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TerraVest Industries Management Reports 2021
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Management Reports
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MANAGEMENT'S DISCUSSION AND ANALYSIS
For the year ended September 30, 2021 Dated: December 7, 2021
INTRODUCTION AND FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis ("MD&A") presents management's view of the financial position and performance of TerraVest Industries Inc. ("TerraVest" or the "Company") for the year ended September 30, 2021 and should be read in conjunction with TerraVest's audited consolidated financial statements for the years ended September 30, 2021 and 2020. The financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS"). All amounts are stated in thousands of Canadian dollars, except share and per share amounts or unless otherwise stated. This discussion is prepared as at December 7, 2021 and has been prepared with all available information up to and including the date of this report. This document should be read in full including the definitions of non‐IFRS measures such as Adjusted earnings before interests, income taxes, depreciation and amortization ("EBITDA"), Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital which are found in the following section of this MD&A.
This MD&A sets out management's assessment of TerraVest's future plans and operations and contains forward‐looking statements as defined under applicable Canadian securities legislation. These forward‐looking statements often contain words such as "anticipates", "does not anticipate", "believes", "estimates", "forecasts", "intends", "expects", "does not expect", "could", "may", "will", "should", "plans" or similar terms or variations of these words and contain estimates or assumptions about the outcome of future events. These forward‐looking statements are provided in the interest of providing readers with information regarding TerraVest. Readers are cautioned that management's expectations, estimates and assumptions, although considered reasonable, may prove to be incorrect and readers should not place undue reliance on forward‐looking statements which are subject to risks, uncertainties, and other factors that could result in the outcome of these events being materially different from those anticipated in this MD&A. These factors and assumptions include, but are not limited to: levels of business activity in TerraVest's segments, political conditions and events, competitive pressures, changes in government policy or regulations, commodity pricing, and general economic conditions. TerraVest's actual results may differ materially from those expressed in, or implied by these forward‐looking statements. The forward‐looking information contained in the MD&A is expressly qualified by the cautionary statement. TerraVest does not undertake any obligation to update or release any revisions to these forward‐looking statements to reflect events or circumstances, unanticipated events or circumstances, or should its estimates or assumptions change, after the date hereof, except as expressly required by law. Additional information relating to TerraVest and the risks to which its business is subject is contained in its Annual Information Form ("AIF"), which is available on SEDAR at www.sedar.com.
NON-IFRS FINANCIAL MEASURES
Adjusted EBITDA, Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. TerraVest's definitions may differ from those of other issuers and therefore may not be comparable to similarly titled measures used by other issuers.
Adjusted EBITDA: is defined as net income adjusted for income tax expense, financing costs, depreciation, amortization, gains or losses on disposal of property, plant and equipment and on disposal of assets held for sale, change in fair value of derivative financial instruments, change in fair value of investment in equity instruments, gains or losses on foreign exchange, non‐recurring acquisition‐related costs, impairment charges and other non‐recurring and/or non‐operations related items that do not reflect the current ongoing operations of TerraVest. Management believes this is a useful metric in evaluating the ongoing operating performance of TerraVest. Readers are cautioned that adjusted EBITDA should not be construed as an alternative to net income determined in accordance with IFRS as an indicator of TerraVest's performance.
Cash Available for Distribution: is defined as cash flow from operating activities adjusted for changes in non‐cash operating working capital, maintenance capital expenditures and repayment of lease liabilities. Management believes that cash available for distribution, as a liquidity measure, is a useful metric that provides an indication of the cash available from ongoing operations that can be distributed to shareholders as a dividend. Readers are cautioned that cash available for distribution should not be construed as an alternative to cash flow from operating activities determined in accordance with IFRS as an indicator of TerraVest's liquidity and cash flows.
Dividend Payout Ratio: is defined as dividends paid in cash during the period divided by cash available for distribution for the period. Management believes that dividend payout ratio is a useful metric as it provides an indication of TerraVest's ability to sustain its current dividend policy. There is no directly comparable IFRS measure for dividend payout ratio.
Maintenance Capital Expenditures: is defined as capital expenditures made to sustain the operations of TerraVest's operating businesses and to maintain the productive capacity of the businesses over an economic cycle, whether or not they yield significant cost or production efficiencies. Management believes that maintenance capital expenditures should be funded by cash flow from existing operating activities and, therefore, deducted in determining cash available for distribution. There is no directly comparable IFRS measure for maintenance capital expenditures.
Working Capital: is calculated by subtracting current liabilities from current assets. Management uses working capital as a measure for assessing overall liquidity. There is no directly comparable IFRS measure for working capital.
BUSINESS OVERVIEW
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.
Fuel Containment Segment
Through wholly‐owned subsidiaries, TerraVest's Fuel Containment segment is a leading provider of products and services to a variety of industries across Canada and the United States. The Fuel Containment segment manufactures products including: bulk LPG transport trailers, LPG delivery and service trucks, bulk LPG storage tanks, residential and commercial LPG tanks and dispensers, custom pressure vessels, commercial and residential refined fuel tanks, and furnaces and boilers. This segment sells its products direct to end user and through various distribution networks. The end users of the products are fuel distributors, transportation companies and industrial, commercial and residential consumers.
