being produced from our operating business, without the influence of extraneous events.
EBITDA and Adjusted EBITDA are intended to provide additional information to investors and analysts and do not have any standardized
definition under U.S. GAAP, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance
with U.S. GAAP. EBITDA and Adjusted EBITDA exclude the impact of cash costs of financing activities and taxes, and the effects of changes in
operating working capital balances, and therefore are not necessarily indicative of operating profit or cash flow from operations as determined
under U.S. GAAP. Other companies may calculate EBITDA and Adjusted EBITDA differently.
EBITDA
Westport Fuel Systems defines EBITDA as net income or loss from continuing operations before income taxes adjusted for net interest expense
and depreciation and amortization.
QUARTERLY EBITDA DATA
Three months ended:
Mar 31
Jun 30
Sep 30
Dec 31
Mar 31
Jun 30
Sep 30
Dec 31
2019
2020
Income (loss) before income taxes from continuing operations
$
(1.9) $
(1.4) $
5.7 $
(0.3) $
(16.0) $
4.6 $
0.2 $
Interest expense, net (1)
Depreciation and amortization
EBITDA
1.8
4.3
1.4
4.0
1.8
4.2
1.5
3.8
1.5
3.4
1.2
3.4
1.3
3.4
$
4.2 $
4.0 $
11.7 $
5.0 $
(11.1) $
9.2 $
4.9 $
13.1
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 increased by $8.2 million from $4.9 million for the three months ended September 30, 2020 compared to $13.1 million in the three
months ended December 31, 2020. The increase is primarily due to improved gross margins, increased income from our CWI joint venture and
a higher unrealized foreign exchange gain in the current quarter.
Adjusted EBITDA
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.
QUARTERLY ADJUSTED EBITDA DATA
Three months ended:
Mar 31
Jun 30
Sep 30
Dec 31
Mar 31
Jun 30
Sep 30
Dec 31
2019
2020
$
4.2 $
4.0 $
11.7 $
5.0 $
(11.1) $
9.2 $
4.9 $
EBITDA
Stock based compensation
Unrealized foreign exchange (gain) loss
Intangible impairment
Asset impairment
Restructuring, termination and other exit costs
Costs associated with SEC investigation
Other
Adjusted EBITDA
0.4
0.1
—
—
0.8
1.8
—
0.3
(0.7)
—
—
—
4.5
—
$
7.3 $
8.1 $
0.3
0.7
—
—
—
—
(3.3)
9.4 $
0.5
(2.6)
0.7
—
—
—
—
0.6
6.9
—
—
—
—
—
0.6
(3.6)
—
—
—
—
—
0.9
(2.3)
—
0.5
—
—
—
3.6 $
(3.6) $
6.2 $
4.0 $
8.1
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 23
5.3
4.0
3.8
13.1
0.3
(5.3)
—
—
—
—
—
Management's Discussion and Analysis | Summary of Quarterly Results
Adjusted EBITDA increased by $4.1 million from $4.0 million for the three months ended September 30, 2020 to $8.1 million for the three
months ended December 31, 2020 primarily due to improved gross margin from a volume discount from an HPDI component supplier achieved
at the end of the year and recognized during the quarter and higher CWI net income attributed to the Company in the current quarter.
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, which, 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, 2020 under the
heading “Risk Factors” and is available on SEDAR at www.sedar.com.
24 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
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. (and subsidiaries) (the Company) as of
December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and
cash flows for each of the years in the two-year period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended
December 31, 2020, 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, 2020, 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 15, 2021
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Indicators of Impairment for Property, Plant and Equipment Related to HPDI
As discussed in Notes 3(k) and 8 to the consolidated financial statements, the carrying value of property, plant and equipment reported on the
consolidated balance sheet as at December 31, 2020 is $57.507 million, which includes the property, plant and equipment used in the
Company’s heavy-duty Original Equipment Manufacturer (OEM) business, which includes the Company’s High Pressure Direct Injection
(HPDI) business, which is in the early stages of commercialization and has generated losses to date. The Company assesses its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The
Company’s determination of whether an indicator of impairment exists includes the preparation of a forecast of future cash flows of the HPDI
business. The significant assumptions used in the Company’s forecast of future cash flows include, amongst others, estimates of component
sales in the future.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 25
Reports
We identified the assessment of indicators of impairment for property, plant and equipment related to HPDI as a critical audit matter. A higher
degree of subjective auditor judgment was required to assess the Company’s evaluation of indicators of impairment due to the uncertainty in
the estimates of component sales in the future.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls related to the Company’s process for the identification and evaluation of indicators of impairment.
This included a control related to the determination of the estimates of component sales in the future. We evaluated the reasonableness of the
estimates of component sales in the future by comparing them to the Company’s internal documentation and external communications and
comparing their consistency with relevant industry data and regulatory factors. We compared the Company’s historical sales forecasts to
actual results to assess the accuracy of the Company’s forecasts of future sales.
Liquidity and Going Concern Assessment
As discussed in Note 2(b) to the consolidated financial statements, the consolidated financial statements have been prepared on the basis that
the Company will continue as a going concern. In making this assessment, the Company has evaluated whether there are conditions or events
that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the consolidated financial
statements are issued. The Company 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. The Company incurred a loss of $7.359 million and negative cash flows from
operations of $35.149 million in the year ended December 31, 2020.
We identified the assessment of the existence of conditions or events that raise substantial doubt about the Company’s ability to continue as a
going concern for a period of at least one year from the date of issuance of the consolidated financial statements as a critical audit matter. The
evaluation of the Company’s cash flows used in its forecasted model of liquidity and its determination of the existence of conditions or events
that may raise substantial doubt involved a high degree of auditor judgment due to the uncertainty in the estimate of future cash flows.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls related to the Company’s assessment of its ability to continue as a going concern. This included a
control over the determination of significant assumptions used in the forecasted model of liquidity, including forecast sales, forecast increases
in sales of the heavy-duty OEM business, forecast costs and capital expenditures. We assessed the reasonableness of the significant
assumptions underlying the Company’s forecasted model of liquidity by comparing the forecasted cash flows to actual results of the Company
and to approved budgets. We compared the Company’s historical forecasted cash flows to actual results to assess the Company’s ability to
accurately forecast. We compared the forecasted sales for a key customer in the heavy-duty OEM business to the demand forecast provided to
the Company by this customer. We performed sensitivity analyses to assess the impact of changes in the significant assumptions included in the
Company’s forecasted model of liquidity. We assessed the Company’s forecasted model of liquidity in the context of other audit evidence
obtained during the audit to determine whether it supported or contradicted the conclusions reached by the Company.
KPMG LLP, Chartered Professional Accountants,
We have served as the Company's auditors since 2015.
