Velan Inc.
TSX : VLN

Velan Inc.

April 10, 2007 15:45 ET

Velan Inc. Reports its 3rd Quarter 2006/2007 Financial Results

MONTREAL, QUEBEC--(CCNMatthews - April 10, 2007) - Velan Inc. (TSX:VLN). Revenues for the third quarter reached $97.7 million, the highest third quarter sales in the Company's history. This is a 16.2% increase over the same quarter last year when the Company recorded sales of $84.1 million. Net earnings for the quarter of $5.8 million, or $0.25 per share, compared to net earnings of $0.5 million, or $0.02 per share, in the prior year. For the nine months ended February 28, 2007, net earnings amounted to $11.5 million, or $0.51 per share, versus net earnings of $4.1 million, or $0.18 per share, in the prior year.

The gross profit of the third quarter of $28.6 million, or 29.2% of sales, compares favourably to the $20.2 million, or 24.0% of sales, recorded last year. As was the case at the end of the second quarter, this was due to a combination of factors such as an increased production, select price increases and a slight improvement in product mix. These positive factors more than offset the rising steel and other material costs. The gross profit for the nine months amounted to $76.4 million, or 27.4% of sales, this year compared to the $68.4 million, or 26.6% of sales, experienced last year.

Although the Company reports in Canadian dollars, a majority of its sales is in US dollars. Based on average exchange rates the Canadian dollar weakened against the US dollar 0.9% for the quarter but, on a year to date basis, strengthened 4.2%. Likewise, the Canadian dollar weakened against the Euro 9.4% in the quarter, and 2.3% on a nine month year to date basis. A weakening Canadian dollar will positively impact the sales as reported in Canadian dollars. As a result of the fluctuations of the Canadian dollar based on period end rates, the company recorded an unrealized gain during the quarter of $1.2 million on consolidation of its integrated foreign subsidiaries compared to a $0.8 million loss during the same quarter last year, and a $2.2 million gain versus a $3.7 million loss during the equivalent nine month periods.

The company continues to experience strong demand for its products, and new orders received during the quarter amounted to $159.6 million, representing a 47% increase from the comparative quarter last year. Order intake exceeded shipments for both the quarter and year to date periods, resulting in a record backlog of $388.5 million as at February 28, 2007. This is $134.2 million higher than May 31,2006. The order backlog as of February 28, 2007 includes $65.4 million of orders scheduled for delivery after February 29, 2008.

The Company ended the quarter with shareholders' equity of $253.9 million, or $11.38 per share. The Company's net cash, defined as cash and cash equivalents plus short term investments less bank indebtedness, amounted to $17.8 million as at February 28, 2007, a decrease of $25.5 million from May 31, 2006. Net cash used for operating activities amounted to $12.2 million for the quarter and $19.9 million for the nine months, primarily to fund increases in inventory required for the continued growth of the company, particularly in light of the higher order backlog.

The Company continues to move ahead with its previously announced decision to establish a greenfield manufacturing operation in Suzhou, China. The Company has acquired a land site and construction permit, and will commence construction of the facility in the fourth quarter. The investment is intended to help improve the cost competitiveness of the Company's global supply chain and eventually to help serve the Chinese market, the Company's largest export market. This operation is not expected to have a significant impact on the current fiscal year's results.

The Company's president, Tom Velan, said "Our goal is to extend the positive momentum in sales revenues and earnings and turn our record backlog into growing sales revenues while improving our margins so we can continue to grow our operating 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.

J.D. Ball, CFO



Consolidated Statements of Earnings
and Retained Earnings
Unaudited Unaudited
Three months ended Nine months ended
February 28 February 28
(in thousands of dollars,
excluding per share amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Sales $97,742 $84,055 $278,705 $256,917
Cost of sales (note 3) 69,170 63,903 202,347 188,513
-------------------------------------------------------------------------
Gross profit 28,572 20,152 76,358 68,404
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Expenses (other income)
Engineering, selling,
general and administrative
and research (note 4) 18,440 16,055 50,974 48,581
Interest
Long-term debt 74 71 230 191
Other 230 124 419 402
Amortization of property,
plant and equipment 2,049 2,072 6,369 6,301
Other expense (income) (183) (415) (893) (1,119)
Non-controlling interest 687 104 2,570 1,572
Foreign exchange loss (gain)
on translation of
integrated subsidiaries (1,150) 778 (2,230) 3,693
-------------------------------------------------------------------------
20,147 18,789 57,439 59,621
-------------------------------------------------------------------------
Earnings before income taxes 8,425 1,363 18,919 8,783
Provision for income taxes 2,669 838 7,428 4,687
-------------------------------------------------------------------------
Net earnings $5,756 $525 $11,491 $4,096
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Retained earnings
- beginning $135,568 $127,630 $129,833 $124,059
Net earnings 5,756 525 11,491 4,096
-------------------------------------------------------------------------
Retained earnings
- ending $141,324 $128,155 $141,324 $128,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (note 2)
Basic $0.25 $0.02 $0.51 $0.18
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Diluted $0.25 $0.02 $0.51 $0.18
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Consolidated Balance Sheets
Unaudited Audited
February 28 May 31
(in thousands of dollars) 2007 2006
------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 26,082 $ 49,138
Short-term investments 25 449
Accounts receivable 99,141 89,661
Inventories 186,382 135,007
Deposits and prepaid expenses 2,564 1,760
Future income taxes 3,046 2,988
------------------------------------------------------
------------------------------------------------------
317,240 279,003

Property, plant and equipment 56,939 54,476
Goodwill 12,502 12,502
Other assets 1,126 1,061
------------------------------------------------------
$387,807 $347,042
------------------------------------------------------
------------------------------------------------------

