Velan Inc.
TSX : VLN

Velan Inc.

October 14, 2008 15:48 ET

VELAN Inc. Reports its 1st Quarter 2008/2009 Financial Results

MONTREAL, QUEBEC--(Marketwire - Oct. 14, 2008) - VELAN INC. (TSX:VLN).

Revenues for the first quarter reached $86.9 million, a 7.7% decrease from last year's record first quarter sales of $94.1 million. Net earnings for the quarter amounted to $37.9 million, or $1.70 per share, compared to $1.4 million, or $0.06 per share, in the prior year. These net earnings included 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.

The 7.7% decrease in sales was due primarily to delays in certain end-user projects which in turn caused delays in shipping valves in the Company's North American and German operations. The continuing strength of the Canadian dollar, which rose 2.9% against the U.S. dollar compared to the average of the first quarter last year, also negatively impacted sales as the U.S. dollar is the Company's main selling currency.

Net new orders amounted to a record $222.1 million, a 73.9% or $94.4 million increase over the $127.7 million recorded in the same quarter last year. Order intake exceeded shipments resulting in a backlog of $537.6 million as at August 31, 2008. Adjusting for the disposition of the Italian operations, this is 60.2% and 38.2% higher than as at August 31, 2007 and May 31, 2008 respectively. Part of the growth in the backlog is also a result of booking more orders with longer lead times than in the past and, of the total backlog, nearly $137.8 million is due to be shipped after August 31, 2009. The major increases in our order bookings came from the North American operations and in France where the Company booked large orders from CNPEC (China Nuclear Power Engineering Co.) to supply high-pressure forged valves for six nuclear power plants in China. The plants are located in Hong Tang He, Ning De and Yang Jiang, and the valves are required to be supplied during the 2010 and 2011 fiscal years.

Excluding the net gain of $36.6 million on the disposal of a business, the net earnings of $1.3 million in the quarter are down from the $1.4 million in the same quarter last year. This includes a $2.0 million unrealized foreign exchange gain on the translation of integrated subsidiaries this year, versus a loss of $0.8 million last year.

The quarter's gross profit of $19.6 million, or 22.6% of sales, compares to $23.4 million, or 24.9%, last year. The decrease in sales during the quarter resulted in a decrease in gross profit in both dollar and percentage terms as the Company was not able to absorb as much of its fixed overhead costs. A negative product mix and significantly increasing steel prices further contributed to the decreased margin.

The Company ended the quarter with shareholders' equity of $307 million, or $13.76 per share. The Company continues to work to improve its working capital efficiency and with the sale of the Italian joint venture the net cash (cash and cash equivalents plus short-term investments less bank indebtedness and short-term bank loans) has increased by $60.7 million during the quarter to reach $86.7 million, or $3.88 per share, at the quarter end.

Tom Velan, the President, said, "Global demand for valves continues to be strong in our main markets. Most of our plants are operating with very large order backlogs so it is an important priority for us to focus on better execution by improving the efficiency, productivity and profitability of our global operations. We have to increase our production of valves for projects. Recently we announced a $25 million investment in our Montreal plant facilities, machinery and equipment to increase capacity and improve productivity. We are also investing $3 million in our plant in Lyon, France. In addition we have started machining operations in our new plant in Suzhou, China, and we will start producing valves for the China market during this fiscal year. While we have some concerns about the impact of the recent turmoil in financial markets on the capital intensive project market we believe there will be a continuing need to invest in the energy sector. We are fortunate to enter this uncertain period with a record backlog of orders and the strongest balance sheet and net cash in the history of our company. Our challenge for 2009 is to improve our overall performance and turn our large order backlog into more profitable sales."

The Company declared a dividend of $0.08 per share payable on December 31, 2008 to the shareholders of record on December 15, 2008.

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.