March 15, 2021, Vancouver, Canada
26 | WESTPORT FUEL SYSTEMS INC. 2020 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 (and subsidiaries’) (the Company) internal control over financial reporting as of December 31,
2020, 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, 2020, 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, 2020 and 2019, the related consolidated statements of operations and
comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and
the related notes (collectively, the consolidated financial statements), and our report dated March 15, 2021 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,
March 15, 2021
Vancouver, Canada
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 27
Consolidated Financial Statements
Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(expressed in thousands of United States dollars, except share amounts)
Assets
Current assets:
Years ended Dec 31
2020
2019
Cash and cash equivalents (including restricted cash, note 3(c))
$
64,262 $
Accounts receivable (note 5)
Inventories (note 6)
Prepaid expenses
Total current assets
Long-term investments (note 7)
Property, plant and equipment (note 8)
Operating lease right-of-use assets (note 12)
Intangible assets (note 9)
Deferred income tax assets (note 18(b))
Goodwill (note 10)
Other long-term assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (note 11)
Current portion of operating lease liabilities (note 12)
Short-term debt (note 13)
Current portion of long-term debt (note 14)
Current portion of long-term royalty payable (note 15)
Current portion of warranty liability (note 16)
Total current liabilities
Long-term operating lease liabilities (note 12)
Long-term debt (note 14)
Long-term royalty payable (note 15)
Warranty liability (note 16)
Deferred income tax liabilities (note 18(b))
Other long-term liabilities
Total long-term liabilities
Shareholders’ equity:
Share capital (note 17):
Unlimited common and preferred shares, no par value
90,467
51,402
11,767
217,898
13,954
57,507
27,962
11,784
2,140
3,397
11,621
46,012
66,950
47,806
7,417
168,185
10,587
58,856
17,524
13,075
1,929
3,110
6,660
$
$
346,263 $
279,926
84,599 $
86,180
4,476
23,445
16,302
7,451
10,749
147,022
23,486
45,651
8,591
8,187
3,250
6,017
4,406
3,625
9,942
5,936
4,505
114,594
13,118
35,312
12,322
4,396
4,445
6,380
242,204
190,567
144,069,972 (2019 - 136,416,981) common shares issued and outstanding
1,115,092
1,094,633
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)
Subsequent events (notes 13(b), 14(b), and 17)
7,671
11,516
(1,005,679)
(24,541)
104,059
346,263 $
$
6,857
10,079
(998,320)
(23,890)
89,359
279,926
See accompanying notes to consolidated financial statements
Approved on behalf of the Board
Rita Forst
Director
Brenda J. Eprile
Director
28 | WESTPORT FUEL SYSTEMS INC. 2020 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 and per share amounts)
Cost of revenue and expenses:
Cost of revenue
Research and development
General and administrative
Sales and marketing
Restructuring costs
Foreign exchange gain
Depreciation and amortization (notes 8 and 9)
Impairment on long lived assets, net (notes 8 and 9)
Loss from continuing operations
Income from investments accounted for by the equity method
Interest on long-term debt and accretion on royalty payable
Interest and other income
Income (loss) from continuing operations before income taxes
Income tax expense (recovery) (note 18):
Current
Deferred
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss) for the year
Other comprehensive loss:
Cumulative translation adjustment
Comprehensive loss
Income (loss) per share:
From continuing operations - basic and diluted
From discontinued operations - basic and diluted
Net income (loss) per share
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Years ended December 31
2019
2020
$
252,497 $
305,338
212,953
237,086
20,976
26,629
11,510
—
(4,300)
6,239
479
274,486
(21,989)
24,047
(7,988)
2
(5,928)
2,438
(1,007)
1,431
(7,359)
—
(7,359)
(651)
(8,010) $
(0.05) $
0.00 $
(0.05) $
25,172
41,339
16,380
825
(2,537)
7,778
688
326,731
(21,393)
26,741
(7,265)
4,065
2,148
3,607
(1,647)
1,960
188
(147)
41
(2,832)
(2,791)
0.00
0.00
0.00
137,092,854
134,224,799
137,092,854
144,067,256
$
$
$
$
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 29
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
loss
Total
shareholders'
equity
January 1, 2019
133,380,899 $
1,087,068 $
12,948 $
10,079 $
(998,361) $
(21,058) $
90,676
Issuance of common shares on
exercise of share units
Stock-based compensation
Net income for the year
Other comprehensive loss
3,036,082
7,565
(7,565)
—
—
—
—
—
—
1,474
—
—
—
—
—
—
—
—
41
—
—
—
—
—
1,474
41
(2,832)
(2,832)
December 31, 2019
136,416,981
1,094,633
6,857
10,079
(998,320)
(23,890)
89,359
Issuance of common shares on
exercise of share units
Issuance of common shares on
conversions of convertible debt
Issuance of common shares on at-
the-market public offering, net of
costs incurred
Change in fair value of the
embedded conversion feature on
convertible debt
Stock-based compensation
Net loss for the year
Other comprehensive loss
829,553
1,433
(1,433)
3,607,468
5,122
3,215,970
13,904
—
—
—
—
—
—
—
—
—
—
—
2,247
—
—
—
—
—
1,437
—
—
—
—
—
—
—
—
(7,359)
—
—
—
—
—
—
—
(651)
—
5,122
13,904
1,437
2,247
(7,359)
(651)
December 31, 2020
144,069,972 $
1,115,092 $
7,671 $
11,516 $
(1,005,679) $
(24,541) $
104,059
See accompanying notes to consolidated financial statements.
30 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Consolidated Financial Statements | Consolidated Statements of Cash Flows
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of United States dollars)
Cash flows from (used in) operating activities:
Years ended Dec 31
2020
2019
Net income (loss) for the year from continuing operations
$
(7,359) $
188
Items not involving cash:
Depreciation and amortization
Stock-based compensation expense
Unrealized foreign exchange gain
Deferred income tax
Income from investments accounted for by the equity method
Interest on long-term debt and accretion of royalty payable
Impairment on long lived assets, net
Inventory write-downs to net realizable value (note 6)
Other income
Change in bad debt expense
Net cash used before working capital changes
Changes in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Warranty liability
Net cash used in operating activities of continuing operations
Net cash used in operating activities of discontinued operations
Cash flows from (used in) investing activities:
Purchase of property, plant and equipment
Proceeds on sale of assets
Dividends received from joint ventures
Net cash from investing activities
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
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 (including restricted cash)
Cash and cash equivalents, end of year (including restricted cash)
See accompanying notes to consolidated financial statements.
SUPPLEMENTARY CASH FLOW INFORMATION
Supplementary information:
Interest paid
Taxes paid, net of refunds
Refer to note 17 for non-cash transactions.
See accompanying notes to consolidated financial statements.
14,034
2,368
(4,300)
(1,007)
(24,047)
7,988
479
507
—
299
(11,038)
(22,721)
(3,225)
(8,685)
(420)
10,940
(35,149)
—
(7,123)
207
20,758
13,842
85,258
(53,523)
13,904
(5,948)
—
39,691
(134)
18,250
46,012
64,262 $
16,340
1,474
(2,537)
(1,647)
(26,741)
7,265
688
57
(3,317)
831
(7,399)
(11,137)
(2,004)
(2,653)
3,312
4,196
(15,685)
(147)
(8,860)
—
25,045
16,185
25,081
(33,258)
—
(6,034)
(553)
(14,764)
(696)
(15,107)
61,119
46,012
Years ended Dec 31
2020
2019
4,699 $
1,374
3,953
1,926
$
$
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 31
Financial Statements | 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 markets on a global basis.
The Company's components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in
internal combustion engines.
2. Impact of COVID-19 and Going Concern
(a)
Impact of COVID-19
The COVID-19 pandemic had an adverse impact on the Company's business in 2020. The extent, duration and impact of COVID-19 is uncertain
however in the second half of 2020, the Company's sales and customer demand rebounded compared to the first half of the year. The majority
of the Company's production is from three facilities located in Northern Italy and one in the Netherlands. Sales from these facilities are
primarily to Western and Eastern Europe which were significantly impacted by the COVID-19 pandemic. The Company's Brescia facility was
closed from March 16, 2020 through May 4, 2020. This facility produces components in the light-duty Original Equipment Manufacturer
("OEM") business and assembles LNG tank systems for the heavy-duty OEM business. The Company's Cherasco and Albinea facilities were
closed from March 22, 2020 through May 4, 2020. These facilities produce components and kits in the Independent Aftermarket ("IAM"),
Delayed OEM ("DOEM"), electronics and OEM businesses.
