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Velan Inc. Reports Its First Quarter 2022/23 Financial Results With Sales and Gross Margins Comparable to the Prior Year

Velan Inc.
Velan Inc.

MONTREAL, July 07, 2022 (GLOBE NEWSWIRE) -- Velan Inc. (TSX: VLN) (the “Company”), a world-leading manufacturer of industrial valves, announced today its financial results for its first quarter ended May 31, 2022.

Highlights:

  • Sales for the quarter amounted to $75.0 million, an increase of $0.5 million or 0.6% compared to the same quarter of the previous fiscal year. Although comparable to prior year’s first quarter performance, the Company continues to navigate through a volatile market where certain shipments for the quarter were delayed and are planned to be shipped later in the year.

  • Gross profit for the quarter amounted to $20.1 million or 26.8%, stable compared to last year’s $20.0 million of 26.8%. Gross profit improved for the quarter when considering the absence of Canada Emergency Wage Subsidies («CEWS») compared to $0.6 million last year. Prior year’s gross profit percentage without the subsidies would have been 26.1% compared to 26.8% for the current quarter.

  • Net loss1 of $7.4 million and negative EBITDA2 of $2.9 million for the quarter compared to a net loss1 of $5.1 million and a negative EBITDA2 of $0.9 million last year. The decrease in results is primarily attributable to an increase in administration costs, namely freight out costs and the absence of CEWS in the current quarter.

  • Order backlog2 remains strong at $506.0 million, an increase of $4.7 million or 0.9% since the beginning of the year. The portion of the current backlog3 deliverable in the next twelve months is $339.2 million.

  • Net new orders (“bookings”)2 of $93.4 million for the quarter, representing a book-to-bill ratio2 of 1.25. The decrease in bookings2 of $22.9 million or 19.7% compared to last year resulted mainly from the current geo-political uncertainties which created slower project awards. The Company nonetheless continues to observe a strong amount of activity ongoing.

  • The Company’s net cash amounted to a solid $47.7 million at the end of the quarter, a decrease of $5.8 million since the beginning of the fiscal year. The decrease in net cash for the quarter is primarily attributable to the lower EBITDA for the quarter. The shifting of revenues and related gross profits, as mentioned in the notes above have resulted in higher work in process and finished goods inventories by $16.3 million.

Bruno Carbonaro, CEO of Velan Inc., said, “We presented similar sales and gross profit as last year, but we were impacted by certain market volatility and governmental documentation delays which would have allowed us to realize improved results. We are nonetheless working very hard to resolve these delays, and as well are working on several strategic initiatives such as growing our pipeline of new products and improving our aftermarket business. Finally, we are always focusing time and attention to improve our operational flexibility and efficiency which is how we believe we can get to the next level in terms of financial results.”

Financial Highlights

(thousands of U.S. dollars, excluding per share amounts)

 

May 31,
2022

 

 

May 31,
2001

 



Sales



$



75,005

 



$



74,529

 

Gross profit

 

20,073

 

 

19,994

 

Gross profit %

 

26.8

%

 

26.8

%

Net loss2

 

(7,352

)

 

(5,073

)

Net loss2 per share – basic and diluted

 

(0.34

)

 

(0.24

)

EBITDA1

 

(2,878

)

 

(941

)

EBITDA1 per share – basic and diluted

 

(0.13

)

 

(0.04

)

First Quarter Fiscal 2023 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the first quarter of fiscal 2022):

  • Sales were slightly higher for the quarter, increasing by $0.5 million or 0.6% compared to the same quarter last year. The increase in sales for the quarter is primarily attributable to increased shipments of large orders in the Company’s Italian operations, partially offset by reduced shipments in the Company’s North American operations. Although comparable to prior year’s first quarter performance, sales were impacted in the quarter by supply chain delays, increased time to obtain government export documentation and final commercial negotiations on a handful of contracts. The revenues related to these contracts are expected to be recovered throughout the remainder of the fiscal year.

  • Bookings2 amounted to $93.4 million, a decrease of $22.9 million or 19.7% compared to the first quarter of last year. This decrease is primarily attributable to upstream oil and gas and nuclear orders recorded in the Company’s Italian and French operations. The current geo-political uncertainties have created slower project awards resulting in lower bookings2 for the Company in the current quarter. The Company nonetheless continues to observe a strong amount of activity ongoing.

