KAIFENG, China, March 17 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (OTC Bulletin Board: CVVT) ("China Valves" or the "Company"), a leading metal valve manufacturer with operations in the People's Republic of China (the "PRC"), today announced its financial results for its fourth quarter and fiscal year ended December 31, 2008.
Highlights for the Fourth Quarter 2008 and Recent Developments
-- Net revenue was $19.7 million, an increase of 79.1% from the fourth
quarter of 2007
-- Gross profit was $7.4 million, an increase of 60.8% from the fourth
quarter of 2007
-- Gross margin was 37.3%, compared to 41.5% in the fourth quarter of 2007
-- Net loss was $12.3 million, compared to net income of $2.0 million in
year 2007
-- Non-GAAP net income for the fourth quarter of 2008, after excluding
$15.0 million in non-cash compensation expenses, was $2.7 million, or
$0.05 per fully diluted share, an increase of 37.0% from $2.0 million,
or $0.05 per fully diluted share in the fourth quarter of 2007
-- Government support for infrastructure projects and China's equipment
manufacturing sector helped stimulate the valve industry and create new
sales opportunities for the Company
Full Year 2008 Highlights
-- Net revenue was $65.9 million, an increase of 78.1% from 2007
-- Gross profit was $25.9 million, an increase of 72.6% from 2007
-- Gross profit margin was 39.2%, compared to 40.5% in 2007
-- Non-GAAP net income, after excluding $15.0 million in non-cash
compensation expenses was $10.8 million, or $0.23 per fully diluted
share, an increase of 50.7% from $7.1 million, or $0.18 per fully
diluted share, in 2007
-- Net loss was $4.2 million, compared to net income of $7.1 million in
year 2007
"While our fourth quarter results came in below our expectations, we achieved record financial results in 2008 and exceeded our make good target of $10.5 million in net income, excluding non-cash charges. We believe China's valve market will fare better than other industries in the wake of the weakening global economic environment due to government support of large infrastructure construction projects and demand related to rebuilding the earthquake-affected areas in Sichuan province," commented Mr. Siping Fang, Chairman and CEO of China Valves. "During the quarter, we experienced growth in sales of our valve products used in power stations, in the oil and petrochemical industry as well as water supply and sewage disposal systems. We also developed a series of technologically sophisticated products during the fourth quarter of 2008, which helped us maintain our position in the Chinese industrial valves industry."
Unaudited Fourth Quarter 2008 Results
China Valves' net revenue in the fourth quarter of 2008 was $19.7 million, an increase of 79.1% from $11.0 million in the fourth quarter of 2007. Sales volume was 5,392 tons for the fourth quarter of 2008, up 47.9% from 3,646 tons in the fourth quarter of 2007. The increased net revenue was mainly due to continued strong demand for industrial use valve products, more direct sales centers and distribution channels to serve more industries, increased sales of high value-added products and the introduction of new high-end products.
Approximately 29.3% of the Company's sales in the fourth quarter came from power station gate valves (used to control steam flow) and 40.8% of the Company's sales were butterfly valves (used to control municipal water and sewage flow), mainly due to the fast development of power station and water supply infrastructure projects.
Revenue from domestic sales and exports were $18.6 million and $1.2 million, or 94.2% and 5.8% of total revenues, for the fourth quarter of 2008, respectively.
Gross profit in the fourth quarter of 2008 was $7.4 million, an increase of 60.8% from $4.6 million in the fourth quarter of 2007. Gross profit margin was 37.3%, compared to 41.5% in the fourth quarter of 2007. Gross profit margin decreased due to higher raw materials costs related to raw materials purchased in previous quarters and changes in the product mix.