In addition to the Company's production facilities, its initial High Pressure Direct Injection ("Westport HPDI 2.0TM" or "HPDI") launch partner
temporarily closed its facilities in mid-March in response to safety concerns and government restrictions arising from the spread of COVID-19.
The Company's launch partner reopened its production facilities in late April and has since exceeded pre-COVID-19 sales volume levels for the
HPDI product in the second half of 2020.
The Company's light-duty OEM and DOEM businesses are dependent on new vehicle sales with gaseous fuel systems. Sales revenue in these
businesses declined significantly during the second quarter of 2020 due to the impact of the COVID-19 pandemic, but revenue increased in the
second half of 2020, albeit to levels still below the comparative period in the prior year as the Company continues to recover. While revenue
from these businesses recovered during the fourth quarter, the rise in COVID-19 cases and new virus variants may adversely affect customer
demand going forward.
The Company's heavy-duty business was less impacted than the IAM and light-duty OEM businesses due to on-going need for freight
transportation and the growing demand for more climate-friendly vehicles in markets with favourable fuel price economics. Demand for
essential goods remains and consumer delivery of these goods has increased, resulting in stable demand for medium and heavy-duty trucks.
Management is closely monitoring and making efforts to mitigate the impact of COVID-19 on the Company's business. The Company has
significant operations in Italy where there has been many cases. The Company also sources components from China. At this time, management
does not see a material impact to its business; however, the situation is evolving and could become material if the supply chain disruption is
prolonged or end customer demand declines.
In response to pandemic, the Company undertook numerous financing actions and implemented multiple austerity measures, including actions
to reduce costs, such as salary and other compensation deferrals and reductions, and delaying non-critical projects and capital expenditures to
secure liquidity and improve its ability to fund its operations. The Company also worked closely with its key lenders to strengthen its liquidity
and has made significant progress to reduce its cost of capital, summarized as follows:
• New loans and principal deferrals of $16,000 with Export Development Canada ("EDC");
• New loans in the amount of €27,000 ($31,590) with UniCredit S.p.A ("UniCredit") and Deutsche Bank;
•
•
•
Restructuring of the convertible notes with Cartesian Capital Group and its affiliates ("Cartesian") to pay down the existing
convertible notes from $17,500 to $10,000;
Increasing the maximum draw amount on the revolving financing facility with HSBC Bank Canada ("HSBC") from $10,000 to $20,000;
Conversion of a total of $5,000 convertible debt with Cartesian into common shares as of December 31, 2020; and
32 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 2. Impact of COVID-19 and Going Concern
•
Issuance of $14,376 gross proceeds in common shares from treasury to the public as of December 31, 2020 through the at-the-
market equity offering program (the "ATM Program") launched on November 9, 2020.
The Company is also participating in government wage-subsidy and other support programs in the countries where it operates. The Company
has received $6,093 in the year ended December 31, 2020 related to these programs. Refer to notes 13, 14(a), 14(b), and 17 in these
consolidated financial statements for more details.
(b)
Liquidity and Going Concern
In connection with preparing consolidated financial statements for each annual and interim reporting period, the Company is required to
evaluate whether there are conditions or events, considered in 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 aggregate, indicate that it is probable that a 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 and actions 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 Company’s
ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered
probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.
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 are issued.
These consolidated financial statements have therefore been prepared on the basis that the Company will continue as a going concern.
The assessment of the liquidity and going concern requires the Company to make judgments about the existence of conditions or events that
raise substantial doubt about the ability to continue as a going concern within one year after the date that the consolidated financial statements
are issued. This includes judgments about the Company's future activities and the timing thereof and estimates of future cash flows. Significant
assumptions used in the Company's forecasted model of liquidity include forecasted sales, including forecasted increases in sales of the heavy-
duty OEM business, forecasted costs and capital expenditures, amongst others. Changes in the assumptions could have a material impact on
the forecasted liquidity and going concern assessment.
The Company believes it has taken into account all the possible impacts of known events arising from the COVID-19 pandemic in the
preparation of the consolidated financial statements. However, changes in circumstances due to COVID-19 could impact management's
judgments and estimates associated with the liquidity and going concern assessment, and other critical accounting assessments.
At December 31, 2020, the Company's net working capital was $70,876 (2019 - $53,591) including cash and cash equivalents of $64,262 (2019
- $46,012). The Company has another $2,177 in restricted cash pledged to the repayment of the debt it holds in its Italian subsidiaries recorded
in other long-term assets. The Company's short-term and long-term debt, including the royalty payable, was $101,440, net of deferred
financing fees, of which $39,747 of this debt matures in 2021 and $7,451 of the royalty payable is due in 2021. The Company incurred a loss of
$7,359 and negative cash flows from operations of $35,149 in the year ended December 31, 2020.
As part of its on-going monitoring of financial condition, management is evaluating foreseeable future cash flows from the Cummins Westport
joint venture investment, as the joint venture term is scheduled to end on December 31, 2021. The joint venture pays significant dividends to
the joint venture partners, with the Company receiving $20,758 as dividends in 2020 (2019 - $25,045). As per the joint venture agreement,
both Cummins Inc. and the Company have equal rights to the joint venture’s intellectual property. However, there is no certainty that the
Company will be able to monetize the intellectual property to the level of the current dividends received from the joint venture. See note 7(a)
for additional details related to the Cummins Westport joint venture.
Management believes that the cash on hand at December 31, 2020 and the continued recovery in operational performance, coupled with the
additional sources of capital mentioned above, will provide the cash flow necessary to fund operations over the next year to March 2022. The
ability to continue as a going concern beyond March 2022 will be dependent on the Company's ability to generate sufficient positive cash flows
from operations, successful conversion of or refinancing of the convertible debt, effective management of the Cummins Westport joint venture
transition and on the Company's ability to finance its long term strategic objectives and operations (specifically the growth of the HPDI
business). If, as a result of future events, the Company was to determine it was no longer able to continue as a going concern, significant
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 33
Financial Statements | Notes | 2. Impact of Covid-19 and Going Concern
adjustments would be required to the carrying value of assets and liabilities in the accompanying, 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 financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S.
GAAP”).
B. FOREIGN CURRENCY TRANSLATION
The Company’s functional currency is the Canadian dollar and its reporting currency for its consolidated financial statement presentation is the
United States dollar ("U.S. Dollar"). The functional currencies for the Company's subsidiaries include the following: U.S. dollar, Canadian dollar,
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 the weighted average of
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 currencies of the Company’s or its subsidiaries' operations are
translated at the rates in effect on the date of the transaction. Foreign currency denominated monetary assets and liabilities are translated to
the applicable functional currency at the exchange rates in effect on the balance sheet date. Non-monetary assets and liabilities are translated
at the historical exchange rate. All foreign exchange gains and losses are recognized in the statement of operations, except for the translation
gains and losses arising from available-for-sale instruments, which are recorded through other comprehensive income until realized through
disposal or impairment.
As at June 30, 2018, the Company concluded that Argentina's economy is highly inflationary. As a result, the Company has 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 year presented, the Company used
the following exchange rates:
FOREIGN EXCHANGE RATES
Canadian dollar
Euro
Argentina Peso
RMB
Swedish Krona
Indian Rupee
Year end exchange rate
Avg. for yr. ended
2020
2019
2020
2019
1.27
0.82
1.34
0.89
1.34
0.88
1.33
0.89
84.06
43.42
69.59
46.74
6.53
8.19
6.71
9.27
6.90
9.18
6.91
9.45
73.00
69.17
74.08
70.40
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, term deposits, banker 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. Cash and cash equivalents at December 31, 2020 include restricted cash of $75 (2019
- $2,279). Restricted cash at December 31, 2020 and 2019 is related to cash used to secure a letter of credit.
