Velan Inc.
TSX : VLN

Velan Inc.

October 13, 2010 13:22 ET

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

MONTREAL, QUEBEC--(Marketwire - Oct. 13, 2010) - Velan Inc. (TSX:VLN) today reported its financial results for the second quarter ended August 31, 2010.

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

  THREE MONTHS ENDED SIX MONTHS ENDED
  AUGUST 31 AUGUST 31
  2010   2009 2010 2009
           
Sales 81.6   117.6 173.3 237.9
           
Net Earnings (Loss) (0.9 ) 7.6 0.2 21.9
           
Earnings (Loss) per Share (0.04 ) 0.34 0.01 0.98

Highlights

Velan reported lower financial results for the three months ended August 31, 2010, with sales of $81.6 million and a net loss of $0.9 million, or $0.04 per share. For the six months ended August 31, 2010, sales were $173.3 million and net earnings were $0.2 million, or $0.01 per share.

Sales, gross profit and net earnings

The second quarter and first half of fiscal 2011 were challenging for the Company, due in large part to the lower shippable backlog and to the considerable adverse exchange rate fluctuations. The strong Canadian dollar relative to the U.S. dollar and the euro resulted in reduced sales, bookings and profits. Based on average foreign currency exchange rates, the Canadian dollar strengthened by 6.9% and 12.7% against the U.S. dollar when compared to the three and six month periods last year. The Canadian dollar strengthened by 19.5% against the euro when compared to both the three and six month periods last year. Sales for the quarter were $81.6 million. This is a 30.6% decrease from the same quarter last year when the company achieved record sales of $117.6 million, which were by far the highest sales reached in this quarter in the Company's history. Excluding the negative currency impact, the decrease would have been $26.7 million or 22.7%. For the six months ended August 31, 2010, sales were $173.3 million compared to $237.9 million last year, a decrease of $64.6 million, or 27.2%. Adjusting for the negative currency impact, the decrease would have been $42.4 million, or 17.2%. The decrease in sales is mainly a result of the lower deliverable backlog. The global economic recession and financial crisis resulted in reduced order bookings in fiscal 2010, which, in turn, reduced sales and profits in fiscal 2011.

The gross profit of the second quarter was $17.0 million, or 20.9% of sales, compared to a gross profit of $32.4 million, or 27.6% of sales, recorded last year. When adjusting for the negative currency impact, gross profit percent would have decreased by 2.6%. The gross profit for the six months decreased by $40.9 million or 50.1% compared to last year. Gross profit percent decreased 10.8% from 34.3% to 23.5% but, when adjusted for the negative currency impact, it would have decreased by 4.2%. The principal factor negatively impacting the gross profit percent was the decrease in sales which, in turn, resulted in decreased fixed cost absorption.

Net loss for the quarter amounted to $0.9 million, or $0.04 per share, compared to net earnings of $7.6 million, or $0.34 per share, in the prior year. Net earnings for the six months amounted to $0.2 million, or $0.01 per share, compared to $21.9 million, or $0.98 per share, in the prior year. In addition to the impact on operating results of average exchange rates referred to above, changes in the period-end currency rates result in the unrealized gains or losses on the consolidation of integrated subsidiaries. The Company recorded a foreign exchange gain on the translation of integrated subsidiaries of $0.6 million and a loss of $0.2 million for the quarter and the six months respectively, compared to losses of $0.6 million and $6.2 million for the corresponding periods of the prior year.

Strong balance sheet

The Company continues to build a strong balance sheet and ended the quarter with shareholders' equity of $339.5 million, or $15.29 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 $117.9 million as at August 31, 2010, an increase of $14.1 million from February 28, 2010. Net cash provided from operating activities amounted to $7.6 million for the quarter and $22.7 million for the six months.

Bookings and outlook

Order bookings of $111.5 million were down 1.8% from last year while order backlog increased by 0.9% from last year to reach $507.6 million, of which $172.1 million is scheduled for shipment after August 2011. More than 50% of the backlog is in the French subsidiaries, and they have many longer term orders. The Company's President, Tom Velan, said "Our previously stated expectations that this will be a downturn year with lower sales and reduced margins have unfortunately been correct. Although there have now been more positive trends in the global economy, this has not yet resulted in an upward trend for our company, with the exception of bookings in nuclear markets. There are signs of improvement in our markets, but we expect that it will take time for the capital-intensive project market to fully recover and we continue to experience fierce competition as competitors fight to maintain market share and sales volume.

There has been downward pressure on valve prices and we expect this will continue. Material costs have increased while many of our selling prices have fallen so margins are consequently reduced. We are focusing on our operational excellence program to implement cost reductions. We expect that these measures will 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 two years, 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 a late cycle company so we have lower sales now while many businesses had lower sales right after the financial crisis and are now growing again. We are concerned by the slow recovery in our markets, by our lower order bookings, our lower margins, and by the strength of the Canadian dollar. We continue to expect that this will be a challenging year with lower sales and reduced margins. We are focusing 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 December 31, 2010 to all shareholders of record as at December 15, 2010.

