Velan Inc.
TSX : VLN

Velan Inc.

October 08, 2009 13:54 ET

Velan Inc. Reports Its Second Quarter 2009/10 Financial Results

MONTREAL, QUEBEC--(Marketwire - Oct. 8, 2009) - Velan Inc. (TSX:VLN) today reported its financial results for the second quarter ended August 31, 2009.



SUMMARY OF RESULTS
(In millions of Canadian dollars, except per share amounts)
----------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31 AUGUST 31
2009 2008 2009 2008
----------------------------------------------------------------------
Sales 117.6 86.9 237.9 226.3

Net Earnings 7.6 1.3(i) 21.9 8.6(i)

Earnings per Share 0.34 0.06(i) 0.98 0.39(i)
----------------------------------------------------------------------
(i)excluding a net gain of $36.6 million, or $1.64 per share, on the
disposal of the Company's 50% interest in an Italian joint venture
company


Highlights

Velan reported strong financial results for the three months ended August 31, 2009. Sales of $117.6 million were a record for the quarter. The net earnings for the three months were $7.6 million, or $0.34 per share. For the six months ended August 31, 2009, Sales were $273.9 million and Net Earnings were $21.9 million, or $0.98 per share.

Sales, Gross Profit and Net Earnings

Sales for the quarter reached $117.6 million, a record level for the quarter ended August 31. This is a 35.3% increase over the same quarter last year when the company recorded sales of $86.9 million, and 59.7% higher after adjusting for the sales of the Italian joint venture company in the 2008 figures. For the six months ended August 31, 2009, sales were $237.9 million, which is 27.6% higher than the previous year after adjusting for the sale of the Italian joint venture in July 2008. The main increases were in the North American, German and UK operations. The 2009 quarterly sales includes a positive currency impact of $8.6 million when compared to 2008 because the US dollar was on average 8.2% stronger than the Canadian dollar.

The gross profit of the second quarter of $32.4 million, or 27.6% of sales, compared to an adjusted gross profit of $15.1 million, or 20.5% of sales, recorded last year. The principal factor positively impacting the gross profit percentage was the weakening of the Canadian dollar against the US dollar, based on average rates as compared to the prior year. Other factors such as the marked to market gains on derivative financial instruments, increased volume and product mix also affected margins. The gross profit for the six months amounted to $81.6 million, or 34.3% of sales, this year compares to the adjusted gross margin of $43.4 million, or 23.3% of sales, recorded last year.

Net earnings for the quarter of $7.6 million, or $0.34 per share, compared to net earnings of $1.3 million, or $0.06 per share, in the prior year, after adjusting for the gain on the sale of the Italian joint venture. Net earnings for the six months amounted to $21.9 million, or $0.98 per share, compared to $8.6 million, or $0.39 per share, in the prior year. Although the Company reports in Canadian dollars, a majority of its sales is in US dollars. Based on average exchange rates the US dollar strengthened against the Canadian dollar by 8.2% and 14.4% for the three and six month periods respectively, which positively affected operating results. Changes in the period end currency rates result in the unrealized gains or losses on the consolidation of integrated subsidiaries. The Company recorded foreign exchange losses on the translation of integrated subsidiaries of $0.6 million and $6.2 million for the quarter and the six months respectively, compared to gains of $2.0 million and $1.8 million for the corresponding periods of the prior year.

Strong Balance Sheet

The Company continues to build a strong balance sheet and ended the quarter with shareholders' equity of $343.0 million, or $15.40 per share. The Company's net cash, defined as cash and cash equivalents plus short term investments less bank indebtedness and short-term bank loans, amounted to $93.9 million as at August 31, 2009, an increase of $30.4 million from February 28, 2009. Net cash provided from operating activities amounted to $35.3 million for the quarter and $43.8 million for the six months.

