VELAN INC. REPORTS ITS SECOND QUARTER 2016/17 FINANCIAL RESULTS

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1 7007 Côte de Liesse, Montreal, QC H4T 1G2 Canada Tel: (514) Fax: (514) PRESS RELEASE FOR IMMEDIATE RELEASE For further information please contact: Tom Velan, Chief Executive Officer Yves Leduc, President or John D. Ball, Chief Financial Officer Tel: (514) Fax: (514) Web: October 13, 2016 VELAN INC. REPORTS ITS SECOND QUARTER 2016/17 FINANCIAL RESULTS MONTREAL, QUEBEC Velan Inc. (TSX: VLN) (the Company ), a world-leading manufacturer of industrial valves, announced today its financial results for its second quarter ended, Highlights Sales of US$71.1 million for the quarter Net earnings 1 of US$2.0 million for the quarter Order backlog of US$374.0 million at the end of the quarter Net order bookings of US$77.4 million for the quarter Net cash 2 of US$80.6 million at the end of the quarter (millions of U.S. dollars, excluding per share amounts) Three-month periods ended Six-month periods ended Sales $71.1 $111.6 $148.5 $214.7 Gross Profit Gross profit % 27.0% 23.9% 25.5% 23.4% Net income attributable to Multiple and Subordinate Voting Shares Net income per share basic and diluted Second Quarter Fiscal 2017 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the second quarter of fiscal 2016): Net earnings 1 amounted to $2.0 million or $0.10 per share compared to $4.7 million or $0.22 per share last year. The $2.7 million decrease in net earnings 1 is primarily attributable to a lower sales volume which was partially offset by a higher gross profit percentage and decreased administration costs. Net new orders received amounted to $77.4 million, an increase of $5.9 million or 8.3% compared to last year. This increase is due primarily to new large project orders booked by the Company s French operations, which was partially offset by a decrease in orders booked in the Company s North American operations.

2 Sales amounted to $71.1 million, a decrease of $40.5 million or 36.3% from the prior year. Sales were negatively impacted by the decreased bookings received over the last fiscal year as well as delays in shipments of certain large project orders caused by various customer-related, supply chain and internal operational issues. Gross profit percentage increased by 310 basis points from 23.9% to 27.0%. Despite the lower sales volume, the increase in the gross profit percentage was mainly attributable to a product mix with a greater proportion of higher margin product sales, material cost savings, as well as labour and overhead savings stemming from the restructuring initiatives implemented in the prior fiscal year. The Company ended the period with net cash 2 of $80.6 million, a decrease of $12.4 million or 13.3% since the beginning of the current quarter. This decrease is primarily attributable to negative non-cash working capital movements, particularly an increase in inventories and a decrease in accounts payable and accrued liabilities. First Half Year Fiscal 2017 (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the first half year of fiscal 2016): Net earnings 1 amounted to $2.5 million or $0.12 per share compared to $7.9 million or $0.36 per share last year. The $5.4 million decrease in net earnings 1 is primarily attributable to a lower sales volume which was partially offset by a higher gross profit percentage and decreased administration costs. Bookings amounted to $187.4 million, an increase of $34.1 million or 22.2% compared to last year. Excluding the effect of an order cancellation of $23.6 million in the prior year period, bookings would have increased by $10.5 million or 5.9%. This increase is due primarily to new large project orders booked by the Company s French and Italian operations, which was partially offset by a decrease in orders booked in the Company s North American operations. Sales amounted to $148.5 million, a decrease of $66.2 million or 30.8% from the prior year. Sales were negatively impacted, particularly in our Italian and North American operations, by the decreased bookings received over the last fiscal year. Delays in shipments of certain large project orders caused by various customer-related, supply chain and internal operational issues, particularly in our North American operations, also had a negative impact on sales for the period. As a result of bookings outpacing sales in the period, the Company ended the period with a backlog of $374.0 million, an increase of $42.8 million or 12.9% since the beginning of the current fiscal year. In addition to higher bookings, 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 increased by 210 basis points from 23.4% to 25.5%. Despite the lower sales volume, the increase in the gross profit percentage was mainly attributable to a product mix with a greater proportion of higher margin product sales, material cost savings, as well as labour and overhead savings stemming from the restructuring initiatives implemented in the prior fiscal year. Administration costs amounted to $35.8 million, a decrease of $3.3 million or 8.4%. The decrease was achieved despite a $0.6 million 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: o Based on average exchange rates, the Euro strengthened 1.7% 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.