LIABILITIES
Current liabilities
Bank indebtedness $8,332 $6,288
Accounts payable and accrued
liabilities 73,668 64,547
Income taxes payable 3,532 2,513
Customers' deposits 19,053 11,374
Provision for performance
guarantees 7,569 7,419
Current portion of long-term
debt 1,220 1,039
------------------------------------------------------
113,374 93,180
Future income taxes 395 413
Long-term debt 6,273 5,390
Non-controlling interest 6,946 4,376
Other long-term liabilities 6,938 5,937
------------------------------------------------------
133,926 109,296
------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 5) 109,390 109,390
Contributed surplus (note 5) 1,452 1,419
Retained earnings 141,324 129,833
Cumulative translation
adjustment 1,715 (2,896)
------------------------------------------------------
253,881 237,746
------------------------------------------------------
$387,807 $347,042
------------------------------------------------------
------------------------------------------------------



Consolidated Statements of Cash Flows

Unaudited Unaudited
Three months ended Nine months ended
February 28 February 28
(in thousands of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------

Cash provided from (required for):
Operating activities
Net earnings $ 5,756 $ 525 11,491 $ 4,096
Items not affecting cash -
Amortization 2,049 2,072 6,369 6,301
Loss (gain) on disposal of
property, plant and
equipment 1 (32) (11) (1,581)
Non-controlling interest 687 104 2,570 1,572
Net change in other
long-term liabilities 342 195 1,031 (4)
-------------------------------------------------------------------------
8,835 2,864 21,450 10,384
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Net changes in non-cash
working capital items
Accounts receivable 2,744 2,582 (9,196) 325
Income tax recoverable - 744 - 2,020
Inventories (19,113) (1,370) (49,834) (7,898)
Deposits and prepaid
expenses (382) (378) (780) 529
Accounts payable and
accrued liabilities (3,482) 4,980 9,395 1,656
Income tax payable 320 196 1,050 196
Customers' deposits (1,090) 2,779 7,909 2,054
Provision for performance
guarantees (66) (239) 154 (513)
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(21,069) 9,294 (41,302) (1,631)
-------------------------------------------------------------------------
(12,234) 12,158 (19,852) 8,753
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Investing activities
Short-term investments 1 (3,141) 424 (15,713)
Additions to property,
plant and equipment (2,909) (1,418) (7,384) (5,153)
Proceeds on disposal
of property,plant and
equipment 5 44 28 4,458
Net change in other assets 196 64 (63) 217
-------------------------------------------------------------------------
(2,707) (4,451) (6,995) (16,191)
-------------------------------------------------------------------------

Financing activities
Dividends - - - (3,348)
Increase in long-term debt 721 - 1,390 2,457
Repayment of long-term debt (229) (122) (727) (872)
-------------------------------------------------------------------------
492 (122) 663 (1,763)

Effect of exchange rate differences
on cash and cash equivalents (52) (1,659) 1,084 (3,955)
-------------------------------------------------------------------------
Net change in cash and cash
equivalents (14,501) 5,926 (25,100) (13,156)
Net cash - beginning 32,251 7,814 42,850 26,896
-------------------------------------------------------------------------
Net cash - ending $17,750 $13,740 $17,750 $13,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Net cash includes cash and cash
equivalents less bank indebtedness

Interest paid amounted to : 270 190 624 506
Income tax paid amounted to: 694 585 2,407 1,457


Notes to Consolidated Financial Statements

For the nine months ended February 28, 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, 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 (February 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 Nine months ended
February 28 February 28
2007 2006 2007 2006
$ $ $ $
-------------------------------------------------------------------------
Actual net gain (loss) on
translation of foreign
currencies (1,067) (19) (717) 1,749
-------------------------------------------------------------------------


4. RESEARCH EXPENSE

Research Expenses included the following:
----------------------------------------------------------------------
----------------------------------------------------------------------
Three months ended Nine months ended
February 28 February 28
2007 2006 2007 2006
$ $ $ $
----------------------------------------------------------------------
Research Expenditures 1,642 1,486 4,542 4,182
Less: Scientific research tax
credits (462) (462) (1,319) (1,385)
----------------------------------------------------------------------
1,180 1,024 3,223 2,797
----------------------------------------------------------------------
----------------------------------------------------------------------


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
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
--------------------------------------------------------------------
--------------------------------------------------------------------
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 $3.35
per option.

A compensation cost of $15 related to the 30,000 options granted in
the first quarter ($33 for the nine months), was recorded in the
statement of earnings and credited to contributed surplus.

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

----------------------------------------------------------------------
Three months ended February 28, 2007
----------------------------------------------------------------------
Weighted Weighted
Number average average
of exercise contractual
Shares price ($) life
----------------------------------------------------------------------
Outstanding, beginning
of period 30,000 12.81 56.5 months
Granted - - -
Exercised - - -
Expired/Forfeited - - -
----------------------------------------------------------------------
Outstanding, end of period 30,000 12.81 53.5 months
----------------------------------------------------------------------
----------------------------------------------------------------------
Exercisable, end of period - -
----------------------------------------------------------------------
----------------------------------------------------------------------

----------------------------------------------------------------------
Nine months ended February 28, 2007
----------------------------------------------------------------------
Weighted Weighted
Number average average
of exercise contractual
Shares price ($) life
----------------------------------------------------------------------
Outstanding, beginning
of period 105,000 13.50 4.9 months
Granted 30,000 12.81 -
Exercised - - -
Expired/Forfeited 105,000 13.50 -
----------------------------------------------------------------------
Outstanding, end of period 30,000 12.81 53.5 months
----------------------------------------------------------------------
----------------------------------------------------------------------
Exercisable, end of period - - -
----------------------------------------------------------------------
----------------------------------------------------------------------


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)