Velan Inc.
TSX : VLN.SV

Velan Inc.

October 12, 2005 15:23 ET

Velan Inc. Reports Its 1st Quarter 2005/2006 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Oct. 12, 2005) - Velan Inc. (TSX:VLN.SV) - Revenues for our first quarter reached a record $77.9 million, an 8.5% increase over the same quarter last year when we recorded sales of $71.8 million. We had a net profit of $1.4 million, or $0.06 per share, compared to a loss of $0.6 million, or $0.03 per share in the prior year. These annual results were achieved in spite of the negative impact of the strength of the Canadian dollar, which rose 8.8% against the U.S. dollar compared to the average of the first quarter last year.

Order bookings have increased to $97.0 million, up 8.1% over bookings in the same quarter last year. During the quarter, bookings exceeded sales revenues by $19.1 million as our backlog reached $219.5 million. The main reason for the increase in backlog was a $16.5 million increase in the backlog in our Italian joint venture company, Velan Srl, resulting from very strong order bookings of $21 million in the quarter. Despite our high overall backlog, some plants are missing work in certain product lines. We are working on balancing the workload between plants.

Our net profit of $1.4 million was achieved despite a $1.8 million unrealized currency loss on consolidation of our integrated foreign subsidiaries, compared to a $1.5 million currency loss last year.

We ended the quarter with shareholders' equity of $234.5 million, or $10.51 per share. Our net cash and short term investments declined during the quarter by $8.9 million ending the quarter at $24 million. The negative cash flow was mainly due to an $11.6 million increase in inventory while accounts receivable declined by $5.3 million. While inventory increased to meet higher backlogs and sales, our objective is to increase our inventory turns and working capital efficiency.

While we are encouraged by the increase in our sales revenues, we expect that both our sales and margins will continue to be negatively impacted by the continued strength of the Canadian dollar. During the first quarter, the Canadian dollar rose 5.7% against the U.S. dollar to close at 84.2 cents and since then has increased to approximately 85 cents. The strengthening Canadian dollar makes our Canadian manufactured goods less cost competitive, while at the same time negatively impacting our sales, as our products are mainly priced in U.S. dollars.

The Company has decided to consolidate the wafer check valve production from Oakville to its manufacturing facilities in Montreal and to sell its Securamax clamp business.

Worldwide competition remains fierce, and Asian competitors continue to make inroads in the market, both as branded valves and under their own brand names. We have had to increase our prices due to cost increases and extend lead times for some product lines due to our large order backlog, which will make it harder to book new orders for some of our product lines. Even though this is a very competitive marketplace, we believe that our broad and growing product range, diversity of geographic and end user markets, and our solid reputation for the quality and engineering of our valves will continue to create sales opportunities for us around the world.

The Company has decided to suspend for an indefinite period its current dividend policy of paying 30 cents per share annually in two semi-annual installments. The Company's net cash and short term investments have declined from $72.9 million as at May 31, 2004 to $24.0 million as at August 31, 2005 due to a combination of factors, including the increase in the Canadian dollar with respect to the U.S. dollar and the Euro (a substantial portion of the cash and near cash assets of the Company are held in such currencies), high inventory levels which have contributed to increased sales and high input costs. The Company is also considering certain potential investments. The board of directors will be monitoring these factors in order to assess whether the dividend policy should be reinstated or possibly modified.

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.


T.C. Velan

President



Consolidated Statements of Earnings (Loss)
and Retained Earnings

Unaudited
Three months ended
August 31
(in thousands of dollars, Restated
excluding per share amounts) 2005 2004
--------------------------------------------------------------

Sales $77,946 $71,766
Cost of sales (note 3) 54,688 52,482
--------------------------------------------------------------
Gross profit 23,258 19,284
--------------------------------------------------------------

Expenses (other income)
Engineering, selling, general and
administrative and research (note 4) 15,949 16,075
Interest
Long-term debt 71 47
Other 136 105
Amortization of property, plant
and equipment 2,122 2,200
Other expense (income) (290) (346)
Non-controlling interest 330 (122)
Foreign exchange loss (gain) on
translation of integrated
subsidiaries 1,758 1,492
--------------------------------------------------------------
20,076 19,451
--------------------------------------------------------------
Earnings (loss) before income taxes 3,182 (167)

Provision for income taxes 1,741 403
--------------------------------------------------------------
Net earnings (loss) $1,441 $(570)
--------------------------------------------------------------
--------------------------------------------------------------


Retained earnings - beginning $124,059 $133,562
Net earnings (loss) 1,441 (570)
--------------------------------------------------------------
Retained earnings - ending $125,500 $132,992
--------------------------------------------------------------
--------------------------------------------------------------


Earnings (loss) per share (note 2)
Basic $0.06 $(0.03)
--------------------------------------------------------------
Diluted $0.06 $(0.03)
--------------------------------------------------------------


Consolidated Balance Sheets

Unaudited Audited
August 31 May 31
(in thousands of dollars) 2005 2005
--------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $30,848 $37,424
Short-term investments 3,000 6,000
Accounts receivable 74,064 79,398
Income taxes recoverable 1,219 1,953
Inventories 137,091 125,652
Deposits and prepaid expenses 2,521 2,552
Future income taxes 2,562 2,735
--------------------------------------------------------------
251,305 255,714

