TerraVest Industries — Interim / Quarterly Report 2021

Feb 11, 2021

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the first quarter ended December 31, 2020

Interim Condensed Consolidated Statements of Financial Position

(In thousands of Canadian dollars)

		As at	As at
		December 31, 2020	September 30, 2020
	Note	(Unaudited)	(Audited)
		$	$
ASSETS
Current
Cash		29,023	27,452
Accounts receivable		42,060	44,610
Income taxes receivable		1,043	783
Inventories		78,888	83,955
Other current assets	6	5,098	3,790
		156,112	160,590
Non-Current
Property, plant and equipment		75,253	76,359
Right-of-use assets		31,081	32,411
Intangible assets		19,827	21,404
Deferred income tax assets		8,412	8,587
Investments	7	12,311	7,470
Other non‐current assets		150	150
Goodwill		12,393	12,654
		315,539	319,625
LIABILITIES
Current
Bank overdrafts		230	735
Revolving credit facility		8	864
Accounts payable and accrued liabilities		25,461	24,536
Deferred revenues		14,509	15,888
Dividends payable	9	1,848	1,868
Income taxes payable		1,265	2,833
Current portion of long‐term debt		5,371	5,251
Current portion of lease liabilities		4,403	4,374
		53,095	56,349
Non-Current
Long‐term debt		93,384	98,400
Lease liabilities		29,309	30,523
Deferred income tax liabilities		8,148	8,211
		183,936	193,483
SHAREHOLDERS' EQUITY
Share capital	9	147,658	149,284
Share premium		33,760	35,191
Share‐based payments reserve		445	417
Accumulated other comprehensive income (loss)		(1,221)	393
Accumulated deficit		(49,186)	(59,355)
		131,456	125,930
Non‐controlling interest		147	212
		131,603	126,142
		315,539	319,625

See accompanying notes to the interim condensed consolidated financial statements

On behalf of the Board:

/s/ Charles Pellerin, Director /s/ Blair Cook, Director

Interim Condensed Consolidated Statements of Income

(Unaudited – in thousands of Canadian dollars, except share and per share amount)

			First quarters ended
	Note	December 31, 2020	December 31, 2019
		$	$
SALES	14
Products		79,049	84,378
Services		3,291	3,874
		82,340	88,252
Cost of sales		60,248	67,770
Gross profit		22,092	20,482
EXPENSES
Administration		6,113	8,311
Selling		1,608	1,704
Financing costs	11	976	1,571
Other (gains) losses	12	(1,907)	(213)
		6,790	11,373
EARNINGS BEFORE INCOME TAXES		15,302	9,109
INCOME TAX EXPENSE
Current		3,238	2,171
Deferred		112	518
		3,350	2,689
NET INCOME		11,952	6,420
Net income (loss) attributable to:
Common shareholders		12,017	6,461
Non‐controlling interest		(65)	(41)
		11,952	6,420
Weighted average number of common shares:
Basic	10	18,493,271	17,869,479
Diluted	10	18,746,722	19,107,518
Net income per share:
Basic	10	$0.65	$0.36
Diluted	10	$0.64	$0.35

Interim Condensed Consolidated Statements of Comprehensive Income

(Unaudited – in thousands of Canadian dollars)

	First quarters ended
	December 31, 2020	December 31, 2019
	$	$
NET INCOME	11,952	6,420
Other comprehensive loss, net of income tax:
Item that may be reclassified subsequently to profit or loss:
Exchange difference on translating foreign operations	(1,614)	(647)
COMPREHENSIVE INCOME	10,338	5,773
Attributable to:
Common shareholders	10,403	5,814
Non‐controlling interest	(65)	(41)
	10,338	5,773

Interim Condensed Consolidated Statements of Changes in Shareholders' Equity

(Unaudited – in thousands of Canadian dollars)