Processing Equipment Segment
Through subsidiaries, TerraVest's Processing Equipment segment is a leading fabricator of equipment for various end‐markets including: upstream and midstream oil and gas processing, agriculture, transportation and mining. The Processing Equipment segment manufactures and sells a wide array of equipment such as: wellhead processing equipment and tanks, wellhead desanding units, central facilities processing equipment, NGL and LPG storage tanks, anhydrous ammonia storage tanks, bulk NGL and LPG transport trailers, bulk ammonia transport trailers and wagons, compressed gas transport trailers and a wide variety of customized processing equipment for various applications. This segment's products and services are primarily sold to oil and gas producers, midstream companies, engineering companies, propane distributors, fertilizer distributors and transportation companies.
Service Segment
TerraVest's Service segment provides well servicing to the oil and gas sector and is a market‐leader in South‐Western and Central Saskatchewan. The Service segment has been providing well servicing to major oil and gas producers in Saskatchewan for many years and is a well‐recognized name. The Service segment currently operates 21 service rigs giving it the critical mass to service the needs of the largest oil and gas producers in the area.
FOURTH QUARTER AND YEAR END REVIEW AND OUTLOOK
Business Performance
Management believes that there are certain non‐IFRS financial measures that can be used to assist shareholders in analyzing the performance of TerraVest. The table below highlights certain financial results and reconciles net income to adjusted EBITDA for the fourth quarter and year ended September 30, 2021 and the comparative periods in fiscal 2020.
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Sales | 80,816 | 68,231 | 307,463 | 304,253 | |
| Net Income | 9,388 | 11,082 | 36,410 | 26,628 | |
| Add (subtract): | |||||
| Income tax expense | 2,111 | 3,652 | 9,636 | 8,870 | |
| Financing costs | 1,648 | 1,038 | 4,505 | 5,240 | |
| Depreciation and amortization | 5,049 | 5,308 | 19,253 | 18,867 | |
| Change in fair value of derivative | |||||
| financial instruments | 606 | (800) | (1,345) | 127 | |
| Change in fair value of investment in | |||||
| equity instruments | (1) | (1,760) | (3,992) | (1,713) | |
| (Gain) loss on foreign exchange | (1,365) | 490 | 2,119 | (604) | |
| Acquisition‐related cost | 433 | 280 | 433 | 451 | |
| (Gain) loss on disposal of property, plant | |||||
| and equipment | (695) | (255) | (1,283) | (555) | |
| (Gain) loss on disposal of assets held for sale | - | ‐ | - | (931) | |
| (Gain) loss on contingent considerations | - | (1,587) | - | (1,648) | |
| Adjusted EBITDA | 17,174 | 17,448 | 65,736 | 54,732 |
Sales for the fourth quarter and year ended September 30, 2021 were $80,816 and $307,463 versus $68,231 and $304,253 for the prior comparable periods. This represents increases of 18% and 1% respectively. However, TerraVest acquired all of the issued and outstanding shares of ECR International Inc. ("ECR") in August 2021 and all of the assets of Argo Sales Inc. ("Argo") in December 2019 of which only Argo partially contributed to the prior comparable periods. Excluding ECR, sales for the fourth quarter were $69,707 versus $68,231 for the prior comparable period and excluding ECR and Argo, sales for the year ended September 30, 2021 were $263,462 versus $268,293 for the prior comparable period. This represents an increase of 2% and a decrease of 2% respectively for TerraVest's base portfolio (excluding ECR and Argo).
Sales for the fourth quarter ended September 30, 2021 slightly increased versus the prior comparable period which is explained by increased demand for oil and gas processing equipment and service in Western Canada. The sales increase was partially offset by lower demand for LPG products. The sales for TerraVest's base portfolio decreased slightly versus the prior year. This decrease was a result of weaker sales in the first half of the year versus the prior period, partially offset by stronger sales in the second half of the year versus the prior period. During the year, TerraVest experienced weaker demand for LPG and NGL storage and distribution equipment partially offset by higher demand for most of TerraVest's other products lines.
Net income for the fourth quarter and year ended September 30, 2021 were $9,388 and $36,410 versus $11,082 and $26,628 for the prior comparable periods. This represents a decrease of 15% and an increase 37% respectively. The decrease for the fourth quarter is the result of increased raw material costs, reduced government subsidies versus comparable quarter, additional financing costs following the acquisition of ECR and an unfavorable change in the fair value of derivative financial instruments, partially offset by the addition of ECR. In addition, in the fourth quarter of fiscal 2020, TerraVest had benefited from a non‐recurring gain on contingent consideration and a favorable change in the fair value of investment in equity instrument which was subsequently sold during the second quarter of fiscal 2021.
The increase in net income for the year ended September 30, 2021 is a result of a more favorable product mix, government wage subsidies to help maintain employment during the COVID‐19 pandemic and other government subsidies available for entities experiencing significant revenue decreases as well as cost control measures put in place and a favorable change in the fair value of derivative financial instruments. The changes in net income are also a result of the variations highlighted in the table above.
Adjusted EBITDA for the fourth quarter and year ended September 30, 2021 were $17,174 and $65,736 versus $17,448 and $54,732 for the prior comparable periods. This represents a decrease of 2% and an increase of 20% respectively, which are a result of the reasons explained above.
