Velan Inc.
TSX : VLN.SV

Velan Inc.

April 11, 2006 15:53 ET

Velan Inc. Reports its 3rd Quarter 2005-2006 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - April 11, 2006) - Velan inc. (TSX:VLN.SV)

Revenues for our third quarter reached $84.1 million, a 10.4% increase over the same quarter last year when the company recorded sales of $76.1 million. The net earnings for the quarter of $0.5 million, or $0.02 per share, compared to net earnings of $1.2 million, or $0.05 per share, in the prior year. For the nine months ended February 28, 2006, net earnings amounted to $4.1 million, or $0.18 per share, versus a net loss of $2.9 million, or $0.13 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 6.3% against the U.S. dollar and 16.8% against the Euro compared to the average of the third quarter last year.

Order bookings of $108.6 million increased 13.6% over bookings in the same quarter last year as our backlog reached a record level of $271.3 million.

The net earnings for the quarter of $525,000 were lower than the $1.2 million reported for the same quarter last year as the strengthening of the Canadian dollar resulted in a $778,000 unrealized currency loss on the translation of integrated subsidiaries. This compares to a $1.4 million gain for the same quarter last year offset by a $537,000 claim settlement. Excluding these gains and losses, net earnings would have been $1.3 million this year versus $325,000 for the third quarter last year.

The company ended the quarter with shareholders' equity of $234.4 million, or $10.50 per share. The net cash and short term investments increased during the quarter by $9.1 million, from $26.4 million to end the quarter at $35.5 million. The increase in net cash is due mainly to a decrease in accounts receivable of $2.6 million and increases in accounts payable and customer deposits of $5.0 million and $2.8 million respectively. The variations in these accounts are primarily the result of timing.

The company is encouraged by the continuing increase in sales revenues and as well as order bookings. The company is taking measures to increase production capacity. The company made a decision to set up a greenfield manufacturing operation in China and is currently working on registering a company and securing both land and key personnel for this operation. The registered capital will be about $3.5 million, to be invested over the next three years. China is Velan's largest overseas export market and there is great potential in the energy sector, particularly for nuclear and fossil power plant valves. The company's China plant will help serve the local market as well as improve the cost competitiveness of our global supply chain.

Despite the improvement in both sales and order backlog, the strength of the Canadian dollar against the US dollar and Euro continues to negatively impact both the company's sales and net earnings. As the Canadian dollar strengthens, Canadian costs become a higher percentage of US dollar selling prices and lower sales and earnings are consolidated from foreign subsidiaries. It also makes Canadian manufactured products less cost competitive. While the company expects that 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, it expects to partially offset the material cost increases by buying more from lower cost Asian sources and through price increases.

Worldwide competition is fierce and 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. The company has had to increase its prices due to cost increases and to extend lead times for some product lines due to the large backlog. Even though this is a very competitive marketplace, the company's broad and growing product range, diversity of geographic and end user markets, and solid reputation for the quality and performance of its valves open up good sales opportunities around the world.

The company is working hard to improve its performance and become a leaner more productive valve manufacturer. The company continues to face tough challenges but remains focused on its strategy to improve future results.

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.

T.C. Velan

President




Consolidated Statements of Earnings (Loss) and Retained Earnings

Unaudited Unaudited
Three months ended Nine months ended
(in thousands of dollars February 28 February 28
excluding per share
amounts) 2006 2005 2006 2005
---------------------------------------------------------------------

Sales $84,055 $76,129 $256,917 $228,683
Cost of sales (note 3) 63,903 56,847 188,513 168,046
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Gross profit 20,152 19,282 68,404 60,637
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Expenses (other income)
Engineering, selling,
general and administra-
tive and research
(note 4) 16,055 16,818 48,581 49,457
Interest
Long-term debt 71 56 191 158
Other 124 104 402 343
Amortization of property,
plant and equipment 2,072 2,418 6,301 6,880
Other expense (income) (415) 438 (1,119) 1,731
Non-controlling interest 104 (170) 1,572 (42)
Foreign exchange loss
(gain) on translation of
integrated subsidiaries 778 (1,371) 3,693 4,387
---------------------------------------------------------------------
18,789 18,293 59,621 62,914
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Earnings (loss) before
income taxes 1,363 989 8,783 (2,277)

Provision for income taxes 838 (170) 4,687 633
---------------------------------------------------------------------
Net earnings (loss) $525 $1,159 $4,096 $(2,910)
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---------------------------------------------------------------------

Retained earnings -
beginning $127,630 $122,797 $124,059 $133,562
Net earnings (loss) 525 1,159 4,096 (2,910)

Dividends
Multiple Voting Shares - - - (4,726)
Subordinate Voting Shares - - - (1,970)
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Retained earnings -
ending $128,155 $123,956 $128,155 $123,956
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Earnings (loss) per
share (note 2)
Basic $0.02 $0.05 $0.18 $(0.13)
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Diluted $0.02 $0.05 $0.18 $(0.13)
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Consolidated Balance Sheet

Unaudited Audited
February 28 May 31
(in thousands of dollars) 2006 2005
--------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $21,883 $37,424
Short-term investments 21,713 6,000
Accounts receivable 79,085 79,398
Income taxes recoverable - 1,953
Inventories 133,831 125,652
Deposits and prepaid expenses 2,041 2,552
Future income taxes 2,403 2,735
--------------------------------------------------------------------
260,956 255,714

