Velan Inc.
TSX : VLN

Velan Inc.

October 10, 2007 15:45 ET

Velan Inc. Reports its 1st Quarter 2007/2008 Financial Results

MONTREAL, QUEBEC--(Marketwire - Oct. 10, 2007) - Velan Inc. (TSX:VLN) - Revenues for the first quarter reached $94.1 million, a 18.4% increase over the same quarter last year's sales of $79.5 million. Net earnings for the quarter amounted to $1.4 million, or $0.06 per share, compared to $0.9 million, or $0.04 per share, in the prior year. These sales were the highest first quarter sales in the company's history and were achieved despite the continuing negative impact of the strength of the Canadian dollar, which rose 5.9% against the U.S. dollar compared to the average of the first quarter last year.

Order bookings reached $138.3 million, an increase of 10.3% over bookings in the same quarter last year. Velan Gmbh, the German sales distribution company which offers complete valve packages to European engineering companies and users booked a record $30.2 million of orders in the quarter. This included a US$17 million order to supply valves to OJSC Power Machines in Russia for three 600 Megawatt units of the Sipat coal fired power plant in India. Bookings in the quarter exceeded shipments such that order backlog increased by $44.7 million to reach $378.5 million (these figures exclude $12.1 million attributable to a business acquisition). The growth in backlog reflects the importance of the global operations as 54% of the consolidated backlog of orders has been booked in the overseas subsidiaries. The growth in the backlog is also a result of booking more orders with longer lead times than in the past. Nearly $108.3 million of backlog is scheduled to be shipped after the May 31, 2008 fiscal year end.

The net earnings of $1.4 million in the quarter were up from the $0.9 million in the same quarter last year. This was achieved despite a $0.8 million unrealized foreign exchange loss on translation of integrated subsidiaries, versus a small gain last year.

The quarter's gross profit of $23.4 million, or 24.9% of sales, compares to $19.4 million, or 24.4%, last year. The increase in gross profit in both dollar and percentage terms is due to the significant increase in volume.

The company purchases most of its material in US dollars. In periods when the Canadian dollar rises, its inventory, which was purchased when the Canadian dollar was weaker, becomes a higher percentage of the US dollar sales. Subsequent to the end of the first quarter, the Canadian dollar increased to par with the US dollar which presents important challenges for Canadian manufacturers/exporters. In the last fiscal year, the average exchange rate was 88 cents and the year end rate was 93.5 cents. Although the company manages a portion of its short term foreign currency risk through the use of forward contracts, a sustained strengthening of the Canadian dollar has a significant negative impact, both realized and unrealized, on the company's results.

The company ended the quarter with shareholders' equity of $258.0 million, or $11.56 per share. The company continues to work to improve its working capital efficiency and the net cash position has increased by $14.3 million during the quarter to reach $22.9 million at the quarter end (these figures exclude $3.3 million cash acquired in a business acquisition), despite the continued strengthening of the Canadian dollar.

The President, Tom Velan, said, "We have had an encouraging positive trend in our sales, order bookings and earnings over the last 3 years. Our order backlog of $390.6 million gives us a solid foundation to continue to grow our sales revenues. Over the last 13 quarters we have demonstrated the ability to grow our sales and operating earnings during a period when the Canadian dollar increased by 29% from 73.3 cents to 94.7 cents US. Our challenge over the next three quarters is to turn our large backlog into growing sales revenues while limiting the impact of the rapid rise of the Canadian dollar on our operating results."

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.



Consolidated Statements of Earnings and Retained Earnings

Unaudited
Three months ended
August 31
(in thousands of dollars,
excluding per share amounts) 2007 2006
-------------------------------------------------------------------
Sales $94,076 $79,457
Cost of sales (note 3) 70,675 60,088
-------------------
Gross profit 23,401 19,369
-------------------

Expenses (other income)
Engineering, selling, general and
administrative and research (note 4) 17,138 14,805
Interest
Long-term debt 69 66
Other 240 72
Amortization of property, plant and equipment 2,053 1,890
Other expense (income) (468) (390)
Non-controlling interest 435 710
Foreign exchange loss (gain) on translation of
integrated subsidiaries 779 (33)
-------------------
20,246 17,120
-------------------
Earnings before income taxes 3,155 2,249