During the year, TerraVest recognized $12,988 in net income ($12,553 for the year ended September 30, 2020) in relation to the Canada Emergency Wage Subsidy ("CEWS") as part of the Federal Government's response to the COVID‐19 pandemic. Had the CEWS program not been available, TerraVest would have made incremental significant personnel reductions to mitigate reduced business activity. TerraVest also recognized $5,107 in net income during the year in relation to other various government subsidies available in response to the COVID‐19 pandemic.
The table below reconciles cash flow from operating activities to cash available for distribution for the fourth quarter and year ended September 30, 2021 and the comparative periods in fiscal 2020.
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Cash Flow from (used in) Operating Activities | (1,481) | 16,657 | 23,064 | 64,876 | |
| Add (subtract): | |||||
| Change in non‐cash operating working capital items | 14,121 | (3,474) | 23,874 | (21,435) | |
| Maintenance capital expenditures | (1,353) | (581) | (5,829) | (3,221) | |
| Repayment of lease liabilities | (1,123) | (1,032) | (4,381) | (3,603) | |
| Cash Available for Distribution | 10,164 | 11,570 | 36,728 | 36,617 | |
| Dividends Paid in the Period | 1,757 | 1,868 | 7,317 | 7,337 | |
| Dividend Payout Ratio | 17% | 16% | 20% | 20% |
Cash flow from (used in) operating activities for the fourth quarter and year ended September 30, 2021 were $(1,481) and $23,064 versus $16,657 and $64,876 for the prior comparable periods. This represents decreases of 109% and 64% respectively. The decreases in cash flow from operating activities is largely attributable to increased working capital as activity levels increased throughout the year. The significant increase in steel and other raw materials pricing has also had a noticeable effect on working capital levels.
Maintenance capital expenditures were $1,353 for the fourth quarter ended September 30, 2021 versus $581 for the prior comparable period representing an increase of 133%. This variation is due to the timing of certain larger capital projects that fell within the period. During the fourth quarter, TerraVest's total purchase of property, plant and equipment paid was $4,845 of which $3,492 is considered growth capital. The growth capital incurred during the fourth quarter consisted of additions to the Company's rental fleet and deposits on new robotic equipment to automate certain production lines. These growth projects are expected to result in increased capacity and greater efficiencies in several of TerraVest's businesses.
Cash available for distribution for the fourth quarter and year ended September 30, 2021 decreased by 12% and had a negligeable change respectively versus the prior comparable periods. The variations are a result of reasons explained above and previously in this MD&A.
The dividend payout ratio for the fourth quarter and year ended September 30, 2021 were 17% and 20% versus 16% and 20% respectively for the prior comparable periods.
Outlook
The current global pandemic continues to create a challenging business environment for TerraVest on many fronts. Over the past year, the Company and its employees have done an excellent job managing through COVID‐19 pandemic related restrictions, all while keeping tight control on operating costs and improving manufacturing efficiency. However, new challenges continue to present themselves, as a result of the COVID‐19 pandemic, such as disrupted global supply chains resulting in rising raw material prices and, in many cases, supply shortages. Navigating these challenges, while continuing to keep our employees, our customers and our vendors safe will be the primary focus for the Company for the remainder of the year. Additionally, TerraVest will remain vigilant in managing its cost structure and will make targeted investments in manufacturing efficiency improvements as well as continue to pursue its acquisition strategy. During the year, TerraVest entered the renewable natural gas equipment market and to date as been awarded three contracts to supply renewable natural gas equipment to customers in Canada. While these contracts do not represent a meaningful amount of revenue to TerraVest today, management is optimistic about the future of this business line.
Business Combinations
On August 19, 2021, a subsidiary of TerraVest entered into an acquisition agreement to acquire all the issued and outstanding shares of ECR, a privately‐owned manufacturing company head‐quartered in Utica, New York that produces heating and cooling products under a family of brand names in North America, including the Dunkirk, Utica and Olsen brands, among others. The business combination has been accounted for using the acquisition method with the results of operations included in earnings from the date of acquisition. TerraVest acquired the shares of ECR using its existing cash and credit facilities. For information regarding the fair value of the consideration transferred, the assets acquired and the liabilities assumed at the acquisition date, please refer to Note 4 of the audited consolidated financial statements for the year ended September 30, 2021, available on SEDAR.
Effective November 1, 2021, TerraVest acquired an additional 6,202,740 shares in Green Energy Services ("GES") and now owns 66.8% of the outstanding shares of GES. GES, operating under the name Fraction Energy Services, is an industry leader in water management and environmental solutions. TerraVest acquired the shares of GES using its existing credit facilities and the issuance of TerraVest common shares. For further information on the subsequent event, please refer to note 31 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides the financial results of TerraVest's operations for the fourth quarter and year ended September 30, 2021 and the comparative periods in fiscal 2020.
