Velan Inc. Reports Its Second Quarter 2018/19 Financial Results

MONTREAL, Oct. 11, 2018 (GLOBE NEWSWIRE) — Velan Inc. (TSX: VLN) (the “Company”), a world-leading manufacturer of industrial valves, announced today its financial results for its second quarter ended August 31, 2018.

Highlights

  • Sales of US$91.4 million for the quarter
  • Net loss1 of US$2.4 million for the quarter
  • EBITDA2 of US$1.4 million for the quarter
  • Net new orders (“Bookings”) of US$103.5 million for the quarter
  • Order backlog of US$469.0 million at the end of the quarter, of which US$163.0 million is scheduled for delivery beyond the next 12 months
  • Net cash of US$51.3 million at the end of the quarter
(millions of U.S. dollars, excluding per share amounts) Three-month periods ended
August 31
  Six-month periods ended
August 31
2018   2017   2018   2017
Sales $91.4   $76.5   $169.2   $147.6
               
Gross Profit3 19.3   15.7   37.1   29.6
Gross profit3 % 21.1%   20.5%   21.9%   20.1%
               
EBITDA2 1.4   (4.2)   (0.1)   (6.7)
EBITDA2 per share – basic and diluted 0.06   (0.19)   (0.01)   (0.31)
               
Net loss1 (2.4)   (5.6)   (6.2)   (9.9)
Net loss1 per share – basic and diluted (0.11)   (0.26)   (0.28)   (0.46)

Second Quarter Fiscal 2019 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the second quarter of fiscal 2018):

  • Sales amounted to $91.4 million, an increase of $14.9 million or 19.5% from the prior year. Sales were positively impacted by an increase in improved MRO business and in shipments of large project orders that were ordered in the prior fiscal year for the Company’s North American operations. This increase was partially offset by decreased shipments from the Company’s Italian operations which was caused by the lower order bookings by the subsidiary in the prior year.
  • Net loss1 amounted to $2.4 million or $0.11 per share compared to $5.6 million or $0.26 per share last year. The improvement is primarily due to the higher volume of shipments that occurred in the quarter compared to last year.  Despite a higher sales volume and improved margins, fierce competition and weakness in the Company’s North American operating markets continued to apply pressure on the Company’s overall results, highlighting the need to accelerate its global cost reduction and transformation initiatives.
  • EBITDA2 amounted to $1.4 million or $0.06 per share compared to a negative $4.2 million or $0.19 per share last year. The $5.6 million improvement in EBITDA2 is primarily attributable to a higher sales volume and a higher gross profit percentage.
  • Gross profit percentage increased by 60 basis points from 20.5% to 21.1%. The increase in the gross profit percentage is mainly attributable to the higher sales volume, which helped to cover the Company’s fixed production overheads, as well as a product mix with a higher proportion of higher margin product sales. However, the continued pressure on pricing continues to affect the Company’s margins, particularly in its North American operations.
  • Net new orders received (“bookings”) amounted to $103.5 million, an increase of $11.0 million or 11.9% compared to last year. This increase is due primarily to new orders booked by the Company’s Italian operations, which was partially offset by a decrease in orders booked in the Company’s North American operations, which had recorded significant large project orders in the prior year.
  • The Company ended the quarter with net cash of $51.3 million, a decrease of $0.3 million or 0.0% since the beginning of the quarter.  The Company’s net cash remained stable over the course of the current quarter
  • The increase in bookings and the improved sales performance was achieved thanks to the recovery observed in the oil and gas markets benefitting mainly MRO and upstream valve bookings, and also in part by the realignment in the prior year of the global sales force along vertical market lines rather than geographic lines. 