Tom Velan

President

CERTIFIED TO ISO 9001 QUALITY STANDARDS



Consolidated Statements of Earnings
and Retained Earnings
Unaudited
Three months ended
August 31
(in thousands of dollars,
excluding per share amounts) 2008 2007
------------------------------------------------------------------
Sales (note 3) $86,861 $94,076
Cost of sales (notes 1 and 3) 67,220 70,675
------------------------------------------------------------------

Gross profit 19,641 23,401
------------------------------------------------------------------
Expenses (other income)
Engineering, selling, general and
administrative and research (note 4) 17,344 17,138
Interest
Long-term debt 205 69
Other 225 240
Amortization of property, plant and equipment 1,986 2,053
Net gain on disposition of business (note 6) (36,595) -
Other expense (income) (473) (468)
Non-controlling interest 709 435
Foreign exchange loss (gain) on translation of
integrated subsidiaries (2,045) 779
------------------------------------------------------------------

(18,644) 20,246
------------------------------------------------------------------
Earnings before income taxes 38,285 3,155

Provision for income taxes 348 1,757
------------------------------------------------------------------

Net earnings $37,937 $1,398
------------------------------------------------------------------
------------------------------------------------------------------

Retained earnings - beginning $160,873 $148,245
Transition adjustment on adoption of
financial instrument standards,
net of tax - 148
Net earnings 37,937 1,398
Dividends
Multiple Voting Shares 1,245 -
Subordinate Voting Shares 540 -
------------------------------------------------------------------

Retained earnings - ending $197,025 $149,791
------------------------------------------------------------------
------------------------------------------------------------------

Earnings per share (note 2)
Basic $1.70 $0.06
------------------------------------------------------------------
Diluted $1.70 $0.06
------------------------------------------------------------------
------------------------------------------------------------------



Consolidated Balance Sheets

Unaudited Audited
August 31 May 31
(in thousands of dollars) 2008 2008
------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $90,247 $38,831
Short-term investments 757 937
Accounts receivable 94,257 155,956
Income taxes recoverable 6,294 4,173
Inventories 183,058 184,697
Deposits and prepaid expenses 3,478 3,283
Future income taxes 3,020 3,747
------------------------------------------------------------------
381,111 391,624

Future income taxes 1,938 2,009
Property, plant and equipment 58,537 62,852
Goodwill 12,502 12,502
Other assets 1,581 1,481
------------------------------------------------------------------

$455,669 $470,468
------------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $3,377 $4,220
Short-term bank loans 933 9,519
Accounts payable and accrued liabilities 71,808 97,933
Income taxes payable 1,376 3,509
Dividend payable 1,785 -
Customers' deposits 41,101 32,713
Provision for performance guarantees 7,417 8,591
Future income taxes 1,919 2,044
Current portion of long-term debt 2,490 5,990
------------------------------------------------------------------
132,206 164,519
Future income taxes 2,883 2,825
Long-term debt 3,530 13,755
Non-controlling interest (note 6) 2,690 9,869
Other long-term liabilities 7,321 7,471
------------------------------------------------------------------
148,630 198,439
------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,506 1,502
Retained earnings 197,025 160,873
Accumulated other comprehensive income (loss) (882) 264
------------------------------------------------------------------
307,039 272,029
------------------------------------------------------------------

$455,669 $470,468
------------------------------------------------------------------
------------------------------------------------------------------



Consolidated Statement of Cash Flows
Unaudited
Three months ended
August 31
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net earnings 37,937 $1,398
Items not affecting cash -
Amortization 1,986 2,053
Stock options expense 4 9
Loss (gain) on disposal of property,
plant and equipment (9) (48)
Net gain on disposition of business
(note 6) (36,595) -
Non-controlling interest 709 435
Net change in other long-term liabilities 205 236
-------------------------------------------------------------------

4,237 4,083
-------------------------------------------------------------------

Net changes in non-cash working capital items
Accounts receivable 26,069 29,869
Income taxes recoverable (2,132) (470)
Inventories (21,367) (10,814)
Deposits and prepaid expenses (762) (203)
Accounts payable and accrued liabilities (1,065) (3,242)
Income taxes payable 80 451
Customers' deposits 11,625 1,844
Provision for performance guarantees (319) (734)
-------------------------------------------------------------------
12,129 16,701
-------------------------------------------------------------------
16,366 20,784
-------------------------------------------------------------------

Investing activities

Net proceeds on disposition of business
(note 6) 42,538 -
Net cash paid on business acquisition - (1,438)
Short-term investments 180 1,012
Additions to property, plant and equipment (2,683) (3,113)
Proceeds on disposal of property, plant
and equipment 9 -
Net change in other assets (101) 237
-------------------------------------------------------------------
39,943 (3,302)
-------------------------------------------------------------------