D. ACCOUNTS RECEIVABLE, NET
The accounts receivable balance reflects invoiced and accrued revenue and is presented net of an allowance for credit losses. The Company
expects the majority of its accounts receivable balances to continue to come from large customers as it supplies the majority of its products and
services through a network of distributors and OEMs and provides DOEM services. The Company establishes current expected credit losses
("CECL") for pools of assets with similar risk characteristics by evaluating historical levels of credit losses, current economic conditions that
34 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 3. Significant Accounting Policies
may affect a customer's ability to pay, and creditworthiness of significant customers. When specific customers are identified as no longer
sharing the same risk profile as their current pool, they are removed from the pool and evaluated separately. The Company, in the normal
course of business, monitors the financial condition of its customers and reviews the credit history of each new customer. When the Company
becomes aware of a specific customer's inability to meet its financial obligations to the Company (such as in the case of bankruptcy filings or
material deterioration in the customer's operating results or financial position, and payment experiences), the Company records a specific
credit loss provision to reduce the customer's related accounts receivable to its estimated net realizable value. If circumstances related to
specific customers change, the Company's estimates of the recoverability of accounts receivable balances could be further adjusted.
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, noncancellable, 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
Computer equipment and software
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Basis
Straight-line
Straight-line
Straight-line
Rate
10 years
3 years
5 years
Straight-line
5-10 years
Straight-line
Lease term
Depreciation expense on machinery and equipment used in the production and manufacturing process is included in cost of revenue. All other
depreciation is included in depreciation and amortization expense in the statement of operations and comprehensive loss.
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 increase in long-term investments. Any dividends paid or
payable are credited against long-term investments.
H. FINANCIAL LIABILITIES
Accounts payable and accrued liabilities, short-term debt and long-term debt are measured at amortized cost. Transaction costs relating to
long-term debt are netted against long-term debt and are amortized using the effective interest rate method.
I. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are recorded net of government funding received or receivable.
J. 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.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 35
Financial Statements | Notes | 3. Significant Accounting Policies
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.
The Company has significant investments in property, plant and equipment related to its Westport HPDI 2.0™ business. The HPDI business is
still in 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 2020 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.
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 December
31. 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
The Company generates revenues primarily from product sales. Product revenues are derived from standard product sales contracts and from
long-term fixed price contracts. The Company recognizes revenue 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. Service revenue is recognized over time as performance obligations are satisfied.
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 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.
36 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 3. Significant Accounting Policies
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.
Interest and penalties related to income taxes are included as a component of income tax expense.
4. Accounting Changes
A. NEW ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2020
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" which requires the measurement and
recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaced the former incurred loss impairment
model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning after December 15, 2019. The adoption of this guidance in the first quarter
of 2020 did not result in any material impact to the Company's consolidated financial statements.
5. Accounts Receivable
ACCOUNTS RECEIVABLE
Customer trade receivables
Other receivables
Income tax receivable
Due from related parties (note 7(a))
Allowance for doubtful accounts
6. Inventories
INVENTORIES
Purchased parts and materials
Work-in-process
Finished goods
Total
Years Ended Dec 31
2020
2019
$
81,968 $
62,974
14,967
9,092
52
74
475
272
(6,594)
(5,863)
$
90,467 $
66,950
Years ended Dec 31
2019
2018
$
36,066 $
32,818
3,203
12,133
51,402 $
2,854
12,134
47,806
$
During the year ended December 31, 2020, the Company recorded write-downs to net realizable value of approximately $507 (year ended
December 31, 2019 - $57).
7. Long-term Investments
LONG-TERM INVESTMENTS
Cummins Westport Inc. (a)
Weichai Westport Inc. (b)
Minda Emer Technologies Limited (1)
Other equity accounted investees
Total long-term investments
Years Ended Dec 31
2020
2019
10,866 $
1,824
1,116
148
7,850
1,824
737
176
13,954 $
10,587
$
$
(1) Effective March 4, 2021, Minda Emer Technologies Limited changed its name to Minda Westport Technologies Limited.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 37
Financial Statements | Notes | 7. Long-Term Investments
A. CUMMINS WESTPORT INC. ("CWI")
The Company, indirectly through its wholly-owned subsidiary, Westport Power Inc., 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 19, 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 19, 2012,
the Company and Cummins shared equally in the profits and losses of CWI. Under the amended JVA, profits and losses are shared equally up to
an established revenue baseline, then any excess profit will be allocated 75% to the Company and 25% to Cummins.
The Company has determined that CWI is a variable interest entity. 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, thus power is shared.
Accordingly, neither party is the primary beneficiary. The joint venture term is scheduled to end on December 31, 2021 and, as per the JVA,
effective from July 1, 2019, either Cummins or the Company can buy out the other's interest based on contractually defined terms and
conditions.
The Company recognized its share of CWI’s income and received dividends as follows:
Years ended Dec 31
2020
2019
Investment income from CWI
$ 23,774 $ 26,586
Dividends received
20,758
25,045
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, 2020, the Company has a related party accounts receivable balance of $74 (2019 - $272)
due from CWI. During the year ended December 31, 2020, total expense recoveries from CWI were $1,611 (2019 - $1,903).
The carrying amount and maximum exposure to losses relating to CWI were as follows:
Equity method investment in CWI
Accounts receivable due from CWI
Assets, liabilities, revenue and expenses of CWI, are as follows:
CWI ASSETS & LIABILITIES
Balance at Dec 31
2020
2019
Carrying
amount
Maximum
exposure to loss
Carrying
amount
Maximum
exposure to loss
$
10,866 $
10,866 $
7,850 $
74
74
272
7,850
272
Years ended Dec 31
2020
2019
Current assets:
Long-term assets:
Total assets
Current liabilities:
Long-term liabilities:
Total liabilities
Cash and short-term investments
Accounts receivable
Property, plant and equipment
Deferred income tax assets
Current portion of warranty liability
Current portion of deferred revenue
Accounts payable and accrued liabilities
Warranty liability
Deferred revenue
Other long-term liabilities
38 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
5,681
605
21,651
$ 94,984 $ 90,296
1,363
844
21,322
$ 122,921 $ 113,825
$ 19,485 $ 19,816
16,678
3,858
40,352
30,463
23,667
3,631
57,761
$ 101,178 $ 98,113
13,628
5,557
38,670
34,737
23,802
3,969
62,508
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
Income from operations
Interest and investment income
Income before income taxes
Income tax expense (recovery):
Current
Deferred
Income for the year
Financial Statements | Notes | 7. Long-Term Investments
Years ended Dec 31
2020
219,141
104,339
323,480
2019
246,503
115,267
361,770
236,154
257,717
12,185
1,650
12,567
15,933
1,743
17,950
262,556
293,343
60,924
1,074
61,998
14,779
(329)
14,450
$
47,548 $
68,427
2,421
70,848
16,102
1,575
17,677
53,171
B. 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 WWI. 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. 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%.
Cartesian 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. In addition, Peter Yu, the founder and managing partner of Cartesian, was elected as a Director of the Company in January
2016 and resigned as a Director of the Company in July 2020. See notes 14(b) and 15 for additional details of Cartesian’s investments in the
Company.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 39
Financial Statements | Notes | 8. Property, Plant and Equipment
8. Property, Plant & Equipment
PROPERTY, PLANT & EQUIPMENT
December 31, 2020
Land and buildings
Computer equipment and software
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Total 2020
December 31, 2019
Land and buildings
Computer equipment and software
Furniture and fixtures
Machinery and equipment
Leasehold improvements
Total 2019
Cost
Accumulated
depreciation
book
value
$ 5,303 $
7,045
4,968
102,834
12,479
$ 132,629 $
$ 4,764 $
5,601
4,213
91,926
11,463
$ 117,967 $
1,701 $ 3,602
1,475
5,570
820
4,148
48,447
54,387
3,163
9,316
75,122 $ 57,507
1,565 $ 3,199
1,080
4,521
498
3,715
50,151
41,775
3,928
7,535
59,111 $ 58,856
During the year ended December 31, 2020, an impairment charge of $479 was recorded related to property, plant and equipment (December
31, 2019 - nil).