Results for the six-month period ended August 31, 2018

  • Sales amounted to $169.2 million, an increase of $21.6 million or 14.6% from the prior year. Sales were positively impacted by an increase in shipments from the Company’s North American and French subsidiaries, which were partially offset by decreased shipments from the Company’s German operations.  Sales were positively impacted by an increase in shipments from the Company’s North American operations resulting from the improved MRO business and the large project orders that were booked in the prior fiscal year, although, delays in the shipments of certain large project orders in both the German and North American operations of the Company caused by various customer-related, supply chain and internal operational issues are still present.
  • Net loss1 amounted to $6.2 million or $0.28 per share compared to $9.9 million or $0.46 per share last year. The $3.7 million improvement is primarily attributable to a higher gross profit percentage, partially offset by an increase of administration costs. At the current sales level, the Company was not able to generate a gross margin sufficient to cover all its fixed administration and other costs.
  • Gross profit percentage increased by 180 basis points from 20.1% to 21.9%. This improvement is due to a higher sales volume and a product mix with a greater proportion of higher margin product sales.   
  • EBITDA2 amounted to a negative $0.1 million or $0.01 per share compared to a negative $6.7 million or $0.31 per share last year. The $6.6 million improvement in EBITDA2 is primarily attributable to a higher sales volume and a higher gross profit percentage.
  • Bookings amounted to $189.7 million, an increase of $25.0 million or 15.2% compared to last year. This increase is due primarily to higher orders booked by the Company’s Italian and North American subsidiaries, particularly in the oil and gas sector. The bookings of the Italian operations of the Company were negatively affected by the cancellation of a significant order in the prior fiscal year.  Furthermore, the Company noted a significant increase of its non-project valve order bookings in its North American operations for the current year. Even with the positive bookings figure, the Company still believes it is necessary to accelerate the assessment of its global manufacturing footprint, supply chain and cost structure as per its Velocity 2020 strategic plan. Consequently, the Company has begun a global cost reduction and efficiency transformation initiative with the goal of reducing annual supply chain, production and overhead costs.
  • As a result of bookings outpacing sales in the period, the Company ended the period with a backlog of $469.0 million, an increase of $4.5 million or 1.0% since the beginning of the current fiscal year. The positive book-to-bill ratio was in part negatively impacted by the weakening of the euro spot rate against the U.S. dollar at quarter end.
  • Administration costs amounted to $43.7 million, an increase of $2.5 million or 6.1% compared to last year. This increase is primarily attributable to an increase in sales commissions and freight to certain overseas project customers due to the increased sales volume in the Company’s North American operations as well as the investment in the sales force that was announced at this time last year.  The increase of administration costs was partially offset by the reduction of the costs recognized in connection with the Company’s ongoing asbestos litigation. The fluctuation in asbestos costs for the period is due more to the timing of settlements in these two periods rather than to changes in long-term trends.
  • The Company ended the period with net cash of $51.3 million, a decrease of $13.2 million or 20.5% since the beginning of the year. This decrease is primarily attributable to cash used by operations, investment in property, plant and equipment, long-term debt repayments, as well as distributions to shareholders via dividends. Net cash was also negatively impacted by the weakening of the euro spot rate against the U.S. dollar over the course of the current year. 
     
  • Foreign currency impacts:
  ° In spite of the drop of the euro spot rate at quarter end, the average exchange rates of the euro strengthened 6.4% against the U.S. dollar when compared to the same period last year. This strengthening resulted in the Company’s net profits and bookings from its European subsidiaries being reported as higher U.S. dollar amounts in the current period.
  ° Based on average exchange rates, the Canadian dollar strengthened 1.6% 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 period.
  ° The net impact of the above currency swings was generally favourable on the Company’s results.

“Our second quarter was an improvement in several respects on our first quarter, in terms of sales, margins, expenses, Net Income and order bookings, all of which showed positive signs in the quarter compared both to last year and our first quarter. We recorded an EBITDA profit for the quarter and conserved our cash,” said John Ball, CFO of Velan Inc. “These improvements notwithstanding, we continue to actively seek ways to improve our competitive position and profitability for the future.”

Yves Leduc, President and CEO of Velan Inc., said, “As I stated earlier this year, we are working to make important changes to improve our operating results. We are happy with the improved performance on several fronts in this quarter, but the need to transform remains as strong, as we are slowed down by our complexity and must realign our business and global supply chain to markets where we can drive faster and more profitable growth and achieve greater pricing power through our engineering and design capabilities.”