		First quarters ended
	Note	December 31, 2020	December 31, 2019
		$	$
Share capital
Common shares:	9
Balance, beginning of year		149,284	139,290
Issued on conversion of convertible debentures		-	6,422
Repurchased and cancelled during the period		(1,626)	(176)
Balance, end of period		147,658	145,536
Share premium
Balance, beginning of year		35,191	36,513
Carrying value of common shares repurchased lower than
consideration paid		(1,431)	(101)
Balance, end of period		33,760	36,412
Share‐based payments reserve
Balance, beginning of year		417	432
Share‐based payments expense		28	13
Balance, end of period		445	445
Accumulated other comprehensive income (loss)
Balance, beginning of year		393	163
Other comprehensive loss		(1,614)	(647)
Balance, end of period		(1,221)	(484)
Equity component of convertible debentures
Balance, beginning of year		-	1,451
Conversion of convertible debentures		-	(725)
Balance, end of period		-	726
Accumulated deficit
Balance, beginning of year		(59,355)	(77,346)
Impact of change in accounting policy		-	(1,407)
Adjusted balance, beginning of year		(59,355)	(78,753)
Net income attributable to common shareholders		12,017	6,461
Dividends declared during the period		(1,848)	(1,831)
Balance, end of period		(49,186)	(74,123)
Total shareholders' equity attributable to common shareholders		131,456	108,512
Non‐controlling interest
Balance, beginning of year		212	423
Net loss attributable to non‐controlling interest		(65)	(41)
Balance, end of period		147	382
Total shareholders' equity		131,603	108,894

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited – in thousands of Canadian dollars)

		First quarters ended
	Note	December 31, 2020	December 31, 2019
		$	$
OPERATING ACTIVITIES
Net income		11,952	6,420
Adjustments for:
Current income tax expense		3,238	2,171
Interest expense		909	1,408
Items not affecting cash	13	1,486	4,262
Interest paid		(885)	(1,622)
Income taxes paid		(5,074)	(3,959)
Change in non‐cash operating working capital items	13	7,411	10,990
		19,037	19,670
INVESTING ACTIVITIES
Consideration paid on business combinations, net of
cash acquired		-	(10,978)
Purchase of property, plant and equipment		(3,088)	(2,385)
Proceeds from disposal of property, plant and equipment		192	716
Purchase of intangible assets		(20)	-
Investment in equity instruments		(309)	-
Investment in associates		(1,616)	-
Investment in joint venture		(75)	-
		(4,916)	(12,647)
FINANCING ACTIVITIES
Net change in current revolving credit facility		(856)	(741)
Net change in long-term revolving operating loans, net of
transaction costs		(4,088)	5,979
Repayment of long‐term debt		(747)	(476)
Repayment of lease liabilities		(1,068)	(719)
Common shares repurchased and cancelled	9	(3,057)	(277)
Dividends paid		(1,868)	(1,764)
		(11,684)	2,002
Net inflows for the period		2,437	9,025
Cash and bank overdrafts, beginning of year		26,717	9,093
Impact of foreign exchange on cash and bank overdrafts		(361)	(151)
CASH AND BANK OVERDRAFTS, END OF PERIOD		28,793	17,967

1. DESCRIPTION OF THE BUSINESS

TerraVest Industries Inc. ("TerraVest" or the "Company") is incorporated under the laws of Alberta and is listed on the Toronto Stock Exchange (equity symbol: TVK). TerraVest's head office is located at 4901 Bruce Road in Vegreville, Alberta, Canada.

TerraVest is a diversified industrial company that manufactures and sells goods and services to various end markets including: energy, agriculture, mining, and transportation, among others. TerraVest is focused on acquiring and operating market-leading businesses that will benefit from TerraVest's financial and operational support. These opportunities generally center on manufactured steel products that complement TerraVest's existing operations and provide integration benefits.

TerraVest is comprised of three operating segments: Fuel Containment, Processing Equipment and Service.

2. STATEMENT OF COMPLIANCE

These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") using the same accounting policies TerraVest disclosed in its audited consolidated financial statements for the year ended September 30, 2020.

These interim condensed consolidated financial statements do not include all the information required under International Financial Reporting Standards ("IFRS") for complete set of financial statements. Therefore, these interim condensed consolidated financial statements should be read in conjunction with TerraVest's audited consolidated financial statements for the year ended September 30, 2020.