Future income taxes - 15
Property, plant and equipment 53,263 58,696
Goodwill 12,502 12,502
Other assets 1,117 1,327
--------------------------------------------------------------------
$327,838 $328,254
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $8,143 $10,528
Accounts payable and
accrued liabilities 53,490 51,889
Income taxes payable 196 -
Dividend payable - 3,348
Customers' deposits 8,818 6,832
Provision for performance
guarantees 7,027 7,558
Current portion of long-term debt 817 1,625
--------------------------------------------------------------------
78,491 81,780
Future income taxes 149 -
Long-term debt 5,060 3,050
Non-controlling interest 3,925 2,320
Other long-term liabilities 5,830 5,834
--------------------------------------------------------------------
93,455 92,984
---------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,419 1,419
Retained earnings 128,155 124,059
Cumulative translation adjustment (4,581) 402
--------------------------------------------------------------------
234,383 235,270
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$327,838 $328,254
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Consolidated Statements of Cash Flow

Unaudited Unaudited
Three months ended Nine months ended
February 28 February 28
(in thousands of dollars) 2006 2005 2006 2005
---------------------------------------------------------------------
Cash provided from
(required for):
Operating activities
Net earnings (loss) $525 $1,159 4,096 $(2,910)
Items not affecting
cash -
Amortization 2,072 2,418 6,301 6,880
Future income taxes - - - -
Loss (gain) on
disposal of property,
plant and equipment (32) 12 (1,581) -
Non-controlling interest 104 (170) 1,572 (42)
Net change in other
long-term liabilities 195 327 (4) 417
---------------------------------------------------------------------
2,864 3,746 10,384 4,345
---------------------------------------------------------------------

Net changes in non-cash
working capital items
Accounts receivable 2,582 (4,630) 325 (7,312)
Income tax recoverable 744 1,336 2,020 269
Inventories (1,370) (3,427) (7,898) (14,868)
Deposits and prepaid
expenses (378) (219) 529 740
Accounts payable and
accrued liabilities 4,980 (1,080) 1,656 (2,368)
Income tax payable 196 - 196 -
Customers' deposits 2,779 95 2,054 (236)
Provision for
performance guarantees (239) 474 (513) 61
---------------------------------------------------------------------
9,294 (7,451) (1,631) (23,714)
---------------------------------------------------------------------
12,158 (3,705) 8,753 (19,369)
---------------------------------------------------------------------

Investing activities
Short-term investments (3,141) (3,000) (15,713) 17,041
Additions to property,
plant and equipment (1,418) (1,662) (5,153) (6,151)
Proceeds on disposal of
property, plant and
equipment 44 1 4,458 62
Net change in other assets 64 (135) 217 (847)
---------------------------------------------------------------------
(4,451) (4,796) (16,191) 10,105
---------------------------------------------------------------------

Financing activities
Dividends - (6,696) (3,348) (10,044)
Increase in long-
term debt - 6 2,457 1,432
Repayment of long-
term debt (122) (269) (872) (770)
---------------------------------------------------------------------
(122) (6,959) (1,763) (9,382)
---------------------------------------------------------------------

Effect of exchange rate
differences on cash and
cash equivalents (1,659) 327 (3,955) (667)
---------------------------------------------------------------------

Net change in cash and
cash equivalents 5,926 (15,133) (13,156) (19,313)

Net cash - beginning 7,814 46,477 26,896 52,902
Assumed on adoption of
new accounting guideline - - - (2,245)
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Net cash - ending $13,740 $31,344 $13,740 $31,344
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---------------------------------------------------------------------

Net cash includes cash and cash equivalents less bank indebtedness

Interest paid amounted to : 190 280 506 484
Income tax paid amounted to: 585 728 1,457 1,411


Notes to Consolidated Financial Statements

For the nine months ended February 28, 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, 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.

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 (February 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 Nine months ended
February 28 February 28
2006 2005 2006 2005
$ $ $ $
---------------------------------------------------------------------
Actual net gain (loss) on
translation of foreign
currencies (19) 105 1,749 2,299
---------------------------------------------------------------------
---------------------------------------------------------------------
4. RESEARCH EXPENSE

Research Expenses included the following:

---------------------------------------------------------------------
Three months ended Nine months ended
February 28 February 28
2006 2005 2006 2005
$ $ $ $
---------------------------------------------------------------------
Research Expenditures 1,486 1,448 4,182 4,367
Less: Scientific
research tax credits (462) (463) (1,385) (1,390)
---------------------------------------------------------------------
1,024 985 2,797 2,977
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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

-------------------------------------------------------------------
February 28 May 31
2006 2005
$ $
-------------------------------------------------------------------
6,707,401 (May 31, 2005 - 6,707,401) Subordinate Voting Shares
15,611,567 (May 31, 2005 - 15,611,567) Multiple Voting Shares

100,541 100,541
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 Nine months ended
February 28 February 28
2006 2005 2006 2005
$ $ $ $
-------------------------------------------------------------------
Net Earnings (Loss)
As reported 525 1,159 4,096 (2,910)
Pro forma 525 1,159 4,096 (2,928)
Basic and Diluted earnings
(loss) per share
As reported 0.02 0.05 0.18 (0.13)
Pro forma 0.02 0.05 0.18 (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 Nine months ended
February 28, 2006 February 28, 2006
---------------------------------------------------------------------
Weighted Weighted
average average
Number exercise contractual
of Shares price($) life
---------------------------------------------------------------------
Outstanding,
beginning of
period 105,000 13.50 11.0 months


Granted - - -


Exercised - - -


Expired/Forfeited - - -


Outstanding,
end of period 105,000 13.50 8 months
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable,
end of period - - -
---------------------------------------------------------------------
---------------------------------------------------------------
Three months ended Nine months ended
February 28, 2006 February 28, 2006
---------------------------------------------------------------
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 8.0 months
---------------------------------------------------------------
---------------------------------------------------------------

Exercisable,
end of period 105,000 13.50 -
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----------------------------------------------------------------


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.
    M. John D. Ball
    Chief Financial Officer
    (514) 748-7743
    (514) 748-8635 (FAX)