Velan Inc.
TSX : VLN

Velan Inc.

August 21, 2007 15:45 ET

Velan Inc. Reports its 2007 Financial Results

MONTREAL, QUEBEC--(Marketwire - Aug. 21, 2007) - Velan Inc. (TSX:VLN) reported significantly improved financial results for the fiscal year ended May 31, 2007, and the company ended the year with net earnings of $18.4 million, or $0.82 per share, compared to $5.8 million, or $0.26 per share, in the preceding year. For the fourth quarter, net earnings amounted to $6.9 million, or $0.31 per share, versus $1.7 million, or $0.08 per share, in the preceding year. These annual results were achieved despite $1.1 million of unrealized currency losses on consolidation of integrated foreign subsidiaries in 2007 versus $4.8 million in 2006. For the fourth quarter, these unrealized currency losses amounted to $3.4 million this year versus $1.1 million last year.

Sales, Order Bookings and Backlog

Sales for the year reached a record $418.3 million, the highest sales in the company's history, and an increase of 16.1% over last year. This growth was achieved despite the continued strengthening of the Canadian dollar, which increased an average of 3.1% against the U.S. dollar, the currency of most of the sales, and decreased 3.8% against the Euro. The fourth quarter sales increased from $103.4 million last year to a record $139.6 million this year, as the company shipped and recognized revenue on several large projects, including an important part of the order for the Goro Nickel project in New Caledonia. Velan Inc. sold its products in 70 different countries in 2007. China continues to represent the single largest overseas export market with sales of $35.1 million in 2007, largely as a result of demand for special engineered valves for the energy sector.

The company had record order bookings of $498 million in 2007, an increase of 20% over the previous year. This is due to strong demand in end-user markets, particularly energy related. Subsequent to the year end, the company's German subsidiary, Velan Gmbh, booked a US$ 17 million order to supply valves to OJSC Power Machines in Russia for three 600 Megawatt units of the Sipat coal fired power plant in India. This will be the first Indian supercritical power plant which operates at higher pressure and temperature to improve efficiency and reduce fuel consumption and greenhouse gas emissions. The company ended the year with a large backlog of $334 million, which includes many large and long term contracts, and $70 million is scheduled for delivery after Fiscal 2008.

Net Earnings

Fourth quarter net earnings were $6.9 million, or $0.31 per share, compared with net earnings of $1.7 million, or $0.08 per share, last year. Net earnings for the year were $18.4 million, or $0.82 per share versus $5.8 million, or $0.26 per share, last year. The increase in volume contributed to the increase in gross margin, from $94.3 million in 2006 to $115.7 million in 2007, and gross margin as a percent of sales improved from 26.2% in 2006 to 27.7% in 2007 as a result of manufacturing efficiencies from this increased volume, which offset some of the raw material price increases during the year.

Acquisition and new joint ventures

Subsequent to the year end, the company acquired a majority interest in Segault SA, a French valve manufacturer for the nuclear industry and for special petrochemical processes. In their last fiscal year they recorded sales of roughly $10 million. Frederic Segault, the President, will continue to own 25% of the company. This acquisition is expected to strengthen Velan's position in the nuclear valve industry.

Construction is continuing on the greenfield plant in Suzhou, China. It is expected to start up production during the current year but the impact on fiscal 2008 will be minor. Velan's Italian joint venture company, Velan Srl, signed a letter of intent with a Chinese minority partner to establish a greenfield plant in Chengdu, China to produce API 6D pipeline valves and components. This project is still in the planning stage.

Outlook

The company's continued priority and focus is on improving the efficiency, productivity and profitability of its existing operations while expanding its production and procurement in Asia to be more cost competitive. The company started fiscal 2008 with a backlog of $334 million, and is well positioned to increase sales revenues provided the Canadian dollar doesn't continue to appreciate over last year's average US dollar and Euro exchange rates. Any increase in the average exchange rate negatively impacts operating results as all costs incurred in Canadian dollars increase as a percentage of US dollar selling prices. Even though a portion of the short term currency risk is managed through the use of forward contracts, a sustained strengthening of the Canadian dollar will have a negative effect on results, which require the company to become a leaner and more productive valve manufacturer and to expand quality production and procurement in Asia.

The company's solid reputation for the quality and performance of its valves, as well as its strong balance sheet and financial resources, are important assets as it faces these opportunities and challenges. The company remains focused on its core 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) 2007 2006 2007 2006
--------------------------------------------------------------------------
Sales $139,616 $103,405 $418,321 $360,322
Cost of sales (note 3) 100,269 77,492 302,616 266,005
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Gross profit 39,347 25,913 115,705 94,317
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Expenses (other income)
Engineering, selling,
general and administrative
and research (note 4) 20,814 17,713 71,788 66,294
Interest
Long-term debt 79 92 309 283
Other 338 105 757 507
Amortization of property,
plant and equipment 1,946 1,878 8,315 8,179
Other expense (income) (245) (51) (1,138) (1,170)
Non-controlling interest 617 520 3,187 2,092
Foreign exchange loss (gain)
on translation of
integrated subsidiaries 3,354 1,090 1,124 4,783
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26,903 21,347 84,342 80,968
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Earnings before income taxes 12,444 4,566 31,363 13,349

Provision for income taxes 5,203 3,115 12,631 7,802
Provision (recovery) for future
income taxes 320 (227) 320 (227)
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Net earnings $6,921 $1,678 $18,412 $5,774
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Retained earnings - beginning $141,324 $128,155 $129,833 $124,059
Net earnings 6,921 1,678 18,412 5,774
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Retained earnings - ending $148,245 $129,833 $148,245 $129,833
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Earnings per share (note 2)
Basic $0.31 $0.08 $0.82 $0.26
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Diluted $0.31 $0.08 $0.82 $0.26
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Consolidated Balance Sheets

