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Sutor Technology Group Limited Announces Third Quarter

Of Fiscal Year 2012 Financial Results

  

CHANGSHU, China, May 11/PRNewswire-Asia/ -- Sutor Technology Group Limited (the "Company" or "Sutor") (Nasdaq: SUTR), a leading China-based non-state-owned manufacturer and distributor of high-end fine finished steel products and welded steel pipes used by a variety of downstream applications, today announced its unaudited financial results for the third quarter of fiscal year 2012 ended March 31, 2012.

  

Third Quarter 2012 Highlights:

 

   3QFY2012   3Q FY2011   Change 
Revenues (million)  $109.9   $101.4    8.4%
Gross profit (million)  $7.9   $8.6    -8.1%
Gross margin   7.2%   8.5%   -15.3%
Net income (million)  $1.2   $3.5    -65.7%
EPS:  $0.03   $0.09    -66.7%

  

Ms. Lifang Chen, Chairwoman and CEO, commented, “Our performance was lower than that in the same quarter last year due to a combination of factors including the slowing down of the Chinese economic growth, equipment shutdown for energy-saving related renovation as well as the timing of project completion. Further, continued appreciation of the Chinese Yuan and lingering financial crises in Europe resulted in slower export sales. It was one of the most challenging quarterly performances for the last several years. We understand every industry and company may have its ups and downs.”

 

“That being said, we are pleased with the fact that sales from our main HDG products were up approximately 36.1% during the quarter compared with the same quarter last year because demand exceeded supplies. As a result, we built up inventories and engaged in spot sales. We fully expect sequentially improved performance in the fourth fiscal quarter in an otherwise challenging but improving economic environment. I am also pleased to report that the construction of the new 500,000 metric tons of high-precision cold-roll steel production line is progressing well. We anticipate trial production will start in July.”

 

“On the capital market, we’ll continue to closely monitor the tradeoff between trading liquidity and share prices. We may resume repurchasing shares to protect and maximize shareholder value when appropriate. We may also ask the Board of Directors to approve new buyback programs after the existing program expires. Our near-term priority is to complete the new cold-roll production line on time and then try to maximize the asset value.” concluded Ms. Chen.

 

Revenue. For the three months ended March 31, 2012, revenue was $109.9 million, compared to $101.4 million for the same period last year, an increase of $8.5 million, or 8.4%. The increase was mainly attributable to higher revenue from our HDG and acid-pickled steel products. During the three months ended March 31, 2012, revenue from our HDG and acid-pickled steel products increased by 36.1% and 39.3%, respectively, as compared to the same period last year. The higher revenue from HDG products was primarily due to the higher sales volume, which increased by approximately 37.1%. The higher revenue of acid-pickled steel was primarily due to higher sales volume and higher average selling price, which increased by 30.3% and 6.9%, respectively. The increased demands for HDG and acid picked products were mainly resulted from our successful efforts to expand the group of end-customers. The company recently established a special division to target and service large and end-user customers. During the quarter, we added more than one hundred end-customers. Further, demand for thick-spec HDG products recently exceeded supplies.

 

 
 

 

However, we experienced a decrease in sales of cold rolled steel products by approximately 86.0% mainly because we used more of them internally for the production of our other products. Furthermore, sales of PPGI and steel pipe products also decreased during the third fiscal quarter of 2012 due to the timing of the Chinese New Year, the number of working days during the month of January and longer-than-normal facilities renovation, which caused a reduction of production of these products during this quarter. Specifically, revenues from PPGI and steel pipe products decreased 65.6% and 39.2%, respectively. We renovated the furnace of the PPGI production line in order to achieve long-term energy savings. The declined pipe product revenue was mainly due to the timing of projects. The average selling price was down 1.4% for the PPGI products and up 14.7% for the pipe products during the third-quarter ended March 31, 2012 as compared with the same period last year.

 

Cost of revenue. Cost of revenue increased by $9.3 million, or 10.0%, to $102.1 million in the three months ended March 31, 2012, from $92.8 million in the same period in 2011. As a percentage of revenue, cost of revenue increased to 92.8% in the three months ended March 31, 2012, as compared to 91.5% in the same period last year. The increased amount of the cost of revenue was generally in line with the increased sales revenue.

