Velan Inc.
TSX : VLN.SV

Velan Inc.

August 22, 2005 15:56 ET

VELAN Inc. Reports its 2005 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Aug. 22, 2005) - Velan Inc. (TSX:VLN.SV) - Financial results for the 4th quarter and the fiscal year ended May 31, 2005 were positive, and the company ended the year with net earnings of $541,000, or $0.02 per share, compared to a loss of $2,866,000, or $0.13 per share, in the preceding year. For the fourth quarter, net earnings amounted to $3.4 million, or $0.15 per share, versus $1.4 million, or $0.06 per share, in the preceding year. These annual results were achieved despite $2.9 million of unrealized currency losses on consolidation and settlement of two long outstanding legal claims totaling $3 million.

Under a new guideline issued by the Canadian Institute of Chartered Accountants, the company must now consolidate 100% of the sales and expenses in the joint venture companies in Korea, Taiwan and Italy, and then assign a portion of the net profit or loss to the non-controlling interest. This new method means that sales, expenses, order bookings and backlog will all be higher than under the old method, but the net profit remains the same. Comparisons in this press release are based on the previously reported amounts being restated under the new method.

Revenues, Order Bookings and Backlog

4th quarter sales of $90.9 million were 13.7% higher than last year, as restated. Sales for the year reached $319.6 million, an increase of 14% over last year, as restated. This was achieved in spite of a 6.6% decline in the U.S. dollar, the currency of most of the sales, versus the Canadian dollar. Sales growth came mostly in overseas markets, with China being the most important growth area. Sales in China reached $34.7 million, an increase of 65% over last year, as a result of demand for special engineered valves for the energy sector.

The company had record order bookings of $357 million, which grew faster than sales with the result that the company ended the year with a record backlog of $200.4 million, an increase of 23.1%. Most of the increase in order bookings and backlog came from international projects.

Net Earnings

4th quarter net earnings were $3.4 million, or $0.15 per share, compared with net earnings of $1.4 million, or $0.06 per share, last year. Net earnings for the year were $541,000, or $0.02 per share versus a net loss of $2,866,000, or $0.13 per share, last year.

These results were achieved in spite of foreign exchange loss on consolidation of the company's integrated subsidiaries, as well as the legal claims settlements, which negatively impacted net income in 2005 by $4.9 million.

A major contributor to the improvement in the net earnings in 2005 was the strengthening of the gross margin, which increased from 23.1% of sales in 2004 to 26.5% in 2005. Although 2005 was a period of rising steel prices, the company's gross margin improved as a result of several factors, the improvement in the mix of higher margin spare parts sales, the higher volume of sales which resulted in a lower proportion of fixed manufacturing costs, and the benefit of an inventory at the beginning of the year which was purchased at more advantageous prices.

Outlook

The company started fiscal 2006 with a record order backlog, and is well positioned to increase sales revenues provided the Canadian dollar doesn't significantly appreciate over last year's average U.S. dollar and Euro exchange rates. Worldwide competition continues to be strong, particularly in Asia where low-cost manufacturers continue to make inroads. In addition, the company believes that profit margins could be negatively impacted by high steel prices and energy costs, although the company expects to partially offset this by buying more from lower cost Asian sources and through select price increases.

The company continues to benefit from its solid reputation for the quality and performance of its valves, as well as its strong balance sheet and financial resources. The company remains focused on its strategy and is determined to improve its performance in the future.