Unaudited Audited
May 31 May 31
(in thousands of dollars) 2007 2006
--------------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $25,803 $49,138
Short-term investments 1,012 449
Accounts receivable 129,644 89,661
Income taxes recoverable 1,574 1,505
Inventories 176,061 135,007
Deposits and prepaid expenses 3,133 1,760
Future income taxes 2,404 2,988
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339,631 280,508

Future income taxes 1,420 1,567
Property, plant and equipment 56,017 54,476
Goodwill 12,502 12,502
Other assets 1,216 1,061
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$410,786 $350,114
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LIABILITIES
Current liabilities
Bank indebtedness $5,487 $6,288
Short term bank loans 12,731 -
Accounts payable and accrued liabilities 81,190 64,547
Income taxes payable 3,159 4,018
Customers' deposits 18,192 11,374
Provision for performance guarantees 7,779 7,419
Future income taxes 194 222
Current portion of long-term debt 2,558 1,039
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131,290 94,907

Future income taxes 1,523 1,758
Long-term debt 7,107 5,390
Non-controlling interest 7,476 4,376
Other long-term liabilities 6,737 5,937
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154,133 112,368
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SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,467 1,419
Retained earnings 148,245 129,833
Cumulative translation adjustment (2,449) (2,896)
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256,653 237,746
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$410,786 $350,114
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Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Year ended
May 31 May 31
(in thousands of dollars) 2007 2006 2007 2006
--------------------------------------------------------------------------
Cash provided from (required for):
Operating activities
Net earnings $6,921 $1,678 $18,412 $5,774
Items not affecting cash -
Amortization 1,946 1,878 8,315 8,179
Stock options expense 15 - 48 -
Future income taxes 320 (227) 320 (227)
Loss (gain) on disposal of
property, plant and equipment 49 (64) 38 (1,645)
Non-controlling interest 617 520 3,187 2,092
Net change in other long-term
liabilities (233) 109 798 105
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9,635 3,894 31,118 14,278
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Net changes in non-cash
working capital items
Accounts receivable (30,915) (10,420) (40,111) (10,095)
Income taxes recoverable (69) (2,849) (69) 478
Inventories 8,650 (1,303) (41,184) (9,201)
Deposits and prepaid expenses (597) 276 (1,377) 805
Accounts payable and accrued
liabilities 7,195 11,210 16,590 12,866
Income taxes payable (1,912) 5,172 (862) 4,061
Customers' deposits (1,113) 2,563 6,796 4,617
Provision for performance
guarantees 205 376 359 (137)
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(18,556) 5,025 (59,858) 3,394
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(8,921) 8,919 (28,740) 17,672
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Investing activities
Short-term investments (987) 21,264 (563) 5,551
Additions to property, plant
and equipment (1,045) (3,053) (8,429) (8,206)
Proceeds on disposal of
property, plant and equipment 10 257 38 4,715
Net change in other assets (92) 53 (155) 270
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(2,114) 18,521 (9,109) 2,330
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Financing activities
Dividends - - - (3,348)
Short-term bank loans 12,731 - 12,731 -
Increase in long-term debt 2,237 1,412 3,627 3,869
Repayment of long-term debt (369) (892) (1,096) (1,764)
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14,599 520 15,262 (1,243)
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Effect of exchange rate
differences on cash and
cash equivalents (998) 1,150 53 (2,805)
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Net change in cash and cash
equivalents 2,566 29,110 (22,534) 15,954
Net cash - beginning 17,750 13,740 42,850 26,896
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Net cash - ending $20,316 $42,850 $20,316 $42,850
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Net cash includes cash and cash equivalents less bank indebtedness

Interest paid amounted to : 542 241 1,166 747
Income tax paid amounted to: 5,603 447 8,010 1,904


Notes to Consolidated Financial Statements

For the year ended May 31, 2007
(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, 2007, 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, 2007. 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 2006 - 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
2007 2006 2007 2006
$ $ $ $
--------------------------------------------------------------------------
Actual net gain (loss) on translation
of foreign currencies 547 (600) (170) 1,149
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4. RESEARCH EXPENSE

Research Expenses included the following:

--------------------------------------------------------------------------
Three months ended Year ended
. May 31 . May 31
2007 2006 2007 2006
$ $ $ $
--------------------------------------------------------------------------
Research Expenditures 3,302 2,465 7,844 6,647
Less: Scientific research tax credits (461) (461) (1,780) (1,846)
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2,841 2,004 6,064 4,801
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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

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May 31 May 31
2007 2006
$ $
--------------------------------------------------------------------------
6,707,401 (May 31, 2006 - 6,707,401)
Subordinate Voting Shares 100,541 100,541
15,611,567 (May 31, 2006 - 15,611,567)
Multiple Voting Shares 8,849 8,849
--------------------------------------------------------------------------
109,390 109,390
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--------------------------------------------------------------------------

c) Stock Options

The fair value of the remaining 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 $3.31 per
option.

A compensation cost of $48 related to the 30,000 options granted during the
year, was recorded in the statement of earnings and credited to contributed
surplus.


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

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Three months ended May 31, 2007 Year ended May 31, 2007
---------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
average average average average
Number exercise contractual Number exercise contractual
of Shares price ($) life of Shares price ($) life
---------------------------------------------------------------------------
Outstanding,
beginning
of period 30,000 12.81 53.5 months 105,000 13.50 4.9 months

Granted - - - 30,000 12.81 -

Exercised - - - - - -

Expired/
Forfeited - - - 105,000 13.50 -
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Outstanding,
end of
period 30,000 12.81 50.5 months 30,000 12.81 50.5 months
---------------------------------------------------------------------------
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Exercisable,
end of
period - - - - -
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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)