Provision for income taxes 1,757 1,333
-------------------

Net earnings $1,398 $916
-------------------
-------------------


Retained earnings - beginning $148,245 $129,833
Transition adjustment on adoption of financial
instrument standards, net of tax (note 1) 148 -
Net earnings 1,398 916
--------------------
Retained earnings - ending $149,791 $130,749
--------------------
--------------------

Earnings per share (note 2)
Basic $0.06 $0.04
--------------------
Diluted $0.06 $0.04
--------------------



Consolidated Balance Sheets
Unaudited Unaudited
August 31 May 31
(in thousands of dollars) 2007 2007
-------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $39,331 $25,803
Short-term investments - 1,012
Accounts receivable 103,003 129,644
Income taxes recoverable 2,044 1,574
Inventories 189,780 176,061
Deposits and prepaid expenses 3,339 3,133
Future income taxes 2,375 2,404
-------------------------
339,872 339,631
Future income taxes 1,309 1,420
Property, plant and equipment 60,716 56,017
Goodwill 12,502 12,502
Other assets 979 1,216
-------------------------
$415,378 $410,786
-------------------------
-------------------------
LIABILITIES
Current liabilities
Bank indebtedness $3,177 $5,487
Short term bank loans 9,907 12,731
Accounts payable and accrued liabilities 82,913 81,190
Income taxes payable 3,842 3,159
Customers' deposits 20,264 18,192
Provision for performance guarantees 7,412 7,779
Future income taxes 97 194
Current portion of long-term debt 2,721 2,558
-------------------------
130,333 131,290
Future income taxes 1,519 1,523
Long-term debt 10,288 7,107
Non-controlling interest 7,911 7,476
Other long-term liabilities 7,287 6,737
-------------------------
157,338 154,133
-------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,476 1,467
Retained earnings 149,791 148,245
Accumulated other comprehensive loss (2,617) (2,449)
-------------------------
258,040 256,653
-------------------------
$415,378 $410,786
-------------------------
-------------------------



Consolidated Statements of Cash Flows
Unaudited
Three months ended
August 31
(in thousands of dollars) 2007 2006
-------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net earnings $1,398 $916
Items not affecting cash -
Amortization 2,053 1,890
Stock options expense 9 3
Loss (gain) on disposal of property, plant and
equipment (48) (6)
Non-controlling interest 435 710
Net change in other long-term liabilities 236 93
----------------
4,083 3,606
----------------

Net changes in non-cash working capital items
Accounts receivable 29,869 14,826
Income taxes recoverable (470) -
Inventories (10,814) (11,994)
Deposits and prepaid expenses (203) (979)
Accounts payable and accrued liabilities (3,242) (3,035)
Income taxes payable 451 (758)
Customers' deposits 1,844 1,834
Provision for performance guarantees (734) (92)
----------------
16,701 (198)
----------------
20,784 3,408
----------------

Investing activities
Net cash paid on business acquisition (note 6) (1,438) -
Short-term investments 1,012 (1)
Additions to property, plant and equipment (3,113) (3,208)
Proceeds on disposal of property,
plant and equipment - 12
Net change in other assets 237 (118)
----------------
(3,302) (3,315)
----------------

Financing activities
Short-term bank loans (2,824) -
Increase in long-term debt 1,437 665
Repayment of long-term debt (242) (162)
----------------
(1,629) 503
-------------------

Effect of exchange rate differences on
cash andcash equivalents (15) 106
-------------------
Net change in cash and cash equivalents 15,838 702

Net cash - beginning 20,316 42,850
-------------------
Net cash - ending $36,154 $43,552
-------------------
-------------------

Net cash includes cash and cash equivalents
less bank indebtedness

Interest paid amounted to : 293 354
Income tax paid amounted to: 1,307 786



Consolidated Statements of Comprehensive Income (Loss)

Unaudited
Three months ended
August 31
(in thousands of dollars) 2007 2006
-------------------------------------------------------------------
Net earnings $1,398 $916
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment
on self-sustaining operations (non taxable) (168) 158
----------------
Comprehensive income (loss) 1,230 1,074
----------------
----------------

Accumulated other comprehensive income (loss),
net tax
Accumulated other comprehensive loss,
beginning of period (2,449) (2,896)
Other comprehensive income (loss)
for the period (168) 158
----------------
Accumulated other comprehensive loss,
end of period (2,617) (2,738)
----------------
----------------


Notes to Consolidated Financial Statements

For the three months ended August 31, 2007

(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 May 31, 2007. 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 May 31, 2007, except for the following:

Accounting changes

On June 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1506, Accounting Changes. This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors.