Conference Call

Financial analysts, shareholders and other interested individuals are invited to attend the third quarter and fiscal year conference call to be held on October 13, 2010 at 4:30 PM (ET). The toll free call-in number is 1-800-733-4208, access code 21484507. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 21424905.

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         Six months ended  
    August 31         August 31  
(in thousands of dollars,                                      
excluding per share amounts)   2010           2009         2010         2009  
   
Sales (note 3) $ 81,617     $ 117,580   $ 173,316   $ 237,945  
Cost of sales (notes 3 and 5)   64,571           85,163         132,622         156,325  
Gross profit   17,046           32,417         40,694         81,620  
   
Expenses (other income)                                      
  Engineering, selling, general and                                      
    administrative and research(note 4)   16,160           17,726         34,344         35,202  
  Interest                                      
    Long-term debt   70           67         137         192  
    Other   115           52         158         106  
  Amortization of property, plant and equipment   2,429           2,286         4,887         4,672  
  Other expense (income)   (304 )         (243 )       (591 )       (540 )
  Non-controlling interest   355           351         686         708  
  Foreign exchange loss (gain) on translation of                                      
    integrated subsidiaries   (592 )         587         227         6,246  
    18,233           20,826         39,848         46,586  
Earnings before income taxes   (1,187 )         11,591         846         35,034  
   
Provision for income taxes   (305 )         4,005         654         13,132  
Net earnings $ (882 )     $ 7,586     $ 192     $ 21,902  
   
   
   
Retained earnings - beginning $ 244,950     $ 229,782   $ 245,654   $ 217,251  
Net earnings   (882 )         7,586         192         21,902  
Dividends                                      
  Multiple Voting Shares   1,245           1,245         2,490         2,490  
  Subordinate Voting Shares   532           533         1,065         1,073  
Retained earnings - ending $ 242,291       $ 235,590     $ 242,291     $ 235,590  
   
   
Earnings per share (note 2)                                      
  Basic $ (0.04 )       $ 0.34       $ 0.01       $ 0.98  
  Diluted $ (0.04 )       $ 0.34       $ 0.01       $ 0.98  

Consolidated Balance Sheets

      Unaudited         Unaudited  
      August 31         February 28  
(in thousands of dollars)     2010         2010  
   
ASSETS                  
Current assets                  
  Cash and cash equivalents $ 120,337   $ 106,940  
  Short-term investments     364         310  
  Accounts receivable     66,344         95,546  
  Income taxes recoverable     6,269         3,497  
  Inventories     212,729         206,472  
  Deposits and prepaid expenses     7,337         5,959  
  Future income taxes     4,690         4,735  
      418,070         423,459  
   
Future income taxes     1,806         1,880  
Property, plant and equipment     71,185         73,418  
Goodwill     12,502         12,502  
Other assets     1,498         1,438  
    $ 505,061     $ 512,697  
   
LIABILITIES                  
Current liabilities                  
  Bank indebtedness $ 1,951   $ 2,630  
  Short-term bank loans     844         833  
  Accounts payable and accrued liabilities     60,713         68,248  
  Income taxes payable     1,232         3,473  
  Dividend payable     1,778         1,778  
  Customers' deposits     65,952         58,146  
  Provision for performance guarantees     12,896         11,470  
  Future income taxes     898         907  
  Current portion of long-term debt     111         46  
      146,375         147,531  
Future income taxes     3,798         3,834  
Long-term debt     3,830         3,956  
Non-controlling interest     4,718         4,149  
Other long-term liabilities     6,791         7,043  
      165,512         166,513  
   
SHAREHOLDERS' EQUITY                  
Capital stock (Note 6)     107,819         108,073  
Contributed surplus (Note 6)     2,064         2,016  
Retained earnings     242,291         245,654  
Accumulated other comprehensive loss     (12,625 )       (9,559 )
      339,549         346,184  
    $ 505,061     $ 512,697  

Consolidated Statement of Cash Flows

    Unaudited   Unaudited  
    Three months ended   Six months ended  
    August 31   August 31  
(in thousands of dollars)   2010       2009   2010       2009  
Cash provided from (required for):                          
Operating activities                          
  Net earnings $ (882 )   $ 7,586   192     $ 21,902  
    Items not affecting cash -                          
      Amortization   2,429       2,286   4,887       4,672  
      Stock options expense   23       64   38       127  
      Loss on disposal of property, plant and equipment   (46 )     -   (38 )     -  
      Non-controlling interest   355       351   686       708  
      Net change in other long-term liabilities   352       273   (257 )     269  
    2,231       10,560   5,508       27,678  
  Net changes in non-cash working capital items                          
      Accounts receivable   12,422       17,018   28,660       31,746  
      Income taxes recoverable   (2,645 )     (37 ) (2,824 )     900  
      Inventories   (11,821 )     6,703   (6,373 )     (2,460 )
      Deposits and prepaid expenses   (1,732 )     (2,017 ) (1,404 )     2,931  
      Accounts payable and accrued liabilities   (3,326 )     (6,561 ) (7,675 )     (30,017 )
      Income taxes payable   (1,920 )     1,319   (2,283 )     9,026  
      Customers' deposits   12,031       8,409   7,661       4,663  
      Provision for performance guarantees   2,392       (106 ) 1,399       (674 )
    5,401       24,728   17,161       16,115  
    7,632       35,288   22,669       43,793  
Investing activities                          
   
