Scottie Resources Corp. — Interim / Quarterly Report 2022

Oct 7, 2021

MANAGEMENT’S DISCUSSION AND ANALYSIS Second quarter ended August 31, 2021

Management’s Discussion and Analysis Second quarter ended August 31, 2021

HIGHLIGHTS[1]

• Sales for the quarter amounted to $101.9 million, an increase of 33.6 million or 49.1% compared to the same quarter of the previous fiscal year. This quarter’s sales level represents the highest volume in the last six quarters.

• Gross profit for the quarter of $31.4 million, or 30.8%, an increase of $14.3 million or 580 basis points from the same quarter of the previous year. The gross profit percentage of 29.1% for the first six-month of the fiscal year is the highest in recent history, a performance essentially driven by the improved sales volume, a more profitable product mix delivered, as well as the margin improvement activities undertaken over the past fiscal years within the scope of the V20 restructuring and transformation plan.

• Net income[2] of $5.0 million and EBITDA[3] of $10.7 million for the quarter represent a significant improvement compared to last year’s results. The better results are explained primarily by an increased gross profit, driven by an improved sales volume and product mix, despite notably lower Canada Emergency Wage Subsidies («CEWS»).

• Strong order backlog[3] of $575.8 million at the end of the quarter.

• Net new orders (“bookings”)[3] of $81.6 million for the quarter, a decrease of $19.7 million or 19.5% compared to the same quarter of the previous fiscal year. The Company’s book-to-bill ratio of 0.80 for the quarter has a stronger relation to the improved sales volume rather than the softer quarter in terms of bookings. Nonetheless, the book-to-bill ratio for the six-month period stands at a positive 1.12.

• The Company’s net cash amounted to $68.1 million at the end of the quarter, an increase of $5.2 million since the beginning of the fiscal year.

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

1

Management’s Discussion and Analysis Second quarter ended August 31, 2021

The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the Company”) for the quarter ended August 31, 2021, current as of October 7, 2021, the date of approval of this Management Discussion and Analysis (“MD&A”) by the Board of Directors. This MD&A should be read in conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2021 and February 29, 2020. 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. 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 1,699 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 and a 50%-owned Korean foundry.

2

Management’s Discussion and Analysis Second quarter ended August 31, 2021

RESULTS OF OPERATIONS

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

Three-month periods ended Six-month periods ended	Three-month periods ended Six-month periods ended
(thousands) August 31, 2021 August 31, 2020	Variance August 31, 2021 August 31, 2020 Variance
Sales $101,893 $68,340 Gross profit 31,391 17,053 Administration costs 23,977 19,687 Income taxes 2,271 (505) Net income (loss)1 5,015 (5,112) EBITDA2 10,657 (2,497) Bookings2 81,550 101,287 Period ending backlog2of orders	33,553 $176,422 $144,993 31,429 14,338 51,385 35,445 15,940 4,290 47,756 37,354 10,402 2,776 2,902 608 2,294 10,127 (58) (6,998) 6,940 13,154 9,716 141 9,575 (19,737) 197,924 178,023 19,901 575,826 462,695 113,131
(as a percentage of sales) Gross profit 30.8% 25.0%	580 bpts 29.1% 24.4% 470 bpts
(in dollars per share) Net income (loss)1per share – basic and diluted 0.23 (0.24) EBITDA2per share – basic and diluted 0.49 (0.12)	0.47 (0.00) (0.32) 0.32 0.61 0.45 0.01 0.44

Backlog[2 ]

			As at
	August 31,	February 28,	August 31,
(thousands)	2021	2021	2020
Backlog2	575,826	562,458	462,696
For delivery within the next twelve months	346,586	338,458	289,389
For delivery beyond the next twelve months	229,240	224,035	173,307
Percentage – beyond the next twelve months	39.8%	39.8%	37.5%

As a result of bookings[2] outpacing sales in the current six-month period, the Company’s book-to-bill ratio[2] was 1.12 for the period. Furthermore, the total backlog[2] increased by $13.3 million or 2.4% since the beginning of the fiscal year, amounting to $575.8 million as at August 31, 2021.

