Velan Inc.
TSX : VLN

Velan Inc.

August 18, 2006 15:45 ET

Velan Inc. Reports its 2006 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Aug. 18, 2006) - Velan Inc. (TSX:VLN) reported improved financial results for the fiscal year ended May 31, 2006, and the company ended the year with net earnings of $5,774,000, or $0.26 per share, compared to $541,000, or $0.02 per share, in the preceding year. For the fourth quarter, net earnings amounted to $1,678,000, or $0.08 per share, versus $3,451,000, or $0.15 per share, in the preceding year. These annual results were achieved despite $4.8 million of unrealized currency losses on consolidation of integrated foreign subsidiaries in 2006 versus $2.9 million in 2005. For the fourth quarter, these unrealized currency losses amounted to $1.1 million this year versus a gain of $1.5 million last year.

Revenues, Order Bookings and Backlog

Sales for the year reached a record $360.3 million, an increase of 12.7% over last year. This growth was achieved despite the continued strengthening of the Canadian dollar, which increased an average of 7.3% against the U.S. dollar, the currency of most of the sales, and 12.5% against the Euro. The fourth quarter revenue increased from $90.9 million last year to $103.4 million this year, an increase of 13.8% which is the first quarter that the company has ever achieved over $100 million. Velan Inc. sold its products in 69 different countries in 2006. China represents the largest overseas export market, with sales of $42 million in 2006, an increase of 18% over last year, as a result of demand for special engineered valves for the energy sector.

The company had record order bookings of $414 million in 2006, an increase of 16% over the previous year and mainly due to strong demand in key energy related markets. The company ended the year with a large backlog of $254 million, of which all but $22.4 million is scheduled for delivery in Fiscal 2007.

Net Earnings

4th quarter net earnings were $1,678,000, or $0.08 per share, compared with net earnings of $3,451,000, or $0.15 per share, last year. Net earnings for the year were $5,774,000, or $0.26 per share versus $541,000, or $0.02 per share, last year. While the increase in volume contributed to the increase in gross margin, from $84.7 million in 2005 to $94.3 million in 2006, gross margin as a percent of sales slipped slightly from 26.5% in 2005 to 26.2% in 2006. Although the company implemented select price increases and increased its purchases from lower cost Asian suppliers, factors such as rising steel prices coupled with an unfavourable shift in product mix, away from sales of higher margin spare parts and site maintenance work, resulted in this slight decrease.

Outlook

The company started fiscal 2007 with a large order backlog, and is well positioned to increase sales revenues provided the Canadian dollar doesn't continue to appreciate over last year's average U.S. dollar and Euro exchange rates. The company's immediate focus is on improving the efficiency of its global manufacturing operations and reducing the cost of raw materials and components through strategic sourcing initiatives.

The company's solid reputation for the quality and performance of its valves, as well as its strong balance sheet and financial resources, are needed to meet the challenges of a competitive global marketplace. The company remains focused on its strategy and is committed to building long term value for all its shareholders.

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
and Retained Earnings

Unaudited Unaudited
Three months ended Year ended
May 31 May 31
(in thousands of dollars,
excluding per share
amounts) 2006 2005 2006 2005
--------------------------------------------------------------------
Sales $103,405 $90,938 $360,322 $319,621
Cost of sales (note 3) 77,492 66,855 266,005 234,901
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Gross profit 25,913 24,083 94,317 84,720
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Expenses (other income)
Engineering, selling,
general and
administrative and
research (note 4) 17,713 17,999 66,294 67,456
Interest
Long-term debt 92 58 283 216
Other 105 159 507 502
Amortization of property,
plant and equipment 1,878 2,548 8,179 9,428
Other expense (income) (51) (309) (1,170) 1,422
Non-controlling interest 520 2 2,092 (40)
Foreign exchange loss
(gain) on translation of
integrated subsidiaries 1,090 (1,504) 4,783 2,883
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21,347 18,953 80,968 81,867
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Earnings before income taxes 4,566 5,130 13,349 2,853

Provision for income taxes 3,115 1,970 7,802 2,603
Provision (recovery) for
future income taxes (227) (291) (227) (291)
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Net earnings $1,678 $3,451 $5,774 $541
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Retained earnings
- beginning $128,155 $123,956 $124,059 $133,562
Net earnings 1,678 3,451 5,774 541
Dividends
Multiple Voting Shares - (2,343) - (7,026)
Subordinate Voting Shares - (1,005) - (3,018)
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Retained earnings - ending $129,833 $124,059 $129,833 $124,059
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Earnings per share (note 2)
Basic $0.08 $0.15 $0.26 $0.02
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Diluted $0.08 $0.15 $0.26 $0.02
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Consolidated Balance Sheets
Unaudited Audited
May 31 May 31
(in thousands of dollars) 2006 2005
----------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $49,138 $37,424
Short-term investments 449 6,000
Accounts receivable 89,661 79,398
Income taxes recoverable - 1,953
Inventories 135,007 125,652
Deposits and prepaid expenses 1,760 2,552
Future income taxes 2,988 2,735
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279,003 255,714