  • The total backlog2 increased by $4.7 million or 0.9% since the beginning of the fiscal year, amounting to $506.0 million at the end of the quarter. The increase in backlog is primarily due to a strong book-to-bill ratio2 of 1.25 as a result of bookings outpacing sales in the current quarter. Otherwise, the increase in backlog2 was negatively impacted by the weakening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year which represented $12.8 million at the end of the quarter.

  • Gross profit remained stable for the quarter, totaling $20.1 million or 26.8% compared to last year’s $20.0 million or 26.8%. Gross profit remained stable due to the delivery of a comparable sales profile to last year, a balanced product mix, and continued focus on project delivery execution. The Company’s gross profit also benefited from favorable foreign exchange movements which were primarily made up of unrealized foreign exchange translations related to the fluctuation of the U.S. dollar against the euro and Canadian dollar when compared to similar movements from the previous year. The gross profit in the prior period was positively impacted by the recording of $0.6 million of CEWS while the Company did not qualify for such subsidies in the current fiscal year. The subsidies were allocated between cost of sales and administration costs. Prior year’s gross profit percentage without CEWS would have been 26.1% compared to 26.8% for the current quarter.

  • Administration costs for the quarter amounted to $25.8 million, an increase of $2.0 million or 8.5%. The increase in administration costs for the quarter is primarily attributable to higher outbound freight costs caused by the current global supply chain issues which are impacting freight costs and shipping delays. The administration costs in the prior year benefited from the recording of $0.4 million of CEWS while the Company did not qualify for such subsidies in the current quarter. The subsidies were allocated between cost of sales and administration costs. The increase for the quarter was partially offset by lower sales commissions recorded on the delivery of large orders over the course of the quarter.

  • Net loss1 amounted to $7.4 million or $0.34 per share compared to $5.1 million or $0.24 per share last year. EBITDA2 amounted to a negative $2.9 million or $0.13 per share compared to a negative $0.9 million or $0.04 per share last year. The unfavorable movement in EBITDA2 for the quarter is primarily attributable to the previously explained increase in administration costs. The movement in net loss1 was primarily attributable to the same factors as EBITDA2 combined with unfavorable movements in income taxes, partially offset by a favorable movement in finance costs.

Dividend

For the current quarter, no dividend will be declared. The Company will revisit the declaration of dividends in subsequent quarters.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the first quarter conference call to be held on Friday, July 8, 2022, at 11:00 a.m. (EDT). The toll free call-in number is 1-800-754-1346, access code 22019459. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 22019459.

About Velan

Founded in Montreal in 1950, Velan Inc. (www.velan.com) is one of the world’s leading manufacturers of industrial valves, with sales of US$411.2 million in its last reported fiscal year. The Company employs approximately 1,650 people and has manufacturing plants in 9 countries. Velan Inc. is a public company with its shares listed on the Toronto Stock Exchange under the symbol VLN.

Safe harbour statement

This news release may include forward-looking statements, which generally contain words like “should”, “believe”, “anticipate”, “plan”, “may”, “will”, “expect”, “intend”, “continue” or “estimate” or the negatives of these terms or variations of them or similar expressions, all of which are subject to risks and uncertainties, which are disclosed in the Company’s filings with the appropriate securities commissions. While these statements are based on management’s assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that it believes are reasonable and appropriate in the circumstances, no forward-looking statement can be guaranteed and actual future results may differ materially from those expressed herein. The Company disclaims any intention or obligation to update or revise any forward-looking statements contained herein whether as a result of new information, future events or otherwise, except as required by the applicable securities laws. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

Non-IFRS and supplementary financial measures

In this press release, the Company has presented measures of performance or financial condition which are not defined under IFRS (“non-IFRS measures”) and are, therefore, unlikely to be comparable to similar measures presented by other companies. These measures are used by management in assessing the operating results and financial condition of the Company and are reconciled with the performance measures defined under IFRS. Company has also presented supplementary financial measures which are defined at the end of this report. Reconciliation and definition can be found on the next page.

Earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA")

Three-month periods ended

(thousands, except amount per shares)

May 31,
2022
$

 

May 31,
2021
$

 



Net loss2



(7,352



)



(5,073



)

Adjustments for:

 

 

Depreciation of property, plant and equipment

2,161

 

2,414

 

Amortization of intangible assets

568

 

558

 

Finance costs – net

236

 

529

 

Income taxes

1,509

 

631

 



EBITDA



(2,878



)



(941



)

EBITDA per share

 

 

-        Basic and diluted

(0.13

)

(0.04

)

The term “EBITDA” is defined as net income or loss attributable to Subordinate and Multiple Voting Shares plus depreciation of property, plant & equipment, plus amortization of intangible assets, plus net finance costs plus income tax provision. The terms “EBITDA per share” is obtained by dividing EBITDA by the total amount of subordinate and multiple voting shares. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Definitions of supplementary financial measures

The term “Net new orders” or “bookings” is defined as firm orders, net of cancellations, recorded by the Company during a period. Bookings are impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the Company’s sales operation performance for a given period as well as well as an expectation of future sales and cash flows to be achieved on these orders.

The term “backlog” is defined as the buildup of all outstanding bookings to be delivered by the Company. The Company’s backlog is impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the future operational challenges of the Company as well as an expectation of future sales and cash flows to be achieved on these orders.

The term “book-to-bill” is obtained by dividing bookings by sales. The measure provides an indication of the Company’s performance and outlook for a given period.

The forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

1 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares
2 Non-IFRS and supplementary financial measures – additional specifications at the end of this report

For further information please contact: Bruno Carbonaro, Chief Executive Officer and President
Tel: (438) 817-7593
or Rishi Sharma, Chief Financial Officer
Tel: (438) 817-4430

MANAGEMENT’S DISCUSSION AND ANALYSIS

First quarter ended May 31, 2022

HIGHLIGHTS1

  • Sales for the quarter amounted to $75.0 million, an increase of $0.5 million or 0.6% compared to the same quarter of the previous fiscal year. Although comparable to prior year’s first quarter performance, the Company continues to navigate through a volatile market where certain shipments for the quarter were delayed and are planned to be shipped later in the year.

  • Gross profit for the quarter amounted to $20.1 million or 26.8%, stable compared to last year’s $20.0 million of 26.8%. Gross profit improved for the quarter when considering the absence of Canada Emergency Wage Subsidies («CEWS») compared to $0.6 million last year. Prior year’s gross profit percentage without the subsidies would have been 26.1% compared to 26.8% for the current quarter.

  • Net loss2 of $7.4 million and negative EBITDA3 of $2.9 million for the quarter compared to a net loss1 of $5.1 million and a negative EBITDA2 of $0.9 million last year. The decrease in EIBTDA3 is primarily attributable to an increase in administration costs, namely freight out costs and the absence of CEWS in the current quarter.

  • Order backlog3 remains strong at $506.0 million, an increase of $4.7 million or 0.9% since the beginning of the year. The portion of the current backlog3 deliverable in the next twelve months is $339.2 million.

  • Net new orders (“bookings”)3 of $93.4 million for the quarter, representing a book-to-bill ratio3 of 1.25. The decrease in bookings3 of $22.9 million or 19.7% compared to last year resulted mainly from the current geo-political uncertainties which created slower project awards. The Company nonetheless continues to observe a strong amount of activity ongoing.

  • The Company’s net cash amounted to a solid $47.7 million at the end of the quarter, a decrease of $5.8 million since the beginning of the fiscal year. The decrease in net cash for the quarter is primarily attributable to the lower EBITDA for the quarter. The shifting of revenues and related gross profits, as mentioned in the notes above have resulted in higher work in process and finished goods inventories by $16.3 million.

The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the Company”) for the quarter ended May 31, 2022. This MD&A should be read in conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2022 and 2021. The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The significant accounting policies upon which these consolidated financial statements have been prepared are detailed in Note 2 of the Company’s audited consolidated financial statements. All foreign currency transactions, balances and overseas operations have been converted to U.S. dollars, the Company’s reporting currency. This MD&A was approved by the Board of Directors of the Company on July 7, 2022. Additional information relating to the Company, including the Annual Information Form and Proxy Information Circular, can be found on SEDAR at www.sedar.com.

NON-IFRS AND SUPPLEMENTARY FINANCIAL MEASURES

In this MD&A, the Company has presented measures of performance or financial condition which are not defined under IFRS (“non-IFRS measures”) and are, therefore, unlikely to be comparable to similar measures presented by other companies. These measures are used by management in assessing the operating results and financial condition of the Company and are reconciled with the performance measures defined under IFRS. Reconciliations of these amounts can be found at the end of this report. The Company has also presented supplementary financial measures which are defined at the end of this report.