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Sales | 80,816 | 68,231 | 307,463 | 304,253 | |
| Cost of sales | 59,161 | 48,854 | 226,829 | 231,990 | |
| Gross profit | 21,655 | 19,377 | 80,634 | 72,263 | |
| Administration expenses | 7,435 | 6,314 | 26,816 | 31,164 | |
| Selling expenses | 2,745 | 1,174 | 7,690 | 5,656 | |
| Financing costs | 1,648 | 1,038 | 4,505 | 5,240 | |
| Share of associates and joint venture net loss | |||||
| (income) | (217) | 29 | 78 | 29 | |
| Other (gains) losses | (1,455) | (3,912) | (4,501) | (5,324) | |
| 10,156 | 4,643 | 34,588 | 36,765 | ||
| Earnings before income taxes | 11,499 | 14,734 | 46,046 | 35,498 | |
| Income tax expense | 2,111 | 3,652 | 9,636 | 8,870 | |
| Net Income | 9,388 | 11,082 | 36,410 | 26,628 | |
| Allocated to non‐controlling interest | (7) | (91) | (208) | (211) | |
| Net income attributable to common shareholders | 9,395 | 11,173 | 36,618 | 26,839 | |
| Weighted average shares outstanding – Basic | 17,567,469 | 18,681,250 | 18,099,965 | 18,486,064 | |
| Weighted average shares outstanding – Diluted | 17,762,042 | 18,926,946 | 18,352,184 | 19,030,735 | |
| Net income per share – Basic | $0.53 | $0.60 | $2.02 | $1.45 | |
| Net income per share – Diluted | $0.53 | $0.59 | $2.00 | $1.42 |
Sales for the fourth quarter and year ended September 30, 2021 increased by 18% and 1% respectively versus the prior comparable periods. The reasons have been explained previously in this MD&A.
Gross profit for the fourth quarter and year ended September 30, 2021 increased by 12% versus the prior comparable periods. This is primarily explained by the addition of ECR, a more favorable product mix and increased government subsidies versus last fiscal year, partially offset by significant increase in raw material prices and decreased sales volume for some of
TerraVest's base portfolio businesses. The amount of government subsidies recognized during the fourth quarter ended September 30, 2021 is also less than the prior comparable period.
Administration expenses for the fourth quarter and year ended September 30, 2021 increased by 18% and decreased by 14% respectively versus the prior comparable periods. The variation is mainly the result of the addition of ECR in the fourth quarter and non‐recurring acquisition‐related expenses mitigated by cost control measures during the year.
Selling expenses for the fourth quarter and year ended September 30, 2021 increased by 134% and 36% respectively versus the prior comparable periods. The increase over the prior comparable periods is primarily a result of increased commissions due to increased sales and the addition of ECR during the fourth quarter.
Financing costs for the fourth quarter and year ended September 30, 2021 increased by 59% and decreased by 14% respectively versus the prior comparable periods. The increase in the fourth quarter is mainly a result of the interest expense on the additional debt incurred to purchase ECR. The financing cost decrease for the year is primarily explained by lower interest expense because of the prime rate reductions in March 2020 and April 2020 and by reduced debt balances for the first nine month of the fiscal year, partially offset by additional debt incurred in the fourth quarter.
Other (gains) losses variance for the fourth quarter and year ended September 30, 2021 is a result of favorable changes in the fair value of derivative financial instruments and investment in equity instruments (both unfavorable for the fourth quarter) as well as a gain on disposal of property, plant and equipment which were partially offset by a loss on foreign exchange (gain in the fourth quarter). In addition, TerraVest had recognized a non‐recurring gain on contingent consideration in the fourth quarter ended September 30, 2020.
Income tax expense decreased for the fourth quarter and increased for the year ended September 30, 2021 versus the prior comparable periods. The decrease for the fourth quarter ended September 30, 2021 is mainly explained by decreased taxable earnings and the timing of income tax expense adjustments while the increase for the year ended September 30, 2021 is the result of increased taxable earnings, partially offset by a reduction of the tax rates for certain subsidiaries of TerraVest and the use of available carry‐forward capital losses to offset current year capital gains.
As a result of the above, net income attributable to common shareholders for the fourth quarter and year ended September 30, 2021 decreased by 16% and increased by 36% respectively versus the prior comparable periods.
Segmented Results
a) Fuel Containment
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Sales | 53,851 | 43,161 | 185,359 | 158,996 | |
| Net Income | 6,395 | 8,552 | 28,269 | 21,524 | |
| Add (subtract): | |||||
| Income tax expense | 2,312 | 3,827 | 9,309 | 8,232 | |
| Financing costs | 1,157 | 521 | 2,559 | 2,468 | |
| Depreciation and amortization | 2,094 | 1,995 | 7,836 | 7,952 | |
| Change in fair value of derivative | |||||
| financial instruments | 606 | (800) | (1,345) | 127 | |
| (Gain) loss on foreign exchange | (1,071) | 237 | 1,590 | (518) | |
| Acquisition related‐costs | 433 | - | 433 | - | |
| (Gain) loss on disposal of property, plant | |||||
| and equipment | - | (210) | (49) | (222) | |
| Gain (loss) on disposal of assets held for sale | - | ‐ | - | 180 | |
| Gain (loss) on contingent consideration | - | ‐ | - | (61) | |
| Adjusted EBITDA | 11,926 | 14,122 | 48,602 | 39,682 |
Sales for the fourth quarter and year ended September 30, 2021 were $53,851 and $185,359 versus $43,161 and $158,996 for the prior comparable periods. This represents increases of 25% and 17% respectively. Excluding ECR, sales for the fourth quarter and year ended September 30, 2021 were $42,742 and $174,250 versus $43,161 and $158,996 for the comparable periods. This represents a decrease of 1% and an increase of 10% respectively. The increase in sales for the year in the fuel containment segment's base portfolio businesses is a result of stronger demand for home heating product lines and commercial fiberglass products, partially offset by decreased sales for this segment's LPG distribution equipment products versus the prior comparable period.