These interim condensed consolidated financial statements were authorized for issue by the Board of Directors on February 10, 2021.

3. ESTIMATES

The preparation of financial statements requires management to make judgments, estimates and assumptions that may affect the application of policies and reported amounts of assets, liabilities, contingent assets and liabilities, income and expenses. Actual results could differ from these judgments, estimates and assumptions.

The judgments, estimates and assumptions applied in the interim condensed consolidated financial statements, including the key areas of estimation uncertainty, were the same as those applied in TerraVest's audited consolidated financial statements for the year ended September 30, 2020, with the exception of:

• the estimate of income tax expense which is determined in the interim condensed consolidated financial statements using the estimated average annual effective income tax rate applied to the estimated taxable earnings of the interim period.

4. SEASONALITY

TerraVest's operating segments are seasonal in nature. The strongest quarters for TerraVest are its first and last quarters. The Processing Equipment and Service segments generally experience higher sales in the first and second quarters as majority of the drilling in Western Canada occurs during this period. The Fuel Containment segment generally experiences higher revenues during the first and last quarters as demand for residential, commercial and industrial heating products increases heading into the winter months. The third quarter is typically the weakest across all segments. TerraVest takes advantage of this seasonality to build inventory levels during non-peak demand periods, thereby allowing TerraVest to more readily meet increased levels of demand during its regular peak demand periods.

5. FINANCIAL INSTRUMENTS

The fair value of the investments in equity instruments has been determined based on the quoted price in active markets and is classified in Level 1 of the fair value hierarchy. The fair values of revolving credit facilities and long-term debt have been determined based on discounted cash flows using interest rates for similar instruments. The fair values of the financial instruments measured at amortized cost are not significantly different to their carrying values. These items are classified in Level 2 of the fair value hierarchy.

TerraVest's derivative financial instruments are forward exchange contracts and interest rate swap agreement which are not traded in active markets. Forward exchange contracts have been fair valued using observable forward exchange rates and interest rates corresponding to the maturity of the contracts. The interest rate swap agreement has been fair valued using observable interest rates corresponding to the maturity of the agreement. The effects of non-observable inputs are not significant for forward exchange contracts and interest rate swap agreement. These items are classified in Level 2 of the fair value hierarchy.

5.1 Forward exchange contracts

As at December 31, 2020, TerraVest had forward exchange contracts totaling $34,397 ($29,792 as at September 30, 2020) outstanding to sell, at various rates and expiring on various dates up to and including December 28, 2023. The fair value of forward exchange contracts was an asset of $633 as at December 31, 2020 included in other current assets (a liability of $391 as at September 30, 2020 was included in accounts payable and accrued liabilities).

5.2 Interest rate swap

As at December 31, 2020, TerraVest had an interest rate swap agreement expiring on June 9, 2025 for the notional amount of $25,000. Under the interest rate swap agreement, TerraVest receives interest on the notional amount at the 1-month CDOR rate in exchange for payments at a fixed rate of 0.87%, plus 140 to 265 basis points based on a prescribed ratio. The fair value of the interest rate swap was a liability of $125 as at December 31, 2020 ($167 as at September 30, 2020) included in accounts payable and accrued liabilities.

6. OTHER CURRENT ASSETS

	As atDecember 31, 2020(Unaudited)	As atSeptember 30, 2020(Audited)
	$	$
Prepaid expenses	3,154	2,597
Derivative financial instruments asset	633	-
Other	1,311	1,193
	5,098	3,790

7. INVESTMENTS

	As atDecember 31, 2020(Unaudited)	As atSeptember 30, 2020(Audited)
	$	$
Investment in equity instruments	9,423	6,273
Investment in associates	2,813	1,197
Investment in joint venture i)	75	-
	12,311	7,470

i) The investment in a joint venture is accounted for using the equity method.

