Velan Inc.
TSX : VLN

Velan Inc.

January 10, 2007 15:46 ET

Velan Inc. Reports its 2nd Quarter 2006/2007 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Jan. 10, 2007) - Velan inc. (TSX:VLN)

Revenues for the second quarter reached $101.5 million, a 7.0% increase over the same quarter last year when the company recorded sales of $94.9 million. Net earnings for the quarter of $4.8 million, or $0.22 per share, compared to net earnings of $2.1 million, or $0.10 per share, in the prior year. For the six months ended November 30, 2006, net earnings amounted to $5.7 million, or $0.26 per share, versus net earnings of $3.6 million, or $0.16 per share, in the prior year.

The gross profit of the second quarter of $28.4 million, or 28.0% of sales, compares favourably to the $25.0 million, or 26.3% of sales, recorded last year. This was due to a combination of factors such as an increased volume of production, select price increases and a slight improvement in product mix. This more than offset the rising steel and other material costs. The gross profit for the six months amounted to $47.8 million, or 26.4% of sales, this year compared to the $48.3 million, or 27.9% of sales, experienced last year. The slightly lower year to date margin is due to the lower first quarter results. An unfavourable product mix coupled with only a marginal increase in volume were the main reasons for the lower margins in the first quarter.

Although the Company reports in Canadian dollars, a majority of its sales is in US dollars. Based on average exchange rates the Canadian dollar strengthened against the US dollar 4.6% and 6.8% for the three and six months respectively, which negatively impacted its sales as reported in Canadian dollars. However, as a result of the weakening of the Canadian dollar based on period end rates, the Company recorded an unrealized gain during the quarter of $1.0 million on consolidation of its integrated foreign subsidiaries compared to a $1.2 million loss during the same quarter last year, and a $1.1 million gain versus a $2.9 million loss during the equivalent six month periods.

New orders received during the quarter amounted to $127.9 million, representing a 4.7% or $5.8 million increase from the comparative quarter last year. Order intake exceeded shipments for both the quarter and year to date periods, resulting in a record backlog of $325.8 million as at November 30, 2006. This is 28.1% and 32.0% higher than May 31,2006 and November 30,2005 respectively. From the total backlog, $117 million is due to be shipped after our May 31st year end of which $42 million is scheduled after November 30, 2007.

The Company ended the quarter with shareholders' equity of $246.9 million, or $11.06 per share. The Company's net cash, defined as cash and cash equivalents plus short term investments less bank indebtedness, amounted to $32.3 million as at November 30, 2006, a decrease of $11.7 million and $11.0 million from August 31, 2006 and May 31, 2006 respectively. Net cash used for operating activities amounted to $11.0 million for the quarter and $7.6 million for the six months, primarily to fund increases in accounts receivable and inventory required for the continued growth of the company, particularly in light of the higher order backlog.

The Company is moving ahead with its previously announced decision to establish a greenfield manufacturing operation in Suzhou, China. The registered capital of the company is US$3 million, to be invested over the next two years. The Company has made a down payment on the land site and has signed a shareholders' agreement with a partner with significant Chinese experience who will effectively hold a 15% interest in this Chinese venture. The investment is intended to help improve the cost competitiveness of the Company's global supply chain and eventually to help serve the Chinese market, the Company's largest export market. This operation is not expected to have a significant impact on the current fiscal year's results.

The Company's president, Tom Velan, said "our goal for the second half of this fiscal year is to turn our record backlog into growing sales revenues while improving our margins so we can continue to grow 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 Unaudited
Three months ended Six months ended
November 30 November 30
(in thousands of dollars,
excluding per share
amounts) 2006 2005 2006 2005
------------------------------------------------------------------

Sales $ 101,506 $ 94,916 $ 180,963 $ 172,862
Cost of sales (note 3) 73,089 69,922 133,177 124,610
------------------------------------------------------------------
Gross profit 28,417 24,994 47,786 48,252
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Expenses (other income)

