Mr. Yves Leduc reports

VELAN INC. REPORTS ITS FIRST QUARTER 2018/19 FINANCIAL RESULTS

Velan Inc. has released its financial results for its first quarter ended May 31, 2018.

Highlights:

• Sales of $77.9-million (U.S.) for the quarter;
• Net loss of $3.7-million (U.S.) for the quarter;
• Net new orders of $86.2-million (U.S.) for the quarter;
• Order backlog of $459.9-million (U.S.) at the end of the quarter, of which $164.8-million (U.S.) is scheduled for delivery beyond the next 12 months;
• Net cash of $47.9-million (U.S.) at the end of the quarter.

       (millions of U.S. dollars, excluding per-share amounts)

                                                    Three-month periods ended
                                                        May 31,        May 31,        
                                                          2018           2017      

Sales                                                    $77.9          $71.1   
Gross profit                                              17.7           13.5   
Gross profit %                                            22.7%          19.0%
                                                                                
EBITDA                                                    (1.5)          (2.5)
EBITDA per share -- basic and diluted                    (0.07)         (0.12)
Net earnings (loss)                                       (3.7)          (4.3)
Net earnings (loss) per share -- basic and diluted       (0.17)         (0.20)

First quarter fiscal 2019 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are with the first quarter of fiscal 2018)

Sales amounted to $77.9-million, an increase of $6.8-million or 9.6 per cent from the prior year. Sales were positively impacted by an increase in shipments in the company's North American, French and Italian operations. Despite the higher sales volume for the quarter, delays in shipments of certain large project orders caused by various customer-related, supply chain and internal operational issues continued to be an issue. Fierce competition continues to have a negative impact in most of the company's markets, which increased the importance for the company to target discrete market segments where its engineering know-how and agile design capabilities can be a leverage for future growth.

Bookings amounted to $86.2-million, an increase of $14.0-million or 19.5 per cent compared with last year. This increase is due primarily to higher orders booked by the company's North American and Italian subsidiaries, particularly in the oil and gas sector. The company also noted an increase in non-project valve orders in the current quarter.

The company ended the period with a backlog of $459.9-million, a decrease of $4.6-million or 1.0 per cent since the beginning of the current fiscal year. Despite a positive book-to-bill ratio of 1.11 in the quarter, the decrease in backlog is primarily attributable to the weakening of the euro spot rate against the United States dollar over the course of the current quarter.

Gross profit percentage increased by 370 basis points from 19.0 per cent to 22.7 per cent. The increase in the gross profit percentage is mainly attributable to the higher sales volume as well as a product mix with a higher proportion of higher margin product sales, such as spare parts and cost items. However, the continued pressure on pricing continues to cause an erosion of the company's margins, particularly in its North American operations.

Administration costs amounted to $22.3-million, an increase of $3.2-million or 16.8 per cent compared with last year. The increase is primarily attributable to the planned investment in sales force, engineering and information technology expenses, as well as increased costs for freight to customers.

Earnings before interest, taxes, depreciation and amortization amounted to a negative balance of $1.5-million or seven cents per share compared with a negative balance of $2.5-million or 12 cents per share last year. The $1.0-million improvement in EBITDA is primarily attributable to a higher sales volume and a higher gross profit percentage.

Net loss amounted to $3.7-million or 17 cents per share compared with $4.3-million or 20 cents per share last year. Despite a higher sales volume and improved margins, continued weakness in the company's North American operations dragged down its overall results, highlighting the need to accelerate its global cost reduction and transformation initiatives.

The company ended the quarter with net cash of $47.9-million, a decrease of $13.1-million or 21.5 per cent since the beginning of the current fiscal year. This decrease is primarily attributable to negative non-cash working capital movements of $6.2-million, dividend payments to shareholders and non-controlling interests of $2.5-million, and additions of property, plant and equipment of $2.0-million. 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 quarter.

Foreign currency impacts

Based on average exchange rates, the euro strengthened 12.2 per cent against the U.S. dollar when compared with 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 quarter.

Based on average exchange rates, the Canadian dollar strengthened 4.9 per cent against the U.S. dollar when compared with 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 net impact of the above currency swings was not significant on the company's net loss.

"While we had a slight improvement in quarterly sales and margin over last year, as well as a positive book-to-bill ratio, we fully acknowledge the need to transform our business model and return to bottom-line profitability, which is an ongoing process," said John Ball, chief financial officer of Velan. "We are also placing renewed emphasis on treasury and working capital conservation as we manage through this challenging period."

Yves Leduc, president and chief executive officer of Velan, said: "We believe our strategic direction is right and have been laying the foundation for the future in the midst of a shifting business environment. We are reducing complexity where it hinders our ability to drive improvements, as we sharpen our focus on products and markets with greater margins. As I stated in May, we are working to make important changes to improve our operating results."

Dividend

The board declared an eligible quarterly dividend of three cents per share, payable on Sept. 28, 2018, to all shareholders of record as at Sept. 14, 2018.

Conference call

Financial analysts, shareholders and other interested individuals are invited to attend the first quarter conference call to be held on Thursday, July 12, 2018, at 4:30 p.m. ET. The toll-free call-in number is 1-800-672-0241, access code 21892120. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 21892120.

About Velan Inc.

Founded in Montreal in 1950, Velan is one of the world's leading manufacturers of industrial valves, with sales of $338-million (U.S.) in its last reported fiscal year. The company employs more than 1,800 people and has manufacturing plants in nine countries.

              CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)                    
      (in thousands of U.S. dollars, excluding number of shares and per-share amounts)      
                                                              
                                                            Three-month periods ended May 31, 
                                                                          2018          2017

Sales                                                                  $77,874       $71,087
Cost of sales                                                           60,137        57,596
Gross profit                                                            17,737        13,491
Administration costs                                                    22,224        19,139
Other expense (income)                                                     (16)          296
Operating profit (loss)                                                 (4,471)       (5,944)
Finance income                                                             142           128
Finance costs                                                              174           152
Finance income (costs) -- net                                              (32)          (24)
Income (loss) before income taxes                                       (4,503)       (5,968)
Income taxes                                                              (829)       (1,382)
Net income (loss) for the period                                        (3,674)       (4,586)
Net income (loss) attributable to
Subordinate voting shares and multiple voting shares                    (3,727)       (4,304)
Non-controlling interest                                                    53          (282)
                                                                        (3,674)       (4,586)
Net income (loss) per subordinate and multiple voting share
Basic                                                                    (0.17)        (0.20)
Diluted                                                                  (0.17)        (0.20)
Dividends declared per subordinate and multiple voting share              0.02          0.07

We seek Safe Harbor.