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 – more information at the end of this report

3

Management’s Discussion and Analysis Second quarter ended August 31, 2021

Bookings[1 ]

Bookings[1] amounted to $81.6 million, a decrease of $19.7 million or 19.5% for the quarter. This decrease is primarily attributable to lower large project orders recorded by the Company’s French and North American operations. Bookings[1 ] amounted to $197.9 million, an increase of $19.9 million or 11.2% for the six-month period. The increase is primarily attributable to large project orders recorded by the Company’s Italian and North American operations, notably in the marine and oil and gas markets. The increase is also attributable to higher MRO orders recorded by the Company’s North American operations. The Company is encouraged by the recovery of its MRO order bookings, which were severely impacted by the global pandemic at the end of the prior fiscal year, and ultimately adversely affected the sales of its current fiscal year as explained in the next paragraph. The increase in bookings for the six-month period was partially offset by a reduction in large project orders recorded by the Company’s French operations.

Sales

Sales amounted to $101.9 million, an increase of $33.6 million or 49.1% for the quarter. Sales amounted to $176.4 million, an increase of $31.4 million or 21.7% for the six-month period. Sales for both periods were positively impacted by the Company’s North American operations increased large project orders shipments primarily destined for the petrochemical and power markets. For the quarter, sales were positively impacted by the shipment of previously delayed orders by the Company’s Italian operations. The delays were due to various customer-related and global logistics factors. In terms of the six-month period, the Company’s French operations were able to show an improved sales volume due to their strong performance in the first quarter of the current fiscal year. Finally, the Company’s MRO sales for the six-month period were negatively affected by the persistent unfavorable market conditions triggered by the novel coronavirus (“COVID-19”) global pandemic which has significantly affected the Company’s distribution channels’ bookings in the previous fiscal year. The lower distribution channels’ bookings in the latter part of the prior year translated in lower shipments of such orders in the first quarter of the current year.

Gross profit

Gross profit amounted to $31.4 million, an increase of $14.3 million or 84.1% for the quarter. Gross profit amounted to $51.4 million, an increase of $15.9 million or 45.0% for the six-month period. The gross profit percentage for the quarter of 30.8% was an increase of 580 basis points compared to last year‘s second quarter, while the gross profit percentage for the first six-month period of 29.1% represented an increase of 470 basis points compared to the same period last year, and is also the highest in recent history. The improvement in gross profit percentage for both periods is primarily attributable to the higher sales volume, which helped to cover the Company’s fixed production overhead costs more efficiently. The Company’s improved margins are also stemming from the margin improvement activities implemented over the course of the past fiscal years within the scope of the V20 restructuring and transformation plan. Additionally, the Company’s gross profit also benefited from favorable movements in unrealized foreign exchange translation primarily attributable to the fluctuation of the U.S. dollar against the euro and the Canadian dollar for the quarter and the six-month period when compared to the prior year. Finally, the increase in gross profit percentage was such that it could more than offset the impact of a lower amount of CEWS of $1.7 million for the quarter and $3.1 million for the six-month period compared to last year. The subsidies are allocated between cost of sales and administration costs.

1 Non-IFRS and supplementary financial measures – more information at the end of this report

4

Management’s Discussion and Analysis Second quarter ended August 31, 2021

EBITDA[1]

EBITDA[1] for the quarter amounted to $10.7 million or $0.49 per share compared to a negative $2.5 million or $0.12 per share last year. EBITDA[1] for the six-month period amounted to $9.7 million or $0.45 per share compared to $0.1 million or $0.01 per share in the prior period. The improvements in EBITDA[1] for both periods are primarily attributable to:

• An increase in gross profit by $14.3 million, from 25.0% to 30.8% for the quarter and $15.9 million, from 24.4% to 29.1% for the six-month period, primarily due to a higher sales volume, while reflecting the notably improved product mix and margins resulting from the Company’s targeted efforts under V20, described earlier. The Company’s gross profit also benefited from favorable movements in unrealized foreign exchange translation for the quarter and six-month period when compared to the prior year.

• The absence of restructuring and transformation costs in the current fiscal year which totaled $1.7 million in the previous quarter and $2.9 million in the previous six-month period; and

• A reduction in other expenses of $1.4 million for the quarter and six-month period primarily due to land clean-up costs of a former factory incurred in the second quarter of the prior year.