Total depreciation expense for the year ended December 31, 2020 was $12,288 (year ended December 31, 2019 - $13,409). The amount of
depreciation expense included in cost of revenue for the year ended December 31, 2020 was $7,795 (year ended December 31, 2019 - $8,562).
9. Intangible Assets
INTANGIBLE ASSETS
December 31, 2020
Patents and trademarks
Technology
Customer contracts
Other intangibles
Total 2020
December 31, 2019
Patents and trademarks
Technology
Customer contracts
Other intangibles
Total 2019
Cost
Accumulated
depreciation
Net
book value
$ 21,763 $
11,513 $
10,250
6,040
13,234
477
5,613
12,283
321
427
951
156
$ 41,514 $
29,730 $
11,784
$ 20,386 $
9,333 $
11,053
5,457
12,150
328
$ 38,321 $
4,917
10,668
328
25,246 $
540
1,482
—
13,075
During the year ended December 31, 2020, the Company recorded an impairment charge of nil (year ended December 31, 2019 - $688).
During the year ended December 31, 2020, amortization of $1,746 (year ended December 31, 2019 - $2,931) was recognized in the
consolidated statement of operations.
10. Goodwill
A continuity of goodwill is as follows:
GOODWILL
Balance, beginning of year
Impact of foreign exchange changes
Balance, end of year
40 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Years ended Dec 31
2020
2019
$
$
3,110 $
287
3,397 $
3,170
(60)
3,110
Goodwill of $3,397 as at December 31, 2020, and $3,110 as at December 31, 2019, relates to the acquisition of Prins Autogassystemen
Holding B.V. in 2014. The Company completed its annual assessment of impairment and concluded that the remaining goodwill of $3,397
related to the IAM business segment was not impaired as at December 31, 2020.
Financial Statements | Notes | 11. Accounts Payable and Accrued Liabilities
11. Accounts Payable and Accrued Liabilities
ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Trade accounts payable
Accrued payroll
Accrued interest
Due to related parties
Taxes payable
Deferred revenue
Other payables
Years ended Dec 31
2020
2019
$ 57,307 $ 60,170
15,906
1,568
794
3,497
2,717
1,528
$ 84,599 $ 86,180
14,737
137
—
3,905
8,008
505
12. Operating Lease Right-of-Use Assets
The Company has entered into various non-cancellable operating lease agreements primarily for its manufacturing facilities and offices. The
Company's leases have lease terms expiring between 2020 and 2029. Many leases include one or more options to renew. The Company does
not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement.
The average remaining lease term is approximately four years and the present value of the outstanding operating lease liability was determined
applying a weighted average discount rate of 3.0% based on incremental borrowing rates applicable in each location.
The components of lease cost are as follows:
Operating Lease Cost
Amortization of right-of-use assets
Interest
Total lease cost
The maturities of lease liabilities as of December 31, 2020 are as follows:
$
$
Operating Lease Cost
2021
2022
2023
2024
2025
Thereafter
Total undiscounted cash flows
Less: imputed interest
Present value of operating lease liabilities
Less: current portion
Long term operating lease liabilities
13. Short-Term Debt
Short-Term Debt
Revolving financing facility (a)
Credit facility (b)
Total short-term debt
2020
2019
$
$
3,874 $
813
4,687 $
3,513
973
4,486
4,476
4,291
3,178
2,570
2,034
15,919
32,468
(4,506)
27,962
(4,476)
23,486
2020
2019
$ 17,428 $
3,625
6,017
—
$ 23,445 $
3,625
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 41
Financial Statements | Notes | 13. Short-Term Debt
The 2019 comparative figures have been revised to conform with current year presentation.
(a)
The Company has a revolving financing facility with HSBC. This facility is secured by certain receivables of the Company and the
maximum draw amount is $20,000, based on the receivables outstanding. As the Company collects these secured receivables, the facility is
repaid. The interest rate for this facility is the LIBOR rate plus 2.5%.
(b)
On July 23, 2020, the Company entered into a one-year $10,000 non-revolving term credit facility with EDC to provide working
capital support in response to short-term liquidity shortfalls as a result of the COVID-19 pandemic. This credit facility's interest rate is the U.S.
Prime Rate plus 3.0% per annum on amounts drawn and has no prepayment penalty or standby charge. As at December 31, 2020, the Company
has drawn $6,000 on this facility. On February 16, 2021, the Company and EDC amended the credit facility availability period to February 16,
2021 and the Company will not draw any additional funds from this facility.
14. Long-Term Debt
LONG-TERM DEBT
Term loan facilities, net of debt issuance costs (a)
Convertible debt (b)
Senior financing (c)
Other bank financing (d)
Capital lease obligations (e)
Balance, end of period
Current portion
Long-term portion
Years Ended Dec 31
2020
2019
53,731
4,362
—
1,325
2,535
22,207
17,431
2,504
1,480
1,632
$
61,953 $
45,254
(16,302)
(9,942)
$
45,651 $
35,312
On December 20, 2017, the Company entered into a loan agreement with EDC for a $20,000 non-revolving term facility. The
(a)
Company incurred debt issuance costs of $1,013 related to this loan, which are being amortized over the loan term using the effective interest
rate method. The loan bears interest at 6% (prior to March 1, 2019, 9% plus monitoring fees), payable quarterly, as well as quarterly principal
repayments. On March 23, 2020, the Company and EDC amended the terms of the secured term loan to defer $6,000 in principal payments in
2020, to recommence payment of $2,000 quarterly starting March 15, 2021 and to extend the term of the loan until September 30, 2022. As at
December 31, 2020 the amount outstanding for this loan was $13,618, net of issuance costs, compared to $13,269, net of issuance costs, as at
December 31, 2019. The loan is secured by share pledges over Westport Power, Inc., Fuel Systems Solutions, Inc., Westport Luxembourg
S.a.r.l and MTM and by certain of the Company's property, plant and equipment.
On October 9, 2018, the Company entered into a Euro denominated loan agreement with UniCredit. This loan bears interest at an annual rate
of 2.3% and interest is paid quarterly. This loan matures on December 31, 2023. As at December 31, 2020, the amount outstanding for this loan
was $4,561 compared to $5,569 as at December 31, 2019, and was secured by a cash pledge of $1,356, with these restricted funds being
recorded in other long-term assets.
On November 28, 2019, the Company entered into a second Euro denominated loan agreement with UniCredit. This loan bears interest at an
annual rate of 1.8% and interest is paid quarterly. This loan matures on September 30, 2023. As at December 31, 2020, the amount outstanding
for this loan was $2,685 compared to $3,369 as at December 31, 2019, and is secured by a cash pledge of $821, with these restricted funds also
being recorded in other long-term assets.
On May 20, 2020, the Company entered into a third Euro denominated loan agreement with UniCredit. The effective interest rate of this loan is
1.82% with a maturity date of May 31, 2025. As at December 31, 2020, the amount outstanding for this loan was $5,558. There is no security
on the loan as it was made as part of the Italian government's COVID-19 Decreto Liquidità.
