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2013-03-30 09:58:19
17-May-2010
Quarterly Report
Special Note Regarding Forward Looking Statements
This quarterly report contains forward-looking statements relating to us that are based on the beliefs of our management as well as assumptions made by,商家直供工程价格根据时间等因素影响加价幅度不同, and information currently available to, our management. When used in this Report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect management's current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: plans to expand our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management; continued growth of the Chinese economy and industries demanding our products; our ability to produce and sell cold-rolled precision steel products at high margins; our ability to secure at acceptable prices the raw materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products in our target markets; general business conditions and competitive factors, including pricing pressures and product development; changes in our relationships with customers and suppliers; and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Report as anticipated, estimated or expected. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2009.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I, Item 1, "Financial Statements," of this quarterly report. Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion and analysis covers the Company's consolidated financial condition at March 31, 2010 (unaudited) and June 30, 2009, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three and nine month periods ended March 31, 2010 and 2009.
Use of Terms
Except as otherwise indicated by the context, all references in this Quarterly Report to (i) the "Group," the "Company," "we," "us" or "our" are to China Precision Steel, Inc., a Delaware corporation,, and its direct and indirect subsidiaries; (ii) "PSHL" are to our subsidiary Partner Success Holdings Limited, a BVI company; (iii) "Blessford International" are to PSHL's subsidiary Blessford International Limited, a BVI company; (iv) "Shanghai Blessford" are to Blessford International's subsidiary Shanghai Blessford Alloy Company Limited, a PRC company; (v) "Chengtong" are to PSHL's subsidiary Shanghai Chengtong Precision Strip Company Limited, a PRC company; (vi) "Tuorong" are to PSHL's subsidiary Shanghai Tuorong Precision Strip Company Limited, a PRC company;
(vii) "SEC" are to the United States Securities and Exchange Commission; (viii) "Securities Act" are to the Securities Act of 1933, as amended; (ix) "Exchange Act" are to the Securities Exchange Act of 1934, as amended; (x) "RMB" are to Renminbi, the legal currency of China; (xi) "U.S. dollar," "USD," "US$" and "$" are to the legal currency of the United States; (xii) "China," "Chinese" and "PRC" are to the People's Republic of China; and (xiii) "BVI" are to the British Virgin Islands.
Overview of Our Business
We are a niche and high value-added steel processing company principally engaged in the manufacture and sale of high precision cold-rolled steel products, in the provision of heat treatment and in the cutting and slitting of medium and high-carbon hot-rolled steel strips. We use commodity steel to create a high value-added specialty premium steel. Specialty precision steel pertains to the precision of measurements and tolerances of thickness, shape, width, surface finish and other special quality features of highly-engineered end-use applications.
We produce and sell precision ultra-thin and high strength cold-rolled steel products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and cutting and slitting of medium and high-carbon hot-rolled steel strips not exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled) steel coils through a cold-rolling mill, utilizing our patented systems and high technology reduction processing procedures, to make steel coils and sheets in customized thicknesses according to customer specifications. Currently, our specialty precision products are mainly used in the manufacture of automobile parts and components, steel roofing, plane friction discs, appliances, food packaging materials, saw blades, textile needles, and microelectronics.
Third Quarter Financial Performance Highlights
During the third fiscal quarter of 2010, we saw robust growth in demand for our cold rolled steel products as market sentiment continued to improve. We have seen gradually increasing demand and orders from both our long term and new customers, especially in the low-carbon cold-rolled steel segment and the high-carbon cold-rolled steel segment, due to favorable policies and PRC government subsidies for the home appliance industry and the auto industry, where our products in these two segments are used in the manufacturing of certain components. However, despite the positive growth we have seen during the current period, general industry problems such as excess capacity, low industrial concentration and a lack of access to natural resources that have long plagued China's steel sector still remain. Starting January 1, 2010, we have commenced production from our 3rd cold rolling mill and we are operating a total of three cold rolling mills at our facilities now, at a combined utilization rate of approximately 80% as of March 31, 2010.
During the three months ended March 31, 2010, we sold a total of 36,953 tons of products, an increase of 25,953 tons from 11,000 tons during the same period a year ago, due to an increase in demand in a gradually improving market as well as the addition of our 3rd mill which increases our total annual production capacity from 120,000 tons to 160,000 tons during its first year of operation and ultimately to 220,000 tons when it reaches its full design capacity in the next three to four years. We believe that such increase was mainly caused by increases in demand from the auto and home appliance products due to PRC government subsidies to encourage consumer spending in these segments during the period ended March 31, 2010. Increased volume and sales have led to a gross profit of $3,429,875 and a net income of $2,011,354 for the three months ended March 31, 2010. Total company backlog as of March 31, 2010 was $36,752,762.