FORWARD-LOOKING INFORMATION

This MD&A may include forward-looking statements, which generally contain words like “should”, “believe”, “anticipate”, “plan”, “may”, “will”, “expect”, “intend”, “continue” or “estimate” or the negatives of these terms or variations of them or similar expressions, all of which are subject to risks and uncertainties. These risks and uncertainties are disclosed in the Company’s filings with the appropriate securities commissions. While these statements are based on management’s assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that it believes are reasonable and appropriate in the circumstances, no forward-looking statement can be guaranteed and actual future results may differ materially from those expressed herein. The Company disclaims any intention or obligation to update or revise any forward-looking statements contained herein whether as a result of new information, future events or otherwise, except as required by the applicable securities laws. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.

ABOUT VELAN

The Company designs, manufactures and markets on a worldwide basis a broad range of industrial valves for use in most industry applications including power generation, oil and gas, refining and petrochemicals, chemicals, LNG and cryogenics, pulp and paper, geothermal processes and shipbuilding. The Company is a world leader in steel industrial valves operating 12 manufacturing plants worldwide with 1,651 employees. The Company’s head office is located in Montreal, Canada. The Company’s business strategy is to design, manufacture, and market new and innovative valves with emphasis on quality, safety, ease of operation, and long service life. The Company’s strategic goals include, but are not limited to, customer-driven operational excellence and margin improvements, accelerated growth through increased focus on key target markets where the Company has distinct competitive advantages and continuously improving and modernizing its systems and processes.

The consolidated financial statements of the Company include the North American operations comprising two manufacturing plants in Canada, as well as one manufacturing plant and one distribution facility in the U.S. Significant overseas operations include manufacturing plants in France, Italy, Portugal, Korea, Taiwan, India, and China. The Company’s operations also include a sales operation in Germany.

RESULTS OF OPERATIONS
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the first quarter of the last fiscal year)

Three-month periods ended

 

(thousands)

 

May 31,
2022

 

 

May 31,
2021

 

Variance

 

 

 

 

 

Sales

$

75,005

 

$

74,529

 

476

 

Gross profit

 

20,073

 

 

19,994

 

79

 

Administration costs

 

25,812

 

 

23,779

 

2,033

 

Income taxes

 

1,509

 

 

631

 

878

 

Net loss4

 

(7,352

)

 

(5,073

)

(2,279

)

EBITDA5

 

(2,878

)

 

(941

)

(1,937

)

Bookings2

 

93,446

 

 

116,374

 

(22,928

)

Period ending backlog2 of orders

 

505,950

 

 

607,162

 

(101,212

)

(as a percentage of sales)

 

 

 

Gross profit

 

26.8

%

 

26.8

%

-

 

(in dollars per share)

 

 

 

Net loss1 per share – basic and diluted

 

(0.34

)

 

(0.24

)

(0.10

)

EBITDA2 per share – basic and diluted

 

(0.13

)

 

(0.04

)

(0.09

)

Backlog2

 

 

 

 

 



As at

 

(thousands)

May 31,
2022

 

February 28,
2022

 

May 31,
2021

 

 

 

 

 

Backlog2

505,950

 

501,224

 

607,162

 

For delivery within the next twelve months

339,214

 

321,860

 

360,414

 

For delivery beyond the next twelve months

166,736

 

179,364

 

246,748

 

Percentage – beyond the next twelve months

33.0

%

35.8

%

40.6

%

The total backlog2 increased by $4.7 million or 0.9% since the beginning of the fiscal year, amounting to $506.0 million at the end of the quarter. The increase in backlog is primarily due to a strong book-to-bill ratio2 of 1.25 as a result of bookings outpacing sales in the current quarter. Otherwise, the increase in backlog2 was negatively impacted by the weakening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year which represented $12.8 million at the end of the quarter.
Bookings6

Bookings1 amounted to $93.4 million, a decrease of $22.9 million or 19.7% compared to the first quarter of last year. This decrease is primarily attributable to upstream oil and gas and nuclear orders recorded in the Company’s Italian and French operations. The current geo-political uncertainties have created slower project awards resulting in lower bookings1 for the Company in the current quarter. The Company nonetheless continues to observe a strong amount of activity ongoing.