Net income for the fourth quarter and year ended September 30, 2021 were $6,395 and $28,269 versus $8,552 and $21,524 for the prior comparable periods. This represents a decrease of 25% and an increase of 31% respectively. The decrease in net income for the fourth quarter versus prior comparable period is a result of increased raw material costs, reduction in government subsidies and an unfavorable change in the fair value of derivative financial instruments, partially offset by the addition of ECR results and a gain on foreign exchange. The variation in net income for the year ended September 30, 2021 compared to prior comparable period also benefited from increased sales as explained above, a favorable change in product mix and in the fair value of derivative financial instruments, partially offset by a loss on foreign exchange.
Adjusted EBITDA for the fourth quarter and year ended September 30, 2021 were $11,926 and $48,602 versus $14,122 and $39,682 for the prior comparable periods. This represents a decrease of 16% and an increase of 22% respectively, which are a result of the reasons highlighted above.
b) Processing Equipment
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Sales | 22,716 | 22,349 | 107,435 | 134,295 | |
| Net Income | 2,993 | 484 | 7,261 | 4,404 | |
| Add (subtract): | |||||
| Income tax expense (recovery) | (694) | 18 | (777) | 1,091 | |
| Financing costs | 452 | 463 | 1,752 | 2,171 | |
| Depreciation and amortization | 2,534 | 2,939 | 9,844 | 9,420 | |
| (Gain) loss on foreign exchange | 18 | 26 | 18 | 32 | |
| Acquisition‐related costs | - | 375 | - | 375 | |
| (Gain) loss on disposal of property, plant | |||||
| and equipment | (634) | (45) | (1,175) | (332) | |
| Gain (loss) on contingent consideration | - | (1,587) | - | (1,587) | |
| Adjusted EBITDA | 4,669 | 2,673 | 16,923 | 15,574 |
Sales for the fourth quarter and year ended September 30, 2021 were $22,716 and $107,435 versus $22,349 and $134,295 for the prior comparable periods. This represents an increase of 2% and a decrease of 20% respectively. However, excluding the addition of Argo, sales for the year were $74,543 versus $98,335 for the prior comparable period representing a decrease of 24%. The decrease in sales for the year ended September 30, 2021 compared to prior period is mainly the result of weaker demand for NGL storage and distribution equipment in Western Canada and LPG trailers in the United States, partially offset by increased demand in the last six months of fiscal 2021 for oil and gas processing equipment as commodity pricing is increasing.
Net income for the fourth quarter and year ended September 30, 2021 were $2,993 and $7,261 versus $484 and $4,404 for the prior comparable periods. This represents increases of 518% and 65% respectively. The impact of the overall decrease in this segment's sales compared to the prior year was mitigated by significant cost control measures and government subsidies. This segment also recognized a gain on disposal of property, plant and equipment and incurred higher depreciation and amortization expense during the year ended September 30, 2021 versus prior comparable period.
Adjusted EBITDA for the fourth quarter and year ended September 30, 2021 were $4,669 and $16,923 versus $2,673 and $15,574 for the prior comparable periods. This represents increases of 75% and 9% respectively, which are a result of the reasons explained above.
| Fourth quarters ended | Years ended | ||||
|---|---|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | $ | $ | ||
| Sales | 4,242 | 2,721 | 14,638 | 10,962 | |
| Net Income (loss) | 368 | 510 | 1,166 | (184) | |
| Add (subtract): | |||||
| Income tax expense (recovery) | 104 | 56 | 37 | 18 | |
| Financing costs | 53 | 61 | 214 | 333 | |
| Depreciation and amortization | 421 | 374 | 1,572 | 1,494 | |
| (Gain) loss on disposal of property, plant | |||||
| and equipment | (62) | ‐ | (59) | (1) | |
| Adjusted EBITDA | 884 | 1,001 | 2,930 | 1,660 |
c) Service
Sales for the fourth quarter and year ended September 30, 2021 were $4,242 and $14,638 versus $2,721 and $10,962 for the prior comparable periods. This represents increases of 56% and 34% respectively. The increases in sales are primarily the result of higher commodity pricing driving increased activity by this segment's customers. Government funding targeted at oil and gas well abandonment work in Western Canada is also contributing to increased activity and rig utilization.
Net income for the fourth quarter and year ended September 30, 2021 were $368 and $1,166 versus a net income of $510 and a net loss of $184 for the prior comparable periods. This represents a decrease of 28% and an increase of 734% respectively, and are a result of increased sales, cost control measures and a decrease in financing costs because of the prime rate reductions in March 2020 and April 2020, partially offset by reduced government subsidies.
Adjusted EBITDA for the fourth quarter and year ended September 30, 2021 were $884 and $2,930 versus $1,001 and $1,660 for the prior comparable periods. This represents a decrease of 12% and an increase of 77% respectively, and are a result of the reasons explained above.
| For the quarters ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 30-Sep-21 | 30-Jun-2131-Mar-2131-Dec-2030-Sep-2030-Jun-2031-Mar-20 | ||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | ||
| Sales | 80,816 | 67,830 | 76,477 | 82,340 | 68,231 | 61,019 | 86,751 | 88,252 | |
| Adjusted EBITDA | 17,174 | 11,939 | 17,535 | 19,088 | 17,448 | 11,854 | 10,853 | 14,577 | |
| Net income attributableto common shareholders | 9,395 | 4,420 | 10,786 | 12,017 | 11,173 | 3,882 | 5,323 | 6,461 | |
| Net income per share | |||||||||
| – Basic | 0.53 | 0.25 | 0.58 | 0.65 | 0.60 | 0.21 | 0.28 | 0.36 | |
| –Diluted | 0.53 | 0.24 | 0.57 | 0.64 | 0.59 | 0.20 | 0.28 | 0.35 |
Quarterly Results
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 sales 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.
