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

MONTREAL, QUEBEC--(Marketwire - Jan. 10, 2011) - Velan Inc. (TSX:VLN) today reported its financial results for the third quarter ended November 30, 2010.

SUMMARY OF RESULTS

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

	THREE MONTHS ENDED		NINE MONTHS ENDED
	NOVEMBER 30		NOVEMBER 30
	2010	2009	2010	2009
Sales	108.0	111.2	281.3	349.2
Net Earnings	5.8	7.6	6.0	29.5
Earnings per Share	0.26	0.34	0.27	1.32

Highlights

After weak results in the first two quarters, Velan reported improved financial results for the three months ended November 30, 2010. Sales for the quarter were $108.0 million, down 2.9% from last year's strong sales. The net earnings for the three months were $5.8 million, or $0.26 per share. For the nine months ended November 30, 2010, sales were $281.3 million and net earnings were $6.0 million, or $0.27 per share.

Sales, gross profit, and net earnings

Sales for the quarter reached $108.0 million, a 2.9% decrease from the same quarter last year. Excluding the impact of negative currency fluctuations, sales would have increased by $4.1 million or 3.7%. For the nine-month period ended November 30, 2010, sales were $281.3 million, which is $67.9 million or 19.4% lower than the previous year. Excluding the impact of negative currency fluctuations, the sales decrease would have been $38.1 million or 10.8%.

Although the Company reports in Canadian dollars, a majority of its sales is in US dollars and euros. The strong Canadian dollar relative to the U.S. dollar and euro resulted in reduced sales, profits, and bookings as recorded in Canadian dollars. Based on average exchange rates, the Canadian dollar strengthened by 4.3% and 9.9% against the U.S. dollar when compared to the three- and nine-month periods last year. The Canadian dollar strengthened by 13.7% and 17.6% against the euro when compared to the three- and nine-month periods last year. Sales decreased in almost all units except for the French operations, the result of a lower deliverable backlog of orders scheduled for this year.

The gross profit of the third quarter of $31.8 million, or 29.4% of sales, compared to a gross profit of $34.4 million, or 30.9% of sales, recorded last year. The gross profit for the nine months amounted to $72.5 million, or 25.8% of sales, this year compared to a gross profit of $116.0 million, or 33.2% of sales, recorded last year. Adjusted for the foreign currency impact, gross profit would have decreased 0.3% for both the three and nine month periods respectively. The principal factor negatively impacting the gross margin is the decreased fixed cost absorption resulting from the lower level of sales this year.

Net earnings for the quarter were $5.8 million, or $0.26 per share, compared to net earnings of $7.6 million, or $0.34 per share, in the prior year. Net earnings for the nine months amounted to $6.0 million, or $0.27 per share, compared to $29.5 million, or $1.32 per share, in the prior year. It should be noted that changes in the period end currency rates result in the unrealized gains or losses on the consolidation of the company's integrated subsidiaries. The Company recorded foreign exchange losses on the translation of integrated subsidiaries of $1.15 million and $1.37 million for the quarter and the nine months respectively, compared to losses of $1.23 million and $7.48 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 $342.4 million, or $15.43 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 $99.9 million as at November 30, 2010, or $4.50 per share, a decrease of $3.9 million from February 28, 2010. Net cash required for operating activities amounted to $12.0 million for the quarter compared to $10.7 million generated by operations for the nine months.

Bookings and outlook

Order bookings improved significantly during the quarter and amounted to $157.1 million for the three months, a 60.6% increase over the $97.8 million recorded for the same quarter last year. Excluding a negative currency impact of $29.9 million for the nine-month period, the Company recorded order bookings of $365 million, a 20.3% increase over the $303.3 million recorded during the same period last year. The increase in bookings is mainly attributable to bookings for the nuclear power market, principally in the Company's French subsidiaries.

These orders typically have delivery dates of twelve months or longer from the date of order. The backlog as of November 30, 2010, was $556.6 million, of which $208.7 million is scheduled for shipment after November 2011.

The Company's President, Tom Velan, said "Even though we had better results this quarter, we continue to see this as a downturn year with lower sales and reduced margins. There have now been more positive trends in the global economy but this has not yet resulted in an upward trend for our company, with the exception of bookings in nuclear markets, which have been very strong. Although there are signs of improvement in our markets, 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.

"Despite the tough market environment since the fall of 2008, 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 while many businesses had lower sales right after the financial crisis, we had good results for six quarters but are experiencing a downturn in this fiscal year. We are concerned by the slow recovery in our markets, by our lower non- nuclear order bookings, our lower margins, and by the strength of the Canadian dollar. We are focusing our efforts on pursuing business opportunities around the world in order to book enough good orders so we can have better results next fiscal year," he concluded.

Dividend

The Board declared an eligible quarterly dividend of $0.08 per share, payable on March 31, 2011, to all shareholders of record as at March 15, 2011.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the third- quarter conference call to be held on January 10, 2011, at 4:30 PM (ET). The toll free call-in number is 1-800-734-4208, access code 21502525. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 21502525.

