Velan Inc.
TSX : VLN

Velan Inc.

July 08, 2010 13:51 ET

Velan Inc. Reports its First Quarter 2010/11 Financial Results

MONTREAL, QUEBEC--(Marketwire - July 8, 2010) - Velan Inc. (TSX:VLN) today reported its financial results for the three-month quarter ended May 31, 2010.

SUMMARY OF RESULTS    
(In millions of Canadian dollars, except per share amounts)    
     
  THREE MONTHS ENDED
     
  May 31
  2010 2009
     
Sales 91.7 120.4
Net Earnings  1.1 14.3
Earnings per Share 0.05 0.64
     

Highlights

Velan reported lower financial results for the first quarter ended May 31, 2010, as it was negatively impacted by the strengthening of the Canadian dollar, which increased an average of 18.6% and 19.7% against the US dollar and the euro, respectively, when compared to the same quarter last year. The net earnings for the quarter were $1.1 million, and earnings per share were 5 cents.

Sales, gross profit, and net earnings

Sales for the quarter were $91.7 million, which is 23.7% less than the previous year. Sales continue to be negatively impacted by the strong Canadian dollar, which increased in average value by 18.6% compared to the US dollar and 19.7% compared to the euro.

The gross profit of the quarter was $23.6 million, or 25.7% of sales, compared to the $49.2 million, or 40.9% of sales, recorded last year. The principal factor impacting the gross profit percentage continues to be the fluctuation of the Canadian dollar exchange rate against the US dollar. Adjusting for the currency impact, the gross profit percentage would have been approximately 34% in both quarters. 

Net earnings for the quarter were $1.1 million, or $0.05 per share, compared to net earnings of $14.3 million, or $0.64 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, which occurred this quarter, negatively impacted reported sales and earnings. Changes in the period end currency rates between the beginning and end of a financial period 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 $0.8 million for the quarter, compared to a loss of $5.7 million for the corresponding quarter of the prior year, as the Canadian dollar strengthened 0.9% against the US dollar based on period end rates this quarter, as compared to a strengthening of the Canadian dollar against the US dollar of 16.5% during the same quarter last year.

Strong balance sheet

The Company continues to build a strong balance sheet and ended the quarter with shareholders' equity of $338.5 million, or $15.23 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 $112.1 million as at May 31, 2010, an increase of $8.3 million from February 28, 2010. Net cash provided from operating activities amounted to $15.0 million for the quarter.

Bookings and outlook

Excluding a negative currency impact of $34.6 million, the Company recorded fairly strong order bookings of $101.1 million compared to $92.0 million last year. The negative currency impact is principally due to the Canadian dollar strengthening 11.6% against the euro since the beginning of the fiscal year. Backlog declined by 5% during the quarter to $478 million, of which $159 million is required for delivery beyond the next 12 months.

The company continues to weather the current challenging market conditions. Tom Velan, the President, said "Although there have now been more positive trends in the global economy, this has not yet resulted in an upward trend in our markets, with the exception of nuclear markets. We had an increase in short cycle business this quarter as some North American distributors restocked but it is too early to predict if this will continue. We expect that it will take time for the capital-intensive project market to fully recover and we continue to experience fierce competition in our project business as competitors fight to maintain market share and sales volume in a weak market. There has been downward pressure on valve prices and we expect this will continue. Our margins are being squeezed as material prices are increasing and the Canadian dollar has risen 18.6%. We are focusing on our operational excellence program to help protect margins in the near term and help improve margins when the market demand for our products fully recovers. Despite the tough market environment over the last seven quarters, our backlog of orders and strong balance sheet put us in a good position to continue to cope with the impact of the downturn in our markets. We are concerned by the slow recovery in our markets, by our lower order bookings, and by the strength of the Canadian dollar. We regret that market conditions have forced us to lay off some of our employees and we hope that this is a temporary measure. We expect that this will be a challenging year with lower sales and reduced margins. We continue to focus our efforts on pursuing business opportunities around the world in order to book enough orders so we can continue to build on the excellent results achieved last year."