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



Consolidated Statements of Earnings (Loss)
and Retained Earnings

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

Sales $90,938 $78,686 $319,621 $263,266
Cost of sales
(note 4) 66,855 60,093 234,901 202,287
---------------------------------------------------------------------

Gross profit 24,083 18,593 84,720 60,979
---------------------------------------------------------------------

Expenses (other
income)
Engineering,
selling, general
and administrative
and research
(note 5) 17,999 15,807 67,456 55,522
Interest
Long-term debt 58 25 216 166
Other 159 82 502 246
Amortization of
property, plant
and equipment 2,548 2,388 9,428 8,675
Other expense
(income) (309) (824) 1,422 (1,670)
Non-controlling
interest 2 4 (40) 46
Foreign exchange
loss (gain) on
translation of
integrated
subsidiaries (1,504) (501) 2,883 1,646
---------------------------------------------------------------------
18,953 16,981 81,867 64,631
---------------------------------------------------------------------
Earnings (loss)
before income taxes 5,130 1,612 2,853 (3,652)

Provision (recovery)
for income taxes 1,679 257 2,312 (786)
Net earnings (loss) $3,451 $1,355 $541 $(2,866)
---------------------------------------------------------------------
---------------------------------------------------------------------


Retained earnings
- beginning $123,956 $135,555 $133,562 $143,124
Net earnings (loss) 3,451 1,355 541 (2,866)

Dividends
Multiple Voting
Shares (2,343) (2,343) (7,026) (4,706)
Subordinate Voting
Shares (1,005) (1,005) (3,018) (1,990)
---------------------------------------------------------------------
Retained earnings
- ending $124,059 $133,562 $124,059 $133,562
---------------------------------------------------------------------
---------------------------------------------------------------------


Earnings (loss) per
share (note 3)
Basic $0.15 $0.06 $0.02 $(0.13)
---------------------------------------------------------------------
Diluted $0.15 $0.06 $0.02 $(0.13)
---------------------------------------------------------------------



Consolidated Balance Sheets

Unaudited Audited
May 31 May 31
(in thousands of dollars) 2005 2004
---------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $37,424 $58,052
Short-term investments 6,000 20,041
Accounts receivable 79,398 65,885
Income taxes recoverable 1,953 2,981
Inventories 125,652 105,001
Deposits and prepaid expenses 2,552 2,435
Future income taxes 2,735 3,052
---------------------------------------------------------------------
255,714 257,447

Future income taxes 15 -
Property, plant and equipment 58,696 55,070
Goodwill 12,502 12,502
Other assets 1,327 1,765
---------------------------------------------------------------------
$328,254 $326,784
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $10,528 $5,150
Accounts payable and accrued liabilities 51,889 47,978
Dividend payable 3,348 3,348
Customers' deposits 6,832 5,004
Provision for performance guarantees 7,558 7,714
Current portion of long-term debt 1,625 558
---------------------------------------------------------------------
81,780 69,752
Future income taxes - 396
Long-term debt 3,050 2,997
Non-controlling interest 2,320 1,669
Other long-term liabilities 5,834 4,583
---------------------------------------------------------------------
92,984 79,397
---------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 6) 109,390 109,390

Contributed surplus (note 6) 1,419 1,419
Retained earnings 124,059 133,562
Cumulative translation adjustment 402 3,016
---------------------------------------------------------------------
235,270 247,387
---------------------------------------------------------------------
$328,254 $326,784
---------------------------------------------------------------------
---------------------------------------------------------------------



Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Year ended
(in thousands May 31 May 31
of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------

Cash provided from
(required for):
Operating
activities
Net earnings
(loss) $3,451 $1,355 $541 $(2,866)
Items not
affecting cash -
Amortization 2,548 2,388 9,428 8,675
Future income
taxes (291) (2,803) (291) (2,803)
Loss (gain) on
disposal of
property, plant
and equipment 5 (10) 5 (14)
Non-controlling
interest 2 4 (40) 46
Net change in
other long-term
liabilities 569 (22) 986 773
---------------------------------------------------------------------
6,284 912 10,629 3,811
---------------------------------------------------------------------
Net changes in
non-cash working
capital items
Accounts receivable (4,660) (4,634) (11,972) 2,865
Income tax
recoverable 1,008 2,264 1,277 (422)
Inventories (4,220) (286) (19,088) (1,194)
Deposits and
prepaid expenses (622) (1,850) 118 (484)
Accounts payable
and accrued
liabilities 3,145 9,267 777 11,071
Customers'
deposits 1,982 (260) 1,746 2,701
Provision for
performance
guarantees (220) 1,163 (159) 1,282
---------------------------------------------------------------------
(3,587) 5,664 (27,301) 15,819
---------------------------------------------------------------------
2,697 6,576 (16,672) 19,630
---------------------------------------------------------------------