Engineering, selling,
general and
administrative and
research (note 4) 17,729 16,577 32,534 32,526
Interest
Long-term debt 90 49 156 120
Other 117 142 189 278
Amortization of property,
plant and equipment 2,430 2,107 4,320 4,229
Other expense (income) (320) (414) (710) (704)
Non-controlling interest 1,173 1,138 1,883 1,468
Foreign exchange loss
(gain) on translation of
integrated subsidiaries (1,047) 1,157 (1,080) 2,915
------------------------------------------------------------------
20,172 20,756 37,292 40,832
------------------------------------------------------------------

Earnings before income
taxes 8,245 4,238 10,494 7,420

Provision for income
taxes 3,426 2,108 4,759 3,849
------------------------------------------------------------------
Net earnings $ 4,819 $ 2,130 $ 5,735 $ 3,571
------------------------------------------------------------------
------------------------------------------------------------------
Retained earnings -
beginning $ 130,749 $ 125,500 $ 129,833 $ 124,059
Net earnings 4,819 2,130 5,735 3,571
------------------------------------------------------------------
Retained earnings -
ending $ 135,568 $ 127,630 $ 135,568 $ 127,630
------------------------------------------------------------------
------------------------------------------------------------------

Earnings per share (note 2)

Basic $ 0.22 $ 0.10 $ 0.26 $ 0.16
------------------------------------------------------------------
Diluted $ 0.22 $ 0.10 $ 0.26 $ 0.16
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Consolidated Balance Sheets

Unaudited Audited
November 30 May 31
(in thousands of dollars) 2006 2006
-----------------------------------------------------------------

ASSETS

Current assets
Cash and cash equivalents $ 36,330 $ 49,138
Short-term investments 26 449
Accounts receivable 101,853 89,661
Inventories 166,378 135,007
Deposits and prepaid expenses 2,166 1,760
Future income taxes 3,167 2,988
-----------------------------------------------------------------
309,920 279,003

Property, plant and equipment 55,649 54,476
Goodwill 12,502 12,502
Other assets 1,325 1,061
-----------------------------------------------------------------
$ 379,396 $ 347,042

LIABILITIES

Current liabilities
Bank indebtedness $ 4,079 $ 6,288
Accounts payable and
accrued liabilities 77,165 64,547
Income taxes payable 3,228 2,513
Customers' deposits 20,190 11,374
Provision for performance
guarantees 7,635 7,419
Current portion of long-term debt 1,069 1,039
-----------------------------------------------------------------
113,366 93,180

Future income taxes 405 413
Long-term debt 5,833 5,390
Non-controlling interest 6,259 4,376
Other long-term liabilities 6,612 5,937
-----------------------------------------------------------------
132,475 109,296
-----------------------------------------------------------------

SHAREHOLDERS' EQUITY

Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,437 1,419
Retained earnings 135,568 129,833
Cumulative translation
adjustment 526 (2,896)
-----------------------------------------------------------------
246,921 237,746
-----------------------------------------------------------------
$ 379,396 $ 347,042
-----------------------------------------------------------------
-----------------------------------------------------------------

Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Six months ended
November 30 November 30
(in thousands of
dollars) 2006 2005 2006 2005
---------------------------------------------------------------------

Cash provided from
(required for):

Operating activities
Net earnings $ 4,819 $ 2,130 5,735 $ 3,571
Items not affecting cash
Amortization 2,430 2,107 4,320 4,229
Loss (gain) on disposal of
property, plant and
equipment (6) (1,549) (12) (1,549)
Non-controlling interest 1,173 1,138 1,883 1,468
Net change in other
long-term liabilities 596 (20) 689 (199)
---------------------------------------------------------------------
9,012 3,806 12,615 7,520
---------------------------------------------------------------------

Net changes in non-cash
working capital items
Accounts receivable (26,766) (7,533) (11,940) (2,257)
Income tax recoverable - 550 - 1,276
Inventories (18,727) 5,036 (30,721) (6,528)
Deposits and prepaid
expenses 581 876 (398) 907
Accounts payable and
accrued liabilities 15,912 (3,166) 12,877 (3,324)
Income tax payable 1,488 - 730 -
Customers' deposits 7,165 (975) 8,999 (725)
Provision for
performance
guarantees 312 222 220 (274)
----------------------------------------------------------------------
(20,035) (4,990) (20,233) (10,925)
----------------------------------------------------------------------
(11,023) (1,184) (7,618) (3,405)
----------------------------------------------------------------------