Dividend

The Board declared an eligible quarterly dividend of $0.08 per share, payable on September 30, 2010, to all shareholders of record as at September 15, 2010.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the first quarter conference call to be held on July 8, 2010, at 4:30 PM (ET). The toll free call-in number is 1-800-732-5617, access code 21475070. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 21475070.

Annual General Meeting

Velan Inc. will be holding its Annual General Meeting at 11:00 a.m. on Friday, July 9, 2010, 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)   2010   2009
 
Sales (note 3) $ 91,699 $ 120,365
Cost of sales (notes 3 and 5)   68,051   71,162
Gross profit   23,648   49,203
 
Expenses (other income)        
  Engineering, selling, general and        
    administrative and research (note 4)   18,184   17,476
  Interest        
      Long-term debt   67   125
      Other   43   54
  Amortization of property, plant and equipment   2,458   2,386
  Other expense (income)   (287)   (297)
  Non-controlling interest   331   357
  Foreign exchange loss (gain) on translation of        
    integrated subsidiaries   819   5,659
    21,615   25,760
Earnings before income taxes   2,033   23,443
 
Provision for income taxes   959   9,127
Net earnings $ 1,074 $ 14,316
 
 
Retained earnings - beginning $ 245,654 $ 217,251
Net earnings   1,074   14,316
Dividends        
  Multiple Voting Shares   1,245   1,245
  Subordinate Voting Shares   533   540
Retained earnings - ending $ 244,950 $ 229,782
 
 
Earnings per share (note 2)        
  Basic $ 0.05 $ 0.64
  Diluted $ 0.05 $ 0.64
           
           
           
Consolidated Balance Sheets
 
Unaudited   Unaudited
May 31   Feb 28
2010   2010
(in thousands of dollars)                                                                                                                                                 
 
ASSETS        
Current assets        
  Cash and cash equivalents $ 114,477 $ 106,940
  Short-term investments   324   310
  Accounts receivable   78,061   95,546
  Income taxes recoverable   3,664   3,497
  Inventories   200,606   206,472
  Deposits and prepaid expenses   5,606   5,959
  Future income taxes   4,520   4,735
    407,258   423,459
 
Future income taxes   1,772   1,880
Property, plant and equipment   71,067   73,418
Goodwill   12,502   12,502
Other assets   1,476   1,438
  $ 494,075 $ 512,697
 
LIABILITIES        
Current liabilities        
  Bank indebtedness $ 1,914 $ 2,630
  Short-term bank loans   827   833
  Accounts payable and accrued liabilities   64,188   68,248
  Income taxes payable   3,134   3,473
  Dividend payable   1,778   1,778
  Customers' deposits   54,067   58,146
  Provision for performance guarantees   10,543   11,470
  Future income taxes   888   907
  Current portion of long-term debt   106   46
    137,445   147,531
Future income taxes   3,754   3,834
Long-term debt   3,598   3,956
Non-controlling interest   4,340   4,149
Other long-term liabilities   6,475   7,043
    155,612   166,513
 
SHAREHOLDERS' EQUITY        
Capital stock (Note 6)   108,065   108,073
Contributed surplus (Note 6)   2,031   2,016
Retained earnings   244,950   245,654
Accumulated other comprehensive loss   (16,583)   (9,559)
    338,463   346,184
  $ 494,075 $ 512,697
   
   
   
Consolidated Statements of Cash Flows  
   
Unaudited  
  Three months ended  
  May 31  
(in thousands of dollars) 2010     2009  
Cash provided from (required for):          
Operating activities          
  Net earnings 1,074   $ 14,316  
    Items not affecting cash -          
      Amortization 2,458     2,386  
      Stock options expense 15     63  
      Loss on disposal of property, plant and equipment 8     -  
      Non-controlling interest 331     357  
      Net change in other long-term liabilities (609 )   (4 )
  3,277     17,118  
  Net changes in non-cash working capital items          
      Accounts receivable 16,238     14,728  
      Income taxes recoverable (179 )   937  
      Inventories 5,448     (9,163 )
      Deposits and prepaid expenses 328     4,948  
      Accounts payable and accrued liabilities (4,349 )   (23,456 )
      Income taxes payable (363 )   7,707  
      Customers' deposits (4,370 )   (3,746 )
      Provision for performance guarantees (993 )   (568 )
  11,760     (8,613 )
  15,037     8,505  
Investing activities          
   