Operating expenses in the fourth quarter of 2008 were $18.4 million, up from $2.0 million in the fourth quarter of 2007. Operating expenses increased significantly due to a $15.0 million non-cash compensation expense that relates to the release of approximately 8.4 million "make good" shares which were pledged by Mr. Fang in connection with the Company's August 2008 private placement agreement. A total of 25,166,064 shares of the Company's common stock were placed into escrow in support of the Company's performance in 2008, 2009 and 2010. Because the Company exceeded the specified net income target of $10.5 million for the 2008 fiscal year (after excluding the non-cash compensation expense), one-third of the pledged make good shares (the "2008 Make Good Shares") became re-transferable at the direction of Mr. Fang in accordance with the make good arrangement. The 2008 Make Good Shares are being released to the Company's largest shareholder, Mr. Bin Li, pursuant to an agreement between Mr. Li and Mr. Fang. Because Mr. Fang is an officer and a director of the Company, the release of the 2008 Make Good Shares from escrow is accounted for as a separate compensatory agreement and recorded as non-cash compensation and recorded as a general and administrative expense. Other general and administrative expenses also increased due to mainly to higher professional fees associated with being a U.S. public reporting company. Selling expenses increased due to increased advertising and promotion expenses, sales tax, freight charges and higher sales commissions to sales representatives that increased proportionately with increased sales volume.
Income tax expense was $1.6 million, compared to $0.5 million in the fourth quarter of 2007. Income tax expense increased in the fourth quarter of 2008 as a result of higher taxable income recorded by the Company's operating subsidiaries. This increase was offset by a new reduced tax rate of 25.0%, effective January 2008, compared to a tax rate of 33.0% in the fourth quarter of 2007.
Net loss for the fourth quarter 2008 was $12.3 million, compared with $2.0 million in net income for the fourth quarter 2007. Fully diluted loss per share was $0.22 for fourth quarter 2008, compared to fully diluted earnings per share $0.05 for quarter ended December 31, 2007.
After adjusting for the aforementioned $15.0 million in non-cash compensation charges, non-GAAP net income was $2.7 million in the fourth quarter of 2008, as shown in the table below, an increase of 37.0% from net income of $2.0 million in the fourth quarter of 2007. Fully diluted earnings per share were $0.05 for the fourth quarter of 2008, compared to $0.05 in the fourth quarter of 2007. There were 56,885,103 fully diluted weighted average shares outstanding as of in the fourth quarter of December 31, 2008, compared to 40,106,500 in the fourth quarter of 2007.
Full Year 2008 Financial Results
For the full year 2008, net revenue was $65.9 million, up 78.1% from revenues of $37.0 million in 2007. Sales volume was 17,188 tons in 2008, up 51.4% from 11,351 tons in 2007. Gross profit was $25.9 million in 2008, up 72.6% from gross profit of $15.0 million in 2007. Gross margin was 39.2% in 2008, compared to 40.5% for year 2007. Operating loss was $0.6 million, compared with operating income of $8.6 million in 2007. Net loss was $4.2 million, or $0.09 loss per fully diluted share, compared to $7.1 million, or $0.18 earnings per fully diluted share for 2007. Excluding the aforementioned $15 million non-cash compensation expenses recorded in fourth quarter 2008, non-GAAP net income for fiscal year 2008 was $10.8 million, or $0.23 per fully diluted share.
Non-GAAP Net Income Reconciliation to Account for the Effect of a
Non-Cash Expense in the Fourth Quarter of 2008
4Q2008 2008
(unaudited)
Net Income (12,308,540) (4,236,844)
Non-cash Expenses - Shares 14,998,974 14,998,974
Adjusted Net Income 2,690,434 10,762,130
Basic and Diluted Shares 56,885,103 45,974,427
Earnings Per Share (0.22) (0.09)
Adjusted Earnings Per Share 0.05 0.23
Financial Condition
As of December 31, 2008, the Company had $16.4 million in cash and cash equivalents, up from $2.8 million as of December 31, 2007. Most of this increase resulted from the Company's $30.0 million private placement in August 2008. The Company had no long term debt and working capital was $33.1 million as of December 31, 2008, compared to $9.3 million as of December 31, 2007. Total shareholders' equity was $76.6 million as of December 31, 2008, up from $37.2 million as of December 31, 2007.
In the year ended December 31, 2008, the Company used $0.9 million in cash flow from operating activities, primarily due to the increased receivables. Accounts receivable totaled $26.1 million at year end, up from 16.8 million at December 31, 2007. Days sales outstanding were 114 days for the year ended December 31, 2008 compared to 128 days for the year ended December 31, 2007. In an effort to better manage receivables, the Company is tightening its credit policies and increasing collection efforts.
The Company intends to use most of the proceeds from its recent private placement to expand current production capabilities and acquire other companies. The Company is currently looking for acquisition candidates that will complement and enhance its current production and distribution capabilities.