8. SHORT-TERM REVOLVING CREDIT FACILITY AND LONG-TERM DEBT

The quarterly financial covenants to comply with the revolving operating loan and long-term debt were as follows:

	Required	As at
Financial covenants	measurements	December 31, 2020
Total debt to equity ratio	≤ 2.50:1	0.74
Current ratio	≥ 1.15:1	2.01
Interest-bearing debt to EBITDA ratio	≤ 3.50:1	0.88
Interest coverage ratio	≥ 3.50:1	18.44
Funded debt to EBITDA ratio	≤ 3.00:1	2.48
Fixed charge coverage ratio	≥ 1.15:1	2.41

As at December 31, 2020, TerraVest was in compliance with all of its financial and non-financial covenants.

9. SHARE CAPITAL

9.1 Common shares

Changes in the common shares issued and outstanding were as follows:

		As at December 31, 2020
	Number	Amount
		$
Balance, beginning of year	18,681,250	149,284
Repurchased and cancelled	(203,400)	(1,626)
Balance, end of period	18,477,850	147,658

During the first quarter ended December 31, 2020, TerraVest repurchased 203,400 common shares (22,100 during the first quarter ended December 31, 2019) under its common shares normal course issuer bid ("NCIB") for total consideration of $3,057 ($277 during the first quarter ended December 31, 2019). The difference between the amount paid for the common shares and their carrying value was recorded in share premium.

The common shares NCIB expires on March 15, 2021. The remaining number of common shares available for repurchase under the current common shares NCIB was 668,846 as at December 31, 2020.

9.2 Dividends

During the first quarter ended December 31, 2020, TerraVest has declared a dividend of $0.10 per common share ($0.10 per common share during the first quarter ended December 31, 2019). As at December 31, 2020, $1,848 was included in dividends payable.

Subsequent to the end of the quarter, TerraVest declared a cash dividend of $0.10 per common share payable on April 12, 2021 to shareholders of record on March 31, 2021.

10. EARNINGS PER SHARE

The following table provides a breakdown of the numerator and denominator used in the calculation of earnings per share and diluted earnings per share:

	First quarters ended
	December 31, 2020	December 31, 2019
Numerator
Net income attributed to common shareholders	$12,017	$6,461
Financing costs on convertible debentures, net of income tax	-	195
Diluted net income attributed to common shareholders	$12,017	$6,656
Denominator
Common shares, beginning of year	18,681,250	17,642,489
Weighted average shares issued	-	229,095
Weighted average shares repurchased	(187,979)	(2,105)
Weighted average shares, end of period ‐ basic	18,493,271	17,869,479
Dilutive effect of convertible debentures	-	1,029,328
Dilutive effect of stock options	253,451	208,711
Weighted average shares, end of period ‐ diluted	18,746,722	19,107,518
Net income per share ‐ basic	$0.65	$0.36
Net income per share ‐ diluted	$0.64	$0.35

11. FINANCING COSTS

	First quarters ended
	December 31, 2020	December 31, 2019
	$	$
Interest on revolving credit facilities and long-term debt	542	936
Interest on lease liabilities	367	325
Interest on convertible debentures	-	147
Accretion of convertible debentures	-	117
Amortization of financing costs	67	46
	976	1,571

12. OTHER (GAINS) LOSSES

	First quarters ended
	December 31, 2020December 31, 2019
	$	$
(Gain) loss on foreign exchange	2,132	528
Change in fair value of derivative financial instruments	(1,080)	(521)
Change in fair value of investments in equity instruments	(2,857)	-
(Gain) loss on disposal of property, plant and equipment	(102)	(220)
	(1,907)	(213)

TERRAVEST INDUSTRIES INC. Notes to the Interim Condensed Consolidated Financial Statements For the first quarter ended December 31, 2020 (Unaudited – in thousands of Canadian dollars, except share and per share amount)

13. SUPPLEMENTAL CASH FLOW INFORMATION

	December 31, 2020	December 31, 2019
	$	$
Adjustments for items not affecting cash
Depreciation of property, plant and equipment	2,234	2,131
Depreciation of right-of-use assets	1,216	810
Amortization of intangible assets	1,267	998
Amortization of deferred development costs	-	33
Amortization of financing costs	67	46
Share‐based compensation expense	28	13
Net change of inventory valuation allowance	8	30
Change in fair value of derivative financial instruments	(1,080)	(521)
Change in fair value of investments in equity instruments	(2,857)	-
(Gain) loss on disposal of property, plant and equipment	(102)	(220)
Deferred income tax expense	112	518
Accretion of convertible debentures	-	117
Other	First quarters ended5931,4862,6164,112(52)1,883(1,148)	307
		4,262
Change in non‐cash operating working capital items
Accounts receivable		2,538
Inventories		8,467
Other current assets		128
Accounts payable and accrued liabilities		(2,083)
Deferred revenues		1,940
	7,411	10,990

13.1 Additional cash flow information

Deposits on purchase of PP&E of $652 were recorded in other current assets as at December 31, 2020 ($nil as at December 31, 2019).

