Velan Inc.
TSX : VLN

Velan Inc.

October 11, 2006 15:45 ET

Velan Inc. Reports its 1st Quarter 2006/2007 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Oct. 11, 2006) - Velan inc. (TSX:VLN)

Revenues for the first quarter reached $79.5 million, a 1.9% increase over the same quarter last year's sales of $77.9 million. Net earnings for the quarter amounted to $0.9 million, or $0.04 per share, compared to $1.4 million, or $0.06 per share, in the prior year. These results were achieved in spite of the continuing negative impact of the strength of the Canadian dollar, which rose 9.1% against the U.S. dollar and 4.3% against the Euro compared to the average of the first quarter last year.

Order bookings reached a record of $125.4 million, an increase of 29.2% over bookings in the same quarter last year. Bookings in the quarter exceeded shipments, resulting in a record backlog of $300.2 million. This is an increase of $45.9 million since the beginning of this fiscal year, and is due to important order bookings in North America as well as the French and Italian operations. Part of the growth in the backlog is a result of booking more orders with longer lead times than in the past. The growth in sales during the quarter was moderate as, in addition to the currency factor mentioned above, most of the contractual delivery dates in the backlog are subsequent to the first quarter. Of the total backlog, nearly $55 million is due to be shipped after the May 31, 2007 year end.

The net earnings of $0.9 million in the quarter were down from the $1.4 million in the same quarter last year. In last year's first quarter there was a $1.8 million unrealized foreign exchange loss on translation of integrated subsidiaries, versus a small gain this year.

The quarter's gross profit of $19.4 million, or 24.4% of sales, compares to $23.3 million, or 29.9%, last year. Material cost as a percentage of sales increased due to several factors. A combination of an unfavourable product mix coupled with rising steel and other material prices negatively impacted margins. Also, material in inventory that was purchased in the past when the Canadian dollar was weaker now represents a higher percentage of current US dollar sales when converted at the now stronger Canadian dollar rates. Although the company manages a portion of its short term foreign currency risk through the use of foreign currency forward contracts, this does not protect against the impact of a sustained stronger Canadian dollar.

The company ended the quarter with shareholders' equity of $238.8 million, or $10.70 per share, and net cash and short term investments of $44.0 million, or $1.97 per share. The company continues to work to improve its working capital efficiency and the net cash position has increased from $43.3 million at the same date last year, in spite of the continued strengthening of the Canadian dollar.

The President, Tom Velan, said, "Although we are disappointed by the first quarter results, we are encouraged by the strength of our order bookings. With the largest consolidated backlog of orders in our history, we are well positioned to increase sales revenues. The composition and distribution of our backlog means that the sales and gross margins of our first two quarters of the current fiscal year may not be indicative of our annual results. For example, we have started machining the titanium forgings for our large mining valve order but the majority of revenues will only be recognized in our third quarter. The strength of the Canadian dollar against the US dollar and Euro negatively impacts both our sales revenues and our profit. As the Canadian dollar strengthens, our Canadian manufactured products become less cost competitive. While we expect that our profit margins will continue to be negatively impacted by the strong Canadian dollar, high prices for steel castings, forgings and parts, and the competitive level of prices in $US required to maintain market share, we expect to partially offset the material cost increases by buying more from lower cost Asian sources. Our immediate focus is on improving the performance of our global operations and supply chain. Our key challenge is to manufacture and ship more project valves and this depends on the efficiency of our own internal processes and the capacity of our supply chain. We are working hard to improve our performance and become a leaner more productive valve manufacturer. Our goal over the next three quarters 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
Three months ended
August 31
(in thousands of dollars,
excluding per share amounts) 2006 2005
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Sales $79,457 $77,946
Cost of sales (note 3) 60,088 54,688
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Gross profit 19,369 23,258
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Expenses (other income)
Engineering, selling, general and
administrative and research (note 4) 14,805 15,949
Interest
Long-term debt 66 71
Other 72 136
Amortization of property, plant and equipment 1,890 2,122
Other expense (income) (390) (290)
Non-controlling interest 710 330
Foreign exchange loss (gain) on translation of
integrated subsidiaries (33) 1,758
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17,120 20,076
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Earnings before income taxes 2,249 3,182

Provision for income taxes 1,333 1,741
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Net earnings $916 $1,441
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Retained earnings - beginning $129,833 $124,059
Net earnings 916 1,441
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Retained earnings - ending $130,749 $125,500
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Earnings per share (note 2)
Basic $0.04 $0.06
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Diluted $0.04 $0.06
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Consolidated Balance Sheets

Unaudited Audited
August 31 May 31
(in thousands of dollars) 2006 2006
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ASSETS
Current assets
Cash and cash equivalents $51,336 $49,138
Short-term investments 450 449
Accounts receivable 74,861 89,661
Inventories 147,022 135,007
Deposits and prepaid expenses 2,741 1,760
Future income taxes 3,018 2,988
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279,428 279,003
Property, plant and equipment 55,764 54,476
Goodwill 12,502 12,502
Other assets 1,179 1,061
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$348,873 $347,042
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LIABILITIES
Current liabilities
Bank indebtedness $7,784 $6,288
Accounts payable and accrued liabilities 61,507 64,547
Income taxes payable 1,754 2,513
Customers' deposits 13,205 11,374
Provision for performance guarantees 7,327 7,419
Current portion of long-term debt 1,047 1,039
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92,624 93,180
Future income taxes 462 413
Long-term debt 5,848 5,390
Non-controlling interest 5,086 4,376
Other long-term liabilities 6,030 5,937
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110,050 109,296
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SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,422 1,419
Retained earnings 130,749 129,833
Cumulative translation adjustment (2,738) (2,896)
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238,823 237,746
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$348,873 $347,042
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Consolidated Statements of Cash Flows

Unaudited
Three months ended
August 31
(in thousands of dollars) 2006 2005
--------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net earnings $916 $1,441
Items not affecting cash -
Amortization 1,890 2,122
Loss (gain) on disposal of property, plant
and equipment (6) -
Non-controlling interest 710 330
Net change in other long-term liabilities 93 (179)
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3,603 3,714
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Net changes in non-cash working capital items
Accounts receivable 14,826 5,276
Income tax recoverable - 726
Inventories (11,994) (11,564)
Deposits and prepaid expenses (979) 31
Accounts payable and accrued liabilities (3,035) (158)
Income tax payable (758) -
Customers' deposits 1,834 250
Provision for performance guarantees (92) (496)
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(198) (5,935)
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3,405 (2,221)
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Investing activities
Short-term investments (1) 3,000
Additions to property, plant and equipment (3,208) (2,181)
Proceeds on disposal of property, plant and
equipment 12 -
Net change in other assets (118) 66
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(3,315) 885
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Financing activities
Dividends - (3,348)
Increase in long-term debt 665 133
Repayment of long-term debt (162) (227)
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506 (3,442)
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Effect of exchange rate differences on cash
and cash equivalents 106 (1,135)
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Net change in cash and cash equivalents 702 (5,913)
Net cash - beginning 42,850 26,896
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Net cash - ending $43,552 $20,983
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Net cash includes cash and cash equivalents less bank indebtedness

Interest paid amounted to : 354 144
Income tax paid amounted to: 786 382


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