Velan Inc.
TSX : VLN

Velan Inc.

July 09, 2009 13:22 ET

Velan Inc. Reports its First Quarter 2009/10 Financial Results

MONTREAL, QUEBEC--(Marketwire - July 9, 2009) - Velan Inc. (TSX:VLN) today reported its financial results for the three month quarter ended May 31, 2009.



SUMMARY OF RESULTS
(In millions of Canadian dollars, except per share amounts)

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THREE MONTHS ENDED
May 31
2009 2008
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Sales 120.4 139.4
Net Earnings 14.3 7.3
Earnings per Share 0.64 0.33
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Highlights

Velan reported strong financial results for the first quarter ended May 31, 2009, as the Company benefited because the US dollar was on average 20.7% stronger than the Canadian dollar compared to last year. The net earnings for the quarter were $14.3 million, and earnings per share were 64 cents. The Company had previously changed its fiscal year end from May 31 to the last day of February, effective 2009.

Sales, Gross Profit and Net Earnings

Sales for the quarter were $120.4 million, which is 13.6% less than the previous year but 6.7% higher after adjusting for the sales of the Italian joint venture in last year's figures. The company sold its 50% ownership in the joint venture in July 2008. Sales continue to be negatively impacted by delays on several large contracts due to the effects of the global financial crises. Delayed orders resulted in approximately $37 million of inventory of completed valves in the North American plants that couldn't be shipped for various reasons before May 31, 2009.

The gross profit of the quarter of $49.2 million, or 40.9% of sales, compared to the $37.4 million, or 26.8% of sales, recorded last year. The principal factor positively impacting the gross profit percentage continues to be the fluctuation of the Canadian dollar exchange rate against the US dollar. Compared to the first quarter last year, the US dollar strengthened an average of 20.7% against the Canadian dollar. Other factors such as increased volume and product mix also positively affected margins.

Net earnings for the quarter of $14.3 million, or $0.64 per share, compared to net earnings of $7.3 million, or $0.33 per share, in the prior year. The total impact of the change in currency rates is complicated. Although the Company reports in Canadian dollars, a majority of its sales is in US dollars. A change in the average exchange rates, as which occurred this quarter, benefits reported sales and earnings. Changes in the period end currency rates result in the unrealized gains or losses on the consolidation of integrated subsidiaries. The Company recorded foreign exchange losses on the translation of integrated subsidiaries of $5.7 million for the quarter compared to a loss of $0.2 million for the corresponding quarter of the prior year as the Canadian dollar strengthened 16.5% against the US dollar based on period end rates.

Strong Balance Sheet

The Company continues to build a strong balance sheet and ended the quarter with shareholders' equity of $336.9 million, or $15.10 per share. The Company's net cash, defined as cash and cash equivalents plus short term investments less bank indebtedness and short-term bank loans, amounted to $64.7 million as at May 31, 2009, an increase of $1.2 million from February 28, 2009. Net cash provided from operating activities amounted to $8.5 million for the quarter.

Bookings and Outlook

Order bookings continue to be negatively impacted by the current economic conditions, and were lower than the sales in the quarter. Backlog declined by 5.6% during the quarter to $507 million, of which $189 million is required for delivery after the end of the current fiscal year. Notwithstanding the lower order bookings, the backlog is 4.4% higher than last year, or 30.5% higher adjusted for the sale of the Italian joint venture.

The company has weathered the economic crisis and, with the current challenging market conditions, is prepared for the future. Tom Velan, the President said "Our customers and markets have been negatively impacted by the fall in the oil price, lower commodity prices, falling demand, and the global financial crisis. The downward trend has recently been reversing as the oil price is back over $60 and the financial crisis seems to have stabilized. However, this has not yet resulted in an upward trend in our markets. There has been downward pressure on prices and we expect this will continue. Order bookings have also been negatively impacted by the market conditions. We are fortunate to still have a solid backlog of orders in this period of uncertainty. At the same time, we continue to be concerned about the impact of the turmoil in financial markets and the global economy on our customers and in particular the capital-intensive project markets. Exchange rates continue to be very volatile and this has a big impact on our margins. It is very difficult to predict what will happen to our markets and currency exchange rates over the next year but if the current trend in order bookings continues we will have to take measures to reduce costs in line with the lower bookings."

Dividend

The Board declared an eligible quarterly dividend of $0.08 per share, payable on September 30, 2009 to all shareholders of record as at September 15, 2009.

Conference Call

Financial analysts, shareholders and other interested individuals are invited to attend the first quarter conference call to be held on July 9, 2009 at 4:30 PM (ET). The toll free call-in number is 1-800-732-6870, access code 21430864. A recording of this conference call will be available for 7 days at 1-416-626-4100 or 1-800-558-5253, access code 21430864.

Annual Meeting

Velan Inc. will be holding its Annual General Meeting at 11:00 a.m. on Friday, July 10, 2009 at the St.James's Club of Montreal, 1145 Union Avenue, Montreal, Quebec.