 

Gross profit and gross margin. Gross profit decreased by $0.7 million to $7.9 million in the three months ended March 31, 2012, from $8.6 million in the same period in 2011. Gross profit as a percentage of revenue (gross margin) was approximately 7.2% for the three months ended March 31, 2012 as compared with approximately 8.5% for the same period last year. The lower gross margin was due to the fact that we sold more lower gross margin products for the quarter ended March 31, 2012 than the same quarter last year. For instance, we sold more HDG products than PPGI products whereas HDG’s gross margin is usually lower than that of PPGI. As a result, the overall gross margin was reduced. In addition, our adoption of sales promotion policies to some extent negatively affected our profit margin.

 

Total operating expenses. Our total operating expenses increased approximately $0.1 million to $3.2 million in the three months ended March 31, 2012, from $3.1 million in the same period in 2011. As a percentage of revenue, our total operating expenses decreased to 2.9% in the three months ended March 31, 2012, from 3.0% in the same period in 2011.

 

Selling expenses. Our selling expenses decreased by $0.4 million to $0.9 million in the three months ended March 31, 2012, from $1.3 million in the same period in 2011. As a percentage of revenue, our selling expenses decreased to 0.8% for the three months ended March 31, 2012, from 1.3% for the same period last year. The lower selling expenses were mainly due to lower international sales for the quarter ended March 31, 2012 than the same period last year.

 

General and administrative expenses. General and administrative expenses increased by $0.6 million to $2.3million, or 2.1% of the total revenue, in the three months ended March 31, 2012, from $1.7 million, or 1.7% of the revenue, in the same period in 2011. The increased general and administrative expenses were primarily due to increased employee salary and benefits, new office building maintenance expenses, depreciation for office supplies, and expenses for renovating employee dormitories in the amount of approximately $0.13 million, $0.1 million, $0.13 million and $0.14 million, respectively. 

 

Interest expense. Our interest expense increased by $1.5 million to $3.5 million in the three months ended March 31, 2012, from $2.0 million in the same period in 2011. As a percentage of revenue, our interest expense was approximately 3.2% of total revenue in the three months ended March 31, 2012, compared to 2.0% in the same period in 2011. Among the total increase, approximately $1 million of the increased amount was due to discounted interest expenses for bank notes and the remaining $0.5 million was due to higher interest rates and the increased loan amount.

 

 
 

 

Provision for income taxes. Our income tax expense increased to approximately $0.6 million in the three months ended March 31, 2012, from $0.08 million in the same period last year, primarily due to the expiration of the preferential income tax rate of 12.5% for Jiangsu Cold-rolled. Starting 2012, its statutory income tax rate increased to 25%.

 

Net income. Net income, without including the foreign currency translation adjustment, decreased by approximately $2.3 million, or 65.7%, to $1.2 million in the three months ended March 31, 2012, from $3.5 million in the same period in 2011, as a cumulative result of the above factors.

 

Liquidity and Capital Resources

 

Our major sources of liquidity for the periods covered by this report were borrowings through short-term bank and private loans and long-term notes payable. Our operating activities provided approximately $39.6 million of cash in the nine months ended March 31, 2012. As of March 31, 2012, our total indebtedness to non-related parties under existing short-term loans was approximately $136.7 million. We also had approximately $13.6 million under long-term notes payable to non-related parties. We had no notes payable to related parties; however, approximately $25.0 million of our short-term notes payable were guaranteed by Shanghai Huaye and its affiliates. As of March 31, 2012, we also had an unused line of credit with banks of approximately $31.7 million (RMB 200.0 million) which entitled us to draw bank loans for general corporate purposes.

 

Outlook

 

We believe as the inflation pressure in China is under control and the Chinese government may gradually improve monetary liquidity, the Chinese economic growth is expected to gain momentum and that maintain a reasonable growth rate. For the steel industry, especially the downstream segment of the industry where our company is located in, we believe the average product price has reached a local bottom and has been stable for the last several months. As we believe the demand for our product is gradually increasing, we anticipate sequentially improved performance for the fourth fiscal quarter and for the next fiscal year.

 

Conference Call Information

 

Sutor's management will host an earnings conference call on Friday, May 11, 2012, at 9:00 a.m. eastern time. Listeners may access the call by dialing US: 1 877 847 0047; China: 800 876 5011, Hong Kong 852 3006 8101, access code: SUTR. A recording of the call will be available shortly after the call through June 10, 2012. Listeners may access it by dialing US: 1866 572 7808, China: 800 876 5013, Hong Kong: 852 3012 8000, access code: 674027.