Sales

Sales were slightly higher for the quarter, increasing by $0.5 million or 0.6% compared to the same quarter last year. The increase in sales for the quarter is primarily attributable to increased shipments of large orders in the Company’s Italian operations, partially offset by reduced shipments in the Company’s North American operations. Although comparable to prior year’s first quarter performance, sales were impacted in the quarter by supply chain delays, increased time to obtain government export documentation and final commercial negotiations on a handful of contracts. The revenues related to these contracts are expected to be recovered throughout the remainder of the fiscal year.

Gross profit

Gross profit remained stable for quarter, totaling $20.1 million or 26.8% compared to last year’s $20.0 million or 26.8%. Gross profit remained stable due to the delivery of a comparable sales profile to last year, a balanced product mix, and continued focus on project delivery execution. The Company’s gross profit also benefited from favorable foreign exchange movements which were primarily made up of unrealized foreign exchange translations related to the fluctuation of the U.S. dollar against the euro and Canadian dollar when compared to similar movements from the previous year. The gross profit in the prior period was positively impacted by the recording of $0.6 million of CEWS while the Company did not qualify for such subsidies in the current fiscal year. The subsidies were allocated between cost of sales and administration costs. Prior year’s gross profit percentage without CEWS would have been 26.1% compared to 26.8% for the current quarter.

Administration costs

Administration costs for the quarter amounted to $25.8 million, an increase of $2.0 million or 8.5%. The increase in administration costs for the quarter is primarily attributable to higher outbound freight costs caused by the current global supply chain issues which are impacting freight costs and shipping delays. The administration costs in the prior year benefited from the recording of $0.4 million of CEWS while the Company did not qualify for such subsidies in the current quarter. The subsidies were allocated between cost of sales and administration costs. The increase for the quarter was partially offset by lower sales commissions recorded on the delivery of large orders over the course of the quarter.

EBITDA1

EBITDA1 amounted to negative $2.9 million or $0.13 per share compared to a negative $0.9 million or $0.04 per share last year. The unfavorable movement in EBITDA1 for the quarter is primarily attributable to the previously explained increase in administration costs.

Income taxes

 

Three-month periods ended

 

(thousands, excluding percentages)

May 31,
2022

 

May 31,
2021

 

 

$

 

%

 

$

 

%

 

 

 

 

 

 

 

 

 

 

Income tax at statutory rate

(1,546

)

26.5

 

(1,175

)

26.5

 

Tax effects of:

 

 

 

 

Difference in statutory tax rates in foreign jurisdictions

52

 

(0.9

)

114

 

(2.5

)

Non-deductible (taxable) foreign exchange losses (gains)

267

 

(4.6

)

(77

)

1.7

 

Unrecognized tax losses

2,855

 

(48.9

)

1,939

 

(43.7

)

Benefit attributable to a financing structure

(67

)

1.1

 

(66

)

1.5

 

Other differences

(52

)

0.9

 

(104

)

2.3

 

Income tax expense

1,509

 

(25.9

)

631

 

(14.2

)

Net loss7

Net loss1 amounted to $7.4 million or $0.34 per share compared to a net loss1 of $5.1 million or $0.24 per share last year. The movement in net loss1 was primarily attributable to the same factors as explained in the EBITDA8 section combined with unfavorable movements in income taxes, partially offset by a favorable movement in finance costs.

LIQUIDITY AND CAPITAL RESOURCES – a discussion of liquidity risk, credit facilities, cash flows and proposed transactions (unless otherwise noted, all dollar amounts are denominated in U.S. dollars)

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by continually monitoring its future cash requirements. Cash flow forecasting is performed in the operating entities and aggregated by the Company’s corporate finance team. The Company’s policy is to maintain sufficient cash and cash equivalents and available credit facilities in order to meet its present and future operational needs.

On May 31, 2022, the Company’s order backlog2 was $506.0 million and its net cash plus unused credit facilities amounted to $164.9 million, which it believes, along with future cash flows generated from operations, is sufficient to meet its financial obligations, increase its capacity, satisfy its working capital requirements, and execute on its business strategy. The Company also believes that its unused credit facilities are sufficient to navigate through lingering COVID-19 impacts and the conflict in Ukraine. However, there can be no assurance that the risk of another sharp downturn in the economy will not materially adversely affect the Company’s results of operations or financial condition. As at May 31, 2022, the Company is in compliance with all covenants related to its debt and credit facilities.

As part of managing its liquidity risk, the Company also monitors the financial health of its key suppliers. As at May 31, 2022, the Company does not see undue risk as a result of this assessment.