Future income taxes - 15
Property, plant and equipment 54,476 58,696
Goodwill 12,502 12,502
Other assets 1,061 1,327
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$347,042 $328,254
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----------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $6,288 $10,528
Accounts payable and accrued liabilities 64,547 51,889
Income taxes payable 2,513 -
Dividend payable - 3,348
Customers' deposits 11,374 6,832
Provision for performance guarantees 7,419 7,558
Current portion of long-term debt 1,039 1,625
----------------------------------------------------------------
93,180 81,780
Future income taxes 413 -
Long-term debt 5,390 3,050
Non-controlling interest 4,376 2,320
Other long-term liabilities 5,937 5,834
----------------------------------------------------------------
109,296 92,984
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SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,419 1,419
Retained earnings 129,833 124,059
Cumulative translation adjustment (2,896) 402
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237,746 235,270
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$347,042 $328,254
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----------------------------------------------------------------


Consolidated Statements of Cash Flows
Unaudited Unaudited
Three months ended Year ended
May 31 May 31
(in thousands of dollars) 2006 2005 2006 2005
--------------------------------------------------------------------
Cash provided from
(required for):
Operating activities
Net earnings $1,678 $3,451 $5,774 $541
Items not affecting
cash
Amortization 1,878 2,548 8,179 9,428
Future income taxes (227) (291) (227) (291)
Loss (gain) on disposal
of property, plant
and equipment (64) 5 (1,645) 5
Non-controlling interest 520 2 2,092 (40)
Net change in other
long-term liabilities 109 569 105 986
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3,894 6,284 14,278 10,629
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Net changes in non-cash
working capital items
Accounts receivable (10,420) (4,660) (10,095) (11,972)
Income tax recoverable (35) 1,008 1,985 1,277
Inventories (1,303) (4,220) (9,201) (19,088)
Deposits and prepaid
expenses 276 (622) 805 118
Accounts payable and
accrued liabilities 11,210 3,145 12,866 777
Income tax payable 2,358 - 2,554 -
Customers' deposits 2,563 1,982 4,617 1,746
Provision for performance
guarantees 376 (220) (137) (159)
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5,025 (3,587) 3,394 (27,301)
--------------------------------------------------------------------
8,919 2,697 17,672 (16,672)
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Investing activities
Short-term investments 21,264 (3,000) 5,551 14,041
Additions to property,
plant and equipment (3,053) (2,081) (8,206) (8,232)
Proceeds on disposal of
property, plant and
equipment 257 13 4,715 75
Net change in other assets 53 92 270 (755)
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18,521 (4,976) 2,330 5,129
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Financing activities
Dividends - - (3,348) (10,044)
Increase in long-term debt 1,412 149 3,869 1,581
Repayment of long-term debt (892) (1,196) (1,764) (1,966)
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520 (1,047) (1,243) (10,429)
--------------------------------------------------------------------

Effect of exchange rate
differences on cash and
cash equivalents 1,150 (1,122) (2,805) (1,789)
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Net change in cash and cash
equivalents 29,110 (4,448) 15,954 (23,761)

Net cash - beginning 13,740 31,344 26,896 52,902
Assumed on adoption of new
accounting guideline - - - (2,245)
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Net cash - ending $42,850 $26,896 $42,850 $26,896
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Net cash includes cash
and cash equivalents less
bank indebtedness
Interest paid amounted to : 241 285 747 769
Income tax paid amounted
to: 447 529 1,904 1,940


Notes to Consolidated Financial Statements

For the year ended May 31, 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 (May 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 Year ended
May 31 May 31
2006 2005 2006 2005
$ $ $ $
--------------------------------------------------------------------
Actual net gain (loss) on
translation of foreign
currencies (600) (922) 1,149 1,377
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4. RESEARCH EXPENSE

Research Expenses included the following:

--------------------------------------------------------------------
Three months ended Year ended
May 31 May 31
2006 2005 2006 2005
$ $ $ $
--------------------------------------------------------------------
Research Expenditures 2,465 1,679 6,647 6,046
Less: Scientific research
tax credits (461) (464) (1,846) (1,854)
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2,004 1,215 4,801 4,192
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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
--------------------------------------------------------------------
--------------------------------------------------------------------
May 31, May 31,
2006 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
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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 earning and earning per share would
have been the pro forma amounts indicated below:


Three months ended Year ended
------------------------------------------------------------------
May 31 May 31
2006 2005 2006 2005
$ $ $ $
------------------------------------------------------------------
Net Earnings
As reported 1,678 3,451 5,774 541
Pro forma 1,678 3,451 5,774 523
Basic and Diluted earnings
per share
As reported 0.08 0.15 0.26 0.02
Pro forma 0.08 0.15 0.26 0.02
------------------------------------------------------------------

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, 2006
------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
------------------------------------------------------------
Outstanding, beginning of
period 105,000 13.50 8.0 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
------------------------------------------------------------
Outstanding, end of period 105,000 13.50 4.9 months
------------------------------------------------------------
------------------------------------------------------------
Exercisable, end of period
------------------------------------------------------------
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------------------------------------------------------------
Year ended May 31, 2006
------------------------------------------------------------
Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
------------------------------------------------------------
Outstanding, beginning of
period 109,000 13.50 16.4 months
Granted - - -
Exercised - - -
Expired/Forfeited 4,000 13.50 -
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Outstanding, end of period 105,000 13.50 4.9 months
------------------------------------------------------------
------------------------------------------------------------
Exercisable, end of period 105,000 13.50 -
------------------------------------------------------------
------------------------------------------------------------

6. SEGMENT DISCLOSURE

Consistent with the prior year, the company reflects its results
under a single reportable operating segment.


CERTIFIED TO ISO 9001 QUALITY STANDARDS

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