 

About Sutor Technology Group Limited

 

Sutor is a leading China-based non-state-owned manufacturer and distributor of high-end fine finished steel products and welded steel pipes used by a variety of downstream applications. The Company utilizes a variety of in-house developed processes and technologies to convert steel manufactured by third parties into fine finished steel products, including hot-dip galvanized steel, pre-painted galvanized steel, acid-pickled steel, cold-rolled steel and welded steel pipe products. These products are used for household appliances, solar water heaters, automobiles, information technology, construction, and other applications. Currently Sutor has three operating subsidiaries located in two provinces with 12 major production lines capable of processing approximately 2 million metric tons of steel products annually. To learn more about the company, please visit http://www.sutorcn.com/en/index.php.

 

 
 

 

Forward-Looking Statements

 

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include, among others, those concerning our financial and business outlook in the next two years, our expectation regarding cash flow and liquidity, our new facility and capacity expansion, and its expected impact on the Company's business and financial performance, our expectations regarding the market for our existing products and new products, our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China and the current global economic crisis on our business and on our customers’ business, and any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended June 30, 2011 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

 

 

For more information, please contact:

Mr. Jason Wang, Director of IR
Sutor Technology Group Limited
Tel: +86-512-5268-0988

Email: investor_relations@sutorcn.com

 

 

— FINANCIAL TABLES FOLLOW —

 

 
 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

   March 31,   June 30, 
   2012   2011 
ASSETS          
Current Assets:          
Cash and cash equivalents  $5,543,404   $21,324,931 
Restricted cash   139,981,506    72,326,482 
Short-term investments   4,747,962    - 
Trade accounts receivable, net of allowance for doubtful accounts of $ 979,760 and $856,554, respectively   12,308,986    3,969,090 
Other receivables and prepayments, net of allowance for doubtful accounts of $ 337,434 and $529,068, respectively   1,785,800    2,004,044 
Advances to suppliers, related parties, net of allowance of $130,838 and $127,903, respectively   106,009,017    116,772,842 
Advances to suppliers, third parties, net of allowance of $223,794 and $493,761, respectively   38,322,228    42,067,716 
Inventory, net   84,052,192    46,197,179 
Notes receivable   522,276    168,029 
Deferred tax assets   361,117    363,497 
Total Current Assets   393,634,488    305,193,810 
           
Advances for Purchase of Long Term Assets   83,054    81,191 
Property, Plant and Equipment, net   87,930,444    79,103,131 
Intangible Assets, net   3,099,203    3,083,569 
TOTAL ASSETS  $484,747,189   $387,461,701 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $111,271,085   $55,674,454 
Advances from customers   10,364,964    11,737,085 
Other payables and accrued expenses   3,665,614    4,840,135 
Other payables - related parties   -    594,105 
Short-term loans   136,706,341    95,494,490 
Total Current Liabilities   262,008,004    168,340,269 
           
Long-Term Loans   13,605,682    23,626,900 
Total Liabilities   275,613,686    191,967,169 
           
Stockholders' Equity          
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; no shares outstanding   -    - 
Common stock - $0.001 par value; authorized: 500,000,000 shares as of March 31, 2012 and June 30, 2011; issued: 40,805,602 shares and 40,745,602 shares as of March 31, 2012 and June 30, 2011, respectively; outstanding: 40,345,780 and 40,745,602 as of March 31, 2012 and June 30, 2011, respectively   40,805    40,745 
Additional paid-in capital   42,678,516    42,584,974 
Statutory reserves   15,662,039    15,662,039 
Retained earnings   115,910,157    107,137,213 
Accumulated other comprehensive income   35,376,255    30,069,561 
Less: Treasury stock, at cost   (534,269)   - 
Total Stockholders' Equity   209,133,503    195,494,532 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $484,747,189   $387,461,701 

 

 
 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

 

   For The Three Months Ended   For The Nine Months Ended 
   March 31,   March 31, 
   2012   2011   2012   2011 
                 
Revenue:                    
Revenue  $77,293,342   $62,521,577   $258,760,839   $157,802,440 
Revenue from related parties   32,641,713    38,853,040    89,264,631    144,942,388 
    109,935,055    101,374,617    348,025,470    302,744,828 
                     
Cost of Revenue                    
Cost of revenue   71,781,784    57,017,557    237,734,303    143,055,256 
Cost of revenue from related party sales   30,282,224    35,742,344    81,019,969    133,184,740 
    102,064,008    92,759,901    318,754,272    276,239,996 
                     
