Velan Inc. Reports its Third Quarter 2012/13 Financial Results

MONTREAL, QUEBEC--(Marketwire - Jan. 8, 2013) - Velan Inc. (TSX:VLN) (the "Company"), a world-leading manufacturer of industrial valves, announced today its financial results for its third quarter ended November 30, 2012.

	Three-month periods ended				Nine-month periods ended
	November 30				November 30
(millions of U.S. dollars, excluding per share amounts)	2012		2011		2012		2011
Sales	$134.2		$118.9		$358.5		$319.4
Gross profit	33.3		27.3		83.5		64.3
Gross margin %	24.8	%	23.0	%	23.3	%	20.1	%
Net income (loss) attributable to Subordinate and Multiple Voting Shares	5.7		4.0		9.7		2.0
Net income (loss) per share - Basic	0.26		0.18		0.44		0.09
- Diluted	0.26		0.18		0.44		0.09

Highlights

Third Quarter Fiscal 2013 (unless otherwise noted, all comparisons are to the third quarter of fiscal 2012):

• Net earnings¹ amounted to $5.7 million or $0.26 per share compared to $4.0 million or $0.18 per share last year. Excluding currency impacts, the Company would have reported net earnings¹ of $5.5 million or $0.25 per share this year compared to $2.1 million or $0.10 per share last year. Further excluding the results of Velan ABV S.p.A. ("ABV"), an Italian valve manufacturer acquired in the prior fiscal year, and the effects of purchase price accounting, the Company would have reported net earnings¹ of $5.6 million or $0.25 per share this year compared to $4.7 million or $0.21 per share last year.
  
  
• Net new orders received ("bookings") amounted to $83.3 million, a decrease of $10.9 million or 11.6% compared to last year. Excluding currency impacts, the decrease would have been $21.2 million or 22.5%. The Company ended the quarter with a backlog of $575.7 million, a decrease of $86.1 million since the beginning of the current fiscal year. Excluding currency impacts, the backlog would have decreased by $76.3 million over the same period to $585.5 million.
  
  
• Sales amounted to $134.2 million, an increase of $15.3 million or 12.9%. Excluding currency impacts, sales would have increased by $21.3 million or 18.1%.
  
  
• Gross margin increased by 1.8 percentage points from 23.0% to 24.8%. Excluding currency impacts, the gross margin percentage would have increased by 2.5 percentage points in the quarter. Further excluding the results of ABV and the effects of purchase price accounting, gross margin would have increased by 0.9 percentage points in the quarter.
  
  
• Foreign currency impacts:
  
  
  • Based on average exchange rates, the euro weakened 5.7% against the U.S. dollar when compared to the same period last year. This weakening resulted in the Company's net profits from its European subsidiaries being reported as lower U.S. dollar amounts in the current quarter.
    
    
  • Based on average exchange rates, the Canadian dollar strengthened 0.5% against the U.S. dollar when compared to the same period last year. This strengthening resulted in the Company's Canadian dollar expenses being reported as higher U.S. dollar amounts in the current quarter.
    
    
  • The Korean won strengthened 4.7% against the U.S. dollar when comparing the spot rate at the beginning of the period to the period end rate. This strengthening resulted in the Company recording foreign exchange gains in the current quarter upon conversion of the balance sheet of its Korean subsidiary whose functional currency is the U.S. dollar.
    
    
  • The net impact of these three currency swings was generally favourable to the Company's quarterly results since the positive impact of the stronger Korean won outweighed the negative impacts of a weaker euro and stronger Canadian dollar.
    
    

First Nine Months of Fiscal 2013 (unless otherwise noted, all comparisons are to the first nine months of fiscal 2012):

• Net earnings¹ amounted to $9.7 million or $0.44 per share compared to $2.0 million or $0.09 per share last year. Excluding the results of ABV, the effects of purchase price accounting and currency impacts, the Company would have reported net earnings¹ of $12.0 million or $0.54 per share this year compared to $5.7 million or $0.26 per share last year.
  
  
• Bookings amounted to $273.4 million, a decrease of $129.7 million or 32.2% compared to last year. Excluding currency impacts, the decrease would have been $113.1 million or 28.1%.
  
  
• Sales amounted to $358.5 million, an increase of $39.1 million or 12.2%. Excluding ABV and currency impacts, sales would have increased by $37.3 million or 12.3%.
  
  
• Gross margin increased by 3.2 percentage points from 20.1% to 23.3%. Excluding ABV, the effects of purchase price accounting and currency impacts, gross margin would have increased by 3.3 percentage points.
  