13.2 Non-cash transaction

Leases, for which an amount of $nil was recognized in right-of-use assets and lease liabilities during the first quarter ended December 31, 2020 ($6,494 during the first quarter ended December 31, 2019), had no cash impact on investing and financing activities.

14. SEGMENTED INFORMATION

14.1 Reportable segments

TerraVest determines its reportable segments based on the structure of its operations, which as at December 31, 2020 is divided into three operating business units: Fuel Containment, Processing Equipment and Service. Corporate is not a segment and is disclosed for reconciliation purposes.

The following tables also provide information on disaggregated revenue as part of its segmented information disclosure.

				First quarter ended December 31, 2020
	Fuel	Processing
	Containment	Equipment	Service	Corporate	Total
	$	$	$	$	$
Sales	52,119	26,922	3,291	8	82,340
Depreciation and amortization	1,915	2,423	379	-	4,717
Financing costs (income)	489	432	57	(2)	976
Income tax expense	3,140	133	21	56	3,350
Net income	9,320	770	300	1,562	11,952
Goodwill and intangible assets	17,104	15,116	-	-	32,220
Segment assets	159,582	121,926	18,764	15,267	315,539
Segment liabilities	97,113	69,682	14,508	2,633	183,936
Purchase of property, plant and
equipment, net of proceeds	1,356	1,379	161	-	2,896

				First quarter ended December 31, 2019
	FuelContainment	ProcessingEquipment	Service	Corporate	Total
	$	$	$	$	$
Sales	50,208	34,170	3,874	-	88,252
Depreciation and amortization	1,997	1,529	446	-	3,972
Financing costs	705	502	103	261	1,571
Income tax expense (recovery)	2,388	490	(20)	(169)	2,689
Net income (loss)	6,566	1,098	(173)	(1,071)	6,420
Goodwill and intangible assets	19,936	18,512	-	-	38,448
Segment assets	157,392	149,478	19,713	4,385	330,968
Segment liabilities	106,387	95,529	15,746	4,412	222,074
Purchase of property, plant and
equipment, net of proceeds	1,934	(324)	59	-	1,669

14.2 Geographical information

TerraVest generates revenue from two segmental regions. The concentration of TerraVest's revenue is derived from Canadian and U.S. sales.

		First quarters ended
	December 31, 2020	December 31, 2019$
	$
SALES
Canada	42,151	50,427
United States	40,189	37,825
	82,340	88,252

Certain non-current assets and goodwill by geographic segment:

		As at December 31, 2020 – Unaudited
	Canada	United States	Total
	$	$	$
Property, plant and equipment	62,257	12,996	75,253
Right-of-use assets	29,182	1,899	31,081
Intangible assets	13,097	6,730	19,827
Goodwill	6,915	5,478	12,393
	111,451	27,103	138,554

		As at September 30, 2020 – Audited
	Canada	United States	Total
	$	$	$
Property, plant and equipment	62,672	13,687	76,359
Right-of-use assets	30,363	2,048	32,411
Intangible assets	13,948	7,456	21,404
Goodwill	6,915	5,739	12,654
	113,898	28,930	142,828

15. IMPACT OF COVID-19

Management continues to monitor and assess the ongoing development of the COVID-19 and respond accordingly. The impacts, if any, will be accounted for when they are known and may be assessed. During the first quarter ended December 31, 2020, certain Canadian subsidiaries of TerraVest's recognized government subsidies totaling $2,855 in net income. Government subsidies helped maintain employment during a period where revenues have been temporarily reduced.