Investing activities

Short-term investments 424 (15,572) 423 (12,572)
Additions to property,
plant
and equipment (1,267) (1,554) (4,475) (3,735)
Proceeds on disposal of
property, plant and
equipment 11 4,414 23 4,414
Net change in other
assets (141) 87 (259) 153
---------------------------------------------------------------------
(973) (12,625) (4,288) (11,740)
---------------------------------------------------------------------

Financing activities

Dividends - - - (3,348)
Increase in long-term
debt 4 2,324 669 2,457
Repayment of long-term
debt (336) (523) (498) (750)
----------------------------------------------------------------------
(317) (1,801) (189) (1,641)
Effect of exchange rate
differences on cash and
cash equivalents 1,012 (1,161) 1,118 (2,296)
----------------------------------------------------------------------
Net change in cash and cash
cash equivalents (11,301) (13,169) (10,599) (19,082)
Net cash - beginning 43,552 20,983 42,850 26,896
Net cash - ending $ 32,251 $ 7,814 $ 32,251 $ 7,814
---------------------------------------------------------------------
---------------------------------------------------------------------

Net cash includes cash
and cash equivalents
less bank indebtedness

Interest paid amounted to : - 172 354 316
Income tax paid amounted to: 927 490 1,713 872


Notes to Consolidated Financial Statements

For the six months ended November 30, 2006
(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. The same accounting policies as outlined in Note 1 of the consolidated financial statements for the year ended May 31, 2006, have been used.

These interim consolidated financial statements 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, 2006. In addition, an auditor has not performed a review of the interim financial statements.

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 is calculated using the weighted average number of shares outstanding of 22,318,968 (November 2005 -- 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 Six months ended
November 30 November 30
2006 2005 2006 2005
$ $ $ $
---------------------------------------------------------------------
Actual net gain (loss) on
translation of
foreign currencies 318 225 350 1,768
---------------------------------------------------------------------

4. RESEARCH EXPENSE

Research Expenses included the following:

---------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
2006 2005 2006 2005
$ $ $ $
---------------------------------------------------------------------
Research Expenditures 1,501 1,403 2,900 2,696
Less: Scientific research
tax credits (399) (461) (857) (923)
---------------------------------------------------------------------
1,102 942 2,043 1,773
----------------------------------------------- ------------------

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
---------------------------------------------------------------------
November 30 May 31
2006 2006
$ $
---------------------------------------------------------------------
6,707,401 (May 31, 2006 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2006 - 15,611,567)
Multiple Voting Shares 8,849 8,849
---------------------------------------------------------------------
109,390 109,390
---------------------------------------------------------------------

c) Stock Options

The fair value of the remaining 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 $3.35
per option.

A compensation cost of $15 related to the 30,000 options granted in
the first quarter ($18 for the six months), 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 November 30, 2006
---------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
---------------------------------------------------------------------
Outstanding,
beginning of period 132,000 13.34 15.1 months
Granted - - -
Exercised - - -
Expired/Forfeited 102,000 13.50 -
---------------------------------------------------------------------
Outstanding,
end of period 30,000 12.81 56.5 months
---------------------------------------------------------------------
Exercisable,
end of period - -
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
Six months ended November 30, 2006
---------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
---------------------------------------------------------------------
Outstanding,
beginning of period 105,000 13.50 4.9 months
Granted 30,000 12.81 -
Exercised - - -
Expired/Forfeited 105,000 13.50 -
---------------------------------------------------------------------
Outstanding,
end of period 30,000 12.81 56.5 months
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable,
end of period - - -
---------------------------------------------------------------------
6. 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.
    John D. Ball
    Chief Financial Officer
    514-748-7743
    514-748-8635 (FAX)
    www.velan.com