Investing activities
Short-term
investments (3,000) (20,041) 14,041 (20,041)
Additions to
property, plant
and equipment (2,081) (2,331) (8,232) (6,190)
Proceeds on
disposal of
property, plant
and equipment 13 220 75 240
Advance to an
affiliated company - 280 - 280
Net change in other
assets 92 (100) (755) (512)
---------------------------------------------------------------------
(4,976) (21,972) 5,129 (26,223)
---------------------------------------------------------------------

Financing activities
Repurchase of
shares - - - (153)
Dividends - - (10,044) (6,698)
Increase in
long-term debt 149 77 1,581 522
Repayment of
long-term debt (1,196) (224) (1,966) (1,523)
---------------------------------------------------------------------
(1,047) (147) (10,429) (7,852)
---------------------------------------------------------------------
Effect of exchange
rate differences on
cash and cash
equivalents (1,122) (161) (1,789) 436
---------------------------------------------------------------------
Net change in
cash and cash
equivalents (4,448) (15,704) (23,761) (14,009)
Net cash
- beginning 31,344 68,606 52,902 66,911
Assumed on adoption
of new accounting
guideline (note 2) - - (2,245) -
---------------------------------------------------------------------
Net cash - ending $26,896 $52,902 $26,896 $52,902
---------------------------------------------------------------------
---------------------------------------------------------------------

Net cash includes
cash and cash
equivalents less
bank indebtedness

Interest paid
amounted to : 285 124 769 422
Income tax paid
amounted to: 529 328 1,940 3,101



Notes to Consolidated Financial Statements

For the year ended May 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, 2004,
have been used, except as described in Note 2 below.

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,
2004. 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. ADOPTION OF NEW ACCCOUNTING PRONOUNCEMENTS

(a) On June 1, 2004, the company adopted the new requirements of the
Canadian Institute of Chartered Accountants ("CICA") regarding
hedging relationships (Accounting Guideline 13). The guideline
establishes additional documentation and designation requirements
for hedge accounting and requires regular, periodic assessments
of effectiveness. The company has decided to cease hedge
accounting and begin recording the fair value of all forward
contracts effective June 1, 2004. This change was implemented on
a prospective basis.

As a result of this change, a loss of $483 for the quarter and
$296 for the twelve months has been recorded in cost of sales and
amounts of $101 and $397 have been recorded in accounts
receivable and accounts payable, respectively.

(b) On December 1, 2004, the company adopted, retroactive to June 1,
2004 without restatement of prior periods, the CICA's new
requirements for the consolidation of variable interest entities
(Accounting Guideline 15). This guideline provides guidance on
the application of consolidation principles to certain entities
that are subject to control on a basis other than ownership of
voting interests.

Upon adoption of this guideline the company determined that it
has a variable interest in all of its joint venture companies.
These joint venture companies are located in Korea, Taiwan and
Italy. The Korean and Italian companies are 50%-owned with
respect to voting interests. The Taiwanese company is 50%-owned,
with respect to voting interest, by the 75%-owned Taiwanese
subsidiary company.

These companies were previously accounted for using the
proportionate consolidation method of accounting. Upon adoption
of this guideline these companies were fully consolidated in the
accounts with the additional net assets being offset by an equal
increase of $692 to the non-controlling interest.