CASH FLOW
The following table provides summary information with respect to consolidated cash flows from operating, investing and financing activities:
| Years ended | |||
|---|---|---|---|
| Sept. 30, 2021 | Sept. 30, 2020 | ||
| $ | $ | ||
| Cash flow from operating activities | 23,064 | 64,876 | |
| Cash flow used in investing activities | (52,536) | (22,642) | |
| Cash flow from (used in) financing activities | 9,991 | (24,557) | |
| Net inflows (outflows) for the year | (19,481) | 17,677 | |
| Cash and bank overdrafts, beginning of year | 26,717 | 9,093 | |
| Impact of foreign exchange on cash and bank overdrafts | 245 | (53) | |
| Cash and bank overdrafts, end of year | 7,481 | 26,717 |
Cash Flow from Operating Activities
TerraVest generated $23,064 of cash flow from operating activities during the year ended September 30, 2021 compared to $64,876 for the prior comparable period. The decrease is mainly attributable to changes in non‐cash working capital levels versus the prior comparable period, partially offset by increased net income.
Cash Flow used in Investing Activities
Cash flow used in investing activities during the year ended September 30, 2021 was $52,536 compared to $22,642 for the prior comparable period. The increased use of cash is primarily a result of cash paid to acquire ECR, an investment in associate, and increased in capital expenditures, partially offset by the proceeds from disposal of investment in equity instruments.
Cash Flow from (used in) Financing Activities
Cash flow from (used in) financing activities during the year ended September 30, 2021 was $9,991 compared to ($24,557) for the prior comparable period. The difference is attributable to the issuance of debt to purchase ECR partially offset by cash flow used to repurchase TerraVest's common shares.
DIVIDENDS
The following table outlines the dividends declared by TerraVest in fiscal 2021:
| Record date | Payment date | Dividend per share | Type of Dividend |
|---|---|---|---|
| $ | |||
| September 30, 2021 | October 12, 2021 | 0.10 | Eligible |
| June 30, 2021 | July 12, 2021 | 0.10 | Eligible |
| March 31, 2021 | April 12, 2021 | 0.10 | Eligible |
| December 31, 2020 | January 11, 2021 | 0.10 | Eligible |
Subsequent to the end of the year, TerraVest declared a cash dividend of $0.10 per common share payable on January 10, 2022 to shareholders of record on December 31, 2021.
TerraVest expects to declare and pay a dividend on a quarterly basis. The dividend policy may be changed from time to time in the sole discretion of the Board of Directors. Accordingly, there can be no assurance as to the amount or timing of any dividend in the future. In assessing whether to pay a dividend and in determining the amount of the dividend, the Board of Directors will consider TerraVest's financial condition and its then current business needs and other factors the Board of Directors may consider appropriate in the circumstances.
LIQUIDITY AND CAPITAL RESOURCES
TerraVest's objective in managing its capital resources is to ensure that there are adequate capital resources to support the operations of its various business segments and permit opportunistic acquisitions, in order to maximize the return to shareholders. Management continually assesses TerraVest's capital needs to meet its objectives.
TerraVest's principal sources of liquidity are cash on hand, secured credit facilities and cash flow generated by its operations throughout the year. As at September 30, 2021, TerraVest's cash position, net of bank overdrafts, was $7,481 compared to $26,717 as at September 30, 2020. As at September 30, 2021, TerraVest's consolidated working capital, excluding short‐term revolving credit facilities, was $137,385 compared to $105,105 as at September 30, 2020. TerraVest expects to be able to fund all working capital requirements, contractual obligations and capital expenditures from a combination of cash on hand, operating cash flows and existing credit facilities.
Revolving Operating Loans
TerraVest and its subsidiaries have access to revolving operating loans. Two of the revolving operating loans are based on margin requirements. The revolving operating loans are subject to certain financial covenants which are based on the results of the individual subsidiaries in which the credit facilities are held. The availability of the revolving operating loans at any given time may have an impact on TerraVest's liquidity and available capital resources and its ability to fund its operating and future growth plans.
As at September 30, 2021, the maximum amount available was $126,197, of which $88,005 was drawn. TerraVest was in compliance with all of its financial and non‐financial covenants. For further information on the financial and non‐financial covenants, please refer to Note 15 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
Revolving Term Loan
Certain subsidiaries of TerraVest operating in the Processing Equipment and Service segments have access to a $20,000 revolving term loan that can be used to refinance existing debt and to purchase property, plant & equipment. As at September 30, 2021, $17,466 was drawn.