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
Three months ended
May 31
(in thousands of dollars,
excluding per share amounts) 2009 2008
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Sales (note 3) $120,365 $139,418
Cost of sales (notes 3 and 5) 71,162 102,030
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Gross profit 49,203 37,388
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Expenses (other income)
Engineering, selling, general and
administrative and research (note 4) 17,476 21,421
Interest
Long-term debt 125 190
Other 54 432
Amortization of property, plant and equipment 2,386 2,415
Other expense (income) (297) (284)
Non-controlling interest 357 1,145
Foreign exchange loss on translation of
integrated subsidiaries 5,659 237
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25,760 25,556
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Earnings before income taxes 23,443 11,832

Provision for income taxes 9,127 4,539
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Net earnings $14,316 $7,293
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Retained earnings - beginning $217,251 $153,580
Net earnings 14,316 7,293
Dividends
Multiple Voting Shares 1,245 -
Subordinate Voting Shares 540 -
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Retained earnings - ending $229,782 $160,873
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Earnings per share (note 2)
Basic $ 0.64 $ 0.33
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Diluted $ 0.64 $ 0.33
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Consolidated Balance Sheets

Unaudited Unaudited
May 31 Feb 28
(in thousands of dollars) 2009 2009
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ASSETS
Current assets
Cash and cash equivalents $68,465 $66,776
Short-term investments 253 166
Accounts receivable 108,379 123,333
Income taxes recoverable 3,572 4,523
Inventories 221,808 212,781
Deposits and prepaid expenses 3,659 8,683
Future income taxes 4,391 4,054
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410,527 420,316

Future income taxes 1,491 1,614
Property, plant and equipment 70,595 70,270
Goodwill 12,502 12,502
Other assets 1,739 1,818
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$496,854 $506,520
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LIABILITIES
Current liabilities
Bank indebtedness $3,111 $2,454
Short-term bank loans 867 1,003
Accounts payable and accrued liabilities 67,939 91,047
Income taxes payable 11,430 3,605
Dividend payable 1,785 1,786
Customers' deposits 47,918 51,608
Provision for performance guarantees 6,878 7,438
Future income taxes 2,756 2,771
Current portion of long-term debt 548 530
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143,232 162,242
Future income taxes 3,006 3,286
Long-term debt 3,799 4,397
Non-controlling interest 3,081 2,610
Other long-term liabilities 6,866 6,870
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159,984 179,405
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SHAREHOLDERS' EQUITY
Capital stock 109,224 109,326
Contributed surplus 1,700 1,622
Retained earnings 229,782 217,251
Accumulated other comprehensive loss (3,836) (1,084)
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336,870 327,115
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$496,854 $506,520
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Consolidated Statements of Cash Flows

Unaudited
Three months ended
May 31
(in thousands of dollars) 2009 2008
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Cash provided from (required for):
Operating activities
Net earnings 14,316 $7,293
Items not affecting cash -
Amortization 2,386 2,415
Stock options expense 63 9
Future income taxes - 154
Loss on disposal of property, plant and equipment - 134
Non-controlling interest 357 1,145
Net change in other long-term liabilities (4) 36
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17,118 11,186
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Net changes in non-cash working capital items
Accounts receivable 14,728 (12,564)
Income taxes recoverable 937 (563)
Inventories (9,163) (5,981)
Deposits and prepaid expenses 4,948 (760)
Accounts payable and accrued liabilities (23,456) 19,949
Income taxes payable 7,707 (36)
Customers' deposits (3,746) (745)
Provision for performance guarantees (568) 1,612
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(8,613) 912
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8,505 12,098
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Investing activities

Net proceeds on disposition of business - 550
Short-term investments (87) (937)
Additions to property, plant and equipment (3,003) (3,014)
Proceeds on disposal of property, plant and
equipment - 29
Net change in other assets 78 (538)
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(3,012) (3,910)
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Financing activities
Repurchase of Shares (note 6) (88) -
Dividends (1,786) -
Dividends to non-controlling interest - (772)
Short-term bank loans (136) (6,676)
Increase in long-term debt - 209
Repayment of long-term debt (541) (1,777)
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(2,551) (9,016)
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Effect of exchange rate differences on cash and
cash equivalents (1,910) 1,191
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Net change in cash and cash equivalents 1,032 363

Net cash - beginning 64,322 34,248
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Net cash - ending $65,354 $34,611
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Net cash includes cash and cash equivalents less bank indebtedness

Interest paid amounted to : 74 1,120
Income tax paid amounted to: 1,355 5,223



Consolidated Statements of Comprehensive Income

Unaudited
Three months ended
May 31
(in thousands of dollars) 2009 2008
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Net earnings 14,316 $7,293
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment on
self-sustaining operations (non taxable) (2,752) 1,501
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Comprehensive income 11,564 8,794
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Accumulated other comprehensive income (loss),
net tax
Accumulated other comprehensive income (loss),
beginning of period (1,084) (1,074)
Other comprehensive income (loss) for
the period (2,752) 1,501
Realized translation adjustment on reduction
of net investment in self sustaining
foreign operations - (163)
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Accumulated other comprehensive income (loss),
end of period (3,836) 264
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Notes to Consolidated Financial Statements

May 31, 2009

(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. They 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 February 28, 2009. In addition, an auditor has not performed a review of these interim consolidated financial statements.