On July 17, 2020, the Company entered into a fourth Euro denominated loan agreement with UniCredit. The effective interest rate of this loan
is 1.75% with a maturity date of July 31, 2026. As at December 31, 2020, the amount outstanding for this loan was $18,650. There is no
security on the loan as it was made as part of the Italian government’s COVID-19 Decreto Liquidità.
42 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 14. Long-term Debt
On August 11, 2020, the Company entered into a Euro denominated loan agreement with Deutsche Bank. The effective interest rate of this
loan is 1.7% with a maturity date of August 31, 2026. As at December 31, 2020, the amount outstanding for this loan was $8,659. There is no
security on the loan as it was made as part of the Italian government’s COVID-19 Decreto Liquidità.
(b)
On January 11, 2016, the Company entered into a financing agreement ("Tranche 2 Financing") with Cartesian. As part of the
agreement, on June 1, 2016, convertible debt was issued in exchange for 9.0% convertible unsecured notes due June 1, 2021, which are
convertible into common shares of the Company in whole or in part, at Cartesian's option, at any time following the twelve month anniversary
of the closing at a conversion price of $2.17 per share. Interest is payable annually in arrears on December 31 of each year during the term. On
July 24, 2020, Westport restructured the Tranche 2 Financing agreement and entered into a new financing agreement with Cartesian. Under
the terms of the agreement, the Company agreed to pay down the principal amount of the existing convertible notes from $17,500 to $10,000.
Concurrent with such repayment, the maturity of the remaining amended notes was extended three years to July 31, 2023, the coupon rate
was reduced from 9.0% annually to 6.5% annually, and the conversion price was revised from $2.17 per share to $1.42 per share. As of July 30,
2020, Peter Yu, founder and managing partner of Cartesian, resigned his seat on the Board of Directors of the Company.
During the fourth quarter of 2020, Cartesian exercised its option to convert principal amounts of $5,000, plus accrued but unpaid interest on
such principal amounts, into common shares of the Company (note 17).
On January 21, 2021, Cartesian exercised its option to convert a principal amount of $2,500, plus accrued and unpaid interest on such principal
amount, into 1,815,117 common shares of the Company.
(c)
The senior financing facility was repaid on September 30, 2020.
Other bank financing consists of various secured and unsecured bank financing arrangements that carry rates of interest ranging from
(d)
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.
(e)
The Company has capital lease obligations that have terms of three to five years at interest rates ranging from 2.3% to 12.0%.
Throughout the term of certain of these financing arrangements, the Company is required to meet certain financial and non-financial
covenants. As of December 31, 2020, the Company is in compliance with all covenants under the financing arrangements.
The principal repayment schedule of long-term debt is as follows as at December 31, 2020:
LONG-TERM DEBT REPAYMENT SCHEDULE
Term loan facilities
Convertible debt
Other bank
financing
Capital lease
obligations
Total
2021
2022
2023
2024
2025 and thereafter
14,703
14,847
8,828
6,625
8,728
—
—
4,362
—
—
774
368
183
—
—
825
628
488
403
191
$
53,731 $
4,362 $
1,325 $
2,535 $
16,302
15,843
13,861
7,028
8,919
61,953
15. Long-term Royalty Payable
LONG TERM ROYALTY PAYABLE SCHEDULE
Balance, beginning of year
Accretion expense
Repayment
Balance, end of year
Current portion
Long-term portion
Years ended Dec 31
2020
2019
$
18,258 $
3,732
(5,948)
16,042
(7,451)
$
8,591 $
20,935
3,357
(6,034)
18,258
(5,936)
12,322
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 43
Financial Statements | Notes | 15. Long-term Royalty Payable
On January 11, 2016, the Company entered into a financing agreement with Cartesian to support the Company's global growth initiatives. The
financing agreement immediately provided $17,500 in cash (the “Tranche 1 Financing”). In consideration for the funds provided to the
Company, Cartesian is entitled to royalty payments based on the greater of (i) a percentage of amounts received by the Company on select
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.
Amounts due to Cartesian are 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 is paid 15% of the net proceeds from these asset sales to a maximum of $15,000, with these
payments being allocated on a non-discounted basis to future years' minimum payments.
As of December 31, 2020, the total royalty prepayments paid to Cartesian as a result of the Consent Agreement was $11,912.
The minimum repayments including interest are as follows, for the years ending December 31:
MINIMUM REPAYMENTS INCLUDING INTEREST
For years ending
Dec 31
2021
2022
2023
2024
2025
2026
7,451
5,657
1,795
1,637
2,270
2.851
21,661
$
44 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
16. Warranty Liability
A continuity of the warranty liability is as follows:
WARRANTY LIABILITY
Balance, beginning of year
Warranty claims
Warranty accruals
Change in estimate
Impact of foreign exchange changes
Balance, end of year
Less: Current portion
Long-term portion
Financial Statements | Notes | 16. Warranty Liability
Years ended Dec 31
2020
2019
$
8,901 $
(6,906)
16,191
(291)
1,041
18,936
(10,749)
$
8,187 $
4,941
(1,863)
6,794
(481)
(490)
8,901
(4,505)
4,396
During the year ended December 31, 2020, the Company recorded a $11,224 warranty accrual related to a field service campaign for the
replacement of a pressure release device that the Company manufactures and sells to OEM customers. No safety events or field performance
issues have been identified from this product. The Company recorded an insurance recovery of $8,865 related to this issue during the year
ended December 31, 2020, including $3,521 in other receivables and $5,344 as an other long-term asset .
17. Share Capital, Stock Options & Other Stock-based Plans
On November 9, 2020, the Company filed a prospectus supplement to establish an ATM Program which allows the Company to issue up to
$50,000 of common shares from treasury to the public from time to time, at the Company's discretion and subject to regulatory requirements.
During the year ended December 31, 2020, the Company issued 3,215,970 common shares at a weighted average share price of $4.47 per
share for gross proceeds of $14,376. Transaction costs of $472, including commission of $288, were incurred resulting in net proceeds from the
ATM Program equity issuance of $13,904.
Subsequent to the year ended December 31, 2020, the Company issued an additional 1,819,712 common share at weighted average share
price of $7.26 per share for gross proceeds of $13,211, net of total transaction cost of $405, including commission of $264 resulting in net
proceeds of $12,806.
In November and December 2020, Cartesian converted a total of $5,000 principal, plus accrued interest, of the convertible debt (note 14(b))
into 3,607,468 common shares at $1.42 per share.
During the year ended December 31, 2020, the Company issued 829,553 common shares upon exercises of share units (year ended December
31, 2019 – 3,036,082 common shares). The Company issues shares from treasury to satisfy share unit exercises.
(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, 2020, the Company recognized $2,368 (year ended December 31, 2019 - $1,474) of stock-based
compensation associated with the Westport Omnibus Plan.
A continuity of the Units issued under the Westport Omnibus Plan are as follows:
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 45
Financial Statements | Notes | 17. Share Capital, Stock Options & Other Stock-based Plans
UNIT ISSUED SUMMARY
Outstanding, beginning of year
Granted
Vested and exercised
Forfeited/expired
Outstanding, end of year
Units outstanding and exercisable, end of year
WAEP = weighted average exercise price (C$)
Years ended Dec 31
2020
2019
#
WAEP
#
WAEP
1,777,941 $ 3.19
2,667,403 $ 4.41
525,807
2.09
1,877,101
3.08
(829,553) 2.31
(2,622,338) 3.81
(21,817) 3.37
(144,225) 2.86
1,452,378 $ 3.29
1,777,941 $ 3.19
22,588 $ 5.69
14,450 $ 2.41
During the year ended December 31, 2020, 525,807 share units were granted to directors, executives and employees (2019 - 1,877,101). This
included 504,907 Restricted Share Units ("RSUs") (2019 - 971,051) and 20,900 Performance Share Units ("PSUs") (2019 - 906,050). Values of
RSU awards are generally determined based on the fair market value of the underlying common shares 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. PSU awards do not have a certain number of common shares that will be issued over time, but are based on future
performance and other conditions tied to the payout of the PSU.