Gross Profit   7,871,047    8,614,716    29,271,198    26,504,832 
                     
Operating Expenses:                    
                     
Selling expenses   874,867    1,345,635    5,289,139    4,708,748 
General and administrative expenses   2,272,424    1,718,186    7,776,539    5,081,444 
Total Operating Expenses   3,147,291    3,063,821    13,065,678    9,790,192 
Income from Operations   4,723,756    5,550,895    16,205,520    16,714,640 
                     
Other Incomes/(Expenses):                    
Interest income   368,561    188,697    1,046,976    626,412 
Other income   85,323    2,594    105,273    123,886 
Interest expense   (3,484,944)   (1,986,540)   (7,652,460)   (5,856,643)
Other expense   79,488    (210,479)   (779,179)   (485,542)
Total Other Expenses, net   (2,951,572)   (2,005,728)   (7,279,390)   (5,591,887)
                     
Income Before Taxes   1,772,184    3,545,167    8,926,130    11,122,753 
Income tax expense   (553,515)   (76,958)   (153,186)   (1,308,895)
Net Income  $1,218,669   $3,468,209   $8,772,944   $9,813,858 
                     
Basic Earnings per Share  $0.03   $0.09   $0.22   $0.24 
Diluted Earnings per Share  $0.03   $0.09   $0.22   $0.24 
                     
Basic Weighted Average Shares Outstanding   40,345,780    40,727,935    40,531,461    40,719,653 
Diluted Weighted Average Shares Outstanding   40,345,780    40,727,935    40,531,461    40,719,653 
                     
Net Income  $1,218,669   $3,468,209   $8,772,944   $9,813,858 
Foreign currency translation adjustment   1,444,247    1,231,987    5,306,694    6,832,753 
Comprehensive Income  $2,662,916   $4,700,196   $14,079,638   $16,646,611 

  

 
 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For The Nine Months Ended 
   March 31, 
   2012   2011 
Cash Flows from Operating Activities:          
Net income  $8,772,944   $9,813,858 
Adjustments to reconcile net income to net cash provided by/(used in) operating activities          
Depreciation and amortization   6,492,260    5,715,855 
Deferred tax assets   10,738    54,587 
Foreign currency exchange (gain)/loss   (392,608)   191 
Stock based compensation   93,602    89,446 
Loss/(gain) on disposal of property, plant and equipment   72,892    (4,447)
Changes in current assets and liabilities:          
Trade accounts receivable, net   (8,291,096)   (5,228,146)
Other receivable and prepayment   264,671    (1,017,248)
Advances to suppliers   4,718,122    (15,922,866)
Advances to suppliers - related parties   13,630,723    (13,346,284)
Inventory   (36,851,431)   3,277,984 
Accounts payable   54,402,504    6,268,337 
Advances from customers   (1,619,409)   486,821 
Other payables and accrued expenses   (1,133,980)   (163,136)
Other payables - related parties   (608,674)   161,686 
Net Cash Provided by/(Used In) Operating Activities   39,561,258    (9,813,362)
           
Cash Flows from Investing Activities:          
Changes in notes receivable   (350,930)   59,884 
Purchase of property, plant and equipment, net of value added tax refunds received   (13,558,760)   (1,335,063)
Proceeds from disposal of property, plant and equipment   26,025    6,138 
Purchase of short-term investments   (4,755,262)   - 
Net changes in restricted cash   (66,096,711)   (12,595,955)
Net Cash Used In Investing Activities   (84,735,638)   (13,864,996)
           
Cash Flows from Financing Activities:          
Proceeds from loans   143,934,932    96,696,227 
Repayment of loans   (114,432,824)   (74,409,132)
Payments on repurchase of common stock   (534,269)   - 
Net Cash Provided by Financing Activities   28,967,839    22,287,095 
           
Effect of Exchange Rate Changes on Cash and Cash Equivalents   425,014    217,302 
           
Net Change in Cash and Cash Equivalents   (15,781,527)   (1,173,961)
Cash and Cash Equivalents at Beginning of Period   21,324,931    13,336,736 
Cash and Cash Equivalents at End of Period  $5,543,404   $12,162,775 
           
Supplemental Non-Cash Information:          
Offset of notes payable to related parties against receivable from related parties  $10,352,131   $9,959,383 
Supplemental Cash Flow Information:          
Cash paid during the period for interest expense  $(7,230,874)  $(5,426,740)
Cash paid during the period for income tax  $(476,495)  $(2,095,060)