3 o o Based on average exchange rates, the Canadian dollar weakened 3.1% 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 the above currency swings was generally favourable on the Company s net earnings 1. While we continued to experience softness in sales for a variety of reasons, both customer specific and general market conditions, we both improved margin and held expenses in line for the quarter, said John Ball, CFO of Velan Inc. Our bookings and backlog, especially for longer term projects, and bookings to sales ratio all continued to improve, and our general working capital position remains strong. Furthermore, given our strong balance sheet, we intend, subject to Toronto Stock Exchange approval, to renew our normal course issuer bid when it expires on October 21, Under the bid, we may purchase up to 153,969 Subordinate Voting Shares (the "Shares"), representing approximately 2.5% of the issued Shares of such class as at October 13, All Shares purchased will be cancelled. As at October 13, 2016, we had 6,158,768 Shares outstanding. During the past 12 months, 137,700 Shares were purchased at a weighted average price of CA $ We have concluded that purchases of up to 153,969 of the issued and outstanding Shares may be an appropriate and desirable use of available funds and, therefore, would be in the best interest of the Company. As a result of such purchases, the number of issued Shares will be decreased and, consequently, the proportionate share interest of all remaining shareholders will be increased on a pro rata basis. Yves Leduc, President of Velan Inc., said, The market downturn has deeply affected our performance in the first half of the year in several ways: we have seen lower bookings in North America, customers postponing shipments, and the increased complexity of some large orders causing supply chain and production delays. We are responding by intensifying our operational improvement efforts and by aggressively pursuing orders in specifically targeted markets. On the positive side, our backlog has increased steadily since the beginning of the year, which should benefit next year s performance. The Company has the resilience to withstand a very challenging market and is taking actions that should help rebound strongly when it recovers. Tom Velan, CEO of Velan Inc. said, Recently, I attended the annual meeting of the North American Valve Manufacturers Association. The meeting confirmed that the industry is facing a tough market environment and we are continuing our efforts to improve our operations to be ready to benefit when the market conditions improve. Dividend The Board declared an eligible quarterly dividend of CDN$0.10 per share, payable on December 30, 2016, to all shareholders of record as at December 15, Conference call Financial analysts, shareholders, and other interested individuals are invited to attend the second quarter conference call to be held on Thursday, October 13, 2016, at 4:30 p.m. (EDT). The toll free call-in number is , access code A recording of this conference call will be available for seven days at or , access code About Velan Founded in Montreal in 1950, Velan Inc. ( is one of the world s leading manufacturers of industrial valves, with sales of US$426.9 million in its last reported fiscal year. The Company 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.

4 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, 2016 for a detailed calculation of this measure. 1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares. 2 Non-IFRS measures see explanation above.

5 Condensed Interim Consolidated Statements of Financial Position (in thousands of U.S. dollars) As At, February 29, $ $ Assets Current assets Cash and cash equivalents 89,872 89,368 Short-term investments 1,769 3,225 Accounts receivable 103, ,569 Income taxes recoverable 9,116 5,674 Inventories 175, ,523 Deposits and prepaid expenses 5,012 3,586 Derivative assets 1,279 1, , ,543 Non-current assets Property, plant and equipment 94,322 95,257 Intangible assets and goodwill 19,968 20,352 Deferred income taxes 14,486 13,537 Other assets , ,084 Total assets 515, ,627 Liabilities Current liabilities Bank indebtedness 6,996 5,028 Short-term bank loans 1,344 1,319 Accounts payable and accrued liabilities 53,305 62,943 Income taxes payable 4,357 5,746 Dividend payable 1,658 1,606 Customer deposits 39,351 28,123 Provisions 9,647 9,333 Accrual for performance guarantees 29,350 30,563 Derivative liabilities 930 2,945 Current portion of long-term debt 6,575 7, , ,584 Non-current liabilities Long-term debt 13,744 14,471 Deferred income taxes 3,280 3,408 Other liabilities 9,903 9,045 26,927 26,924 Total liabilities 180, ,508 Equity Equity attributable to the Subordinate and Multiple Voting shareholders Share capital 74,217 74,345 Contributed surplus 5,979 5,941 Retained earnings 279, ,380 Accumulated other comprehensive income (loss) (30,526) (33,089) 329, ,577 Non-controlling interest 5,965 5,542 Total equity 335, ,119 Total liabilities and equity 515, ,627

