Velan Inc.
TSX : VLN.SV

Velan Inc.

January 11, 2006 15:50 ET

Velan Inc. Reports its 2nd Quarter 2005-2006 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Jan. 11, 2006) - Velan Inc. (TSX:VLN.SV)

Revenues for our second quarter reached a record $94.9 million, a 17.5% increase over the same quarter last year when we recorded sales of $80.8 million. We had net earnings for the quarter of $2.1 million, or $0.10 per share, compared to a loss of $3.5 million, or $0.15 per share, in the prior year. For the six months ended November 30, 2005, net earnings amounted to $3.6 million, or $0.16 per share, versus a net loss of $4.1 million, or $0.18 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 5.5% against the U.S. dollar and 10.4% against the Euro compared to the average of the second quarter last year.

Order bookings of $122.2 million increased 48.5% over bookings in the same quarter last year as our backlog reached a record of $246.7 million. The increase is mainly due to strong order bookings in Velan Srl, our Italian joint venture, Velan SAS, our French subsidiary and in Velan Canada where we booked a $14.6 million contract to supply Severe Service Metal-Seated Ball Valves in Titanium and Duplex Stainless Steel materials to the Goro Nickel Project located in New Caledonia. This important order, which will be shipped in our next fiscal year, reinforces Velan's position as one of the world's leading manufacturers of severe service valves.

Velan Srl booked US$15.6 million (Cnd$18.4 million) of orders to supply ball valves for the Marlim Sul Field in the Campos Basin off the shore of Brazil.

We also received some important strategic orders after November 30th that we want to mention even though they are not included in the above figures. We booked a US$12.4 million (Cnd. $14.6 million) order from MHI (Mitsubishi Heavy Industries) for the large Rabigh power project in Saudi Arabia. Velan SAS booked its first two North American orders for Velflex cryogenic butterfly valves for LNG receiving terminals to be built in Freeport, Texas and Costa Azul, Mexico. The orders booked to date total _5.4 million (Cnd.$ 7.6 million) and we expect to book additional orders. Shipments of these valves are scheduled for our next fiscal year.

Our net profit for the quarter of $2.1 million included a gain on sale of a property in Korea, offset by costs related to the closure of a manufacturing operation in Ontario, prepayment of royalties related to an interest free loan from Innovatech and a $1.2 million unrealized currency loss on consolidation of our integrated foreign subsidiaries. Excluding these gains and losses, our net earnings would have been $3.6 million.

We ended the quarter with shareholders' equity of $234.3 million, or $10.50 per share. Our net cash and short term investments increased during the quarter by $2.4 million, ending the quarter at $26.4 million. The increase in net cash is due to a combination of factors, including the increase in sales of the quarter as well as our efforts to increase our inventory turns and working capital efficiency.

We are encouraged by the 17.5% increase in our sales revenues and the strength of our order bookings. With the largest consolidated backlog of orders in our history, we are well positioned to increase sales revenues. However, 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, all our Canadian costs become a higher percentage of our US dollar selling prices and lower sales and earnings are consolidated from our foreign subsidiaries. It also makes our Canadian manufactured products 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 and through price increases.

Worldwide competition is fierce and our Asian competitors are aggressively pursuing international business opportunities. They continue to make inroads in the market, both as branded valves and under their own brand names. We have had to increase our prices due to the cost increases and extend lead times for some product lines due to our large backlog. We expect this will make it harder to book new orders for some of our product lines. Even though this is a very competitive marketplace, our broad and growing product range, diversity of geographic and end user markets, and our solid reputation for the quality and performance of our valves open up good sales opportunities around the world.

We are working hard to improve our performance and become a leaner more productive valve manufacturer. Our results this quarter are another step in the right direction. We are facing tough challenges but we remain focused on our strategy and determined to improve our results 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.