Dividend

The Board declared an eligible quarterly dividend of CDN$0.03 per share, payable on December 28, 2018, to all shareholders of record as at December 14, 2018.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the second quarter conference call to be held on Friday, October 12, 2018, at 11:00 a.m. (EDT). The toll free call-in number is 1‑877‑221‑8474, access code 21896631. A recording of this conference call will be available for seven days at 1‑416‑626‑4100 or 1‑800‑558‑5253, access code 21896631.

About Velan

Founded in Montreal in 1950, Velan Inc. (www.velan.com) is one of the world’s leading manufacturers of industrial valves, with sales of US$338 million in its last reported fiscal year. The Company employs over 1,800 people and has manufacturing plants in 9 countries. Velan Inc. is a public company with its shares listed on the Toronto Stock Exchange under the symbol VLN.

Safe harbour statement

This news release may include forward-looking statements, which generally contain words like “should”, “believe”, “anticipate”, “plan”, “may”, “will”, “expect”, “intend”, “continue” or “estimate” or the negatives of these terms or variations of them or similar expressions, all of which are subject to risks and uncertainties, which are disclosed in the Company’s filings with the appropriate securities commissions. While these statements are based on management’s assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that it believes are reasonable and appropriate in the circumstances, no forward-looking statement can be guaranteed and actual future results may differ materially from those expressed herein. The Company disclaims any intention or obligation to update or revise any forward-looking statements contained herein whether as a result of new information, future events or otherwise, except as required by the applicable securities laws. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

Non-IFRS measures

In this press release, the Company presented measures of performance and financial condition that are not defined under International Financial Reporting Standards (“non-IFRS 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. In addition, they provide readers of the Company’s consolidated financial statements with enhanced understanding of its results and financial condition, and increase transparency and clarity into the operating results of its core business.

The term “EBITDA” is defined as net income or loss attributable to Subordinate and Multiple Voting Shares plus depreciation of property, plant & equipment, plus amortization of intangible assets, plus net finance costs plus income tax provision. Refer to the “Reconciliations of Non-IFRS Measures” section in the Company’s Management Discussion and Analysis included in its Interim Report for the quarter ended August 31, 2018 for a detailed calculation of this measure. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

___________________________________

1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see explanation above.
3 In accordance with the current fiscal year’s presentation, the comparative figures were adjusted in order to reflect a more accurate allocation of cost of sales and administration costs.

Velan Inc.    
Condensed Interim Consolidated Statements of Financial Position    
(Unaudited)    
(in thousands of U.S. dollars)    
     
As At August 31, February 28,
  2018 2018
  $ $
Assets    
     
Current assets    
Cash and cash equivalents 70,114 85,391
Short-term investments 158 647
Accounts receivable 129,735 137,382
Income taxes recoverable 11,848 8,012
Inventories 167,357 170,790
Deposits and prepaid expenses 3,946 4,222
Derivative assets 76 604
  383,234 407,048
     
Non-current assets    
Property, plant and equipment 87,860 89,864
Intangible assets and goodwill 21,693 20,210
Deferred income taxes 18,487 22,034
Other assets 400 1,037
     
  128,440 133,145
     
Total assets 511,674 540,193
     
     
Liabilities    
     
Current liabilities    
Bank indebtedness 18,780 20,848
Short-term bank loans 2,059 1,074
Accounts payable and accrued liabilities 62,038 63,441
Income taxes payable 1,430 2,186
Dividend payable 497 1,678
Customer deposits 43,762 48,963
Provisions 9,526 10,798
Accrual for performance guarantees 32,089 32,655
Derivative liabilities 1,492 1,615
Current portion of long-term debt 7,474 8,151
  179,147 191,409
     
Non-current liabilities    
Long-term debt 12,658 13,978
Income taxes payable 2,033 2,078
Deferred income taxes 2,590 2,889
Other liabilities 8,547 8,222
     
  25,828 27,167
     
Total liabilities 204,975 218,576
     
Equity     
     
Equity attributable to the Subordinate and Multiple Voting shareholders    
Share capital 73,090 73,090
Contributed surplus 6,066 6,057
Retained earnings 249,554 256,668
Accumulated other comprehensive loss (26,525) (19,790)
  302,185 316,025
     