We continue to take appropriate actions to perform business and credit reviews of customers and suppliers and reduce exposure by avoiding entry into contracts with countries or customers with high credit risks. We strive to optimize our product mix, prioritize higher margin products, and strengthen collection of accounts receivable in the existing business environment with the goal to maintain overall healthy sales volume, margins and cash positions. We believe that there are high barriers to entry in the Chinese domestic precision cold-rolled steel industry because of the level of technology expertise required for operation. Although we expect a continuation of volatility in demand in both domestic and international markets, and in steel prices which could have adverse impacts on our gross margins in the foreseeable future, the medium to long term prospects of our niche remain highly optimistic. We believe that our unique capabilities and know-how give us a competitive advantage to grow sales and build a globally recognized brand as we continue to carry out R&D and expand to new segments, customers and markets.
The following are some financial highlights for the third fiscal quarter:
? Revenues: Our revenues were approximately $30.0 million for the third quarter, an increase of 293.4% from last year.
? Gross Margin/(loss): Gross margin was 11.4% for the third quarter, as compared to (26.0)% last year.
? Income/(loss) from operations before tax: Income from operations before tax was approximately $2.3 million for the third quarter, as compared to loss from operations before tax of $3.0 million last year.
? Net Income/(loss): Net income was approximately $2.0 million for the third quarter, as compared to a net loss of approximately $3.5 million last year.
? Fully diluted Income/(loss) per share: Fully diluted income per share was $0.04 for the third quarter compared to a fully diluted loss per share of $0.08 last year.
Results of OperationsThe following table sets forth key components of our results of operations forthe periods indicated, in USD and as a percentage of revenues. Three Months Ended March 31, Nine Months Ended March 31, 2010 2009 2010 2009 Amount % of Revenues Amount % of Revenues Amount % of Revenues Amount % of RevenuesRevenues $ 29,990,596 100.0 % $ 7,623,209 100.0 % $ 74,046,423 100.0 % $ 50,547,587 100.0 %Cost of sales(including depreciationand amortization) 26,560,721 88.6 % 9,605,252 126.0 % 66,277,234 89.5 % 45,125,635 89.3 %Gross profit/(loss) 3,429,875 11.4 % (1,982,043 ) (26.0 )% 7,769,189 10.5 % 5,421,952 10.7 %Selling and marketingexpenses 124,589 0.4 % 298,492 3.9 % 227,003 0.3 % 1,632,322 3.2 %Administrative expenses 773,102 2.6 % 541,251 7.1 % 2,005,841 2.7 % 1,581,456 3.1 %Allowance for bad anddoubtful debts 16 <0.1% 672 <0.1% 218,200 0.3 % 3,830,134 7.6 %Depreciation andamortization expense 37,857 0.1 % 33,624 0.4 % 118,350 0.2 % 93,145 0.2 %Total operatingexpenses 935,564 3.1 % 874,039 11.5 % 2,569,394 3.5 % 7,137,057 14.1 %Income/(loss) fromoperations 2,494,311 8.3 % (2,856,082 ) (37.5 )% 5,199,795 7.0 % (1,715,105 ) (3.4 )%Other revenues 9,790 <0.1% 76,556 1.0 % 120,753 0.2 % 336,257 0.7 %Interest and financecosts (171,928 ) (0.6 )% (257,123 ) (3.4 )% (675,362 ) (0.9 )% (905,305 ) (1.8 )%Total other (expense) (162,138 ) (0.5 )% (180,567 ) (2.4 )% (554,609 ) (0.7 )% (569,048 ) (1.1 )%Income/(loss) beforeincome taxes 2,332,173 7.8 % (3,036,649 ) (39.8 )% 4,645,186 6.3 % (2,284,153 ) (4.5 )%Income tax expense 320,819 1.1 % 481,804 6.3 % 319,586 0.4 % 333,547 0.7 %Net income/(loss) $ 2,011,354 6.7 % $ (3,518,453 ) (46.2 )% $ 4,325,600 5.8 % $ (2,617,700 ) (5.2 )%Basic earnings/(loss)per share $ 0.04 $ (0.08 ) $ 0.09 $ (0.06 )Diluted earnings/(loss)per share $ 0.04 $ (0.08 ) $ 0.09 $ (0.06 ) |
Comparison of Three Months Ended March 31, 2010 and 2009
Sales Revenues
Sales volume increased by 25,953 tons, or 236%, period-on-period, to 36,953 tons for the three months ended March 31, 2010 from 11,000 tons for the three months ended March 31, 2009 and, as a result, sales revenues increased by $22,367,387, or 293%, period-on-period to $29,990,596 for the three months ended March 31, 2010 from $7,623,209 for the three months ended March 31, 2009. The increase in sales revenues during the three months ended March 31, 2010 is attributable to increase in demand across all product segments especially our high-carbon cold-rolled products used in automobile components production and our low-carbon cold-rolled products used in home appliances production both due to favorable government policies and subsidies to encourage consumer spending, as well as increase in demand in subcontracting work during the period.