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
			November 30						November 30
(in thousands of dollars,
excluding per share amounts)			2010			2009			2010			2009
Sales (note 3)		$	108,033		$	111,205		$	281,349		$	349,150
Cost of sales (notes 3 and 5)			76,239			76,792			208,861			233,117
Gross profit			31,794			34,413			72,488			116,033
Expenses (other income)
	Engineering, selling, general and administrative and research (note 4)		17,658			18,619			52,002			53,821
	Interest
	Long-term debt		101			61			238			253
	Other		88			50			246			156
	Amortization of property, plant and equipment		2,559			2,501			7,446			7,173
	Other expense (income)		137			(348	)		(454	)		(888	)
	Non-controlling interest		(175	)		183			511			891
	Foreign exchange loss (gain) on translation of integrated subsidiaries		1,147			1,233			1,374			7,479
			21,515			22,299			61,363			68,885
Earnings before income taxes			10,279			12,114			11,125			47,148
Provision for income taxes			4,454			4,551			5,108			17,683
Net earnings		$	5,825		$	7,563		$	6,017		$	29,465
Retained earnings - beginning		$	242,291		$	235,590		$	245,654		$	217,251
Net earnings			5,825			7,563			6,017			29,465
Dividends
	Multiple Voting Shares		1,245			1,246			3,735			3,736
	Subordinate Voting Shares		531			532			1,596			1,605
Retained earnings - ending		$	246,340		$	241,375		$	246,340		$	241,375
Earnings per share (note 2)
	Basic	$	0.26		$	0.34		$	0.27		$	1.32
	Diluted	$	0.26		$	0.34		$	0.27		$	1.32

Consolidated Balance Sheets
			Unaudited			Unaudited
			November 30			February 28
(in thousands of dollars)			2010			2010
ASSETS
Current assets
	Cash and cash equivalents	$	104,847		$	106,940
	Short-term investments		420			310
	Accounts receivable		90,758			95,546
	Income taxes recoverable		3,887			3,497
	Inventories		212,173			206,472
	Deposits and prepaid expenses		5,901			5,959
	Future income taxes		4,594			4,735
			422,580			423,459
Future income taxes			1,789			1,880
Property, plant and equipment			70,564			73,418
Goodwill			12,502			12,502
Other assets			1,488			1,438
		$	508,923		$	512,697
LIABILITIES
Current liabilities
	Bank indebtedness	$	4,568		$	2,630
	Short-term bank loans		832			833
	Accounts payable and accrued liabilities		60,485			68,248
	Income taxes payable		2,110			3,473
	Dividend payable		1,778			1,778
	Customers' deposits		63,753			58,146
	Provision for performance guarantees		14,983			11,470
	Future income taxes		895			907
	Current portion of long-term debt		41			46
			149,445			147,531
Future income taxes			3,768			3,834
Long-term debt			3,877			3,956
Non-controlling interest			3,009			4,149
Other long-term liabilities			6,385			7,043
			166,484			166,513
SHAREHOLDERS' EQUITY
Capital stock (Note 6)			107,583			108,073
Contributed surplus (Note 6)			2,096			2,016
Retained earnings			246,340			245,654
Accumulated other comprehensive loss			(13,580	)		(9,559	)
			342,439			346,184
		$	508,923		$	512,697

Consolidated Statements of Cash Flows
					Unaudited						Unaudited
					Three months ended						Nine months ended
					November 30						November 30
(in thousands of dollars)					2010			2009			2010			2009
Cash provided from (required for):
Operating activities
	Net earnings			$	5,825		$	7,563		$	6,017		$	29,465
		Items not affecting cash -
			Amortization		2,559			2,501			7,446			7,173
			Stock options expense		16			43			54			170
			Loss on disposal of property, plant and equipment		(17	)		-			(55	)		-
			Realized foreign exchange translation adjustment		488						488
			Non-controlling interest		(175	)		183			511			891
			Net change in other long-term liabilities		(442	)		(28	)		(699	)		241
					8,254			10,262			13,762			37,940
	Net changes in non-cash working capital items
			Accounts receivable		(24,168	)		(3,613	)		4,492			28,133
			Income taxes recoverable		2,410			(346	)		(414	)		554
			Inventories		318			(9,889	)		(6,055	)		(12,349	)
			Deposits and prepaid expenses		1,458			689			54			3,620
			Accounts payable and accrued liabilities		(570	)		9,914			(8,245	)		(20,103	)
			Income taxes payable		835			2,786			(1,448	)		11,812
			Customers' deposits		(2,402	)		845			5,259			5,508
			Provision for performance guarantees		1,896			355			3,295			(319	)
					(20,223	)		741			(3,062	)		16,856
					(11,969	)		11,003			10,700			54,796
Investing activities
	Short-term investments				(56	)		(302	)		(110	)		(224	)
	Additions to property, plant and equipment				(2,120	)		(3,247	)		(5,791	)		(9,876	)
	Proceeds on disposal of property, plant and equipment				2			-			166			-
	Net change in other assets				8			34			(53	)		98
					(2,166	)		(3,515	)		(5,788	)		(10,002	)
Financing activities
	Repurchase of Shares (note 6)				(221	)		(124	)		(464	)		(1,056	)
	Dividends				(1,776	)		(1,786	)		(5,331	)		(5,358	)
	Dividends to non-controlling interest				(1,828	)		-			(1,870	)		(85	)
	Short-term bank loans				(12	)		(31	)		(1	)		(167	)
	Repayment of long-term debt				(69	)		-			(89	)		(1,057	)
					(3,906	)		(1,941	)		(7,755	)		(7,723	)
Effect of exchange rate differences on cash and cash equivalents					(66	)		701			(1,188	)		(460	)
Net change in cash and cash equivalents					(18,107	)		6,248			(4,031	)		36,611
Net cash - beginning					118,386			94,685			104,310			64,322
Net cash - ending				$	100,279		$	100,933		$	100,279		$	100,933
Net cash includes cash and cash equivalents less bank indebtedness
Interest paid amounted to :					(12	)		22			89			146
Income tax paid amounted to:					695			3,927			4,858			6,784