As at December 31, 2020, $4,303 of compensation expense related to Units has yet to be recognized in results from operations and will be
recognized ratably over two years.
(b)
Aggregate intrinsic values:
The aggregate intrinsic value of the Company’s share units at December 31, 2020 and 2019 are as follows:
AGGREGATE INTRINSIC VALUES OF SHARE UNITS
(values in CDN$)
Share units:
Outstanding
Exercisable
(c)
Stock-based compensation:
Stock-based compensation associated with the Unit plans is included in operating expenses as follows:
STOCK-BASED COMPENSATION
Cost of revenue
Research and development
General and administrative
Sales and marketing
Total
18. Income Taxes
Years ended
Dec 31
2020
2019
$ 9,787 $ 5,458
153
44
Years ended Dec 31
2020
2019
$
$
140 $
365 $
1,621
242
—
157
1,111
206
$
2,368 $
1,474
The Company’s income tax provision differs from that calculated by applying the combined enacted Canadian federal and provincial
(a)
statutory income tax rate of 27% for the year ended December 31, 2020 (year ended December 31, 2019 – 27%) as follows:
46 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 18. Income Taxes
INCOME TAX PROVISION
Income (loss) from continuing operations before income taxes
Expected income tax expense (recovery)
Increase (reduction) in income taxes resulting from:
Non-deductible stock-based compensation
Other permanent differences
Withholding taxes and other foreign taxes
Change in enacted tax rates
Foreign tax rate differences, foreign exchange and other adjustments
Non-taxable income from equity investment
Change in valuation allowance
Years ended Dec 31
2020
2019
$
(5,928) $
(1,601)
244
3,819
804
(189)
(1,177)
(6,418)
5,949
Income tax expense
$
1,431 $
The significant components of the deferred income tax assets and liabilities are as follows:
DEFERRED INCOME TAX ASSETS & LIABILITIES
2,148
580
264
15
1,017
34
271
(6,416)
6,195
1,960
Deferred income tax assets:
Net loss carry forwards
Intangible assets
Property, plant and equipment
Warranty liability
Foreign tax credits
Inventory
Research and development
Other
Total gross deferred income tax assets
Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
Intangible assets
Property, plant and equipment
Other
Total deferred income tax liabilities
Total net deferred income tax liabilities
Years Ended Dec 31
2020
2019
$ 218,323 $ 211,738
4,629
4,008
17,155
15,518
4,752
620
1,631
6,316
3,342
620
2,306
6,107
10,592
13,618
264,018
257,257
(261,878)
(255,328)
2,140
1,929
(430)
(1,756)
(22)
(61)
(2,798)
(2,628)
(3,250)
(4,445)
$
(1,110) $
(2,516)
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 18(f).
(c)
The components of the Company’s income tax expense (recovery) are as follows:
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 47
Financial Statements | Notes | 18. Income Taxes
INCOME TAX EXPENSE (RECOVERY)
Year ended December 31, 2020
Italy
United States
Canada
Other
Year ended December 31, 2019
Italy
United States
Canada
Other
Net income
(loss) before
income
taxes
Current Deferred
Total
$
5,244
2,007
(1,146) $
861
$
$
21,400
(274)
(31,429)
(1,143)
80
625
—
—
139
(274)
80
764
(5,928) $ 2,438 $ (1,007) $ 1,431
26,645
2,260
(1,647) $
613
16,174
(28,160)
13
—
—
—
13
—
(12,511) 1,334
—
1,334
$
2,148 $ 3,607 $ (1,647) $ 1,960
(d)
The Company has loss carry-forwards in the various tax jurisdictions available to offset future taxable income as follows:
LOSS CARRY-FORWARDS
Canada
Italy
United States
Sweden
Other
Total
Expiring in:
2021
2022
2023
2024+
Total
$
— $
— $
— $ 599,723 $ 599,723
—
—
—
—
—
—
—
—
—
395
395
105,592
105,592
14,672
14,672
3,645
3,858
1,614
10,160
19,277
$ 3,645 $ 3,858 $ 1,614 $ 730,542 $ 739,659
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.
The Company has not recognized a deferred income tax liability for certain undistributed earnings of foreign subsidiaries which are
(e)
essentially investments in those foreign subsidiaries and are permanent in duration.
(f)
The Company records uncertain tax positions in accordance with ASC No. 740, Income Taxes. As at December 31, 2020, the total
amount of the Company’s uncertain tax benefits was $3,852 (year ended December 31, 2019 - $3,652). 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 2017 to 2020 taxation years remain
open to examination by the Internal Revenue Service and the 2015 to 2020 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, directors, officers and shareholders which own greater than 10% of the Company's shares.
(a)
Pursuant to the amended and restated JVA, Westport engages in transactions with CWI (see note 7(a)). 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 appointed as a Director of the Company in January 2016 in connection with the
Investment Agreement entered into with Cartesian in January 2016. As a consequence, the convertible debt (note 14(b)) and royalty payable
(note 15), amounts due to Cartesian were considered as related party balances. As of July 30, 2020, Peter Yu resigned and ceased to be a
related party to the Company.
48 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Financial Statements | Notes | 20. Commitments and Contingencies
20. Commitments and Contingencies
(a)
Contractual commitments
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
The Company is 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 2020, the Company modified the reporting of business segments to allow for increased transparency into the Company's
customer channels and the respective products the Company sells to those customers. Accordingly, from that date, all product information and
other technology related activities previously reported under the Transportation segment have been disaggregated into two segments, OEM
and IAM. All comparative figures presented have been revised to reflect this change. Under this organizational structure, the Company
manages and reports the results of its business through four segments: OEM, IAM, the CWI Joint Venture, and Corporate. This reflects the
manner in which operating decisions and assessing business performance is currently managed by the Chief Operating Decision Maker
("CODM"). The financial information for the 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 matters.
The 2019 comparative figures have been revised to reflect the change in business segments.
Financial information by business segment as follows:
Year ended December 31, 2020
Revenue
Operating
income (loss)
Depreciation &
amortization
Equity income
$
149,632 $
(21,214) $
8,225 $
OEM
IAM
Corporate
CWI - 50%
Total segment
Less: CWI - 50%
Total consolidated
OEM
IAM
Corporate
CWI - 50%
Total segment
Less: CWI - 50%
Total consolidated
Discontinued operations
102,865
—
161,740
414,237
(161,740)
$
252,497 $
Year ended December 31, 2019
6,624
(7,399)
30,462
8,473
(30,462)
(21,989) $
14,034 $
24,047
5,562
247
120
14,154
(120)
6,605
225
45
16,385
(45)
273
—
23,774
—
24,047
—
155
—
26,586
—
26,741
—
16,340 $
26,741
— $
—
Revenue
Operating
income (loss)
Depreciation &
amortization
Equity income
$
164,692 $
(12,746) $
9,510 $
140,646
—
180,885
486,223
(180,885)
305,338 $
— $
11,882
(20,529)
34,214
12,821
(34,214)
(21,393) $
(147) $
$
$
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 49
Financial Statements | Notes | 21. Segment Information
ADDITIONS TO LONG-LIVED ASSETS
Total additions to long-lived assets, excluding business combinations:
OEM
IAM
Corporate
CWI - 50%
Total segment
Less: CWI - 50%
Total consolidated
Years ended Dec 31
2020
2019
$
2,477 $
3,403
1,243
—
2,868
5,386
606
—
7,123
8,860
—
—
$
7,123 $
8,860
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
Europe
Americas
Asia
Others
% of total revenue, years
ended Dec 31
2020
2019
70 %
13 %
9 %
8 %
68 %
17 %
8 %
7 %
During the year ended December 31, 2020, total revenue of $51,580 (2019 - $33,947), or 20% (2019 - 11%) of total revenue, was generated
from our HPDI OEM launch partner.