  
• The Company used net cash² from operations of $8.6 million in the period. This use of net cash² was primarily attributable to increases in accounts receivable and inventories, which was partially offset by positive cash earnings in the period. The Company ended the period with net cash² of $5.5 million.
  
  
• The Company generated net cash² from financing activities of $8.6 million in the period. This source of net cash² was principally from a $20.7 million increase in long-term debt. The Company is using the proceeds of this debt to fund its growing working capital needs, particularly with respect to inventory purchases to service its large backlog, to continue to improve its production capacity with investments in machinery and equipment, and to fund various activities in its overseas operations, particularly in Asia.
  
  
• Based on average exchange rates, the euro weakened 9.3% against the U.S. dollar when compared to the same period last year. This weakening resulted in the Company's net profits from its European subsidiaries being reported as lower U.S. dollar amounts in the current period. The Canadian dollar weakened 1.4% against the U.S. dollar when compared to the same period last year. This weakening resulted in the Company's Canadian dollar expenses being reported as lower U.S. dollar amounts in the current period. The net impact of these two currency swings was generally unfavourable on the Company's results for this period since the positive impact of a weaker Canadian dollar was outweighed by the negative impact of a weaker euro.
  
  

1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.

2 Non-GAAP measures - see explanation below.

"We are pleased that the positive sales and profit trend noted in our second quarter continued and improved in our third quarter," said John Ball, CFO of Velan Inc. "The pressure is easing on our backlog and we are benefitting from the increased flow of shipments. We continue to see opportunities in several foreign markets as demand in our key end-user markets is generally strong and we are focusing our efforts to capitalize on these opportunities."

Tom Velan, President and CEO of Velan Inc. said, "We had record sales of $134.2 million for this quarter and we continued to make progress towards our earnings objectives. While we are striving to achieve the highest sales revenues in our history this year, we are also focusing on longer term objectives. We opened our new plant in Coimbatore, India, in December and at the same time we are expanding production in our Korean and Chinese plants. We have also made significant investments in our North American plants to increase our output. We are building our global manufacturing capacity and at the same time increasing our presence in global markets."

Dividend

The Board declared an eligible quarterly dividend of Canadian dollar $0.08 per share, payable on March 29, 2013, to all shareholders of record as at March 15, 2013.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the third quarter conference call to be held on January 8, 2013, at 4:30 PM (EDT). The toll free call-in number is 1-888-224-7971, access code 21628978. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558- 5253, access code 21628978.

About Velan

Velan Inc. (www.velan.com) is a world-leading manufacturer of industrial valves with sales of $437 million in its last reported fiscal year. The Company employs over 2,000 people and has manufacturing plants in 10 countries. Velan Inc. is a public company with its shares listed on the Toronto Stock Exchange under the symbol VLN.

Safe harbour statement

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.

Non-GAAP measures

In this press release, the Company presented measures of performance and financial condition that are not defined under Canadian GAAP ("non-GAAP measures") and are therefore unlikely to be comparable to similar measures presented by other companies. These measures are used by management in assessing the operating results and financial condition of the Company.

Net cash is defined as cash and cash equivalents plus short-term investments less bank indebtedness, short-term loans, and current portion of long-term bank borrowings.

Velan Inc.

Condensed Interim Consolidated Statements of Income (Loss)

(Unaudited)

(in thousands of U.S. dollars, excluding number of shares and per share amounts)

		Three-month periods ended				Nine-month periods ended
		November 30				November 30
		2012		2011		2012		2011
		$		$		$		$
Sales		134,203		118,939		358,504		319,351
Cost of sales		100,862		91,652		275,035		255,094
Gross profit		33,341		27,287		83,469		64,257
Administration costs		23,592		21,634		68,540		62,214
Other expense (income)		112		(101	)	(718	)	(317	)
Operating profit (loss)		9,637		5,754		15,647		2,360
Finance income		142		69		500		230
Finance costs		1,230		213		2,577		1,036
Finance income (costs) - net		(1,088	)	(144	)	(2,077	)	(806	)
Income (Loss) before income tax		8,549		5,610		13,570		1,554
Provision for (Recovery of) income tax		2,421		1,778		3,317		203
Net income (loss) for the period		6,128		3,832		10,253		1,351
Net income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares		5,712		3,992		9,724		2,028
Non-controlling interest		416		(160	)	529		(677	)
		6,128		3,832		10,253		1,351
Net income (loss) per Subordinate and Multiple Voting Share
Basic		0.26		0.18		0.44		0.09
Diluted		0.26		0.18		0.44		0.09
Dividends declared per Subordinate and Multiple Voting		0.08		0.07		0.24		0.24
	Share	(CDN$0.08	)	(CDN$0.08	)	(CDN$0.24	)	(CDN$0.24	)
Total weighted average number of Subordinate and Multiple Voting Shares
Basic		22,022,256		22,180,538		22,022,256		22,180,538
Diluted		22,027,043		22,197,471		22,030,500		22,218,713

Velan Inc.