Consolidated Statements of Comprehensive Income
				Unaudited						Unaudited
				Three months ended						Nine months ended
				November 30						November 30
(in thousands of dollars)				2010			2009			2010			2009
Net earnings			$	5,825		$	7,563		$	6,017		$	29,465
Other comprehensive income (loss), net of tax
	Foreign currency translation adjustment on self-sustaining
	operations (non taxable)			(1,199	)		201			(4,265	)		(1,422	)
	Realized translation adjustment on the reduction of the net investment in self-sustaining foreign operations (non taxable)			244			-			244			-
	Comprehensive income			4,870			7,764			1,996			28,043
Accumulated other comprehensive income (loss), net tax
Accumulated other comprehensive income (loss), beginning of period				(12,625	)		(2,707	)		(9,559	)		(1,084	)
		Other comprehensive income (loss) for the period		(1,199	)		201			(4,265	)		(1,422	)
		Realized translation adjustment on the reduction of the net investment in self-sustaining foreign operations (non taxable)		244			-			244			-
		Accumulated other comprehensive income (loss), end of period		(13,580	)		(2,506	)		(13,580	)		(2,506	)

Notes to Consolidated Financial Statements

November 30, 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 22,213,841 (November 30, 2009 – 22,264,101). 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			Nine months ended
	November 30			November 30
	2010	2009		2010	2009
	$	$		$	$
Sales	218	(417	)	136	(2,149	)
Cost of Sales	3,011	1,723		4,294	12,963

4. RESEARCH EXPENSE

Research Expenses included the following:

	Three months ended		Nine months ended
	November 30		November 30
	2010	2009	2010	2009
	$	$	$	$
Research Expenditures	1,837	1,121	5,623	4,972
Less: Scientific research tax credits	603	275	1,795	1,687
	1,234	846	3,828	3,285

5. INVENTORY

a) Inventory cost recorded as an expense amounted to:

	Three months ended		Nine months ended
	November 30		November 30
	2010	2009	2010	2009
	$	$	$	$
Inventory Cost of Sales	73,948	81,378	204,063	231,137

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

	Three months ended				Nine months ended
	November 30				November 30
	2010		2009		2010		2009
	$		$		$		$
Provision	2,149		2,108		6,365		5,750
Reversal	(1,167	)	(2,448	)	(3,926	)	(4,662	)
Net	982		(340	)	2,439		1,088

6. CAPITAL STOCK

a) Authorized – in unlimited number

• referred Shares, issuable in series
• Subordinate Voting Shares
• Multiple Voting Shares (five votes per share), convertible into Subordinate Voting Shares

b) Issued

	Nov 30	Feb 28
	2010	2010
	$	$
6,631,001 (Feb 2010 – 6,663,901) (note 6 c) Subordinate Voting Shares	98,759	99,249
15,566,567 Multiple Voting Shares	8,824	8,824
	107,583	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, 2011. During the quarter, 15,900 Subordinate Voting Shares were purchased for a cash consideration of $221 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 $16 (November 2009 - $43) for the quarter and $54 (November 2009 - $170) for the 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 November 30, 2010				Nine months ended November 30, 2010
	Number of Shares	Weighted average exercise price ($)		Weighted average contractual life	Number of Shares		Weighted average exercise price ($)	Weighted average contractual life
Outstanding, beginning of period	190,000	11.29		33.4 months	193,333		11.28	38.8 months
Granted	-	-		-	-		-	-
Exercised	-	-		-	-		-	-
Expired/Forfeited	-	-		-	3,333		11.00	-
Outstanding, end of period	190,000	11.29		30.4 months	190,000		11.29	30.4 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.