Recent Developments
The Company's subsidiary, Henan Kaifeng High Pressure Valve Co., Ltd. ("High Pressure Valve"), and Kaifeng High Pressure Valve Castings Limited Liabilities Company (the "Casting Company"), which is a major supplier of the Company, each have manufacturing operations located on the same piece of land located in Kaifeng City, Henan (the "Kaifeng City Facility"). Until recently, the land use right and the buildings located at the Kaifeng City Facility have been owned by the Casting Company, and High Pressure Valve has been operating at the Kaifeng City Facility pursuant to a lease agreement with the Casting Company. On August 26, 2008, High Pressure Valve and the Casting Company entered into an agreement for the transfer of the Kaifeng City Facility from the Casting Company to High Pressure Valve. In connection with the agreement, the Company issued and placed in escrow for the benefit of Mr. Bin Fang, the shareholder of the Casting Company, or his designee, 5,500,000 shares of the Company's common stock in exchange for Mr. Bin Fang's agreement to cause the Casting Company to transfer the Kaifeng City Facility. The Kaifeng City Facility was transferred to High Pressure Valve on March 6, 2009 and the Company is in the process of arranging for the 5,500,000 shares to be released to Mr. Bin Fang. Other than his ownership interest in the 5,500,000 shares, Mr. Bin Fang is not affiliated with the Company.
In February, the Company's Chairman and CEO, Mr. Siping Fang, was named one of the top 30 famous private entrepreneurs in the selection of "Thirty Famous Non-State Owned Enterprise Entrepreneurs During 30 Years of Reform and Opening up in Henan Province."
Business Outlook
The domestic market contributed over 90% of the Company's sales revenue in 2008, and the Company plans to continue to focus on the Chinese market in 2009. China Valves believes that domestic market demand will continue to grow because the Chinese government has committed to invest approximately $14.5 billion in infrastructure projects starting in the fourth quarter 2008. In addition, the Company believes it will receive additional orders from areas in Sichuan province that were damaged by the earthquake. Although the first quarter of the year is usually the slowest in terms of order volume, the Company currently has an order backlog of over $36 million, primarily from existing customers.
In order to meet market demand for its products and increase its ability to produce higher-end valves, the Company is renovating and expanding its production facilities. In January 2009, the Company completed construction of a new facility at its Kaifeng location that will focus on producing technologically-advanced valve products. The Company is currently installing high-end equipment at the facility and expects to commence production in second quarter of 2009.
"In 2009, in addition to maintaining our leading position in thermal power station and water supply systems, we will strive to develop new products used in the oil and petrochemical industry, which we believe will contribute to higher profit margin. We have completed the design of ball valves and flat valves which are used in the construction of long-range pipelines for oil and gas transmission and should experience strong demand for these products. Due to the government policy supporting the nuclear power supply industry, we feel that the nuclear industry is an attractive market and plan to increase research and development, obtain production licenses and establish a sales team specifically focused on the nuclear power industry," said Mr. Fang. "We are in active negotiations with several potential targets, including producers of high-end valve products used in power stations as well as mid- to low-end valve producers that would allow us to focus our existing operations on producing higher-end products."
The Company expects gross margin to improve in first half of 2009, as selling prices have remained stable, while raw materials prices declined significantly in the fourth quarter of 2008. For the full year 2009, the Company remains focused on meeting the targeted net income of $23 million and fully diluted earnings per share of $0.369 established in the make good escrow agreement related to the August 2008 private placement.
Use of Non-GAAP Financial Measures
To supplement the Company's condensed consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information in this release. These measures are non-GAAP net income and non-GAAP fully diluted earnings per share to exclude the impact of $15 million in non-cash compensation expenses related to the August 2008 private placement that were recorded in the fourth quarter of 2008. The Company's management believes that these non-GAAP measures provide investors with a better understanding of how the results relate to the Company's historical performance. The additional non-GAAP information is not meant to be considered in isolation or as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies.
About China Valves Technology, Inc.
China Valves Technology, Inc. through its subsidiaries, Zhengzhou Zhengdie Valve Co, Ltd. and Henan Kaifeng High Pressure Valve Co., Ltd., is engaged in development, manufacture and sale of high-quality metal valves for the electricity, petroleum, chemical, water, gas and metallurgy industries. The Company has one of the best known brand names in China's valve industry, and its history can be traced back to 1959 when it was formed as a state-owned enterprise. The Company develops valve products by extensive research and development and owns a number of patents. It enjoys significant domestic market shares and exports to Asia and Europe. For more information, visit http://www.cvalve.com .