Financing activities

Short-term bank loans (2,798) (2,824)
Increase in long-term debt 222 1,437
Repayment of long-term debt (800) (242)
-------------------------------------------------------------------
(3,376) (1,629)
-------------------------------------------------------------------
Effect of exchange rate differences on
cash and cash equivalents (674) (15)
-------------------------------------------------------------------
Net change in cash and cash equivalents 52,259 15,838
Net cash - beginning 34,611 20,316
-------------------------------------------------------------------
Net cash - ending $86,870 $36,154
-------------------------------------------------------------------
-------------------------------------------------------------------

Net cash includes cash and cash equivalents
less bank indebtedness

Interest paid amounted to : 87 293
Income tax paid amounted to: 1,730 1,307
-------------------------------------------------------------------
-------------------------------------------------------------------



Consolidated Statements of Comprehensive Income

Unaudited
Three months ended
August 31
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------
Net earnings 37,937 $1,398
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment on
self-sustaining operations (non taxable) (467) (168)
-------------------------------------------------------------------
Comprehensive income 37,470 1,230
-------------------------------------------------------------------
-------------------------------------------------------------------

Accumulated other comprehensive income
(loss), net tax
Accumulated other comprehensive income
(loss), beginning of period 264 (2,449)
Other comprehensive income (loss) for
the period (467) (168)
Realized translation adjustment on
the disposition of a self-sustaining
foreign operations (note 6) (679) -
-------------------------------------------------------------------
Accumulated other comprehensive income
(loss), end of period (882) (2,617)
-------------------------------------------------------------------
-------------------------------------------------------------------

Notes to Consolidated Financial Statements

August 31, 2008

(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, 2008. 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, 2008, except for the following:

Accounting Principles adopted during the period

Capital disclosures

On June 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535, "Capital Disclosures", which requires disclosure of both qualitative and quantitative information that enables financial statement users to evaluate the entity's objectives, policies and processes for managing capital.

The adoption of this section did not have an impact on the Company's financial position, earnings or cash flows however it did result in expanded disclosure. The new disclosures are included in note 7 of these consolidated financial statements.

Financial instruments

On June 1, 2008, the Company adopted CICA Handbook Section 3862, "Financial Instruments -- Disclosures" and Section 3863 "Financial Instruments -- Presentation". These standards introduce disclosure and presentation requirements that will enable financial statement 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.

The adoption of these sections did not have an impact on the Company's financial position, earnings or cash flows however it did result in expanded disclosure.

Disclosures relating to these sections are included in the section entitled "Financial Risk Management" of the Management's Discussion and Analysis for the period ended at the current balance sheet date. Accordingly, these disclosures are incorporated into these interim consolidated financial statements by cross-reference.

Inventories

On June 1, 2008, the Company adopted CICA Handbook Section 3031, "Inventories", which provides guidance on the determination of costs and their subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories. The section also requires additional disclosures related to any write-down or reversal of a previous write-down of inventories recognized during the period.

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

During the three months ended August 31, 2008 the Company recognized an expense of $113 (August 31, 2007 - $405), net of reversals of $1,104 (August 31, 2007 - $1,186), in respect of a write-down of its inventories. Inventory costs recorded as an expense amounted to $65,592 (August 31, 2007 - $70,514).

The net book value of inventory pledged as security under the Company's credit facilities amounted to $3,902.

General standards of financial statement presentation

On June 1, 2008, the Company adopted the amended CICA Handbook Section 1400, "General Standards of Financial Statement Presentation". This section now requires that management make an assessment of an entity's ability to continue as a going concern when preparing financial statements.

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

Accounting principles issued but not yet implemented

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. Standards relating to goodwill are unchanged from those included in Section 3062, "Goodwill and Other Intangible Assets".

This section must be adopted for the Company's fiscal year beginning on June 1, 2009. The Company is currently assessing the impact of this new section on its 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 are calculated using the weighted average number of shares outstanding of 22,318,968 (May 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 and the fair value of foreign currency derivative instruments is included in sales and cost of sales and amounted to:



-------------------------------------------------------------------
Three months ended
. August 31
2008 2007
$ $
-------------------------------------------------------------------
Sales 967 -
Cost of Sales (1,928) 261
-------------------------------------------------------------------
(961) 261
-------------------------------------------------------------------



4. RESEARCH EXPENSE

Research Expenses included the following:

-------------------------------------------------------------------
Three months ended
. August 31
2008 2007
$ $
-------------------------------------------------------------------
Research Expenditures 2,133 1,333
Less: Scientific research tax credits (624) (493)
-------------------------------------------------------------------
1,509 840
-------------------------------------------------------------------



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
2008 2008
$ $
-------------------------------------------------------------------
6,752,401 Subordinate Voting Shares 100,566 100,566
15,566,567 Multiple Voting Shares 8,824 8,824
-------------------------------------------------------------------
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 $3.35 per option.