Consolidated Statements of Earnings (Loss) and Retained Earnings


Unaudited Unaudited
Three months ended Six months ended
(in thousands of November 30 November 30
dollars, excluding Restated Restated
per share amounts) 2005 2004 2005 2004
---------------------------------------------------------------------

Sales $94,916 $80,788 $172,862 $152,554
Cost of sales (note 3) 69,922 58,717 124,610 111,199
---------------------------------------------------------------------
Gross profit 24,994 22,071 48,252 41,355
---------------------------------------------------------------------

Expenses (other income)
Engineering, selling,
general and
administrative and
research (note 4) 16,577 16,564 32,526 32,639
Interest
Long-term debt 49 55 120 102
Other 142 134 278 239
Amortization of
property, plant
and equipment 2,107 2,262 4,229 4,462
Other expense (income) (414) 1,639 (704) 1,293
Non-controlling
interest 1,138 250 1,468 128
Foreign exchange loss
(gain) on translation
of integrated
subsidiaries 1,157 4,266 2,915 5,758
---------------------------------------------------------------------
20,756 25,170 40,832 44,621
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings (loss) before
income taxes 4,238 (3,099) 7,420 (3,266)

Provision for income
taxes 2,108 400 3,849 803
---------------------------------------------------------------------
Net earnings (loss) $2,130 $(3,499) $3,571 $(4,069)
---------------------------------------------------------------------
---------------------------------------------------------------------

Retained earnings
- beginning $125,500 $132,992 $124,059 $133,562
Net earnings (loss) 2,130 (3,499) 3,571 (4,069)

Dividends
Multiple Voting Shares - (4,726) - (4,726)
Subordinate Voting
Shares - (1,970) - (1,970)
---------------------------------------------------------------------
Retained earnings
- ending $127,630 $122,797 $127,630 $122,797
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings (loss)
per share (note 2)
Basic $0.10 $(0.15) $0.16 $(0.18)
---------------------------------------------------------------------
Diluted $0.10 $(0.15) $0.16 $(0.18)
---------------------------------------------------------------------


Consolidated Balance Sheets


Unaudited Audited
November 30 May 31
(in thousands of dollars) 2005 2005
--------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents $17,347 $37,424
Short-term investments 18,572 6,000
Accounts receivable 81,527 79,398
Income taxes recoverable 595 1,953
Inventories 131,809 125,652
Deposits and prepaid expenses 1,587 2,552
Future income taxes 2,468 2,735
--------------------------------------------------------------------
253,905 255,714

Future income taxes - 15
Property, plant and equipment 53,870 58,696
Goodwill 12,502 12,502
Other assets 1,164 1,327
--------------------------------------------------------------------
$321,441 $328,254
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $9,533 $10,528
Accounts payable and accrued
liabilities 48,754 51,889
Dividend payable - 3,348
Customers' deposits 6,148 6,832
Provision for performance
guarantees 7,300 7,558
Current portion of long-term debt 821 1,625
--------------------------------------------------------------------
72,556 81,780
Future income taxes 148 -
Long-term debt 5,175 3,050
Non-controlling interest 3,619 2,320
Other long-term liabilities 5,646 5,834
--------------------------------------------------------------------
87,144 92,984
--------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,419 1,419
Retained earnings 127,630 124,059
Cumulative translation adjustment (4,142) 402
--------------------------------------------------------------------
234,297 235,270
--------------------------------------------------------------------
$321,441 $328,254
--------------------------------------------------------------------
--------------------------------------------------------------------


Consolidated Statements of Cash Flows


Unaudited Unaudited
Three months ended Six months ended
November 30 November 30
(in thousands Restated Restated
of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------

Cash provided from
(required for):
Operating activities
Net earnings (loss) $2,130 $(3,499) 3,571 $(4,069)
Items not affecting
cash -
Amortization 2,107 2,262 4,229 4,462
Loss (gain) on
disposal of property,
plant and equipment (1,549) - (1,549) (12)
Non-controlling
interest 1,138 250 1,468 128
Net change in other
long-term liabilities (20) 152 (199) 90
---------------------------------------------------------------------
3,806 (835) 7,520 599

Net changes in non-
cash working capital
items
Accounts receivable (7,533) (65) (2,257) (2,682)
Income tax
recoverable 550 (582) 1,276 (1,067)
Inventories 5,036 (2,080) (6,528) (11,441)
Deposits and
prepaid expenses 876 690 907 959
Accounts payable
and accrued
liabilities (3,166) (3,376) (3,324) (1,288)
Customers' deposits (975) 613 (725) (331)
Provision for
performance
guarantees 222 (171) (274) (413)
---------------------------------------------------------------------
(4,990) (4,971) (10,925) (16,263)
---------------------------------------------------------------------
(1,184) (5,806) (3,405) (15,664)
---------------------------------------------------------------------