Cash flows - quarter ended May 31, 2022 compared to the quarter ended May 31, 2021
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to same period in the prior fiscal year)

The Company’s changes in net cash were as follows:

 

Three-month periods ended

(thousands)

May 31,
2022

 

May 31,
2021

 

 

 

Net Cash – Beginning of period

53,465

 

62,953

Cash provided (used) by operating activities

(3,065

)

895

Cash provided (used) by investing activities

(2,187

)

907

Cash provided by financing activities

1,221

 

6,046

Effect of exchange rate differences on cash

(1,782

)

436

Net Cash – End of period

47,652

 

71,237

Operating activities

The unfavorable movement in cash used by operating activities for the quarter is primarily attributable to the decrease in EBITDA combined with a reduction in long-term customer deposits, partially offset by a favorable movement in non-cash working capital items.

The changes in non-cash working capital items were as follow:

 

Three-month periods ended

(thousands)

May 31,
2022

 

May 31,
2021

 

 

 

 

Accounts receivable

14,062

 

14,985

 

Income taxes recoverable

(561

)

(910

)

Inventories

(10,173

)

(31,207

)

Deposits and prepaid expenses

(302

)

(2,455

)

Accounts payable and accrued liabilities

413

 

14,830

 

Income taxes payable

(1,098

)

(152

)

Customer deposits

3,790

 

8,747

 

Provisions

(98

)

(289

)

Changes in non-cash working capital items

6,033

 

3,549

 

The positive non-cash working capital movements for the quarter ended May 31, 2022 consisted primarily of:

  • A decrease in accounts receivable primarily due to increased collections of prior year accounts;

  • A higher amount of short-term customer deposits collected on certain large project orders by the Company’s French operations.

The negative non-cash working capital movements for the quarter ended May 31, 2022 were primarily due to an increase in inventories required for the increase in the backlog combined with shipment delays explained under sales in the Results of operations section.

Investing activities

Cash used by investing activities for the quarter was primarily due to an increase in short-term investments and additions to property, plant and equipment. The fluctuation in additions to property, plant and equipment for the current quarter is primarily attributable to the timing of the receipts of certain equipment.

Financing activities

During the quarter, the Company’s Italian operations borrowed $2.2 million in the form of unsecured bank loans, bearing annual interest between 0.67% and 0.71%, repayable quarterly and expiring in fiscal 2027.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk management program focuses on mitigating unpredictable financial market risks and their potential adverse effects on the Company’s financial performance.

The Company’s financial risk management is generally carried out by the corporate finance team, based on policies approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are the responsibility of the corporate finance team in conjunction with the finance teams of the Company’s subsidiaries. The Company uses derivative financial instruments to hedge certain risk exposures. Use of derivative financial instruments is subject to a policy which requires that no derivative transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary being that all derivative transactions are to be entered into for risk management purposes only).

Market risk

Currency risk

Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Currency risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency other than a company’s functional currency. The Company has operations with different functional currencies, each of which will be exposed to currency risk based on its specific functional currency.

When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same currency. The remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the Company uses foreign currency derivatives, primarily foreign exchange forward contracts. These derivatives are not designated as hedges for accounting purposes.

The amounts outstanding as at May 31, 2022 and February 28, 2022 are as follows:

 

Range of exchange rates

Gain (loss)
(in thousands of U.S. dollars)

Notional amount
(in thousands of indicated currency)

 

May 31,
2022

February 28,
2022

May 31,
2022

$

February 28,
2022

$

May 31,
2022

February 28,
2022

Foreign exchange forward contracts

 

 

 

 

 

 

Sell US$ for CA$ - 0 to 12 months

1.27-1.28

1.27-1.28

(152

)

(470

)

US$37,500

US$50,000

Buy US$ for CA$ - 0 to 12 months

1.25

1.25

88

 

301

 

US$37,500

US$50,000

Sell € for US$ – 0 to 12 months

1.15

1.15

(1

)

(90

)

€11,250

€15,000

Buy € for US$ – 0 to 12 months

1.13

1.13

562

 

252

 

€11,250

€15,000

Foreign exchange forward contracts are contracts whereby the Company has the obligation to sell or buy the currencies at the strike price. The fair value of the foreign currency instruments is recorded in the consolidated statement of income and reflects the estimated amounts the Company would have paid or received to settle these contracts as at the financial position date. Unrealized gains are recorded as derivative assets and unrealized losses as derivative liabilities on the consolidated statement of financial position.