  Short-term investments (14 )   (87 )
  Additions to property, plant and equipment (1,685 )   (3,003 )
  Proceeds on disposal of property, plant and equipment 29     -  
  Net change in other assets (41 )   78  
  (1,711 )   (3,012 )
Financing activities          
  Repurchase of Shares (note 6) (7 )   (88 )
  Dividends (1,778 )   (1,786 )
  Short-term bank loans (6 )   (136 )
  Repayment of long-term debt (20 )   (541 )
  (1,811 )   (2,551 )
Effect of exchange rate differences on cash and cash equivalents (3,262 )   (1,910 )
Net change in cash and cash equivalents 8,253     1,032  
Net cash - beginning 104,310     64,322  
Net cash - ending $ 112,563   $ 65,354  
   
Net cash includes cash and cash equivalents less bank indebtedness        
   
Interest paid amounted to : 60     74  
Income tax paid amounted to: 978     1,355  
           
           
           
Consolidated Statements of Comprehensive  
Income  
   
  Unaudited  
  Three months ended  
  May 31  
(in thousands of dollars) 2010     2009  
  Net earnings 1,074   $ 14,316  
  Other comprehensive income (loss), net of tax          
    Foreign currency translation adjustment on self-sustaining          
    operations (non taxable) (7,024 )   (2,752 )
    Comprehensive income (5,950 )   11,564  
   
   
Accumulated other comprehensive income (loss), net tax          
Accumulated other comprehensive income (loss), beginning of period (9,559 )   (1,084 )
  Other comprehensive income (loss) for the period (7,024 )   (2,752 )
   
  Accumulated other comprehensive income (loss), end of period (16,583 )   (3,836 )
             
             

Notes to Consolidated Financial Statements

May 31, 2010

(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, 2010. 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, 2010, except for the following:

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 is calculated using the weighted average number of shares outstanding of 22,230,086 (May 31, 2009 – 22,309,413). 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  
       
  2010 2009  
  $ $  
Sales 73 (1,686 )
Cost of Sales 2,790 9,415  
       
       

4.       RESEARCH EXPENSE

Research Expenses included the following: 

  Three months ended  
  May 31  
       
  2010 2009  
  $ $  
Research Expenditures 1,817 1,947  
Less: Scientific research tax credits (490) (746 )
  1,327 1,201  
       
       

5.           INVENTORY

a) Inventory cost recorded as an expense amounted to: 

  Three months ended May 31
  2010 2009
  $ $
Inventory Cost of Sales 68,177 78,461
     
     

b) The net change in inventory provisions during the period amounted to:

  Three months ended  
  May 31  
         
  2010   2009  
  $   $  
Provision 2,155   2,333  
Reversal (1,315 ) (1,197 )
Net 840   1,136  
         
         

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

May 31, 2010      

(in thousands, excluding number of shares and per share amounts)      

b) Issued

       
  May 31 Feb 28,
  2010 2010
  $ $
6,663,401 (Feb 2010 – 6,663,901) (note 6 c) Subordinate Voting Shares 99,241 99,249
15,566,567 Multiple Voting Shares 8,824 8,824
  108,065 108,073
     
     

c)  Pursuant to its Normal Course Issuer Bid, the company is entitled to repurchase for cancellation a maximum of 333,670 Subordinate Voting Shares during the twelve-month period ended October 20, 2010. During the quarter, 500 Subordinate Voting Shares were purchased for a cash consideration of $7 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 $15 (May 2009 - $63) 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 May 31, 2010
    Weighted Weighted
    average average
  Number of exercise contractual
  Shares price ($) life
Outstanding, beginning of period 193,333 11.28 38.8 months
Granted - - -
Exercised - - -
Expired/Forfeited 3,333 11.00 -
 
Outstanding, end of period 190,000 11.29 36.4 months
 
Exercisable, end of period 83,334 11.65  
 

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