TerraVest was in compliance with all of its financial and non‐financial covenants. For further information on the financial and non‐financial covenants, please refer to Note 15 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
Loan
A subsidiary of TerraVest operating in the Fuel Containment segment obtained an unsecured interest‐bearing loan totaling $50,000. TerraVest was in compliance with all of its financial and non‐financial covenants. For further information on the financial and non‐financial covenants, please refer to Note 15 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
Share Capital
TerraVest's common shares are listed on the Toronto Stock Exchange under the symbol "TVK". Changes in the common shares issued and outstanding were as follows:
| As at September 30, 2021 | As at September 30, 2020 | |||
|---|---|---|---|---|
| Number | Amount | Number | Amount | |
| $ | $ | |||
| Balance, beginning of year | 18,681,250 | 149,284 | 17,642,489 | 139,290 |
| Issued on conversion of convertible debentures | - | - | 1,125,931‐ | 10,690‐ |
| Issued on exercise of stock options | 120,031 | 2,304 | ||
| Repurchased and cancelled | (1,233,826) | (9,876) | (87,170) | (696) |
| Balance, end of year | 17,567,455 | 141,712 | 18,681,250 | 149,284 |
During the year ended September 30, 2021, TerraVest repurchased 1,233,826 common shares (87,170 during the year ended September 30, 2020) under its common shares normal course issuer bid ("NCIB") for total consideration of $21,103 ($1,080 during the year ended September 30, 2020). The difference between the amount paid for the common shares and their carrying value was recorded in share premium.
On March 17, 2021, TerraVest renewed its common shares NCIB under which it may repurchase 1,028,726 common shares. The common shares NCIB expires on March 16, 2022. On April 15, 2021, TerraVest has entered into an Automatic Share Purchase Plan ("ASPP") in order to facilitate, at any trading day, the repurchase of common shares under its common shares NCIB. The remaining number of common shares available for repurchase under the current common shares NCIB was nil as at September 30, 2021.
Subsequent to the end of the year, TerraVest did not repurchased common shares under its common shares NCIB and issued 361,663 common shares. The number of common shares outstanding was 17,929,118 as at November 25, 2021.
Capital Structure
The capital structure of TerraVest consists of its revolving credit facilities, long‐term debt and shareholders' equity attributable to common shareholders. The following table outlines TerraVest's capital structure:
| As at | As at | |
|---|---|---|
| September30,2021 | September 30, 2020 | |
| $ | $ | |
| Bank overdrafts | 878 | 735 |
| Drawn on current revolving credit facility | 251 | 864 |
| Available on current revolving credit facility, net of amount drawn | 3,209 | 3,386 |
| Drawn on long‐term revolving operating loans | 87,754 | 77,457 |
| Available on long‐term revolving operating loans, net of amount drawn | 34,983 | 42,957 |
| Long‐term debt (current and non‐current) | 70,941 | 26,194 |
| Shareholders' equity attributable to common shareholders | 132,055 | 125,930 |
| 330,071 | 277,523 |
Other than the financial covenants and restrictive non‐financial covenants contained in the loan agreements, TerraVest is not subject to any externally imposed capital restrictions.
The Board of Directors does not establish quantitative return on capital criteria for management. TerraVest intends to maintain a flexible capital structure that is consistent with its stated objectives and adjust it in the light of changes in economic conditions and the risk characteristics of the underlying instruments. In order to maintain or adjust its capital structure, TerraVest may, from time to time, acquire shares for cancellation in connection with an SIB or an NCIB, issue new shares, raise capital through various debt instruments or refinance current debt through instruments with different characteristics.
SHARE-BASED PAYMENTS
TerraVest has a stock option plan for which options are granted to key management personnel to purchase common shares of TerraVest. Of the 1,500,000 common shares reserved for issuance, 367,500 were available for issuance under the stock option plan as at September 30, 2021. Total expense arising from the share‐based payment transactions recognized during the year ended September 30, 2021 as compensation expense was $70 ($100 for the year ended September 30, 2020).
| Opening | Settled or | Closing | Vested and | ||||
|---|---|---|---|---|---|---|---|
| Grant Date | Expiry Date | Exercise price | balance | exercised | balance | exercisable | Unvested |
| Feb. 9, 2017 | Feb. 9, 2022 | $9.10 | 333,000 | (333,000) | ‐ | ‐ | ‐ |
| Mar. 9, 2017 | Mar. 9, 2024 | $9.10 | 267,500 | ‐ | 267,500 | 267,500 | ‐ |
| Jan. 20, 2020 | Jan. 20, 2027 | $13.12 | 100,000 | ‐ | 100,000 | 33,333 | 66,667 |
| 700,500 | (333,000) | 367,500 | 300,833 | 66,667 |
The stock options outstanding and the weighted average exercise prices as at September 30, 2021 were as follows:
During the year ended September 30, 2021, no stock options were granted or forfeited and 333,000 stock options were exercised by way of cashless exercise. The aggregate value of the issued common shares and the withholding tax obligation represented the intrinsic value of the 333,000 stock options at the exercise date and was recorded in share premium. The net settlement of this transaction resulted in TerraVest issuing 120,031 common shares at a weighted average share price of $17.92 per common share based on the average trading price of the common shares on the Toronto Stock Exchange for the five trading days immediately preceding the exercise date of the stock options.
Weighted average exercise price $9.67 $9.10 $10.19 $9.55
FINANCIAL INSTRUMENTS RISK
TerraVest is exposed to various risks in relation to financial instruments. The main type of risks are market risk, credit risk and liquidity risk. An analysis of these risks as at September 30, 2021, is provided below.
Market Risk
TerraVest is exposed to market risk, through its use of financial instruments, specifically to foreign currency risk, interest rate risk and certain commodity price risk.