Future income taxes - 15
Property, plant and equipment 57,845 58,696
Goodwill 12,502 12,502
Other assets 1,260 1,327
--------------------------------------------------------------
$322,912 $328,254
--------------------------------------------------------------
--------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $9,865 $10,528
Accounts payable and
accrued liabilities 51,733 51,889
Dividend payable - 3,348
Customers' deposits 7,085 6,832
Provision for performance guarantees 7,067 7,558
Current portion of long-term debt 1,454 1,625
--------------------------------------------------------------
77,204 81,780
Future income taxes 97 -
Long-term debt 2,929 3,050
Non-controlling interest 2,478 2,320
Other long-term liabilities 5,657 5,834
--------------------------------------------------------------
88,365 92,984
--------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,419 1,419
Retained earnings 125,500 124,059
Cumulative translation adjustment (1,762) 402
--------------------------------------------------------------
234,547 235,270
--------------------------------------------------------------
$322,912 $328,254
--------------------------------------------------------------
--------------------------------------------------------------


Consolidated Statements of Cash Flows

Unaudited
Three months ended
August 31
Restated
(in thousands of dollars) 2005 2004
--------------------------------------------------------------

Cash provided from (required for):
Operating activities
Net earnings (loss) $1,441 $(570)
Items not affecting cash -
Amortization 2,122 2,200
Loss (gain) on disposal of
property, plant and equipment - (12)
Non-controlling interest 330 (122)
Net change in other long-term
liabilities (179) (62)
--------------------------------------------------------------
3,714 1,434
--------------------------------------------------------------

Net changes in non-cash working
capital items
Accounts receivable 5,276 (2,617)
Income tax recoverable 726 (485)
Inventories (11,564) (9,362)
Deposits and prepaid expenses 31 269
Accounts payable and
accrued liabilities (158) (2,088)
Customers' deposits 250 (944)
Provision for performance
guarantees (496) (242)
--------------------------------------------------------------
(5,935) (11,293)
--------------------------------------------------------------
(2,221) (9,859)
--------------------------------------------------------------

Investing activities
Short-term investments 3,000 20,042
Additions to property, plant
and equipment (2,181) (2,386)
Proceeds on disposal of property,
plant and equipment - 63
Net change in other assets 66 (660)
--------------------------------------------------------------
885 17,059
--------------------------------------------------------------

Financing activities
Dividends (3,348) (3,348)
Increase in long-term debt 133 1,318
Repayment of long-term debt (227) (181)
--------------------------------------------------------------
(3,442) (2,211)
--------------------------------------------------------------

Effect of exchange rate differences on
cash and cash equivalents (1,135) (597)
Net change in cash and cash equivalents (5,913) (4,392)
Net cash - beginning 26,896 52,902
Assumed on adoption of new
accounting guideline - (2,245)
--------------------------------------------------------------
Net cash - ending $(20,983) $55,049
--------------------------------------------------------------
--------------------------------------------------------------

Net cash includes cash and cash equivalents less
bank indebtedness

Interest paid amounted to : 144 173
Income tax paid amounted to: 382 642


Notes to Consolidated Financial Statements

For the three months ended August 31, 2005
(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,
2005, 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,
2005. In addition, an auditor has not performed a review of the
interim financial statements.

The prior year's numbers have been restated in order to reflect the
adoption of the accounting guideline regarding the consolidation
of variable interest entities. As required, the company adopted
this guideline in the third quarter of last year. The guideline
required the company to consolidate 100% of its joint venture
companies which had been previously accounted for using the
proportionate consolidation method of accounting. This guideline
had no impact on net earnings or retained earnings.

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

2. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is calculated using the weighted average
number of shares outstanding of 22,318,968 (August 2004 -
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
Restated
2005 2004
$ $
-------------------------------------------------------------------
Actual net gain on translation
of foreign currencies 1,543 435
-------------------------------------------------------------------

4. RESEARCH EXPENSE

Research Expenses included the following:

Three months ended
August 31
Restated
2005 2004
$ $
-------------------------------------------------------------------
Research Expenditures 1,293 1,366
Less: Scientific research tax credits (462) (342)
-------------------------------------------------------------------
831 1,024
-------------------------------------------------------------------

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
2005 2005
$ $
-------------------------------------------------------------------
6,707,401 (May 31, 2005 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2005 - 15,611,567)
Multiple Voting Shares 8,849 8,849
-------------------------------------------------------------------
109,390 109,390

c) Stock Options

If the fair value based method of accounting had been used to account
for the options granted, modified or settled between June 1, 2001
and June 1, 2003, the company's net loss and loss per share would
have been the pro forma amounts indicated below:

Three months ended
August 31
Restated
2005 2004
$ $
-------------------------------------------------------------------
Net Earnings (Loss)
As reported 1,441 (570)
Pro forma 1,441 (580)
Basic and Diluted loss per share
As reported 0.06 (0.03)
Pro forma 0.06 (0.03)


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

Risk-free interest rate 4.2 %
Expected dividend yield 2.0 %
Expected life of the options 5.1 years
Expected volatility 25.0 %

The weighted average fair value at grant date of the options is
$3.30 per option.


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

Three months ended August 31, 2005
--------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
---------------------------------------------------------------------
Outstanding, beginning of period 109,000 13.50 16.4 months
Granted - - -
Exercised - - -
Expired/Forfeited 4,000 13.50 -
---------------------------------------------------------------------
Outstanding, end of period 105,000 13.50 14.0 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 Ball
    Chief Financial Officer
    (514) 748-7743
    (514) 748-8635 (FAX)
    www.velan.com