Safe Harbor Statements
Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company's ability to develop and market new products, the ability to access capital for expansion, the ability to acquire other companies, changes from anticipated levels of sales, changes in national or regional economic and competitive conditions, changes in relationships with customers, changes in principal product profits and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The Company undertakes no obligation to update or revise to the public any forward-looking statements, whether as a result of new information, future events or otherwise. This press release was developed by China Valves, and is intended solely for informational purposes and is not to be construed as an offer or solicitation of an offer to buy or sell the Company's stock. This press release is based upon information available to the public, as well as other information from sources which management believes to be reliable, but it is not guaranteed by China Valves to be accurate, nor does China Valves purport it to be complete. Opinions expressed herein are those of management as of the date of publication and are subject to change without notice.
Financial Tables Follow
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
Three Months Ended Years Ended
December 31, December 31,
2008 2007 2008 2007
(Unaudited) (Unaudited)
SALES 19,739,609 11,019,044 65,947,615 37,036,282
COST OF GOODS SOLD 12,379,430 6,442,925 40,082,152 22,050,041
GROSS PROFIT 7,360,179 4,576,119 25,865,463 14,986,241
EXPENSES:
Selling expense 1,758,778 1,088,556 4,929,728 2,998,585
General and
administrative
(including non-cash
stock compensation
expense of
$14,998,974 in 2008) 16,550,911 854,414 21,334,235 3,245,954
Research and
development 44,593 62,242 217,698 104,502
Total Operating
Expenses 18,354,282 2,005,212 26,481,661 6,349,041
(LOSS) INCOME FROM
OPERATIONS (10,994,103) 2,570,907 (616,198) 8,637,200
OTHER (INCOME)
EXPENSE :
Other income, net (236,995) (34,501) (1,145,208) (371,633)
Interest and finance
expense, net 63,326 147,567 486,946 528,498
Change in fair value
of derivative
instruments (65,739) -- (100,479) --
Total Other (Income)
Expense, net (239,408) 113,066 (758,741) 156,865
INCOME BEFORE
PROVISION FOR
INCOME TAXES (10,754,695) 2,457,841 142,543 8,480,335
INCOME TAX EXPENSE 1,553,846 494,331 4,379,388 1,337,743
NET (LOSS) INCOME (12,308,541) 1,963,510 (4,236,845) 7,142,592
OTHER COMPREHENSIVE
INCOME
Foreign currency
translation gain 616,533 1,501,180 2,985,232 1,869,646
COMPREHENSIVE (LOSS)
INCOME (11,692,008) 3,464,690 (1,251,613) 9,012,238
EARNINGS (LOSS)
PER SHARE:
Basic and diluted
weighted average
number of shares 56,885,103 40,003,550 45,974,427 40,003,550
Basic and diluted
earnings (loss)
per share (0.22) 0.05 (0.09) 0.18
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND DECEMBER 31, 2008
ASSETS
December 31, December 31,
2008 2007
CURRENT ASSETS:
Cash and cash equivalents $ 16,427,883 $ 2,773,262
Restricted cash 3,191,237 40,856
Notes receivable 880,200 --
Accounts receivable, net of allowance for
doubtful accounts of $1,163,457 and
$274,167 as of December 31, 2008 and
December 31, 2007, respectively 26,119,447 16,789,383
Other receivables 4,841,691 4,638,477
Inventories 11,244,442 10,539,087
Advances on inventory purchases 1,108,512 458,699
Advances on inventory purchases -
related party 1,367,446 --
Prepaid expenses 52,921 519,043
Total current assets 65,233,779 35,758,807
PLANT AND EQUIPMENT, net 16,184,894 7,523,788
OTHER ASSETS:
Accounts receivable - retainage, long term 2,541,418 559,368
Advances on equipment purchases 2,001,733 324,858
Long term receivable 382,552 --
Goodwill - purchased 20,811,767 19,449,851
Intangibles, net of accumulated amortization 823,331 435,633
Other investments, at lower of cost or market 764,515 714,485
Total other assets 27,325,316 21,484,195
Total assets $108,743,989 $64,766,790