Interest rate risk

The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash and cash equivalents. Items at variable rates expose the Company to cash flow interest rate risk, and items at fixed rates expose the Company to fair value interest rate risk. The Company’s long-term debt and credit facilities predominantly bear interest, and its cash and cash equivalents earn interest at variable rates. An assumed 0.5% change in interest rates would have no significant impact on the Company’s net income or cash flows.

Credit risk

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.

The Company’s credit risk related to its trade accounts receivable is concentrated. As at May 31, 2022, three (February 28, 2022 – three) customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 13.7% (February 28, 2022 – 10.8%), and the Company’s ten largest customers accounted for 59.9% (February 28, 2022 – 55.7%) of trade accounts receivable. In addition, there was two customers (May 31, 2022 – nil) that accounted for more than 10% of the Company’s sales.

In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts receivable, historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established for each customer and reviewed periodically. For some trade accounts receivable, the Company may obtain security in the form of credit insurance which can be called upon if the counterparty is in default under the terms of the agreement.

The Company applies the IFRS 9 simplified approach to measure expected credit losses using a lifetime expected credit loss allowance for trade receivables. The expected credit loss rates are based on the Company’s historical credit losses experienced over the last fiscal year prior to period end. The historical rates are then adjusted for current and forward-looking information on macro-economic factors affecting the Company’s customers.

The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash equivalents and short-term investments, which it manages by dealing with highly rated financial institutions. The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on derivative assets.

The table below summarizes the ageing of the trade accounts receivable as at:

 



As at

(thousands)

May 31,
2022

$

 

February 28,
2022

$

 

 

 

 

Current

49,963

 

64,689

 

Past due 0 to 30 days

9,735

 

17,995

 

Past due 31 to 90 days

16,394

 

9,248

 

Past due more than 90 days

14,858

 

16,285

 

 

90,950

 

108,217

 

Less: Loss allowance

(488

)

(509

)

 

90,462

 

107,708

 

Other receivables

8,124

 

8,126

 

Total accounts receivable

98,586

 

115,834

 

The table below summarizes the movement in the allowance for doubtful accounts:

 



Three-month periods ended

(thousands)

May 31,
2022

$

 

May 31,
2021
$

 

 

 

 

Balance – Beginning of the year

509

 

1,146

 

Loss allowance expense

8

 

-

 

Recoveries of trade accounts receivables

-

 

(22

)

Write-off of trade accounts receivable

(16

)

(55

)

Foreign exchange

(13

)

12

 

Balance – End of the period

488

 

1,081

 

Liquidity risk – see discussion in liquidity and capital resources section

CERTAIN RISKS THAT COULD AFFECT OUR BUSINESS

The Company lists the various risks that could affect its business in the year-end version of its MD&A. The Company continuously monitors and evaluates such risks, with particular current focus on the COVID-19 pandemic, the Ukraine conflict and the ongoing labour union negotiation in Montreal and Granby. The Company has no changes to report as at May 31, 2022.

INTERNAL CONTROLS AND PROCEDURES

In accordance with National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings, disclosure controls and procedures have been designed to provide reasonable assurance that the information presented in the Company’s interim and annual reports to shareholders is accumulated and communicated to management on a timely basis, including the Chief Executive Officer and the Chief Financial Officer, in order for appropriate decisions to be made in regards to disclosures. Internal controls over financial reporting have also been designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements in accordance with IFRS.

The Company did not make any changes to the design of internal controls over financial reporting during the three-month period ended May 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS

The Company’s financial statements are prepared in accordance with IFRS as issued by the IASB. The Company’s significant accounting policies as described in notes 2 and 3 of the Company’s audited consolidated financial statements are essential to understanding the Company’s financial positions, results of operations and cash flows. Certain of these accounting policies require critical accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters that are inherently uncertain and susceptible to change. The assumptions and estimates used are based on parameters which are derived from the knowledge at the time of preparing the financial statements and believed to be reasonable under the circumstances. In particular, the circumstances prevailing at this time and assumptions as to the expected future development of the global and industry-specific environment were used to estimate the Company’s future business performance. Where these conditions develop differently than assumed and beyond the control of the Company, the actual results may differ from those anticipated (see Forward-looking information section above). These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is changed. There were no significant changes made to critical accounting estimates during the past two fiscal years.