On the other hand, these improvements were partially offset by an increase in administration costs of $4.3 million or 21.8% for the quarter and $10.4 million or 27.8% for the six-month period, primarily attributable to:

• A decrease of $1.4 million for the quarter and $2.5 million for the six-month period in CEWS received by the Company compared to last year. The subsidies are allocated between cost of sales and administration costs.

• An increase in sales commissions for both periods due to the higher sales volume.

• A general increase in administration expenses that had been significantly lowered when the global pandemic broke out last year; and

• An increase of $1.4 million for the six-month period in the costs recognized in connection with the Company’s ongoing asbestos litigation (see Contingencies section).

Income taxes

		Three-month periods ended	Three-month periods ended	Three-month periods ended
	August 31,		August 31,
(thousands, excluding percentages)		2021		2020
	$	%	$	%
Income tax at statutory rate	1,846	26.5	(1,536)	26.6
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions	65	0.9	51	(0.9)
Non-deductible (taxable) foreign exchange losses (gains)	148	2.1	(143)	2.5
Unrecognized tax losses	158	2.3	1,079	(18.7)
Benefit attributable to a financing structure	(66)	(0.9)	(64)	1.1
Other differences	120	1.7	108	(1.8)
Income tax expense (recovery)	2,271	32.6	(505)	8.8

1 Non-IFRS and supplementary financial measures – more information at the end of this report

5

Management’s Discussion and Analysis Second quarter ended August 31, 2021

		Six-month periods ended	Six-month periods ended	Six-month periods ended
	August 31,		August 31,
(thousands, excluding percentages)		2021		2020
	$	%	$	%
Income tax at statutory rate	671	26.5	(1,746)	26.6
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions	179	7.1	136	(2.1)
Non-deductible (taxable) foreign exchange losses (gains)	71	2.8	(12)	0.2
Unrecognized tax losses	2,097	82.8	2,301	(35.1)
Benefit attributable to a financing structure	(132)	(5.2)	(125)	1.9
Other differences	16	0.6	54	(0.8)
Income tax expense	2,902	114.6	608	(9.3)

Net income (loss)[1 ]

Net income[1] for the quarter amounted to $5.0 million or $0.23 per share compared to a net loss[1 ] of $5.1 million or $0.24 per share last year. Net loss[1] for the six-month period amounted to $0.1 million or $0.00 per share compared to a net loss[1] of $7.0 million or $0.32 per share in the prior period. The favorable movements in the Company’s results were primarily attributable to the same factors as explained in the EBITDA[2] section coupled with an unfavorable movement in income taxes.

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 August 31, 2021, the Company’s order backlog[2] was $575.8 million and its net cash, subject to certain local exchange control restrictions, plus unused credit facilities amounted to $145.9 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 overcome the remaining lingering effects of the COVID-19 pandemic on the world’s economy. 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 August 31, 2021, 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.

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 – more information at the end of this report

6

Management’s Discussion and Analysis Second quarter ended August 31, 2021

Cash flows - quarter and six-month period ended August 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	Three-month periods ended	Six-month periods ended	Six-month periods ended
	August 31,	August 31,	August 31,	August 31,
(thousands)	2021	2020	2021	2020
Net Cash – Beginning of period	71,237	44,640	62,953	31,010
Cash provided (used) by operating activities	1,533	(140)	2,428	19,103
Cash used by investing activities	(3,599)	(539)	(2,692)	(4,446)
Cash provided by financing activities	688	12,186	6,734	9,532
Effect of exchange rate differences on cash	(1,728)	4,218	(1,292)	5,166
Net Cash – End of period	68,131	60,365	68,131	60,365

Operating activities

The favorable movement in cash provided by operating activities for the quarter is primarily attributable to an improved EBITDA[1] partially offset by unfavorable changes in non-cash working capital items. The decrease in cash provided by operating activities for the six-month period is primarily attributable to unfavorable changes in non-cash working capital items partially offset by an improved EBITDA[1] .

The negative non-cash working capital movements for the quarter ended August 31, 2021 consisted primarily of:

• An increase in inventories principally in reaction to the delivery schedule of certain large project orders.