Bookings and Outlook

Order bookings continue to be negatively impacted by the global financial crisis. Bookings during the quarter were down 49% from last year, excluding the bookings of the Italian joint venture from last year. Bookings in the same quarter last year were the highest in the Company's history and were in turn 60.2% higher than the previous year. The backlog as of August 31, 2009 was $503.3 million, of which $146 million is scheduled for shipment after August 2010. The French subsidiaries continue to have very strong bookings, particularly in nuclear. The Company's President, Tom Velan, said "The more positive trend in the global economy has not yet resulted in an upward trend in our markets except for nuclear. There has been downward pressure on prices and we expect this will continue. Order bookings in markets other than nuclear have also been negatively impacted by the market conditions. We are fortunate to still have a solid backlog of orders in this continuing period of uncertainty but some of our plants don't have enough orders. We expect that it will take time for the capital-intensive project market to recover as many new projects continue to be in the planning stage. Exchange rates have been very volatile and this has a big impact on our margins. It is very difficult to predict what will happen to our markets and currency exchange rates over the next year but if the current trend in order bookings continues we will have to take measures to reduce costs in line with the lower bookings. Despite the tough market environment, our solid backlog of orders and strong balance sheet put us in a good position to weather this global economic storm. Under the circumstances, we are pleased with our results this quarter and for the six month period. We had a sales conference in September with our international sales force and many of our distributors from around the world. We will focus all our efforts to pursue business opportunities around the world in order to book enough orders to continue to build on the good results achieved during our first two quarters."

Dividend

The Board declared an eligible quarterly dividend of $0.08 per share, payable on December 31, 2009 to all shareholders of record as at December 15, 2009.

Conference Call

Financial analysts, shareholders and other interested individuals are invited to attend the second quarter conference call to be held on October 8, 2009 at 4:30 PM (ET). The toll free call-in number is 1-800-745-9476, access code 21439442. A recording of this conference call will be available for 7 days at 1-416-626-4100 or 1-800-558-5253, access code 21439442.

Except for historical information provided herein, this press release may contain information and statements of a forward-looking nature concerning the future performance of the Company. These statements are based on suppositions and uncertainties as well as on management's best possible evaluation of future events. Such factors may include, without excluding other considerations, fluctuations in quarterly results, evolution in customer demand for the Company's products and services, the impact of price pressures exerted by competitors, and general market trends or economic changes. As a result, readers are advised that actual results may differ from expected results.

J.D. Ball

CFO



Consolidated Statements of Earnings
and Retained Earnings

Unaudited Unaudited
Three months ended Six months ended
August 31 August 31
(in thousands of dollars,
excluding per share amounts) 2009 2008 2009 2008
--------------------------------------------------------------------------

Sales (note 3) $117,580 $86,861 $237,945 $226,279
Cost of sales (notes 3 and 5) 85,163 67,220 156,325 169,250
--------------------------------------------------------------------------
Gross profit 32,417 19,641 81,620 57,029
--------------------------------------------------------------------------
Expenses (other income)
Engineering, selling, general
and administrative and research
(note 4) 17,726 17,344 35,202 38,765
Interest
Long-term debt 67 205 192 395
Other 52 225 106 657
Amortization of property, plant
and equipment 2,286 1,986 4,672 4,401
Net gain on disposition of
business - (36,595) - (36,595)
Other expense (income) (243) (473) (540) (757)
Non-controlling interest 351 709 708 1,854
Foreign exchange loss (gain) on
translation of integrated
subsidiaries 587 (2,045) 6,246 (1,808)
--------------------------------------------------------------------------
20,826 (18,644) 46,586 6,912
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Earnings before income taxes 11,591 38,285 35,034 50,117

Provision for income taxes 4,005 348 13,132 4,887
--------------------------------------------------------------------------
Net earnings $7,586 $37,937 $21,902 $45,230
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Retained earnings - beginning $229,782 $160,873 $217,251 $153,580
Net earnings 7,586 37,937 21,902 45,230
Dividends
Multiple Voting Shares 1,245 1,245 2,490 1,245
Subordinate Voting Shares 533 540 1,073 540
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Retained earnings - ending $235,590 $197,025 $235,590 $197,025
--------------------------------------------------------------------------
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Earnings per share (note 2)
Basic $0.34 $1.70 $0.98 $2.03
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Diluted $0.34 $1.70 $0.98 $2.03
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Consolidated Balance Sheets