Investing activities
Short-term
investments (15,572) - (12,572) 20,041
Additions to property,
plant and equipment (1,554) (2,103) (3,735) (4,489)
Proceeds on disposal
of property, plant
and equipment 4,414 (2) 4,414 61
Net change in other
assets 87 (52) 153 (712)
---------------------------------------------------------------------
(12,625) (2,157) (11,740) 14,901
---------------------------------------------------------------------

Financing activities
Dividends - - (3,348) (3,348)
Increase in long-
term debt 2,324 108 2,457 1,426
Repayment of long-
term debt (523) (320) (750) (501)
---------------------------------------------------------------------
1,801 (212) (1,641) (2,423)
---------------------------------------------------------------------
Effect of exchange rate
differences on cash
and cash equivalents (1,161) (397) (2,296) (994)
---------------------------------------------------------------------
Net change in cash
and cash equivalents (13,169) (8,572) (19,082) (4,180)

Net cash - beginning 20,983 55,049 26,896 52,902
Assumed on adoption
of new accounting
guideline - - - (2,245)
---------------------------------------------------------------------
Net cash - ending $7,814 $46,477 $7,814 $46,477
---------------------------------------------------------------------
---------------------------------------------------------------------

Net cash includes
cash and cash
equivalents less
bank indebtedness

Interest paid
amounted to : 172 140 316 313
Income tax paid
amounted to: 490 41 872 683


Notes to Consolidated Financial Statements
For the six months ended November 30, 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, 2005, 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, 2005. In addition, an auditor has not performed a review of the interim financial statements.

The prior year's numbers have been restated in order to reflect the adoption of the accounting guideline regarding the consolidation of variable interest entities. As required, the company adopted this guideline in the third quarter of last year. The guideline required the company to consolidate 100% of its joint venture companies which had been previously accounted for using the proportionate consolidation method of accounting. This guideline had no impact on net earnings or retained earnings.

Certain of the prior year's numbers have been reclassified to conform to the current year's presentation.

2. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is calculated using the weighted average number of shares outstanding of 22,318,968 (November 2004 - 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 Six months ended
November 30 November 30
Restated Restated
2005 2004 2005 2004
$ $ $ $
---------------------------------------------------------------------
Actual net gain (loss)
on translation of
foreign currencies 225 1,760 1,768 2,195
---------------------------------------------------------------------

4. RESEARCH EXPENSE

Research Expenses included the following:
---------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
Restated Restated
2005 2004 2005 2004
$ $ $ $
---------------------------------------------------------------------
Research Expenditures(1) 1,403 1,553 2,696 2,919
Less: Scientific
research tax credits (461) (585) (923) (927)
---------------------------------------------------------------------
942 968 1,773 1,992
---------------------------------------------------------------------


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
---------------------------------------------------------------------
November 30 May 31
2005 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
---------------------------------------------------------------------


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 (loss) and earning (loss) per
share would have been the pro forma amounts indicated below:

---------------------------------------------------------------------
Three months ended Six months ended
November 30 November 30
Restated Restated
2005 2004 2005 2004
$ $ $ $
---------------------------------------------------------------------
Net Earnings (Loss)
As reported 2,130 (3,499) 3,571 (4,069)
Pro forma 2,130 (3,507) 3,571 (4,087)
Basic and Diluted earnings
(loss) per share
As reported 0.10 (0.15) 0.16 (0.18)
Pro forma 0.10 (0.15) 0.16 (0.18)
---------------------------------------------------------------------

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 November 30, 2005
Weighted Weighted
average average
Number exercise contractual
of Shares price($) life
---------------------------------------------------------------------
Outstanding,
beginning of
period 105,000 13.50 14.0 months

Granted - - -

Exercised - - -

Expired/Forfeited - - -

Outstanding,
end of period 105,000 13.50 11.0 months
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable,
end of period - - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended November 30, 2005
Weighted Weighted
average average
Number exercise contractual
of Shares price($) life
---------------------------------------------------------------------
Outstanding,
beginning of
period 109,000 13.50 16.4 months

Granted - - -

Exercised - - -

Expired/Forfeited 4,000 13.50

Outstanding,
end of period 105,000 13.50 11.0 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.

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