Foreign Currency Risk
Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. TerraVest is subject to foreign currency risk for:
- sales and operating expenses denominated in foreign currencies made by Canadian entities; and
- financial instruments denominated in foreign currency in Canadian entities.
TerraVest does not have a policy to hedge its foreign currency risk and manages its exposure to foreign currency risk by periodically entering into forward exchange contracts. Based on the net U.S. dollar exposure as at September 30, 2021, a one cent increase in the Canadian/U.S. dollar exchange rate would have had an unfavorable impact of $70 on net income (favorable impact of $185 for the year ended September 30, 2020). A one cent decrease in the Canadian/U.S. dollar exchange rate would have had an impact of a similar magnitude but in opposite directions on net income.
Interest Rate Risk
TerraVest does not have a policy to hedge its interest rate risk and is exposed to interest rate risk arising from fluctuations in interest rates on revolving credit facilities and long‐term debt at variable interest rates. TerraVest entered into an interest rate swap agreement to manage a portion of its exposure to interest rate risk.
For the year ended September 30, 2021, a 1% increase in the interest rate would have had an unfavorable impact of $590 on net income ($676 for the year ended September 30, 2020), calculated using the average outstanding balances during the year on revolving credit facilities and long‐term debt at variable interest rates. A 1% decrease in the interest rate would have had an impact of a similar magnitude but in opposite directions on net income.
Commodity Price Risk
TerraVest is sensitive to changes in commodity prices for crude oil and natural gas. Fluctuations in commodity prices for crude oil and natural gas have an indirect impact on TerraVest's portfolio businesses operating in the oil and natural gas sectors. The indirect impact is the effect that the price variations have on activity levels for customers of those portfolio businesses and, therefore, the demand for goods and services. The indirect impact is not quantifiable.
Credit Risk
Credit risk is the risk that a counterparty will fail to perform its obligations to TerraVest. TerraVest's credit risk comes mainly from accounts receivable and is mitigated through credit policies that limit transactions according to counterparties' creditworthiness, which is assessed by considering counterparties' financial position, past experience and other factors. In addition, a large majority of TerraVest's clients are well established companies with a history of prompt payment. Accounts receivable amounts are presented on the consolidated statements of financial position net of the allowance for doubtful accounts. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due. The expected loss rates are based on the payment profile for sales based on historical credit losses. Trade receivables are written off when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with TerraVest on alternative payment arrangement, amongst other, may be considered indicators of no reasonable expectation of recovery. The credit risk on cash is considered negligible since cash is held in reputable financial institutions with high quality external credit ratings. TerraVest's maximum exposure to credit risk is $71,285 as at September 30, 2021 ($72,062 as at September 30, 2020).
As at September 30, 2021 and 2020, 91% of TerraVest's accounts receivable were less than 90 days past invoice date. TerraVest recognizes an allowance for doubtful accounts when it believes that the expected recoverable amount is lower than the actual amount of the trade receivables.
Liquidity Risk
TerraVest's objective is to maintain cash and cash availability to meet its liquidity requirements. TerraVest monitors its cash and trade receivable balances as well as cash flows generated from operations to meet its financial obligations. TerraVest also has access to various authorized revolving credit facilities to manage its liquidity need. For a more detailed discussion on liquidity risk, refer to the section entitled "Liquidity and Capital Resources" in this MD&A.
SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS
TerraVest prepares its financial statements in accordance with IFRS. TerraVest's accounting policies under IFRS are disclosed in Note 2 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
CRITICAL ACCOUNTING ESTIMATES
For a detailed discussion on the use of estimates and judgments, please refer to Note 3 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
CONTROLS AND PROCEDURES
As at September 30, 2021, TerraVest's Chief Executive Officer and Chief Financial Officer, have certified that the disclosure controls and procedures, and that the internal controls over financial reporting are effective and that during the period covered by this report, TerraVest did not make any changes in internal controls over financial reporting that materially affected or are reasonably likely to materially affect TerraVest's internal controls over financial reporting.
Exception
TerraVest acquired ECR in August 2021. Management has not yet completed its assessment of the design or operating effectiveness of ECR's disclosure controls and procedures and internal controls over financial reporting.
The following table provides significant financial information of ECR as at and for the year ended September 30, 2021:
| ECR$ | |
|---|---|
| Total assets | 60,227 |
| Total liabilities | 21,209 |
| Sales | 11,109 |
| Net income | 1,080 |
RELATED PARTY TRANSACTIONS
For detailed information on related party identity, relationship and transactions, please refer to Note 28 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021.
RISK FACTORS
For a detailed discussion of the risk factors related to the businesses and to the structure of TerraVest, please refer to the AIF of TerraVest under the heading "Risk Factors", which is incorporated herein by reference.
SUBSEQUENT EVENT
On November 24, 2021, certain subsidiaries of TerraVest operating in the Fuel Containment segment renegotiated their credit facility from $100,000 to $130,000 with a Canadian financial institution. The credit facility is now secured by a first ranking security in the amount of $150,000 over movable and immovable properties and movable assets, tangible and intangible, present and future of certain subsidiaries. All the other borrowing terms remain the same. Refer to Note 15 of TerraVest's audited consolidated financial statements for the year ended September 30, 2021 for complementary information.
ADDITIONAL INFORMATION
Additional information relating to TerraVest, including the AIF of TerraVest, is available on SEDAR at www.sedar.com.