  Short-term investments   (40 )     165   (54 )     78  
  Additions to property, plant and equipment   (1,986 )     (3,626 ) (3,671 )     (6,629 )
  Proceeds on disposal of property, plant and equipment   135       -   164       -  
  Net change in other assets   (20 )     (14 ) (61 )     64  
    (1,911 )     (3,475 ) (3,622 )     (6,487 )
Financing activities                          
  Repurchase of Shares (note 6)   (236 )     (844 ) (243 )     (932 )
  Dividends   (1,777 )     (1,786 ) (3,555 )     (3,572 )
  Dividends to non-controlling interest   (42 )     (85 ) (42 )     (85 )
  Short-term bank loans   17       -   11       (136 )
  Repayment of long-term debt   -       (516 ) (20 )     (1,057 )
    (2,038 )     (3,231 ) (3,849 )     (5,782 )
Effect of exchange rate differences on cash and                          
cash equivalents   2,140       749   (1,122 )     (1,161 )
Net change in cash and cash equivalents   5,823       29,331   14,076       30,363  
Net cash - beginning   112,563       65,354   104,310       64,322  
Net cash - ending $ 118,386     $ 94,685   $ 118,386     $ 94,685  
   
Net cash includes cash and cash equivalents less bank indebtedness                        
   
Interest paid amounted to :   41       50   101       124  
Income tax paid amounted to:   3,185       1,502   4,163       2,857  

Consolidated Statements of Comprehensive Income

    Unaudited     Unaudited  
    Three months ended     Six months ended  
    August 31     August 31  
(in thousands of dollars)   2010     2009     2010     2009  
  Net earnings $ (882 ) $ 7,586   192   $ 21,902  
  Other comprehensive income (loss), net of tax                        
    Foreign currency translation adjustment on self-sustaining                        
    operations (non taxable)   3,958     1,129     (3,066 )   (1,623 )
    Comprehensive income   3,076     8,715     (2,874 )   20,279  
   
   
Accumulated other comprehensive income (loss), net tax                        
Accumulated other comprehensive income (loss), beginning of period   (16,583 )   (3,836 ) (9,559 )   (1,084 )
      Other comprehensive income (loss) for the period   3,958     1,129     (3,066 )   (1,623 )
   
      Accumulated other comprehensive income (loss), end of period   (12,625 )   (2,707 )   (12,625 )   (2,707 )

Notes to Consolidated Financial Statements

August 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 (LOSS) PER SHARE

Earnings (loss) per share is calculated using the weighted average number of shares outstanding of 22,220,030 (August 31, 2009 – 22,267,279). 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 August 31   Six months ended August 31  
  2010   2009   2010   2009  
  $   $   $   $  
Sales (155 ) (46 ) (82 ) (1,732 )
Cost of Sales (1,507 ) 1,824   1,283   11,240  

4. RESEARCH EXPENSE

Research Expenses included the following:

  Three months ended August 31 Six months ended August 31
  2010 2009 2010 2009
  $ $ $ $
Research Expenditures 1,969 1,904 3,786 3,851
Less: Scientific research tax credits 702 666 1,192 1,412
  1,267 1,238 2,594 2,439

5. INVENTORY 

a) Inventory cost recorded as an expense amounted to: 

  Three months ended
August 31
Six months ended
August 31
    2010
$
  2009
$
  2010
$
  2009
$
Inventory Cost of Sales 61,938 71,332 130,115 149,793

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

  Three months ended August 31   Six months ended August 31  
  2010   2009   2010   2009  
  $   $   $   $  
Provision 2,061   1 309   4,216   3,642  
Reversal (1,444 ) (1 017 ) (2,759 ) (2,214 )
Net 617   292   1,457   1,428  

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

  Aug 31 Feb 28
  2010 2010
  $ $
6,646,901 (Feb 2010 – 6,663,901) (note 6 c) Subordinate Voting Shares 98,995 99,249
15,566,567 Multiple Voting Shares 8,824 8,824
  107,819 108,073

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, 16,500 Subordinate Voting Shares were purchased for a cash consideration of $243 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 $23 (August 2009 - $64) for the quarter and $38 (August 2009 - $127) year to date 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 August 31, 2010 Six months ended August 31, 2010
  Number of Weighted average Weighted average Number of Weighted average Weighted average
  Shares exercise price ($) contractual life Shares exercise price ($) contractual life
Outstanding, beginning of period 190,000 11.29 36.4 months 193,333 11.28 38.8 months
Granted - - - - - -
Exercised - - - - - -
Expired/Forfeited - - - 3,333 11.00 -
Outstanding, end of period 190,000 11.29 33.4 months 190,000 11.29 33.4 months
Exercisable, end of period 83,334 11.65   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
    514-908-0180 (FAX)
    or
    VELAN Inc.
    M. John D. Ball
    Chief Financial Officer
    514-748-7743
    514-908-0180 (FAX)