Condensed Interim Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands of U.S. dollars)

	Three-month periods ended			Nine-month periods ended
	November 30			November 30
	2012	2011		2012		2011
	$	$		$		$
Comprehensive income (loss)
Net income (loss) for the period	6,128	3,832		10,253		1,351
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other than the U.S. dollar	4,321	(11,055	)	(4,683	)	(7,210	)
Comprehensive income (loss)	10,449	(7,223	)	5,570		(5,859	)
Comprehensive income (loss) attributable to:
Subordinate Voting Shares and Multiple Voting Shares	9,662	(6,117	)	5,161		(4,090	)
Non-controlling interest	787	(1,106	)	409		(1,769	)
	10,449	(7,223	)	5,570		(5,859	)

Velan Inc.

Condensed Interim Consolidated Statements of Financial Position

(Unaudited)

(in thousands of U.S. dollars)

As At	November 30,		February 29,
	2012		2012
	$		$
Assets
Current assets
Cash and cash equivalents	57,840		65,414
Short-term investments	2,279		4,954
Accounts receivable	132,717		111,856
Income taxes recoverable	6,963		9,682
Inventories	264,952		258,684
Deposits and prepaid expenses	6,578		6,209
Derivative assets	663		1,737
	471,992		458,536
Non-current assets
Property, plant and equipment	87,663		72,961
Intangible assets and goodwill	54,941		58,845
Deferred income taxes	11,086		10,152
Other assets	1,740		1,476
	155,430		143,434
Total assets	627,422		601,970
Liabilities
Current liabilities
Bank indebtedness	45,916		32,438
Short-term loans	2,112		858
Accounts payable and accrued liabilities	78,239		82,088
Income tax payable	2,168		2,484
Dividend payable	1,766		1,791
Customer deposits	84,802		86,544
Provisions	5,179		5,149
Accrual for performance guarantees	25,163		21,679
Derivative liabilities	963		534
Current portion of long-term debt	10,269		1,696
Current portion of other liabilities	2,540		5,753
	259,117		241,014
Non-current liabilities
Long-term debt	17,976		7,891
Deferred income taxes	7,528		8,270
Other liabilities	9,344		9,218
	34,848		25,379
Total liabilities	293,965		266,393
Equity
Equity attributable to the Subordinate and Multiple Voting shareholders
Share capital	76,517		78,764
Contributed surplus	1,745		1,871
Retained earnings	255,399		250,951
Accumulated other comprehensive income (loss)	(8,780	)	(4,217	)
	324,881		327,369
Non-controlling interest	8,576		8,208
Total equity	333,457		335,577
Total liabilities and equity	627,422		601,970

Velan Inc.

Condensed Interim Consolidated Statements of Changes in Equity

(Unaudited)

(in thousands of U.S. dollars, excluding number of shares)