• An increase in accounts receivable mainly due to the higher sales output for the quarter which occurred predominantly at the tail end of the quarter.

• An increase in accounts payable and accrued liabilities due to the timing of payments, especially related to inventory purchases.

The positive non-cash working capital movements for the quarter ended August 31, 2021 were primarily due to an increase in customer deposits collected on certain large project orders by the Company’s Italian and French operations.

The negative non-cash working capital movements for the six-month period ended August 31, 2021 were mainly due to an increase in inventories required for the increase in bookings and backlog since the beginning of the fiscal year.

The positive non-cash working capital movements for the six-month period ended August 31, 2021 consisted principally of:

• A decrease in accounts receivable mainly due to increased collections of prior year account.

• A higher amount of customer deposits collected on certain large project orders by the Company’s Italian, French and North American operations.

• An increase in accounts payable and accrued liabilities due to the timing of payments, especially related to inventory purchases.

1 Non-IFRS and supplementary financial measures – more information at the end of this report

7

Management’s Discussion and Analysis Second quarter ended August 31, 2021

Investing activities

Cash used by investing activities for the quarter was primarily due to additions in property, plant and equipment and an increase in short-term investments.

Cash used by investing activities for the six-month period was primarily due to additions in property, plant and equipment and an increase in short-term investments, partially offset by proceeds on disposal of property, plant and equipment related to the sale of a vacant land that used to host a production plant of the Company. The plant’s operations were fully transferred in fiscal 2017 to other plants, and the building was demolished.

The fluctuations in additions to property, plant and equipment for any period when compared to the prior year comparable period is due to the timing of the receipts of certain equipment.

Financing activities

During the course of the current quarter, while the Company continued to pay down its outstanding long-term debt, its North American operations borrowed $5.9 million in the form of a secured mortgage loan bearing monthly interest payments of 3.80%, with principal payments beginning in October 2021 and repayable over 20 years.

During the second quarter of the previous year, the Company’s North American operations borrowed $10.9 million in the form of a secured mortgage loan bearing monthly interest payments of 3.80%, with principal payments beginning in October 2021 and repayable over 20 years. Additionally, its Italian subsidiary secured three new long-term debt issuances with two financial institutions as part of the measures and initiatives put in place by the Italian government to support companies during the pandemic. Specifically, the subsidiary borrowed $3.4 million in the form of unsecured bank loans, bearing interest between 1.00% and 1.25%, with principal repayments beginning in 2021 and 2022 and repayable in monthly and quarterly installments, expiring in 2025 and 2026.

During the current quarter, the company reimbursed $3.4 million of amounts previously drawn on its revolving credit facility, bringing the net withdrawn amount for the six-month period down to $6.3 million.

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

8

Management’s Discussion and Analysis Second quarter ended August 31, 2021

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 August 31, 2021 and February 28, 2021 are as follows:

	Range of exchange rates	Range of exchange rates	Gain (loss)		Notional amount	Notional amount
			(in thousands of	U.S. dollars)	(in thousands of	indicated currency)
	August 31,	February 28,	August 31,	February 28,	August 31,	February 28,
	2021	2021	2021	2021	2021	2021
			$	$
Foreign exchange forward contracts
Sell US$ for CA$ - 0 to 12 months	1.28-1.30	1.30	(7)	(135)	US$22,000	US$22,000
Buy US$ for CA$ - 0 to 12 months	1.20-1.22	1.22	-	48	US$22,000	US$22,000
Sell € for US$ – 0 to 12 months	1.22-1.24	1.22-1.24	-	(168)	€11,167	€18,363
Buy € for US$ – 0 to 12 months	1.16-1.20	1.16-1.20	73	148	€11,167	€18,363
Buy US$ for € – 0 to 12 months	1.18-1.21	-	-	-	US$323	US$-

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 August 31, 2021, five (February 28, 2021 – five) customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 11.1% (February 28, 2021 – 15.6%), and the Company’s ten largest customers accounted for 55.2% (February 28, 2021 – 63.5%) of trade accounts receivable. In addition, there was no customer (August 31, 2021 – one) 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 standing 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.