Sales by Product LineA break-down of our sales by product line for the three months ended March 31,2010 and 2009 is as follows: 25-------------------------------------------------------------------------------- Three Months Ended March 31, 2010 2009Product $ $ Period-on-period Qty.Category Quantity (tons) Amount % of Sales Quantity (tons) Amount % of Sales VarianceLow carbonhard rolled(export) 5,802 4,071,505 14 3,425 2,093,990 28 2,377Low carboncold-rolled 19,148 14,836,000 49 4,921 2,841,892 37 14,227High-carbonhot-rolled 1,521 1,361,571 4 579 605,437 8 942High-carboncold-rolled 5,441 5,561,538 19 1,733 1,783,447 23 3,708Subcontractingincome 5,041 3,902,652 13 342 68,742 1 4,699Sales of scrapmetal - 257,330 1 - 229,701 3 -Total 36,953 29,990,596 100 11,000 7,623,209 100 25,953 |
There was increase in demand across all product categories during the three months ended March 31, 2010. High-carbon cold-rolled steel products accounted for 19% of the current sales mix at an average selling price of $1,022 per ton for the three months ended March 31, 2010, compared to 23% of the sales mix at an average selling price per ton of $1,029 for the three months ended March 31, 2009. The products in this category are mainly used in the automobile industry and the increase in sales volume period-on-period was a result of overall improved industry sentiment due to the Chinese government's automobile stimulus policies. Low-carbon cold-rolled steel products accounted for 49% of the current sales mix at an average selling price of $775 per ton for the three months ended March 31, 2010, compared to 37% of the sales mix at an average selling price per ton of $578 for the three months ended March 31, 2009. The robust increase in demand in this category during the period was a direct result of increased orders of steel used in the production of home appliances due to subsidies granted by the Chinese government to encourage consumer spending. Low-carbon hard-rolled steel products accounted for 14% of the current sales mix at an average selling price of $702 per ton for the three months ended March 31, 2010, compared to 28% of the sales mix at an average selling price per ton of $611 for the three months ended March 31, 2009, due to a higher concentration of products sold domestically period-on-period, however, revenue increased as a result of gradual improvement of the international market. Subcontracting income increased to $3,902,652, or 13%, of the sales mix for the three months ended March 31, 2010, as compared to $68,742, or less than 1%, of the sales mix for the three months ended March 31, 2009.
Three Months Ended March 31, 2010 2009 Variance Average Selling Prices ($) ($) ($) (%) Low-carbon hard rolled 702 611 91 15 Low-carbon cold-rolled 775 578 197 34 High-carbon hot-rolled 895 1,045 (150 ) (14 ) High-carbon cold-rolled 1,022 1,029 (7 ) (1 ) Subcontracting income 774 201 573 285 |
The average selling price per ton increased to $812 for the three months ended March 31, 2010, compared to the corresponding period in 2009 of $693, representing an increase of $119, or 17%, period-on-period. This increase was mainly due to increases in general steel prices and therefore selling prices during the period. Other than for high-carbon hot-rolled and high-carbon cold-rolled steel products, there were increases in average selling prices across all product categories during the period.
Sales Breakdown by Major Customer Three Months Ended March 31, 2010 2009Customers $ % of Sales $ % of SalesShanghai Changshuo Stainless Steel Co.,Ltd. 7,333,423 24 * *Shanghai Shengdejia Metal Products Co.,Ltd. 5,857,561 20 * *Hangzhou Cogeneration Co., Ltd. 5,394,598 18 * *Fortune Best Corporation Limited 1,357,560 5 * *Zhangjiagang Gangxing InnovativeConstruction Material Co., Ltd. 944,460 3 1,309,743 17Unimax & Far Corporation * * 1,192,141 16Changshu Jiacheng Steel Plate CoatingFactory * * 556,119 7Houw Hing Holdings Ltd. * * 546,723 7Shanghai Wozi Jintian Saw Blade Co.,Ltd. * * 487,029 6Sub-total 20,887,602 70 4,091,755 53Others 9,102,994 30 3,531,454 47Total 29,990,596 100 7,623,209 100 |
* Not major customers for the relevant periods
Sales revenues generated from our top five major customers as a percentage of total sales increased to 70% for the three months ended March 31, 2010, compared to 53% for the three months ended March 31, 2009. Sales to three new major customers, Shanghai Shengdejia Metal Products Co., Ltd., Hangzhou Cogeneration Co., Ltd., Fortune Best Corporation Limited and Shanghai Changshuo Stainless Steel Co., Ltd. accounted for 67% of our sales revenues for the three months. The change in customer mix reflects management's continuous efforts in expanding our customer base and geographical coverage during the course of the quarter.