Financial instruments

On June 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income and Section 3855 Financial Instruments -- Recognition and Measurement. These standards provide accounting guidelines for recognition and measurement of financial assets, financial liabilities and non-financial derivatives as well as the introduction of a new statement of comprehensive income. Section 3865, Hedges, did not have an impact on the Company as it does not use hedge accounting.

The Company's adoption of these new Financial Instruments standards resulted in changes in the accounting for financial instruments as well as the recognition of certain transition adjustments that have been recorded in opening retained earnings and accumulated other comprehensive income as described below. The comparative interim consolidated financial statements have not been restated other than for the foreign currency cumulative translation adjustment, which is now disclosed within accumulated other comprehensive loss. The principal changes in the accounting for financial instruments due to the adoption of these accounting standards are as follows:

(a) Comprehensive income (loss)

Comprehensive income (loss), established under CICA Section 1530, is defined as the change in equity, from transactions and other events and circumstances from sources other than shareholders, and is composed of the Company's net earnings (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are recognized in comprehensive income (loss), but excluded from net earnings (loss), and include foreign currency translation gains and losses on the net investment in self-sustaining operations. The components of comprehensive income (loss) are disclosed in the interim consolidated statements of comprehensive income (loss).

(b) Financial assets and financial liabilities

Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. They are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition.

Held-for-trading

Financial instruments classified as held-for-trading are carried at fair value at each balance sheet date with the changes in fair value recorded in net earnings (loss) in the period in which these changes arise.

Held-to-maturity investments, loans and receivables and other financial liabilities

Financial instruments classified as loans and receivables, held-to-maturity investments and other financial liabilities are carried at amortized cost using the effective interest method. The interest income or expense is included in net earnings (loss) over the expected life of the instrument.

Available-for-sale

Financial instruments classified as available-for-sale are carried at fair value at each balance sheet date with the changes in fair value recorded in other comprehensive income (loss) in the period in which the changes arise. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through earnings (loss) whenever it is necessary to reflect other-than-temporary impairment. Upon derecognition, all cumulative gain or loss is then recognized in net earnings (loss).

As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents, short-term investments, bank indebtedness, short-term debt and derivatives as held-for-trading. Accounts receivable are classified as loans and receivables. Account payable and accrued liabilities, customer deposits, provision for performance guarantees, long-term debt, including interest payable and other long-term liabilities are classified as other liabilities, all of which are measured at amortized cost.

(c) Embedded derivatives

All derivative instruments are recorded in the consolidated balance sheets at fair value at each balance sheet date. Derivatives may be embedded in other financial instruments (the "host instrument"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standards, embedded derivatives are treated as separate derivatives if their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value at each balance sheet date with subsequent changes recognized in net earnings (loss) in the period in which the changes arise. The Company selected June 1, 2002 as its transition date for embedded derivatives, which is the latest date that could be selected according to the accounting standard.

The Company enters into certain contracts for the purchase and sale of non-financial items that are denominated in currencies other than the Canadian dollar, the Company's functional currency. In cases where the foreign exchange component is not leveraged and does not contain an option feature, the contract is denominated in the functional currency of the counter-party or the non-financial item is routinely denominated in the currency of the contract or the currency of the contract is commonly used in the economic environment in which the transaction takes place, the embedded derivative is considered to be closely related and is not accounted for separately.

Adopting these new standards resulted in the following impact on the balance sheet as at June 1, 2007:



Increase (decrease)
------------------
Accounts receivable 217
Future income tax liability -
current portion 69
Retained earnings 148


Embedded foreign currency derivatives gave rise to these transition amounts and were the only items that had an effect on the financial statements as a result of the adoption. The fair value of financial instruments is determined using recognized valuation models using observable market-based inputs.

