Velan Inc. Reports its Second Quarter 2017/18 Financial Results

MONTREAL, Oct. 12, 2017 (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, 2017.

Highlights

  • Sales of US$76.5 million for the quarter
  • Net loss1 of US$5.6 million for the quarter
  • Net new orders (“Bookings”) of US$92.5 million for the quarter
  • Order backlog of US$488.7 million at the end of the quarter, of which US$189.6 million is scheduled for delivery beyond the next 12 months
  • Net cash2 of US$68.2 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
  2017     2016       2017     2016  

Sales

  $76.5     $71.1       $147.6     $148.5  

Gross Profit

  15.1     19.2       28.6     37.9  
Gross profit %   19.7 %   27.0 %     19.4 %   25.5 %
                           
Net income (loss) attributable to Multiple and                          
Subordinate Voting Shares   (5.6 )   2.0       (9.9 )   2.5  
Net income (loss) per share – basic and                          
diluted   (0.26 )   0.10       (0.46 )   0.12  

Second Quarter Fiscal 2018 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the second quarter of fiscal 2017):

• Net loss1 amounted to $5.6 million or $0.26 per share compared to net earnings1 of $2.0 million or $0.10 per share last year. Fierce competition and continued market weakness were a drag on the results and margins of the Company’s North American operations, causing an erosion of the non-project commodity valve business, as well as reduced pricing in the highly-competitive project valve business. While the Company realized improved sales in certain market segments, such as nuclear energy and cryogenics, sales in its North American operations continued to lag, particularly in the oil and gas sector, as a result of poor order bookings in the past.

• In the first quarter of the current fiscal year, the Company announced a global cost reduction and efficiency initiative with the goal of reducing annual supply chain, production and overhead costs by approximately $20 million by the end of the fiscal year ended February 29, 2020. The current quarter’s depressed results highlight the need for this initiative and the Company began a detailed assessment of its global manufacturing footprint, supply chain and cost structure as per its Velocity 2020 strategic plan. The Company is also accelerating the improvement initiatives undertaken in its North American operations to transform and modernize its processes in an effort to increase its competitiveness in project manufacturing. The Company expects to complete this assessment over the remainder of the current fiscal year and begin implementing its cost reduction plan.

• Bookings amounted to $92.5 million, an increase of $15.1 million or 19.5% compared to last year. This increase is due primarily to new project orders booked by the Company’s North American and Italian operations, which was partially offset by a decrease in orders booked in the Company’s French operations, which had recorded significant large project orders in the prior year quarter.

• Sales amounted to $76.5 million, an increase of $5.4 million or 7.6% from the prior year. Sales were positively impacted by an increase in shipments from the Company’s French and Italian subsidiaries resulting from the large project orders that were booked in the prior fiscal year. This increase was partially offset by decreased shipments from the Company’s North American operations.

• In order to improve its bookings and sales performance, the Company restructured its global sales force along vertical market lines rather than geographic lines in order to focus its sales resources on those niche market segments where its engineering know-how and agile design capabilities allow for premium positioning of its products over its competitors.

• Gross profit percentage decreased by 730 basis points from 27.0% to 19.7%. This decrease is due primarily to the Company’s North American operations, which shipped a product mix with a greater proportion of projects with lower margins, coupled with pricing pressure brought on by fierce competition and continued weakness in certain markets; this loss of margin was only partially offset by the material cost savings achieved by the Company’s supply chain improvement initiatives. Furthermore, the Company’s North American operations were impacted by a significant backlog of shippable project valves which it was not able to deliver due to various customer-related issues.

• The Company ended the period with net cash2 of $68.2 million, an increase of $6.6 million or 10.7% since the beginning of the current quarter. This increase is primarily attributable to positive non-cash working capital movements, particularly a decrease in accounts receivable.

First Half Year Fiscal 2018 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the first half year of fiscal 2017):

• Net loss1 amounted to $9.9 million or $0.46 per share compared to net earnings1 of $2.5 million or $0.12 per share last year. The $12.4 million increase in net loss1 is primarily attributable to a lower gross profit percentage and increased administration costs.

• Sales remained relatively stable, amounting to $147.6 million, a decrease of $0.9 million or 0.6% from the prior year. Sales were positively impacted by an increase in shipments from the Company’s French and Italian subsidiaries, which were offset by decreased shipments from the Company’s North American operations. Delays in shipments of certain large project orders caused by various customer-related, supply chain and internal operational issues, and lower shipments of non-project commodity valves negatively impacted the Company’s North American operations.

• Bookings amounted to $164.7 million, a decrease of $22.7 million or 12.1% compared to last year. This decrease is due primarily to lower project orders booked by the Company’s French and Italian subsidiaries, both of which had recorded significant large project orders in the prior year period.

• As a result of bookings outpacing sales in the period, the Company ended the period with a backlog of $488.7 million, an increase of $50.5 million or 11.5% since the beginning of the current fiscal year. In addition to the positive book-to-bill ratio, the backlog was positively impacted by the strengthening of the euro against the U.S. dollar over the course of the period.

• Gross profit percentage decreased by 610 basis points from 25.5% to 19.4%. The decrease in the gross profit percentage is mainly attributable to a product mix with a greater proportion of lower margin product sales, a significant backlog of shippable project valves which were not delivered due to various customer-related issues, and pricing pressure brought on by fierce competition and continued weakness in some of the Company’s markets.

• Administration costs amounted to $40.1 million, an increase of $4.3 million or 12.0%. This increase is primarily attributable to an increase in sales commissions, due to the increased sales volume in the Company’s French and Italian operations, an increase in technology license fees paid on the sale of certain highly-engineered cryogenic valves by the Company’s French operations, and an increase in 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 settlement payments in these two periods rather than to changes in long-term trends.

• Foreign currency impacts:

  • Based on average exchange rates, the euro weakened 0.4% against the U.S. dollar when compared to the same period last year. This weakening resulted in the Company’s net profits and bookings from its European subsidiaries being reported as lower U.S. dollar amounts in the current period.
  • Based on average exchange rates, 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.
  • Based on spot exchange rates, the euro strengthened 11.6% against the U.S. dollar when compared to the rate at the end of the last fiscal year. This strengthening resulted in losses of $1.7 million incurred on foreign exchange forward contracts used by the Company to hedge the net monetary position of its European subsidiaries. This strengthening also resulted in a positive cumulative translation adjustment of $11.8 million which was recorded directly in equity through other comprehensive income.
  • The net impact of the above currency swings was generally unfavourable on the Company’s net earnings1, although it was generally favourable on the Company’s equity.

“Our second quarter was similar in many ways to our first quarter, suffering principally from a lack of sales in our North American operations, resulting, in turn, from a lack of orders in previous quarters. The competitive environment in North America also depressed our margins,” said John Ball, CFO of Velan Inc. “We are encouraged, however, by the $50 million increase in our backlog since the start of the fiscal year. We also note that the balance sheet and equity have remained strong, in spite of the year to date operating loss.”

Yves Leduc, President and CEO of Velan Inc., said, “Market conditions are causing an erosion of the non-project commodity valve business, as well as reduced pricing in the highly-competitive project valve business.  In response, and as announced last quarter, the Company seeks to drive out $20 million of annual costs in three years, which it will invest in improving its competitiveness, while aggressively pursuing market share growth in high-margin segments where fewer competitors can match its product capabilities. We are talking about a transformation, initiated under our Velocity 2020 strategic plan, and an important milestone was achieved last month with the re-organization of our global sales force, moving from a geographic structure to a focus on our customers and markets. This fiscal year will be difficult, due to the low bookings in North America last year and in the earlier part of this year, but we are confident that the recent surge in our backlog, combined with our strategic efforts, will improve our overall position.”

A.K. Velan, founder of the Company, passed away last week at the age of ninety-nine, after a full and remarkable life. Through both good and challenging times, A.K. built the Company into the global valve industry leader it is today. Although he was no longer actively involved in the Company, he continues to be an inspiration to the many people whose lives he touched.

Dividend

The Board declared an eligible quarterly dividend of CDN$0.10 per share, payable on December 29, 2017, to all shareholders of record as at December 15, 2017.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the second quarter conference call to be held on Thursday, October 12, 2017, at 4:30 p.m. (EDT). The toll free call-in number is 1‑800‑672‑0241, access code 21860050. A recording of this conference call will be available for seven days at 1‑416‑626‑4100 or 1‑800‑558‑5253, access code 21860050.

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$331.8 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 “net cash” is defined as cash and cash equivalents plus short-term investments less bank indebtedness, short-term bank loans, and current portion of long-term bank borrowings. 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, 2016 for a detailed calculation of this measure.

_____________________________
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.


 

Velan Inc. 
Condensed Interim Consolidated Statements of Financial Position 
(Unaudited) 
(in thousands of U.S. dollars) 
       
As At   August 31,   February 28,  
    2017   2017  
    $   $  
Assets      
       
Current assets      
Cash and cash equivalents     90,562     84,019  
Short-term investments     1,437     974  
Accounts receivable      116,377     125,512  
Income taxes recoverable      13,891     7,145  
Inventories     184,366     173,089  
Deposits and prepaid expenses     5,163     3,391  
Derivative assets     866     1,202  
      412,662     395,332  
       
Non-current assets      
Property, plant and equipment     91,241     91,535  
Intangible assets and goodwill     20,478     19,023  
Deferred income taxes     12,997     12,951  
Other assets      408     456  
       
      125,124     123,965  
       
Total assets     537,786     519,297  
       
       
Liabilities      
       
Current liabilities      
Bank indebtedness     18,514     7,792  
Short-term bank loans      1,877     1,650  
Accounts payable and accrued liabilities     60,865     60,641  
Income taxes payable     954     946  
Dividend payable     1,729     1,631  
Customer deposits     47,314     43,953  
Provisions      11,986     10,600  
Accrual for performance guarantees     30,110     26,943  
Derivative liabilities     1,634     799  
Current portion of long-term debt     7,830     7,115  
      182,813     162,070  
       
Non-current liabilities      
Long-term debt     14,637     15,318  
Deferred income taxes     2,927     2,784  
Other liabilities     7,597     7,214  
       
      25,161     25,316  
       
Total liabilities     207,974     187,386  
       
Equity       
       
Equity attributable to the Subordinate and Multiple Voting shareholders      
Share capital     73,162     73,584  
Contributed surplus      6,037     6,017  
Retained earnings     267,967     281,343  
Accumulated other comprehensive loss     (23,759 )   (35,550 )
      323,407     325,394  
       
Non-controlling interest     6,405     6,517  
       
Total equity     329,812     331,911  
       
Total liabilities and equity     537,786     519,297  
       
       

 

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

   
                     
  2017   2016     2017   2016    
  $   $     $   $    
             
             
Sales    76,531     71,137       147,618     148,546    
             
Cost of sales   61,455     51,897       119,051     110,641    
             
Gross profit   15,076     19,240       28,567     37,905    
             
Administration costs   21,014     17,032       40,153     35,798    
Other expense (income)   1,223     309       1,519     202    
             
Operating profit (loss)   (7,161 )   1,899       (13,105 )   1,905    
             
Finance income   240     215       368     480    
Finance costs   214     132       366     257    
             
Finance income (costs) – net   26     83       2     223    
             
Income (Loss) before income taxes   (7,135 )   1,982       (13,103 )   2,128    
             
Provision for (Recovery of) income taxes   (1,694 )   102       (3,076 )   (326 )  
             
Net income (loss) for the period   (5,441 )   1,880       (10,027 )   2,454    
             
Net income (loss) attributable to:            
Subordinate Voting Shares and Multiple Voting Shares   (5,591 )   2,001       (9,895 )   2,529    
Non-controlling interest   150     (121 )     (132 )   (75 )  
    (5,441 )   1,880       (10,027 )   2,454    
             
Net income (loss) per Subordinate and Multiple Voting Share          
Basic   (0.26 )   0.10       (0.46 )   0.12    
Diluted   (0.26 )   0.10       (0.46 )   0.12    
             
             
Dividends declared per Subordinate and Multiple  0.08     0.07       0.15     0.15     
 Voting Share  (CA$0.10)   (CA$0.10)     (CA$0.20)   (CA$0.20)   
             
             
Total weighted average number of Subordinate and            
Multiple Voting Shares             
Basic   21,646,695     21,731,871       21,642,740     21,729,924    
Diluted   21,651,792     21,736,983       21,646,938     21,735,703    
             
             

 

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
 
                   
  2017   2016     2017   2016  
  $   $     $   $  
             
             
Comprehensive income (loss)            
             
Net income (loss) for the period   (5,441 )   1,880       (10,027 )   2,454  
             
Other comprehensive income (loss)            
Foreign currency translation adjustment on foreign operations            
whose functional currency is other than the reporting            
currency (U.S. dollar)   5,538     (56 )     11,811     3,061  
             
Comprehensive income (loss)   97     1,824       1,784     5,515  
             
Comprehensive income (loss) attributable to:            
Subordinate Voting Shares and Multiple Voting Shares   (30 )   1,640       1,896     5,092  
Non-controlling interest   127     184       (112 )   423  
             
    97     1,824       1,784     5,515  
             
             

 

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, 2017 21,667,235   73,584   6,017 (35,550 ) 281,343   325,394   6,517   331,911    
                   
Net income (loss) for the period       (9,895 ) (9,895 ) (132 ) (10,027 )  
Other comprehensive income (loss)     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    
                   
                   
Balance – February 29, 2016 21,737,135   74,345   5,941 (33,089 ) 280,380   327,577   5,542   333,119    
                   
Net income (loss) for the period       2,529   2,529   (75 ) 2,454    
Other comprehensive income (loss)     2,563     2,563   498   3,061    
                   
  21,737,135   74,345   5,941 (30,526 ) 282,909   332,669   5,965   338,634    
                   
Effect of share-based compensation     38     38     38    
Share repurchase (11,800 ) (128 )   (31 ) (159 )   (159 )  
Dividends                  
Multiple Voting Shares       (2,402 ) (2,402 )   (2,402 )  
Subordinate Voting Shares       (953 ) (953 )   (953 )  
                   
Balance – August 31, 2016 21,725,335   74,217   5,979 (30,526 ) 279,523   329,193   5,965   335,158    
                   
                   

 

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

   
                     
  2017   2016     2017   2016    
  $   $     $   $    
             
             
Cash flows from            
             
Operating activities            
Net income for the period   (5,441 )   1,880       (10,027 )   2,454    
Adjustments to reconcile net income to cash provided by            
operating activities   3,120     4,752       8,465     5,259    
Changes in non-cash working capital items   11,125     (13,539 )     263     (1,734 )  
Cash provided (used) by operating activities   8,804     (6,907 )     (1,299 )   5,979    
             
Investing activities            
Short-term investments   61     299       (463 )   1,456    
Additions to property, plant and equipment   (1,328 )   (1,937 )     (2,915 )   (3,273 )  
Additions to intangible assets   (258 )   (10 )     (405 )   (60 )  
Proceeds on disposal of property, plant and equipment, and            
intangible assets   2     46       61     179    
Net change in other assets   (3 )   (29 )     52     133    
Cash provided (used) by investing activities   (1,526 )   (1,631 )     (3,670 )   (1,565 )  
             
Financing activities            
Dividends paid to Subordinate and Multiple Voting shareholders   (1,638 )   (1,697 )     (3,269 )   (3,303 )  
Repurchase of shares   (502 )   (159 )     (536 )   (159 )  
Short-term bank loans   482     152       227     25    
Repayment of long-term debt   (821 )   (1,311 )     (1,559 )   (3,272 )  
Cash provided (used) by financing activities   (2,479 )   (3,015 )     (5,137 )   (6,709 )  
             
Effect of exchange rate differences on cash    2,629     (581 )     5,927     831    
             
Net change in cash during the period   7,428     (12,134 )     (4,179 )   (1,464 )  
             
Net cash – Beginning of the period   64,620     95,010       76,227     84,340    
             
Net cash – End of the period   72,048     82,876       72,048     82,876    
             
Net cash is composed of:            
Cash and cash equivalents   90,562     89,872       90,562     89,872    
Bank indebtedness   (18,514 )   (6,996 )     (18,514 )   (6,996 )  
             
    72,048     82,876       72,048     82,876    
             
Supplementary information            
Interest received (paid)   140     112       121     224    
Income taxes reimbursed (paid)   (1,207 )   (1,285 )     (2,759 )   (3,205 )  
             

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