A compensation cost of $4 for the quarter (August 2007 - $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, 2008
--------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
--------------------------------------------------------------------------
Outstanding, beginning of period 30,000 12.81 38.5 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
--------------------------------------------------------------------------
Outstanding, end of period 30,000 12.81 35.5 months
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Exercisable, end of period 20,000 12.81
--------------------------------------------------------------------------
--------------------------------------------------------------------------


6. DISPOSITION OF BUSINESS

On July 21, 2008, the Company sold its 50% interest in an Italian joint venture company, considered a variable interest entity for which the Company was the primary beneficiary, for cash consideration of $44,088 ((Euro27,650)27,650) all of which was received at closing. The company incurred expenses related to the sale of $325 and recognized a gain of $279 on a forward foreign exchange contract related to the sale which has been included in the calculation of the gain on disposition, as outlined below.

Assets and liabilities of the joint venture company at the time of disposition were as follows:



$
-------------------------------------------------------
Cash and cash equivalents 1,504
Accounts receivable 35,498
Inventories 22,899
Property, plant and equipment 6,462
Other assets 1,126
-------------------------------------------------------
67,489
-------------------------------------------------------
Short-term bank loans 5,788
Accounts payable and accrued liabilities 25,065
Customer deposits 3,296
Long-term Debt 13,661
Other liabilities 3,427
-------------------------------------------------------

51,237
-------------------------------------------------------

Net assets 16,252

Less: non-controlling interest's share 8,126
-------------------------------------------------------

Net assets sold 8,126

Gain on disposition of business 35,962
-------------------------------------------------------
Proceeds on disposition of business 44,088
Add: gain on forward contract related to
sale proceeds 279

Less: disposition of cash 1,504
Less: direct expenses related to the sale 325
-------------------------------------------------------

Net proceeds on disposition of business 42,538
-------------------------------------------------------



The net gain on disposition of business includes:

$
-------------------------------------------------------
Gain on disposition of business 35,962
Realized translation adjustment on
disposition of self-sustaining foreign
operation 679
-------------------------------------------------------

36,641
Add: gain on forward contract related
to sale proceeds 279

Less: direct expenses related to the sale 325
-------------------------------------------------------

Net gain on disposition of business 36,595
-------------------------------------------------------


The Company continues to have significant activity in the same market and to that end maintains an on-going business relationship with its former joint venture.

7. CAPITAL MANAGEMENT

The Company's capital management strategy is designed to maintain strong liquidity in order to pursue its organic growth strategy, undertake selective acquisitions and provide an appropriate investment return to its shareholders while taking a conservative approach to financial leverage.

The Company's financial strategy is designed to meet the objectives stated above and to respond to changes in economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid to shareholders or undertake any other activities it considers appropriate under the circumstances.

The Company monitors capital on the basis of its total debt to equity ratio. Total debt consists of all interest bearing debt and equity is defined as total shareholders' equity.

The total debt to equity ratio as at August 31, 2008 was as follows:



(in thousands, excluding percentages) $
-------------------------------------------------------
Bank indebtedness 3,377
Short-term bank loans 933
Current portion of long-term debt 2,490
Long-term debt 3,530
-------------------------------------------------------

Total debt 10,330
-------------------------------------------------------

Shareholders' equity 307,039
-------------------------------------------------------

Total debt to equity ratio 3.4%
-------------------------------------------------------


As at May 31, 2008, before the sale of the Company's Italian joint venture company the debt to equity ratio was 12.3% .

The Company's objective is to conservatively manage the total debt to capital ratio and to maintain funding capacity for potential opportunities.

The Company's financial objectives and strategy as described above have remained unchanged since the last period. These objectives and strategies are reviewed annually or more frequently if the need arises.

The Company is in compliance with all covenants related to its debt and credit facilities and is not subject to any capital requirements imposed by a regulator.

8. 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