The adoption of these sections did not have a significant impact on the earnings for the current quarter. The fair value of the derivatives related to sales contracts is recorded in sales; purchase contracts are recorded in cost of sales.


ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED

Financial instruments - disclosure and presentation

In December 2006, the CICA published the following two sections of the CICA Handbook: Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. These standards introduce disclosure and presentation requirements that will enable financial statements' users to evaluate, and enhance their understanding of, the significance of financial instruments for the entity's financial position, performance and cash flows, and the nature and extent of risks arising from financial instruments to which the entity is exposed, and how those risks are managed.

Capital disclosures

In December 2006, the CICA published section 1535 of the Handbook, Capital disclosures, which requires disclosure of both qualitative and quantitative information that enables financial statements' users to evaluate the entity's objectives, policies and processes for managing capital.

Inventories

In January 2007, the CICA published section 3031 of the Handbook, Inventories, which prescribes the accounting treatment for inventories. Section 3031 provides guidance on the determination of costs and its subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories.

These standards must be adopted for the Company's fiscal year beginning on June 1, 2008. While the Company is currently assessing the impact of these new recommendations on its financial statements, it does not expect the recommendations to have a significant impact on its financial position, earnings or cash flows.

Certain of the prior year's numbers have been reclassified to conform to the current year's presentation.



2. EARNINGS PER SHARE

Earnings per share are calculated using the weighted average number of shares outstanding of 22,318,968 (August 2006 - 22,318,968). The options do not have a dilutive effect.



3. FOREIGN EXCHANGE TRANSLATION

Foreign exchange gains and losses realized on the translation of foreign currency balances and transactions is included in cost of sales and amounted to:



------------------
Three months ended
August 31
2007 2006
$ $
-----------------------------------------------------------------------
Actual net gain on translation of foreign currencies 261 32
-----------------------------------------------------------------------
-----------------------------------------------------------------------


4. RESEARCH EXPENSE

Research Expenses included the following:
-------------------
Three months ended
August 31
2007 2006
$ $
-----------------------------------------------------------------------
Research Expenditures 1,333 1,399
Less: Scientific research tax credits (493) (458)
-------------------
840 941
-----------------------------------------------------------------------
-----------------------------------------------------------------------


5. 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 May 31
2007 2007
$ $
-----------------------------------------------------------------------
6,707,401 (May 31, 2007 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2007 - 15,611,567)
Multiple Voting Shares 8,849 8,849
----------------------------------
109,390 109,390
-----------------------------------------------------------------------
-----------------------------------------------------------------------

c) 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 4.1%
Expected dividend yield 2.0%
Expected life of the options 4.6 years
Expected volatility 28.55%

The weighted average fair value at grant date of the options is $3.31 per
option.

A compensation cost of $9 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, 2007
----------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price($) life
----------------------------------
Outstanding, beginning of period 30,000 12.81 50.5 months

Granted - - -

Exercised - - -

Expired/Forfeited - - -
-------------------------------
Outstanding, end of period 30,000 12.81 47.5 months
-------------------------------
-------------------------------
Exercisable, end of period 10,000 12.81 -
-------------------------------
-------------------------------


6. BUSINESS ACQUISITION

On July 31, 2007, the company acquired all of the equity of Segault S.A., a
valve manufacturer located in France, for a total consideration of $8,768
(EUR 6,000) of which $4,749 (EUR 3,250) has been paid, $1,827 (EUR 1,250)
will be paid in the next few months and $2,192 (EUR 1,500), under certain
conditions, will become due on July 31, 2013. Cash and cash equivalents
acquired on acquisition amounted to $3,311 (EUR 2,266).

The acquisition was accounted for using the purchase price method and the
purchase price was allocated as follows:

$ EUR

Current assets 9,425 6,449
Property, plant and equipment 3,735 2,556
----------------------
13,160 9,005

Current liabilities (3,968) (2,715)
Long-term liabilities (424) (290)
----------------------
8,768 6,000
----------------------
----------------------


7. SEGMENT DISCLOSURE

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

CERTIFIED TO ISO 9001 QUALITY STANDARDS

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)