These interim consolidated financial statements have been prepared using the same accounting policies as outlined in Note 1 of the consolidated financial statements for the year ended February 28, 2009, except for the following:

ADOPTION OF NEW ACCOUNTING PRINCIPLES

Goodwill and intangible assets

The CICA issued Section 3064, "Goodwill and Intangible Assets", which establishes standards for the recognition, measurement, presentation and disclosure of intangible assets. This new section replaced Section 3062, "Goodwill and Other Intangible Assets" and Section 3450 "Research and Development Costs". The Standards relating to goodwill in the new Section 3064 are unchanged from those included in Section 3062.

The adoption of this Section did not have an impact on the Company's financial position, earnings or cash flows.


ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED

Business combinations

The CICA issued Section 1582, "Business Combinations", which replaces Section 1581, "Business Combinations". The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to International Financial Reporting Standard ("IFRS") 3 (Revised), "Business Combinations". The Section applies prospectively to business combinations for which the acquisition date is on or after the Company's annual reporting period beginning March 1, 2011. Earlier application is permitted. The Company is currently evaluating the impact of the adoption of this new accounting standard on its consolidated financial statements.

Consolidated financial statements and non-controlling interests

The CICA issued Section 1601, "Consolidated Financial Statements", and Section 1602, "Non-controlling Interests", which together replace Section 1600, "Consolidated Financial Statements". Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of International Accounting Standard 27 (Revised), "Consolidated and Separate Financial Statements". The standards are effective for the Company's annual reporting period beginning on March 1, 2011, although earlier adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the impact of the adoption of these new accounting standards on its consolidated financial statements.

2. EARNINGS PER SHARE

Earnings per share are calculated using the weighted average number of shares outstanding of 22,309,413 (May 31, 2008 -- 22,318,968). The options do not have a dilutive effect.



3. FOREIGN EXCHANGE TRANSLATION

Foreign exchange gains (losses) realized on the translation of foreign
currency balances and transactions during the period are included in sales
and cost of sales and amounted to:

---------------------------------------------------------------
Three months ended
May 31, May 31,
2009 2008
$ $
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Sales (1,686) (869)
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Cost of Sales 9,415 (508)
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4. RESEARCH EXPENSE

Research Expenses included the following:

---------------------------------------------------------------
Three months ended
May 31, May 31,
2009 2008
$ $
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Research Expenditures 1,947 3,959
Less: Scientific research tax credits (746) (838)
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1,201 3,121
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5. INVENTORY

a) Inventory cost recorded as an expense amounted to:

---------------------------------------------------------------
Three months ended
May 31, May 31,
2009 2008
$ $
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Inventory Cost of Sales 78,461 100,537
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b) The net change in inventory provisions during the period amounted to:


---------------------------------------------------------------
Three months ended
May 31, May 31,
2009 2008
$ $
---------------------------------------------------------------
Provision 2,333 1,923
Reversal (1,197) (1,640)
Net 1,136 283
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6. 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, Feb 28,
2009 2009
$ $
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6,741,201 (Feb 2009 -- 6,748,101) (note 6 c)
Subordinate Voting Shares 100,400 100,502
15,566,567 Multiple Voting Shares 8,824 8,824
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109,224 109,326
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c) Pursuant to its Normal Course Issuer Bid, the company is entitled to
repurchase for cancellation a maximum of 337,620 Subordinate Voting Shares
during the twelve-month period ended October 20, 2009. During the quarter,
6,900 Subordinate Voting Shares were purchased for a cash consideration of
$88 and cancelled. The amount by which the repurchase amount is below the
stated capital of the shares has been credited to contributed surplus.

d) Stock Options

The fair value of the options is estimated as at the date of grant using an
option pricing model with the following weighted average assumptions:

Risk-free interest rate 3.17%
Expected dividend yield 2.77%
Expected life of the options 4.94 years
Expected volatility 28.99%

The weighted average fair value at grant date of the options is $2.46 per
option.

A compensation cost of $63 (May 2008 - $9) for the quarter 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, 2009
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Weighted Weighted
average average
Number of exercise contractual
Shares price ($) life
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Outstanding, beginning of period 200,000 11.27 51.6 months

Granted - - -

Exercised - - -

Expired/Forfeited - - -

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Outstanding, end of period 200,000 11.27 48.6 months
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Exercisable, end of period 20,000 12.81
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7. 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