9

Management’s Discussion and Analysis Second quarter ended August 31, 2021

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
	August 31,	February 28,
	2021	2021
(thousands)	$	$
Current	67,387	76,407
Past due 0 to 30 days	14,329	19,630
Past due 31 to 90 days	13,538	9,672
Past due more than 90 days	20,987	17,653
	116,241	123,362
Less: Loss allowance	(843)	(1,146)
	115,398	122,216
Other receivables	10,677	13,157
Total accounts receivable	126,075	135,373

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

	Six-month periods ended	Six-month periods ended
	August 31,	August 31,
	2021	2020
(thousands)	$	$
Balance – Beginning of the year	1,146	2,002
Loss allowance expenses	58	2
Recoveries of trade accounts receivables	(275)	(122)
Write-off of trade accounts receivable	(8)	(212)
Foreign exchange	(78)	100
Balance – End of the period	843	1,770

Liquidity risk – see discussion in liquidity and capital resources section

10

Management’s Discussion and Analysis Second quarter ended August 31, 2021

CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)

Two of the Company’s U.S. subsidiaries have been named as one of the defendants in a number of pending lawsuits that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. Management believes it has a strong defence related to certain products that may have contained an internal asbestos containing component. 1,973 claims were outstanding at the end of the reporting period (February 28, 2021 – 1,696). During the reporting period, the Company resolved 116 claims (August 31, 2020 – 175) and received 393 claims (August 31, 2020 – 253). Settlement costs and legal fees related to these asbestos claims amounted to $2,454 (August 31, 2020 – $3,171) for the quarter and $6,647 (August 31, 2020 – $5,217) for the six-month period.

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 and six-month periods ended August 31, 2021 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.

11

Management’s Discussion and Analysis Second quarter ended August 31, 2021

ACCOUNTING STANDARDS AND AMENDMENTS ADOPTED IN THE PERIOD

In August 2020, the International Accounting Standards Board (“IASB”) issued Interest Rate Benchmark Reform (Phase 2) , which amends IFRS 9 Financial instruments , IAS 39 Financial instruments: Recognition and measurement , IFRS 7 Financial instruments: Disclosures and IFRS 16 Leases . The Phase 2 amendments address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. These amendments complement those issued in 2019 and focus on issues that might affect financial reporting during the reform of an interest rate benchmark, including the effects of changes to contractual cash flows arising from the replacement of an interest rate benchmark with an alternative benchmark rate. This amendment was adopted effective March 1, 2021 and resulted in no material adjustments.

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 ended in May, August, November and February (in thousands of U.S. dollars, excluding per share amounts)

							QUARTERS ENDED	QUARTERS ENDED
	August	May	February	November	August	May	February	November
	2021	2021	2021	2020	2020	2020	2020	2019
Sales	$101,893	$74,529	$85,510	$71,560	$68,340	$76,653	$113,641	$88,701
Net earnings (loss)1	5,015	(5,073)	338	9,527	(5,112)	(1,886)	(11,116)	(819)
Net earnings (loss)1
per share
- Basic and diluted	0.23	(0.24)	0.02	0.44	(0.24)	(0.09)	(0.51)	(0.04)

1 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares

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Management’s Discussion and Analysis Second quarter ended August 31, 2021

NON-IFRS AND SUPPLEMENTARY FINANCIAL MEASURES

In this MD&A, the Company 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.

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

	Three-month	periods ended	Six-month periods ended	Six-month periods ended
	August 31,	August 31,	August 31,	August 31,
	2021	2020	2021	2020
(thousands, except amount per shares)	$	$	$	$
Net income (loss)1	5,015	(5,112)	(58)	(6,998)
Adjustments for:
Depreciation of property, plant and equipment	2,394	2,450	4,808	4,975
Amortization of intangible assets	451	626	1,009	1,194
Finance costs – net	526	44	1,055	362
Income taxes	2,271	(505)	2,902	608
EBITDA	10,657	(2,497)	9,716	141
EBITDA per share
- Basic and diluted	0.49	(0.12)	0.45	0.01

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 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 Net earnings or loss refer to net income or loss attributable to Subordinate and Multiple Voting Shares

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