Unaudited Unaudited
Aug 31 Feb 28
(in thousands of dollars) 2009 2009
----------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $98,039 $66,776
Short-term investments 88 166
Accounts receivable 91,172 123,333
Income taxes recoverable 3,611 4,523
Inventories 215,210 212,781
Deposits and prepaid expenses 5,714 8,683
Future income taxes 4,685 4,054
----------------------------------------------------------------
418,519 420,316

Future income taxes 1,502 1,614
Property, plant and equipment 72,151 70,270
Goodwill 12,502 12,502
Other assets 1,753 1,818
----------------------------------------------------------------
$506,427 $506,520
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----------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $3,354 $2,454
Short-term bank loans 867 1,003
Accounts payable and accrued liabilities 61,412 91,047
Income taxes payable 12,749 3,605
Dividend payable 1,785 1,786
Customers' deposits 56,332 51,608
Provision for performance guarantees 6,773 7,438
Future income taxes 2,758 2,771
Current portion of long-term debt 113 530
----------------------------------------------------------------
146,143 162,242
Future income taxes 3,017 3,286
Long-term debt 3,845 4,397
Non-controlling interest 3,253 2,610
Other long-term liabilities 7,143 6,870
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163,401 179,405
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SHAREHOLDERS' EQUITY
Capital stock (note 6) 108,214 109,326
Contributed surplus (note 6) 1,929 1,622
Retained earnings 235,590 217,251
Accumulated other comprehensive loss (2,707) (1,084)
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343,026 327,115
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$506,427 $506,520
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----------------------------------------------------------------



Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Six months ended
August 31 August 31
(in thousands of dollars) 2009 2008 2009 2008
--------------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net earnings $7,586 $37,937 21,902 $45,230
Items not affecting cash -
Amortization 2,286 1,986 4,672 4,401
Stock options expense 64 4 127 13
Future income taxes - - - 154
Loss on disposal of property, plant
and equipment - (9) - 125
Net gain on disposition of business - (36,595) - (36,595)
Non-controlling interest 351 709 708 1,854
Net change in other long-term
liabilities 273 205 269 241
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10,560 4,237 27,678 15,423
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Net changes in non-cash working
capital items
Accounts receivable 17,018 26,069 31,746 13,505
Income taxes recoverable (37) (2,132) 900 (2,695)
Inventories 6,703 (21,367) (2,460) (27,348)
Deposits and prepaid expenses (2,017) (762) 2,931 (1,522)
Accounts payable and accrued
liabilities (6,561) (1,065) (30,017) 18,884
Income taxes payable 1,319 80 9,026 44
Customers' deposits 8,409 11,625 4,663 10,880
Provision for performance
guarantees (106) (319) (674) 1,293
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24,728 12,129 16,115 13,041
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35,288 16,366 43,793 28,464
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Investing activities

Net proceeds on disposition of
business - 42,538 - 42,538
Net cash increase on disposal of a
business - - - 550
Short-term investments 165 180 78 (757)
Additions to property, plant and
equipment (3,626) (2,683) (6,629) (5,697)
Proceeds on disposal of property,
plant and equipment - 9 - 38
Net change in other assets (14) (101) 64 (639)
--------------------------------------------------------------------------
(3,475) 39,943 (6,487) 36,033
--------------------------------------------------------------------------

Financing activities
Repurchase of Shares (note 6) (844) - (932) -
Dividends (1,786) - (3,572) -
Dividends to non-controlling
interest (85) - (85) (772)
Short-term bank loans - (2,798) (136) (9,474)
Increase in long-term debt - 222 - 431
Repayment of long-term debt (516) (800) (1,057) (2,577)
--------------------------------------------------------------------------
(3,231) (3,376) (5,782) (12,392)
--------------------------------------------------------------------------
Effect of exchange rate differences
on cash and cash equivalents 749 (674) (1,161) 517
--------------------------------------------------------------------------
Net change in cash and cash
equivalents 29,331 52,259 30,363 52,622
Net cash - beginning 65,354 34,611 64,322 34,248
--------------------------------------------------------------------------
Net cash - ending $94,685 $86,870 $94,685 $86,870
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Net cash includes cash and cash equivalents less bank indebtedness