		Equity attributable to the Subordinate and Multiple Voting shareholders
		Number of shares		Share capital		Contributed surplus		Accumulated other compre- hensive income (loss)		Retained earnings		Total		Non-controlling interest		Total equity
Balance - March 1, 2012		22,148,968		78,764		1,871		(4,217	)	250,951		327,369		8,208		335,577
Net income (loss) for the period		-		-		-		-		9,724		9,724		529		10,253
Other comprehensive income (loss)		-		-		-		(4,563	)	-		(4,563	)	(120	)	(4,683	)
		22,148,968		78,764		1,871		(8,780	)	260,675		332,530		8,617		341,147
Effect of share-based compensation		-		-		43		-		-		43		-		43
Dividends
	Multiple Voting Shares	-		-		-		-		(3,739	)	(3,739	)	-		(3,739	)
	Subordinate Voting Shares	-		-		-		-		(1,537	)	(1,537	)	-		(1,537	)
	Non-controlling interest	-		-		-		-		-		-		(41	)	(41	)
Share repurchase		(206,500	)	(2,247	)	(169	)	-		-		(2,416	)	-		(2,416	)
Balance - November 30, 2012		21,942,468		76,517		1,745		(8,780	)	255,399		324,881		8,576		333,457
Balance - March 1, 2011		22,195,568		79,271		1,898		2,275		250,254		333,698		4,025		337,723
Net income (loss) for the period		-		-		-		-		2,028		2,028		(677	)	1,351
Other comprehensive income (loss)		-		-		-		(6,118	)	-		(6,118	)	(1,092	)	(7,210	)
		22,195,568		79,271		1,898		(3,843	)	252,282		329,608		2,256		331,864
Effect of share-based compensation		-		-		50		-		-		50		-		50
Dividends
	Multiple Voting Shares	-		-		-		-		(3,852	)	(3,852	)	-		(3,852	)
	Subordinate Voting Shares	-		-		-		-		(1,582	)	(1,582	)	-		(1,582	)
	Non-controlling interest	-		-		-		-		-		-		(84	)	(84	)
Share repurchase		(27,800	)	(302	)	(85	)	-		-		(387	)	-		(387	)
Non-controlling interest arising on acquisition		-		-		-		-		-		-		8,372		8,372
Balance - November 30, 2011		22,167,768		78,969		1,863		(3,843	)	246,848		323,837		10,544		334,381

Velan Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. dollars)

		Three-month periods				Nine-month periods
		ended November 30,				ended November 30,
		2012		2011		2012		2011
Cash flows from		$		$		$		$
Operating activities
Net income (loss) for the period		6,128		3,832		10,253		1,351
Adjustments to reconcile net profit to cash provided operating activities
	Depreciation of property, plant and equipment	2,413		2,172		6,941		6,396
	Amortization of intangible assets	607		1,478		2,257		3,836
	Deferred income taxes	100		430		(1,673	)	(512	)
	Share-based compensation expense	14		33		43		50
	Loss (Gain) on disposal of property, plant and equipment	(23	)	(39	)	(144	)	11
	Interest accretion on proceeds payable	156		291		505		702
	Income from fair value adjustment of proceeds payable	-		-		(196	)	-
	Unrealized foreign exchange gain on proceeds payable	149		-		(425	)	-
	Net change in other liabilities	373		(734	)	(61	)	(106	)
		9,917		7,463		17,500		11,728
Changes in non-cash working capital items		5,344		(21,500	)	(26,138	)	(40,096	)
Cash provided (used) by operating activities		15,261		(14,037	)	(8,638	)	(28,368	)
Investing activities
Short -term investments		378		(776	)	2,675		(1,427	)
Additions to property, plant and equipment		(11,559	)	(1,563	)	(22,641	)	(8,940	)
Proceeds on disposal of property, plant and equipment		(75	)	34		384		61
Additions to intangible assets		(139	)	(93	)	(405	)	(738	)
Net change in other assets		(123	)	131		(267	)	148
Business acquisition - net of cash acquired		-		-		-		(37,281	)
Cash provided (used) by investing activities		(11,518	)	(2,267	)	(20,254	)	(48,177	)
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders		(1,801	)	(1,773	)	(5,301	)	(5,453	)
Dividends paid to non-controlling interest		(41	)	-		(41	)	(84	)
Repurchase of shares		(346	)	(109	)	(2,416	)	(388	)
Payment of proceeds payable		-		-		(2,905	)	-
Short -term loans		151		-		1,254		(4,842	)
Increase in long-term debt		-		388		20,715		4,612
Repayment of long-term debt		(1,749	)	(2,579	)	(2,706	)	(2,636	)
Cash provided (used) by financing activities		(3,786	)	(4,073	)	8,600		(8,791	)
Effect of exchange rate differences on cash		509		(1,349	)	(760	)	(1,037	)
Net change in cash during the period		466		(21,726	)	(21,052	)	(86,373	)
Net cash - Beginning of the period		11,458		49,715		32,976		114,362
Net cash - End of the period		11,924		27,989		11,924		27,989
Net cash is composed of:
	Cash and cash equivalents	57,840		49,822		57,840		49,822
	Bank indebtedness	(45,916	)	(21,833	)	(45,916	)	(21,833	)
Supplementary information		11,924		27,989		11,924		27,989
Interest received (paid)		(489	)	(647	)	(1,349	)	(752	)
Income taxes received (paid)		693		(1,835	)	(2,282	)	(5,854	)