Velan Inc.
TSX : VLN

Velan Inc.

January 10, 2011 13:46 ET

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.

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