Interest paid amounted to : 50 87 124 1,207
Income tax paid amounted to: 1,502 1,730 2,857 6,953



Consolidated Statements of Comprehensive Income

Unaudited Unaudited
Three months ended Six months ended
August 31 August 31
(in thousands of dollars) 2009 2008 2009 2008
--------------------------------------------------------------------------
Net earnings $7,586 $37,937 21,902 $45,230
Other comprehensive income (loss),
net of tax
Foreign currency translation
adjustment on self-sustaining
operations (non taxable) 1,129 (467) (1,623) 1,034
--------------------------------------------------------------------------
Comprehensive income 8,715 37,470 20,279 46,264
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Accumulated other comprehensive
income (loss), net tax
Accumulated other comprehensive
income (loss), beginning of period (3,836) 264 (1,084) (1,074)
Other comprehensive income (loss)
for the period 1,129 (467) (1,623) 1,034
Realized translation adjustment on
the disposition of a self-
sustaining foreign operations (679) - (679)
Realized translation adjustment on
reduction of net investment in
self sustaining foreign
operations - - - (163)
--------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period (2,707) (882) (2,707) (882)
--------------------------------------------------------------------------
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Notes to Consolidated Financial Statements

August 31, 2009

(in thousands, excluding number of shares and per share amounts)

1. SUMMARY OF ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the disclosures included in the company's annual consolidated financial statements and as such should be read in conjunction with the consolidated financial statements for the year ended February 28, 2009. In addition, an auditor has not performed a review of these interim consolidated financial statements.

These interim consolidated financial statements have been prepared using the same accounting policies as outlined in Note 1 of the consolidated financial statements for the year ended February 28, 2009, except for the following:

ADOPTION OF NEW ACCOUNTING PRINCIPLES

Goodwill and intangible assets

The CICA issued Section 3064, "Goodwill and Intangible Assets", which establishes standards for the recognition, measurement, presentation and disclosure of intangible assets. This new section replaced Section 3062, "Goodwill and Other Intangible Assets" and Section 3450 "Research and Development Costs". The Standards relating to goodwill in the new Section 3064 are unchanged from those included in Section 3062.

The adoption of this Section did not have an impact on the Company's financial position, earnings or cash flows.

ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED

Business combinations

The CICA issued Section 1582, "Business Combinations", which replaces Section 1581, "Business Combinations". The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to International Financial Reporting Standard ("IFRS") 3 (Revised), "Business Combinations". The Section applies prospectively to business combinations for which the acquisition date is on or after the Company's annual reporting period beginning March 1, 2011. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of this new accounting standard on its consolidated financial statements.

Consolidated financial statements and non-controlling interests

The CICA issued Section 1601, "Consolidated Financial Statements", and Section 1602, "Non-controlling Interests", which together replace Section 1600, "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Accounting Standard 27 (Revised), "Consolidated and Separate Financial Statements". The standards are effective for the Company's annual reporting period beginning on March 1, 2011, although earlier adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the impact of the adoption of these new accounting standards on its consolidated financial statements.

2. EARNINGS PER SHARE

Earnings per share is calculated using the weighted average number of shares outstanding of 22,267,279 (August 31, 2008 -- 22,318,968). The options do not have a dilutive effect.