Non-controlling interest 4,514 5,592
     
Total equity 306,699 321,617
     
Total liabilities and equity 511,674 540,193

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
August 31

  Six-month periods ended
August 31

       
  2018   2017     2018   2017  
  $   $     $   $  
                   
                   
Sales 91,375   76,531     169,249   147,618  
                   
Cost of sales1 72,032   60,817     132,169   117,978  
                   
Gross profit 19,343   15,714     37,080   29,640  
                   
Administration costs1 21,460   21,652     43,684   41,226  
Other expense (income) (8 ) 1,223     (24 ) 1,519  
                   
Operating loss (2,109 ) (7,161 )   (6,580 ) (13,105 )
                   
Finance income 220   240     362   368  
Finance costs 770   214     944   366  
                   
Finance income (costs) – net (550 ) 26     (582 ) 2  
                   
Loss before income taxes (2,659 ) (7,135 )   (7,162 ) (13,103 )
                   
Recovery of income taxes (104 ) (1,694 )   (933 ) (3,076 )
                   
Net loss for the period (2,555 ) (5,441 )   (6,229 ) (10,027 )
                   
Net loss attributable to:                  
Subordinate Voting Shares and Multiple Voting Shares   (2,438 )   (5,591 )     (6,165 )   (9,895 )
Non-controlling interest (117 ) 150     (64 ) (132 )
  (2,555 ) (5,441 )   (6,229 ) (10,027 )
                   
Net loss per Subordinate and Multiple Voting Share                  
Basic (0.11 ) (0.26 )   (0.28 ) (0.46 )
Diluted (0.11 ) (0.26 )   (0.28 ) (0.46 )
                   
                   
Dividends declared per Subordinate and Multiple 0.02   0.08     0.05   0.15  
Voting Share (CA$0.03 ) (CA$0.10 )   (CA$0.06 ) (CA$0.20 )
                   
                   
Total weighted average number of Subordinate and                  
Multiple Voting Shares                   
Basic 21,621,935   21,646,695     21,621,935   21,642,740  
Diluted 21,621,935   21,646,695     21,621,935   21,642,740  
                   
1 In accordance with the current fiscal year’s presentation, the comparative figures were adjusted in order to reflect a more accurate allocation of cost of sales and administration costs.

Velan Inc. 
Condensed Interim Consolidated Statements of Comprehensive Income (Loss) 
(Unaudited) 
(in thousands of U.S. dollars) 
 
  Three-month periods ended
August 31

  Six-month periods ended
August 31

       
  2018   2017     2018   2017  
  $   $     $   $  
                   
                   
Comprehensive income (loss)                  
                   
Net loss for the period   (2,555 )   (5,441 )     (6,229 )   (10,027 )
                   
Other comprehensive income (loss)                  
Foreign currency translation adjustment on foreign operations                  
whose functional currency is other than the reporting                  
currency (U.S. dollar)   (1,390 )   5,538       (6,822 )   11,811  
                   
Comprehensive income (loss)   (3,945 )   97       (13,051 )   1,784  
                   
Comprehensive income (loss) attributable to:                  
Subordinate Voting Shares and Multiple Voting Shares   (3,732 )   (30 )     (12,900 )   1,896  
Non-controlling interest   (213 )   127       (151 )   (112 )
                   
    (3,945 )   97       (13,051 )   1,784  
                   
                   
Other comprehensive income (loss) is composed solely of items that may be reclassified subsequently to the consolidated statement of loss. 
                   

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
comprehensive
income (loss)
  Retained
earnings
  Total   Non-controlling
interest
  Total equity  
                               
Balance – February 28, 2018 21,667,235   73,090   6,057 (19,790 ) 256,668   316,025   5,592   321,617  
                               
Net loss for the period       (6,165 ) (6,165 ) (64 ) (6,229 )
Other comprehensive loss     (6,735 )   (6,735 ) (87 ) (6,822 )
                               
  21,667,235   73,090   6,057 (26,525 ) 250,503   303,125   5,441   308,566  
                               
Effect of share-based compensation     9     9     9  
Dividends                              
Multiple Voting Shares       (685 ) (685 )   (685 )
Subordinate Voting Shares       (264 ) (264 )   (264 )
Non-controlling interest           (927 ) (927 )
                               
Balance – August 31, 2018 21,667,235   73,090   6,066 (26,525 ) 249,554   302,185   4,514   306,699  
                               
                               
Balance – February 28, 2017 21,667,235   73,584   6,017 (35,550 ) 281,343   325,394   6,517   331,911  
                               
Net loss for the period       (9,895 ) (9,895 ) (132 ) (10,027 )
Other comprehensive income     11,791     11,791   20   11,811  
                               
  21,667,235   73,584   6,017 (23,759 ) 271,448   327,290   6,405   333,695  
                               
Effect of share-based compensation     20     20     20  
Share repurchase (38,700 ) (422 )   (114 ) (536 )   (536 )
Dividends                              
Multiple Voting Shares       (2,394 ) (2,394 )   (2,394 )
Subordinate Voting Shares       (973 ) (973 )   (973 )
                               
Balance – August 31, 2017 21,628,535   73,162   6,037 (23,759 ) 267,967   323,407   6,405   329,812  
                               
                               

Velan Inc.
Condensed Interim Consolidated Statements of Cash Flow
(Unaudited)
(in thousands of U.S. dollars)
 
  Three-month periods ended
August 31
  Six-month periods ended
August 31
       
  2018   2017     2018   2017  
  $   $     $   $  
                   
                   
Cash flows from                  
                   
Operating activities                  
Net loss for the period   (2,555 )   (5,441 )     (6,229 )   (10,027 )
Adjustments to reconcile net loss to cash provided by                  
operating activities   3,453     3,120       7,003     8,465  
Changes in non-cash working capital items   2,225     11,125       (3,980 )   263  
Cash provided (used) by operating activities   3,123     8,804       (3,206 )   (1,299 )
                   
Investing activities                  
Short-term investments   438     61       489     (463 )
Additions to property, plant and equipment   (3,278 )   (1,328 )     (5,290 )   (2,915 )
Additions to intangible assets   (3 )   (258 )     (99 )   (405 )
Proceeds on disposal of property, plant and equipment, and                  
intangible assets   115     2       125     61  
Net change in other assets   51     (3 )     578     52  
Cash used by investing activities   (2,677 )   (1,526 )     (4,197 )   (3,670 )
                   
Financing activities                  
Dividends paid to Subordinate and Multiple Voting shareholders   (488 )   (1,638 )     (2,130 )   (3,269 )
Dividends paid to non-controlling interest   –      –        (927 )   –   
Shares issued under Share Option Plan   –      –        –      –   
Repurchase of shares   –      (502 )     –      (536 )
Short-term bank loans   1,020     482       985     227  
Increase in long-term debt   –      –        607     –   
Repayment of long-term debt   (1,268 )   (821 )     (1,930 )   (1,559 )
Cash used by financing activities   (736 )   (2,479 )     (3,395 )   (5,137 )
                   
Effect of exchange rate differences on cash    (3 )   2,629       (2,411 )   5,927  
                   
Net change in cash during the period   (293 )   7,428       (13,209 )   (4,179 )
                   
Net cash – Beginning of the period   51,627     64,620       64,543     76,227  
                   
Net cash – End of the period   51,334     72,048       51,334     72,048  
                   
Net cash is composed of:                  
Cash and cash equivalents   70,114     90,562       70,114     90,562  
Bank indebtedness   (18,780 )   (18,514 )     (18,780 )   (18,514 )
                   
    51,334     72,048       51,334     72,048  
                   
Supplementary information                  
Interest received (paid)   (132 )   140       (168 )   121  
Income taxes paid   (2,421 )   (1,207 )     (4,354 )   (2,759 )
                   

For further information please contact:
Yves Leduc, President and Chief Executive Officer
or
John D. Ball, Chief Financial Officer
Tel: (514) 748-7743
Fax: (514) 748-8635
Web:  www.velan.com

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