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 6,630,574 $6,452,519
Short term loans 7,839,960 6,479,291
Short term loans - related parties 596,791 671,188
Other payables 4,453,881 4,435,982
Other payable - related party 1,975,462 2,848,032
Notes payable 2,934,000 --
Accrued liabilities 2,382,138 1,734,679
Customer deposits 3,129,708 2,810,352
Taxes payable 1,227,338 1,064,512
Derivative instrument liabilities 924,291 --
Total current liabilities 32,094,143 26,496,555
Long-term liabilities:
Long term debt -- 1,096,800
Total long term liabilities -- 1,096,800
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value; 300,000,000
shares authorized; 62,385,103 shares and
40,106,500 shares issued and outstanding as
of December 31, 2008 and December 31, 2007,
respectively 62,386 40,107
Additional paid-in-capital 66,904,774 16,365,029
Common stock subscription receivable (9,834,000) --
Statutory reserves 2,958,659 1,749,601
Retained earnings 10,399,050 15,844,953
Accumulated other comprehensive income 6,158,977 3,173,745
Total shareholders' equity 76,649,846 37,173,435
Total liabilities and shareholders' equity $108,743,989 $64,766,790
CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income $(4,236,845) $ 7,142,592
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation 933,714 551,252
Amortization of intangible assets 68,506 18,917
Bad debt allowance 819,711 263,308
Gain on disposal of fixed assets 26,559 1,363
Change in fair value of derivatives (100,479) --
Debt forgiven as government grant (264,060) --
Stock compensation cost 14,998,974 --
Change in operating assets and liabilities:
Restricted cash due to export covenant (53,193) (39,238)
Note receivable (864,900) --
Accounts receivable - trade (10,741,517) (7,023,086)
Other receivables (256,434) (664,963)
Inventories 32,045 3,215,500
Advance on inventory purchases (606,957) (440,532)
Advance on inventory purchases-related party (1,343,676) --
Prepaid expenses 493,732 70,541
Account payable-trade (269,003) (2,886,075)
Other payables (287,629) 2,032,192
Accrued liabilities 516,849 1,137,096
Customer deposits 120,439 589,965
Taxes payables 86,752 602,527
Net cash (used in) provided by operating
activities (927,412) 4,571,359
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets (419,492) (381,419)
Advance on equipment purchases (1,654,128) (311,992)
Purchases of plant and equipment (3,194,387) (628,934)
Construction in progress (5,879,870) (768,387)
Proceeds from sale of equipment 65,575 --
Net cash used in investing activities (11,082,302) (2,090,732)
CASH FLOWS FINANCING ACTIVITIES:
Restricted cash due to covenant (105,616) --
Restricted cash due to notes payable (2,934,000) --
Proceeds from/(repayments of) other
payable-related party (976,466) 880,977
Proceeds from/(repayments of) notes
payable 2,883,000 (4,486,925)
Proceeds from short term debt 5,753,375 4,397,140
Proceeds from short term loans-related parties 457,436 139,939
Repayments of short term debt (5,751,304) (8,724,565)
Repayments from short term loans-related
parties (576,721) --
Proceeds from long term debt -- 1,053,360
Shareholder contributions -- 1,249,999
Proceeds from private placement financing 26,688,246 --
Net cash provided by (used in)
financing activities 25,437,950 (5,490,075)
EFFECTS OF EXCHANGE RATE CHANGE IN CASH 226,385 191,499
INCREASE (DECREASE) IN CASH 13,654,621 (2,817,949)
CASH and CASH EQUIVALENTS, beginning 2,773,262 5,591,211
CASH and CASH EQUIVALENTS, ending $16,427,883 $2,773,262
SUPPLEMENTAL DISCLOUSRES OF CASH
FLOW INFORMATION:
Cash paid for interest $ 571,139 $ 665,213
Cash paid for income taxes $ 4,001,458 $1,005,265
For further information, please contact:
China Valves Technology, Inc.
Ray Chen, VP of Investor Relations
Tel: +1-650-281-8375
+86-139-2527-9478
Email: raychen@cvalve.net
Web: http://www.cvalve.com
CCG Investor Relations
Crocker Coulson, President
Tel: +1-646-213-1915
Email: crocker.coulson@ccgir.com
Web: http://www.ccgirasia.com