6 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 Six-month periods ended $ $ $ $ Sales 71, , , ,737 Cost of sales 51,897 84, , ,539 Gross profit 19,240 26,681 37,905 50,198 Administration costs 17,032 19,889 35,798 39,070 Other expense (income) 309 (6) Operating profit (loss) 1,899 6,798 1,905 11,119 Finance income Finance costs Finance income (costs) net 83 (21) 223 (67) Income (Loss) before income taxes 1,982 6,777 2,128 11,052 Provision for (Recovery of) income taxes 102 1,680 (326) 2,524 Net income (loss) for the period 1,880 5,097 2,454 8,528 Net income (loss) attributable to: Subordinate Voting Shares and Multiple Voting Shares 2,001 4,749 2,529 7,856 Non-controlling interest (121) 348 (75) 672 1,880 5,097 2,454 8,528 Net income (loss) per Subordinate and Multiple Voting Share Basic Diluted Dividends declared per Subordinate and Multiple 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 21,731,871 21,875,203 21,729,924 21,886,645 Diluted 21,736,983 21,875,203 21,735,703 21,886,645

7 Condensed Interim Consolidated Statements of Comprehensive Income (Loss) (in thousands of U.S. dollars) Three-month periods ended Six-month periods ended $ $ $ $ Comprehensive income (loss) Net income (loss) for the period 1,880 5,097 2,454 8,528 Other comprehensive income (loss) Foreign currency translation adjustment on foreign operations whose functional currency is other than the reporting currency (U.S. dollar) (56) 1,354 3,061 (1,688) Comprehensive income (loss) 1,824 6,451 5,515 6,840 Comprehensive income (loss) attributable to: Subordinate Voting Shares and Multiple Voting Shares 1,640 6,416 5,092 6,528 Non-controlling interest ,824 6,451 5,515 6,840

8 Condensed Interim Consolidated Statements of Changes in Equity (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 29, ,737,135 74,345 5,941 (33,089) 280, ,577 5, ,119 Net income (loss) for the period ,529 2,529 (75) 2,454 Other comprehensive income (loss) ,563-2, ,061 21,737,135 74,345 5,941 (30,526) 282, ,669 5, ,634 Effect of share-based compensation 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 -, ,725,335 74,217 5,979 (30,526) 279, ,193 5, ,158 Balance - February 28, ,939,168 76,475 6,064 (27,652) 283, ,611 6, ,093 Net income (loss) for the period ,856 7, ,528 Other comprehensive income (loss) (1,328) - (1,328) (360) (1,688) 21,939,168 76,475 6,064 (28,980) 291, ,139 6, ,933 Effect of share-based compensation Shares issued under Share Option Plan 14, (227) Share repurchase (89,300) (973) - - (253) (1,226) - (1,226) Acquisition of non-controlling interest (890) (890) Dividends Multiple Voting Shares (2,495) (2,495) - (2,495) Subordinate Voting Shares (932) (932) - (932) Non-controlling interest (139) (139) Balance -, ,864,135 75,729 5,889 (28,980) 287, ,538 5, ,303

9 Condensed Interim Consolidated Statements of Cash Flow (in thousands of U.S. dollars) Three-month periods ended Six-month periods ended $ $ $ $ Cash flows from Operating activities Net income for the period 1,880 5,097 2,454 8,528 Adjustments to reconcile net income to cash provided by operating activities 4,752 4,331 5,259 5,407 Changes in non-cash working capital items (13,539) (3,566) (1,734) (16,409) Cash provided (used) by operating activities (6,907) 5,862 5,979 (2,474) Investing activities Short-term investments 299 (43) 1,456 (817) Additions to property, plant and equipment (1,937) (2,549) (3,273) (4,126) Additions to intangible assets (10) (22) (60) (127) Proceeds on disposal of property, plant and equipment, and intangible assets Acquisition of non-controlling interest - (890) - (890) Net change in other assets (29) (845) 133 (508) Cash provided (used) by investing activities (1,631) (4,276) (1,565) (6,378) Financing activities Dividends paid to Subordinate and Multiple Voting shareholders (1,697) (1,777) (3,303) (3,520) Dividends paid to non-controlling interest - (139) - (139) Repurchase of shares (159) (1,171) (159) (1,226) Short-term bank loans 152 (63) 25 (628) Increase in long-term debt - 6,009-6,009 Repayment of long-term debt (1,311) (2,800) (3,272) (4,224) Cash provided (used) by financing activities (3,015) 59 (6,709) (3,728) Effect of exchange rate differences on cash (581) 2, Net change in cash during the period (12,134) 4,019 (1,464) (11,718) Net cash Beginning of the period 95,010 68,225 84,340 83,962 Net cash End of the period 82,876 72,244 82,876 72,244 Net cash is composed of: Cash and cash equivalents 89,872 87,541 89,872 87,541 Bank indebtedness (6,996) (15,297) (6,996) (15,297) 82,876 72,244 82,876 72,244 Supplementary information Interest received (paid) 112 (4) Income taxes reimbursed (paid) (1,285) (1,981) (3,205) (3,849)