This change has had the impact of increasing all the revenues,
expenses, assets and liabilities accounts of the company, but it
did not have an impact on the net earnings or retained earnings.
The impact resulting from the change on the account balances is
summarized below:

--------------------------------------------------------------------
Three months ended Year ended
May 31, 2005 May 31, 2005
$ $
--------------------------------------------------------------------
Statement of earnings
Sales 1,885 6,503
Gross profit 497 3,058
Total expenses (other income) 381 3,014
Earnings (loss) before tax 116 44
Net earnings (loss) - -
--------------------------------------------------------------------


--------------------------------------------------------------------
Three months ended Year ended
May 31, 2005 May 31, 2005
$ $
--------------------------------------------------------------------
Statement of cash flows
Operating activities (272) (335)
Investing activities (218) (1,317)
Financing activities (436) 86
--------------------------------------------------------------------


--------------------------------------------------------------------
May 31, 2005
$
--------------------------------------------------------------------
Balance Sheet
Total current assets 6,319
Total long-term assets 4,611
Total current liabilities 8,916
Total long-term liabilities 1,982
Cumulative translation account 32
--------------------------------------------------------------------

3. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share are calculated using the weighted average
number of shares outstanding of 22,318,968 (May 2004 - 22,319,527).
The options do not have a dilutive effect.

4. 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 Year ended
May 31 May 31
2005 2004 2005 2004
$ $ $ $
--------------------------------------------------------------------
Actual net gain (loss)
on translation of
foreign currencies (922) (15) 1,377 157
--------------------------------------------------------------------


5. RESEARCH EXPENSE

Research Expenses included the following:

--------------------------------------------------------------------
Three months ended Year ended
May 31 May 31
2005 2004 2005 2004
$ $ $ $
--------------------------------------------------------------------
Research Expenditures 1,679 1,036 6,046 5,034
Less: Scientific research
tax credits (464) (507) (1,854) (1,793)
--------------------------------------------------------------------
1,215 529 4,192 3,241
--------------------------------------------------------------------

6. 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

--------------------------------------------------------------------
May 31 May 31
2005 2004
$ $
--------------------------------------------------------------------
6,707,401 (May 31, 2004 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2004 - 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 earnings (loss) and earnings (loss)
per share would have been the pro forma amounts indicated below:

--------------------------------------------------------------------
Three months ended Year ended
May 31 May 31
2005 2004 2005 2004
$ $ $ $
--------------------------------------------------------------------
Net Earnings (Loss)
As reported 3,451 1,355 541 (2,866)
Pro forma 3,451 1,355 523 (2,915)
Basic and Diluted
earnings (loss) per
share
As reported 0.15 0.06 0.02 (0.13)
Pro forma 0.15 0.06 0.02 (0.13)
--------------------------------------------------------------------

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 May 31, 2005
-----------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
-----------------------------------------------------------------
Outstanding, beginning
of period 109,000 13.50 19.4 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
-----------------------------------------------------------------
Outstanding, end of period 109,000 13.50 16.4 months
-----------------------------------------------------------------
-----------------------------------------------------------------
Exercisable, end of period
-----------------------------------------------------------------
-----------------------------------------------------------------


-----------------------------------------------------------------
Year ended May 31, 2005
-----------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
-----------------------------------------------------------------
Outstanding, beginning
of period 142,000 15.39 24.2 months
Granted - - -
Exercised - - -
Expired/Forfeited 33,000 21.65 -
-----------------------------------------------------------------
Outstanding, end of period 109,000 13.50 16.4 months
-----------------------------------------------------------------
-----------------------------------------------------------------
Exercisable, end of period 109,000 13.50 -
-----------------------------------------------------------------
-----------------------------------------------------------------

7. CONTINGENCIES

In the prior year, an action was instituted against the company and
its subsidiary company, Velan-Proquip Inc., together with other
defendants, claiming damages aggregating $43,273. The action alleged
breaches by contractors and suppliers related to the supply of high-
pressure clamp connectors for a specific project. Velan-Proquip Inc.
supplied the high-pressure clamp connectors with respect to his
project.

During the year, the company paid $2,000 as full and final settlement
for this claim.

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 Ball
    Chief Financial Officer
    (514) 748-7743
    (514) 748-8635 (FAX)
    www.velan.com