As at December 31, 2020, total goodwill of $3,397 (December 31, 2019 - $3,110) was allocated to the OEM segment.
As at December 31, 2020, total long-term investments of $12,838 (December 31, 2019 - $9,850) were allocated to the Corporate segment and
$1,116 (December 31, 2019 - $737) to the OEM segment.
Total assets are allocated as follows:
TOTAL ASSETS BY OPERATING SEGMENT
OEM
IAM
Corporate
CWI - 50%
Total segment assets
Less: CWI - 50%
Total consolidated assets
Years ended Dec 31
2020
2019
$
148,959 $
132,179
156,967
119,769
40,337
61,461
27,978
56,913
407,724
336,839
(61,461)
(56,913)
$
346,263 $
279,926
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:
50 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
LONG-LIVED ASSETS BY REGION
December 31, 2020
Italy
Canada
United States
Rest of Europe
Asia Pacific
Less: equity investees' long lived assets
Total consolidated long-lived assets
December 31, 2019
Italy
Canada
United States
Rest of Europe
Asia Pacific
Less: equity investee long lived assets
Total consolidated long-lived assets
22. Financial Instruments
(a)
Financial risk management:
Financial Statements | Notes | 22. Financial Instruments
Property,
plant and
equipment
Intangible
Assets and
Goodwill
Total
$
24,490 $
11,613 $ 36,103
28,557
719
3,713
633
58,112
(605)
171
28,728
—
719
3,397
7,110
—
633
15,181
73,293
—
(605)
$
$
57,507 $
15,181 $ 72,688
22,534 $
12,883 $ 35,417
31,909
951
3,423
883
59,700
(844)
192
32,101
—
951
3,110
6,533
—
883
16,185
75,885
—
(844)
$
58,856 $
16,185 $ 75,041
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 a history of losses
and negative cash flows from operations since inception. At December 31, 2020, the Company has $64,262 of cash, cash equivalents and short-
term investments, including of $75 restricted cash (see note 3(c)).
The following are the contractual maturities of financial obligations as at December 31, 2020:
CONTRACTUAL OBLIGATIONS
Carrying amount Contractual cash flows
< 1
1–3
4–5
5+
Years
Accounts payable and accrued liabilities
$
84,599 $
84,599 $
84,599 $
Short-term debt (note 13)
Term loan facilities (note 14(a))
Senior revolving financing (note 13(b))
Convertible debt (note 14(b))
Other bank financing (note 14(d))
Capital lease obligations (note 14(e))
Long-term royalty payable (note 15)
Operating lease commitments (note 12)
(c)
Credit risk:
23,445
53,731
—
4,362
1,325
2,535
16,042
27,962
23,445
56,445
—
5,836
1,325
2,610
21,661
32,468
23,445
16,014
—
324
774
870
7,451
4,476
— $
—
— $
—
—
—
24,866
12,860
2,705
—
5,512
551
1,152
7,452
7,469
—
—
—
588
3,907
4,604
—
—
—
—
2,851
15,919
21,475
$
214,001 $
228,389 $
137,953 $
47,002 $
21,959 $
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
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 51
Financial Statements | Notes | 22. Financial Instruments
with cash and cash equivalents by regularly investing primarily in liquid short-term paper issued by major banks. 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, 2020, 84% (December 31, 2019 - 85%) of accounts receivable relates to customer receivables, and 16%
(December 31, 2019 - 15%) 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. Refer to note 3(d) for the Company's policy with respect to an allowance for doubtful receivables.
(d)
Foreign currency risk:
Foreign currency risk is the risk that the fair value of future cash flows of financial instruments will fluctuate because of changes in foreign
currency exchange rates. The Company conducts a significant portion of its business activities in foreign currencies, primarily the U.S. dollar
and the Euro. We are subject to foreign currency exchange rate risk to the extent that our costs are denominated in currencies other than those
in which we earn revenues. In addition, since our consolidated financial statements are denominated in U.S. dollars, changes in foreign currency
exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our results of operations,
financial condition and cash flows.
Cash and cash equivalents, short-term investments, accounts 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. The Company’s
functional currency is the Canadian dollar.
The fluctuation in the average U.S. dollar in recent years has resulted in material impacts on our revenues in those years. If the U.S. dollar
continues to fluctuate against other currencies, we will experience additional volatility in our financial statements.
A 5% increase/decrease in the relative value of the U.S. dollar against the Canadian dollar and Euro compared to the exchange rates in effect for
the year ended December 31, 2020 would have resulted in lower/higher income from operations of approximately $1,001. This assumes a
consistent 5% appreciation in the U.S. dollar against the Canadian dollar and the Euro throughout the fiscal year. The timing of changes in the
relative value of the U.S. dollar can affect the magnitude of the impact that fluctuations in foreign exchange rates have on our income from
operations.
(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 short-term and 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, 2020 had increased or decreased by 50 basis points, with all other variables held constant, net
loss for the year ended December 31, 2020 would have increased or decreased by $307.
(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, Minda Emer Technologies Limited, and other investments. CWI is the most
significant of the long-term investments and is accounted for using the equity method. WWI and other investments are accounted for at fair
value.
The carrying values reported in the consolidated balance sheet for obligations under capital and operating leases, which are based upon
discounted cash flows, approximate their fair values.
The carrying value of the term loan facilities, convertible debt, and other bank financing included in the long-term debt (note 14) do not
materially differ from their fair value as at December 31, 2020, as the majority of the term loan facilities, convertible debt, and other bank
financing were raised or amended recently.
52 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
Forward Looking Statements
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, 2020, cash and cash equivalents and short-term investments are measured at fair value on a recurring basis and are
included in Level 1.
WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT | 53
Forward Looking Statements
Forward-Looking Statements
Certain statements contained in this Annual Report constitute "forward-looking statements". When used in this document, the words "may",
"would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "project" and similar expressions, as they relate to us or our
management, are intended to identify forward-looking statements. In particular, this Annual Report contains forward-looking statements
pertaining to the following:
• Our efforts to capture operating efficiencies and reduce our expenses and the results of such efforts in the future;
•
•
•
The broadening of our product offerings as Westport Fuel Systems implements its strategic plan;
Future asset sales and right-sizing of Westport Fuel Systems cost structure and the results of such activities; and
The timing and effect of the launch of Westport HPDI 2.0TM commercial components with OEM launch partners.
Such statements reflect management's current views with respect to future events and are subject to certain risks and uncertainties and are
based upon a number of factors and assumptions. Actual results may differ materially from those expressed in the foregoing forward-looking
statements due to a number of uncertainties and risks, including the risks described in Westport Fuel Systems Annual Information Form and in
the documents incorporated by reference into this Annual Report and other unforeseen risks. Such risks, uncertainties, factors and
assumptions include, without limitation:
• market acceptance of our products;
•
•
•
•
•
•
•
product development delays and delays in contractual commitments;
changing environmental regulations;
the ability to attract and retain business partners;
the success of our business partners and OEMs with whom we partner;
future levels of government funding and incentives;
limitations in our ability to successfully integrate acquired businesses; 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 and
Sustainability 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.
54 | WESTPORT FUEL SYSTEMS INC. 2020 ANNUAL REPORT
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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