3. FOREIGN EXCHANGE TRANSLATION

Foreign exchange gains (losses) realized on the translation of foreign currency balances and transactions during the period are included in sales and cost of sales and amounted to:



--------------------------------------------------------------------------
Three months ended Six months ended
August 31 August 31
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Sales (46) 967 (1,732) 98
Cost of Sales 1,824 (1,928) 11,240 (2,436)
--------------------------------------------------------------------------
1,778 (961) 9,508 (2,338)
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4. RESEARCH EXPENSE

Research Expenses included the following:

--------------------------------------------------------------------------
Three months ended Six months ended
August 31 August 31
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Research Expenditures 1,904 2,133 3,851 6,092
Less: Scientific research tax credits 666 624 1,412 1,462
--------------------------------------------------------------------------
1,238 1,509 2,439 4,630
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5.INVENTORY

a) Inventory cost recorded as an expense amounted to:

--------------------------------------------------------------------------
Three months ended Six months ended
August 31 August 31
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Inventory Cost of Sales 71,332 65,592 149,793 166,129
--------------------------------------------------------------------------

b) The net change in inventory provisions during the period amounted to:

--------------------------------------------------------------------------
Three months ended Six months ended
August 31 August 31
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Provision 1 309 1,217 3,642 3,140
Reversal (1 017) (1,104) (2,214) (2,744)
--------------------------------------------------------------------------
Net 292 113 1,428 396
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6. CAPITAL STOCK

a) Authorized - in unlimited number

Preferred Shares, issuable in series
Subordinate Voting Shares
Multiple Voting Shares (five votes per share), convertible into
Subordinate Voting Shares

b) Issued

--------------------------------------------------------------------------
August 31 Feb 28,
2009 2009
$ $
--------------------------------------------------------------------------
6,673,401 (Feb 2009 -- 6,748,101) (note 6 c)
Subordinate Voting Shares 99,390 100,502
15,566,567 Multiple Voting Shares 8,824 8,824
--------------------------------------------------------------------------
108,214 109,326
--------------------------------------------------------------------------


c) Pursuant to its Normal Course Issuer Bid, the company is entitled to
repurchase for cancellation a maximum of 337,620 Subordinate Voting
Shares during the twelve-month period ended October 20, 2009. During the
quarter, 67,800 Subordinate Voting Shares (74,700 year to date) were
purchased for a cash consideration of $844 ($932 year to date) and
cancelled. The amount by which the repurchase amount is below the
stated capital of the shares has been credited to contributed surplus.

d) Stock Options

The fair value of the options is estimated as at the date of grant using an
option pricing model with the following weighted average assumptions:

Risk-free interest rate 3.17 %
Expected dividend yield 2.77 %
Expected life of the options 4.94 years
Expected volatility 28.99 %

The weighted average fair value at grant date of the options is $2.46 per
option.

A compensation cost of $64 (August 2008 - $4) for the quarter and $127
(August 2008 - $13) year to date was recorded in the statement of earnings
and credited to contributed surplus.

The table below summarizes the status of the share option plan:


------------------------------------------------------------------
Three months ended August 31, 2009
------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
------------------------------------------------------------------
Outstanding, beginning of period 200,000 11.27 48.6 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
------------------------------------------------------------------
Outstanding, end of period 200,000 11.27 45.6 months
------------------------------------------------------------------
------------------------------------------------------------------
Exercisable, end of period 30,000 12.81
------------------------------------------------------------------
------------------------------------------------------------------


------------------------------------------------------------------
Six months ended August 31, 2009
------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
------------------------------------------------------------------
Outstanding, beginning of period 200,000 11.27 51.6 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
------------------------------------------------------------------
Outstanding, end of period 200,000 11.27 45.6 months
------------------------------------------------------------------
------------------------------------------------------------------
Exercisable, end of period 30,000 12.81
------------------------------------------------------------------
------------------------------------------------------------------

7. SEGMENT DISCLOSURE

Consistent with the prior year, the company reflects its results
under a single reportable operating segment.


Contact Information

  • VELAN Inc.
    Tom Velan
    President
    514-748-7743
    514-748-8635 (FAX)
    or
    VELAN Inc.
    M. John D. Ball
    Chief Financial Officer
    514-748-7743
    514-748-8635 (FAX)
    www.velan.com