There have been no material changes from those identified in the annual MD&A.

ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED

In January 2020, the International Accounting Standards Board (“IASB”) issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1) providing a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments in Classification of Liabilities as Current or Non-current (Amendments to IAS 1) affect only the presentation of liabilities in the statement of financial position, not the amount or timing of recognition of any asset, liability income or expenses, or the information that entities disclose about those items. In July 2020, the IASB published Classification of Liabilities as Current or Non-current – Deferral of Effective Date (Amendment to IAS 1) deferring the effective date of the January 2020 amendments to IAS 1 by one year. The amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2023 with earlier adoption permitted. The Company is currently evaluating the impact of these amendments on its financial statements.

SUMMARY OF QUARTERLY RESULTS

Summary financial data derived from the Company’s unaudited financial statements from each of the eight most recently completed quarters are as follows:

For the quarters in months ending May, August, November and February
(in thousands of U.S. dollars, excluding per share amounts)

 

 

 

 

QUARTERS ENDED

 

May
2022

February
2022

November
2021

August
2021

May
2021

February
2021

November
2020

August
2020

Sales

$75,005

$124,849

$109,971

$101,893

$74,529

$85,510

$71,560

$68,340

Net earnings (loss)9

(7,352)

(25,509)

4,507

5,015

(5,073)

338

9,527

(5,112)

Net earnings (loss) 1 per share

 

 

 

 

 

 

 

 

- Basic and diluted

(0.34)

(1.19)

0.21

0.23

(0.24)

0.02

0.44

(0.24)

EBITDA10

(2,878)

16,592

13,291

10,657

(941)

1,648

13,784

(2,497)

EBITDA2 per share

 

 

 

 

 

 

 

 

- Basic and diluted

(0.13)

0.77

0.62

0.49

(0.04)

0.08

0.64

(0.12)

NON-IFRS AND SUPPLEMENTARY FINANCIAL MEASURES

In this MD&A, the Company has presented measures of performance or financial condition which are not defined under IFRS (“non-IFRS measures”) and are, therefore, unlikely to be comparable to similar measures presented by other companies. These measures are used by management in assessing the operating results and financial condition of the Company and are reconciled with the performance measures defined under IFRS. Company has also presented supplementary financial measures which are defined at the end of this report. Reconciliation and definition can be found below.

Earnings before interest, taxes, depreciation and amortization ("EBITDA")



Three-month periods ended

(thousands, except amount per shares)

May 31,
2022

$

 

May 31,
2021

$

 

 

 

 

Net loss11

(7,352

)

(5,073

)

 

 

 

Adjustments for:

 

 

Depreciation of property, plant and equipment

2,161

 

2,414

 

Amortization of intangible assets

568

 

558

 

Finance costs – net

236

 

529

 

Income taxes

1,509

 

631

 

 

 

 

EBITDA

(2,878

)

(941

)

EBITDA per share

 

 

-        Basic and diluted

(0.13

)

(0.04

)

The term “EBITDA” is defined as net income or loss attributable to Subordinate and Multiple Voting Shares plus depreciation of property, plant & equipment, plus amortization of intangible assets, plus net finance costs plus income taxes. The terms “EBITDA per share” is obtained by dividing EBITDA by the total amount of subordinate and multiple voting shares. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.

Definitions of supplementary financial measures

The term “Net new orders” or “bookings” is defined as firm orders, net of cancellations, recorded by the Company during a period. Bookings are impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the Company’s sales operation performance for a given period as well as well as an expectation of future sales and cash flows to be achieved on these orders.

The term “backlog” is defined as the buildup of all outstanding bookings to be delivered by the Company. The Company’s backlog is impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the future operational challenges of the Company as well as an expectation of future sales and cash flows to be achieved on these orders.

The term “book-to-bill” is obtained by dividing bookings by sales. The measure provides an indication of the Company’s performance and outlook for a given period.  

The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.  

________________________________________
1
All dollar amounts are denominated in U.S. dollars.
2 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares
3 Non-IFRS and supplementary financial measures – additional specifications at the end of this report
4 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares
5 Non-IFRS and supplementary financial measures – more information at the end of this report
6 Non-IFRS and supplementary financial measures – more information at the end of this report
7 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares
8 Non-IFRS and supplementary financial measures – more information at the end of this report
9 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares
10 Non-IFRS and supplementary financial measures – more information at the end of this report
11 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares