VLN Velan Inc

Velan Inc. (TSX: VLN) (the “Company”), a world-leading manufacturer of industrial valves, announced today its financial results for its first quarter ended May 31, 2020.

Highlights

• Sales of US$76.7 million for the quarter
• Net loss1 of US$1.9 million for the quarter
• Operating profit before restructuring and transformation costs2 of US$0.7 million for the quarter
• Adjusted EBITDA2 of US$3.8 million for the quarter
• Net new orders (“Bookings”) of US$76.7 million for the quarter
• Order backlog of US$410.3 million at the end of the quarter, of which US$149.3 million is scheduled for delivery beyond the next 12 months
• Net cash of US$44.6 million at the end of the quarter

	Three-month periods ended
	May 31,	May 31,
(millions of U.S. dollars, excluding per share amounts)	2020	2019
Sales	$76.7	$83.8
Gross Profit	18.4	16.1
Gross profit %	24.0%	19.2%
Net loss1	1.9	5.8
Net loss1 per share – basic and diluted	0.09	0.27
Operating profit (loss) before restructuring and transformation costs2	0.7	(6.8)
Adjusted EBITDA2	3.8	(3.8)
Adjusted EBITDA2 per share – basic and diluted	0.18	(0.18)

First Quarter Fiscal 2021 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the first quarter of fiscal 2020):

• Sales amounted to $76.7 million, a decrease of $7.1 million or 8.5% from the prior year. Sales were negatively impacted by a decrease in shipments from the Company’s North American and French operations, which was partially offset by an increase in shipments from the Company’s Italian operations. The decreased sales volume for the quarter is attributable to a lower shippable backlog in the Company’s North American operations, combined with the negative impact that the novel coronavirus (“COVID-19”) pandemic had on the global economy. For example, the Company had to manage many disruptions related to its supply chain which caused significant delays on certain customer orders, and due to travel restrictions, experienced difficulties in getting inspection clearance to deliver certain large project orders. Finally, the Company was able during the quarter to obtain recognition by most governments of its status as supplier of critical equipment to essential industries and as a result was able to maintain its operations while managing through the pandemic.  However, the Company did nevertheless face government mandated temporary shutdowns in reaction to the spread of the virus in certain regions of the world, in particular in India and Italy. The Company’s Italian operations, though faced with these challenges, were able to deliver a strong quarter in terms of large project orders shipments.
• Gross profit percentage increased by 480 basis points from 19.2% to 24.0%. Despite the lower sales volume, the increase in gross profit percentage was mainly attributable to a product mix with a greater proportion of higher margin product sales as well as labour and overhead savings stemming from the Company’s restructuring and transformation initiatives which started in the prior fiscal year. The increase is also attributable to the Company’s qualification for $1.9 million of wage subsidies. The subsidies were put in place by government authorities to prevent further job losses in the context of the COVID-19 pandemic by offering wages relief to companies negatively impacted by the market distress caused by the virus. This increase was partially offset by a lower gross profit percentage in the Company’s French operations due to lower shipments of large project orders for the quarter.
• Administration costs amounted to $17.7 million, a decrease of $5.3 million or 23.0% compared to last year. The decrease is primarily attributable to the on-going effort to reduce administration overhead expenses under the V20 plan, a $1.5 million reduction of administration employee salaries provided by wage subsidies as well as a general reduction in administration expenses, such as travel expenses and office maintenance costs, caused principally by the downturn of the market conditions as well as the lockdowns that were enforced in a majority of countries over the course of the quarter. The Company had also recorded, in the prior year, a $0.9 million final settlement relating to a long-standing product claim that was filed against the Company. 
• Net loss1 amounted to $1.9 million or $0.09 per share compared to $5.8 million or $0.27 per share last year. The decrease in net loss1 is primarily attributable to the Company’s improved gross profit as well as lowered administration costs, which was partially offset by an increase in restructuring and transformation costs combined with an unfavorable movement in income taxes. 
• Operating profit before restructuring and transformation costs2 amounted to $0.7 million compared to an operating loss before restructuring and transformation costs2 of $6.8 million last year. Adjusted EBITDA2 amounted to $3.8 million or $0.18 per share compared to a negative $3.8 million or a negative $0.18 per share last year. The improvement in operating profit before restructuring and transformation costs2 and adjusted EBITDA2 is primarily attributable to a stronger gross profit, driven by a range of V20 initiatives and a better product mix, as well as lowered administration costs.
• During the quarter, the Company listed one of its Montreal plants for sale through the scope of its restructuring and transformation plan.  As a result, the carrying value of this plant is presented as an asset held for sale. Subsequent to the end of the quarter, the Company agreed to the sale of its Montreal plant on MacArthur Street in Saint-Laurent, Quebec, which will be effective on October 31, 2020. The closing of the plant was planned as part of the V20 reconfiguration of the Company’s North American manufacturing footprint. Gross proceeds will be $12.6M and are conditional upon the submission of a clean Bill 72 environmental report to the Quebec authorities. Additionally, the Company secured, shortly after the end of the quarter, new financing in the form of a $22.5M mortgage loan and a $65.0M revolving credit facility which will be used to support the Company’s operations, to complete its restructuring and transformation plan as well as to provide the necessary capital to pursue future growth initiatives while strengthening its balance sheet as the world economy enters a period of uncertainty. 
• Net new orders received (“bookings”) amounted to $76.7 million, an increase of $12.5 million or 19.5% compared to last year. This increase is primarily attributable to large project orders booked in the Company’s North American, German, French and Italian operations, notably in the liquified natural gas and nuclear markets. This increase was partially offset by a decrease in the non-project orders booked in the Company’s North American operations due to the unfavorable market conditions caused by the COVID-19 pandemic affecting the Company’s distribution channel.  The Company was encouraged nonetheless to record a 19.5% increase in bookings in the current context when compared to last year. 
• The Company ended the period with a backlog of $410.3 million, an increase of $3.5 million or 0.9% since the beginning of the current fiscal year. The increase in backlog is primarily attributable to the strengthening of the euro spot rate against the U.S. dollar over the course of the current quarter.
• The Company ended the quarter with net cash of $44.6 million, an increase of $13.6 million or 43.9% since the beginning of the current fiscal year. This increase is primarily attributable to cash provided by operating activities, mainly due to strong working capital management, and the favorable movements of the Euro and Canadian dollar spot rates, against the U.S dollar, on the net cash balance of the Company over the course of the current quarter. The increase was partially offset by short-term investments, additions to property, plant and equipment, dividend payments to shareholders and repayments of short‑term bank loans, long‑term debt and long-term lease liabilities.
• Foreign currency impacts:
  • Despite the increase of the Euro spot rate over the course of the quarter, the average exchange rates of the Euro weakened 2.7% against the U.S. dollar when compared to the same period last year. This resulted in the Company’s net profits and bookings from its European subsidiaries being reported as lower U.S. dollar amounts in the current quarter.
  • Based on average exchange rates, the Canadian dollar weakened 4.2% against the U.S. dollar when compared to the same period last year. This resulted in the Company’s Canadian dollar expenses being reported as lower U.S. dollar amounts in the current quarter.
  • The net impact of the above currency swings was generally favorable on the Company’s net loss1.

“Our first quarter presented us with a unique set of challenges related to global COVID-19 pandemic and to the rapid drop in the price of oil,” said Réjean Ostiguy, CFO of Velan Inc. “While it did have a negative impact on our quarterly sales, we managed our margins and reduced administration costs so as to come close to an operating breakeven, even when including our restructuring and transformation costs. We took actions to protect our cash and balance sheet by suspending dividends, temporarily rolling back wages, applying for COVID-19 subsidies and completing the refinancing of our North American operations.”

Yves Leduc, CEO of Velan Inc., said, “As supplier of critical equipment to essential industries, we were spared the harshest consequences of the global recession that struck early in the quarter, and we responded extremely swiftly in protecting our employees and ensuring the continuity of our global supply chain, while delivering much improved results over last year. Going forward, we are advantaged by a healthy and well-balanced business portfolio, the accelerated margin growth under our V20 plan, as well as the broad set of recent measures that have increased our company’s resilience and agility. These are hard times but there is business momentum, and, more importantly, our employees, with whom Bruno and I have communicated every single week since the pandemic broke out, are responding admirably well to the challenge. I thank them for their resolve and leadership.”

Dividend

At the end of the fiscal year ended February 29, 2020, the Board of Directors deemed appropriate to suspend the quarterly dividend.  The decision remains unchanged and will be reviewed on a quarterly basis.

Conference call

Financial analysts, shareholders, and other interested individuals are invited to attend the first quarter conference call to be held on Friday, July 10, 2020, at 11:00 a.m. (EDT). The toll free call-in number is 1-800-905-9496, access code 21965457. A recording of this conference call will be available for seven days at 1-416-626-4144 or 1-800-997-6910, access code 21965457.

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$371.6 million in its last reported fiscal year. The Company employs over 1,775 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. Reconciliations of these measures can be found on the following page.

Operating profit (loss) before restructuring and transformation costs and Adjusted net earnings (loss) before interest, taxes, depreciation and amortization ("EBITDA")

	Three-monthperiod endedMay 31,	Three-monthperiod endedMay 31,
	2020	2019
Operating loss	(0.5)	(7.3)
Adjustment for:
Restructuring and transformation costs	1.2	0.5
Operating profit (loss) before restructuring and transformation costs	0.7	(6.8)
Net loss1	(1.9)	(5.8)
Adjustments for:
Depreciation of property, plant and equipment	2.5	2.6
Amortization of intangible assets	0.6	0.4
Finance costs – net	0.3	0.3
Income taxes	1.1	(1.8)
EBITDA	2.6	(4.3)
Adjustment for:
Restructuring and transformation costs	1.2	0.5
Adjusted EBITDA	3.8	(3.8)

The term “operating profit or loss before restructuring and transformation costs” is defined as operating profit or loss plus restructuring and transformation costs. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

The term “adjusted EBITDA” is defined as net income or loss attributable to Subordinate and Multiple Voting Shares plus restructuring and transformation costs, depreciation of property, plant & equipment, plus amortization of intangible assets, plus net finance costs plus income tax provision. 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.

Velan Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited)
(in thousands of U.S. dollars)
As At	May 31,	February 29,
	2020	2020
	$	$
Assets
Current assets
Cash and cash equivalents	84,426	75,327
Short-term investments	1,764	627
Accounts receivable	117,312	135,242
Income taxes recoverable	7,980	8,747
Inventories	166,042	170,265
Deposits and prepaid expenses	6,217	5,191
Derivative assets	124	555
Assets held for sale	3,512	-
	387,377	395,954
Non-current assets
Property, plant and equipment	94,661	98,179
Intangible assets and goodwill	17,036	17,148
Deferred income taxes	25,986	26,702
Other assets	529	513
	138,212	142,542
Total assets	525,589	538,496
Liabilities
Current liabilities
Bank indebtedness	39,786	44,317
Short-term bank loans	397	1,379
Accounts payable and accrued liabilities	63,893	74,271
Income taxes payable	1,965	1,493
Customer deposits	51,086	47,208
Provisions	15,608	14,963
Provision for performance guarantees	20,604	21,127
Derivative liabilities	2,006	1,169
Current portion of long-term lease liabilities	1,617	1,621
Current portion of long-term debt	8,013	8,311
	204,975	215,859
Non-current liabilities
Long-term lease liabilities	13,729	13,722
Long-term debt	10,410	10,986
Income taxes payable	1,576	1,576
Deferred income taxes	2,758	2,869
Other liabilities	8,280	8,623
	36,753	37,776
Total liabilities	241,728	253,635
Total equity	283,861	284,861
Total liabilities and equity	525,589	538,496

Velan Inc.
Condensed Interim Consolidated Statements of Loss
(Unaudited)
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
	Three-month periods endedMay 31
	2020		2019
	$		$
Sales	76,653		83,816
Cost of sales	58,261		67,722
Gross profit	18,392		16,094
Administration costs	17,667		22,954
Restructuring and transformation costs	1,176		509
Other expense (income)	24		(57	)
Operating loss	(475	)	(7,312	)
Finance income	116		140
Finance costs	434		467
Finance costs – net	(318	)	(327	)
Loss before income taxes	(793	)	(7,639	)
Income Taxes	1,113		(1,819	)
Net loss for the period	(1,906	)	(5,820	)
Net loss attributable to:
Subordinate Voting Shares and Multiple Voting Shares	(1,886	)	(5,824	)
Non-controlling interest	(20	)	4
	(1,906	)	(5,820	)
Net loss per Subordinate and Multiple Voting Share
Basic	(0.09	)	(0.27	)
Diluted	(0.09	)	(0.27	)
Dividends declared per Subordinate and Multiple Voting Share	-		0.02
	(CA$ - )		(CA$0.03)
Total weighted average number of Subordinate and Multiple Voting Shares
Basic	21,585,635		21,621,935
Diluted	21,585,635		21,621,935

Velan Inc.
Condensed Interim Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands of U.S. dollars)
	Three-month periods endedMay 31
	2020		2019
	$		$
Comprehensive loss
Net loss for the period	(1,906	)	(5,820	)
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other than the reporting currency (U.S. dollar)	906		(2,851	)
Comprehensive loss	(1,000	)	(8,671	)
Comprehensive loss attributable to:
Subordinate Voting Shares and Multiple Voting Shares	(930	)	(8,537	)
Non-controlling interest	(70	)	(134	)
	(1,000	)	(8,671	)
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	Accumulatedothercomprehensiveincome (loss)		Retainedearnings		Total		Non-controllinginterest		Total equity
Balance - February 28, 2019	21,621,935	73,090	6,074	(28,990	)	254,606		304,780		4,053		308,833
Net loss for the year	-	-	-	-		(5,824	)	(5,824	)	4		(5,820	)
Other comprehensive loss	-	-	-	(2,713	)	-		(2,713	)	(138	)	(2,851	)
Effect of share-based compensation	-	-	1	-		-		1		-		1
Dividends
Multiple Voting Shares	-	-	-	-		(346	)	(346	)	-		(346	)
Subordinate Voting Shares	-	-	-	-		(135	)	(135	)	-		(135	)
Balance - May 31, 2019	21,621,935	73,090	6,075	(31,703	)	248,301		295,763		3,919		299,682
Balance - February 29, 2020	21,585,635	72,695	6,260	(34,047	)	236,269		281,177		3,684		284,861
Net loss for the year	-	-	-	-		(1,886	)	(1,886	)	(20	)	(1,906	)
Other comprehensive income (loss)	-	-	-	956		-		956		(50	)	906
Balance - May 31, 2020	21,585,635	72,695	6,260	(33,091	)	234,383		280,247		3,614		283,861

Velan Inc.
Condensed Interim Consolidated Statements of Cash Flow
(Unaudited)
(in thousands of U.S. dollars)
	Three-month periods endedMay 31
	2020		2019
	$		$
Cash flows from
Operating activities
Net loss for the period	(1,906	)	(5,820	)
Adjustments to reconcile net loss to cash provided by operating activities	4,626		2,683
Changes in non-cash working capital items	16,523		4,859
Cash provided by operating activities	19,243		1,722
Investing activities
Short-term investments	(1,137	)	(4	)
Additions to property, plant and equipment	(2,531	)	(748	)
Additions to intangible assets	(257	)	(22	)
Proceeds on disposal of property, plant and equipment, and intangible assets intangible assets	40		32
Net change in other assets	(22	)	13
Cash used by investing activities	(3,907	)	(729	)
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders	(482	)	(476	)
Short-term bank loans	(982	)	(439	)
Repayment of long-term debt	(759	)	(716	)
Repayment of long-term lease liabilities	(431	)	(396	)
Cash used by financing activities	(2,654	)	(2,027	)
Effect of exchange rate differences on cash	948		(435	)
Net change in cash during the period	13,630		(1,469	)
Net cash – Beginning of the period	31,010		40,866
Net cash – End of the period	44,640		39,397
Net cash is composed of:
Cash and cash equivalents	84,426		72,597
Bank indebtedness	(39,786	)	(33,200	)
	44,640		39,397
Supplementary information
Interest received (paid)	(348	)	279
Income taxes reimbursed (paid)	(555	)	1,831

For further information please contact:Yves Leduc, Chief Executive OfficerorRéjean Ostiguy, Chief Financial OfficerTel: (514) 748-7743Fax: (514) 748-8635Web:  www.velan.com