Cost of Goods Sold
Cost of sales increased by $16,955,469, or 176.5%,, period-on-period, to $26,560,721 for the three months ended March 31, 2010, from $9,605,252 for the three months ended March 31, 2009. Cost of sales represented 88.6% of sales revenues for the three months ended March 31, 2010, compared to 126.0% for the three months ended March 31, 2009. Average cost per unit sold decreased to $719 for the three months ended March 31, 2010, compared to an average cost per unit sold of $873 for the three months ended March 31, 2009, representing a decrease of $154 per ton, or 17.7%, period-on-period.
Three Months Ended March 31, 2010 2009 Variance ($) ($) ($) (%)Cost of goods sold- Raw materials 24,048,082 5,552,803 18,495,279 333.1- Direct labor 151,579 498,968 (347,389 ) (69.6 )- Manufacturing overhead 2,361,060 3,553,481 (1,192,421 ) (33.6 ) 26,560,721 9,605,252 16,955,469 176.5Cost per unit soldTotal units sold (tons) 36,953 11,000 25,953 236Average cost per unit sold ($/ton) 719 873 (154 ) (17.7 ) |
The decrease in average per unit cost of sales is represented by the combined effect of:
? an increase in cost of raw materials per unit sold of $146, or 28.9%, from $505 for the three months ended March 31, 2009 compared to $651 for the three months ended March 31, 2010;
? a decrease in direct labor per unit sold of $41, or 91.1%, from $45 for the three months ended March 31, 2009 compared to $4 for the three months ended March 31, 2010;
? a decrease in factory overhead per unit sold of $259, or 80.2%, from $323 for the three months ended March 31, 2009 compared to $64 for the three months ended March 31, 2010.
The cost of raw materials consumed increased by $18,495,279, or 333.1%, period-on-period, to $24,048,082 for the three months ended March 31, 2010 from $5,552,803 for the three months ended March 31, 2009. This increase was a direct result of increased number of units sold and increased average raw material cost per unit sold during the period as discussed above.
Direct labor costs decreased by $347,389, or 69.6%, period-on-period, to $151,579 for the three months ended March 31, 2010, from $498,968 for the three months ended March 31, 2009. Manufacturing overhead costs decreased by $1,192,421, or 33.6%, period-on-period, to $2,361,060 for the three months ended March 31, 2010, from $3,553,481 for the three months ended March 31, 2009. The decrease in overhead was mainly attributable to the combined effect of a decrease in utilities of $410,037, or 42.0%, period-on-period to $565,958 for the three months ended March 31, 2010, from $975,995 for the three months ended March 31, 2009, and a decrease in depreciation by $453,381, or 31.5%, period-on-period to $983,734 for the three months ended March 31, 2010, from $1,437,115 for the three months ended March 31, 2009. The decrease in both direct labor and manufacturing overhead costs, period-on-period, were a result of substantially increased units sold and therefore lower average production cost per unit sold due to economies of scale.
Gross profit in absolute terms increased by $5,411,918, or 273.0%, period-on-period, to $3,429,875 for the three months ended March 31, 2010, from a gross loss of $1,982,043 for the three months ended March 31, 2009, while gross profit margin increased to 11.4% for the three months ended March 31, 2010, from (26.0)% for the three months ended March 31, 2009. The increase in gross profit margin is a result of the combined effect of a 17.1% increase in average selling prices and a decrease in average cost per unit sold of 17.7% period-on-period.
Selling Expenses
Selling expenses decreased by $173,903, or 58.3%, period-on-period, to $124,589 for the three months ended March 31, 2010 compared to the corresponding period in 2009 of $298,492. The decrease was a direct result of decreased export sales commission costs incurred period-on-period.
Administrative Expenses
Administrative expenses increased by $231,851, or 42.8%, period-on-period, to $773,102 for the three months ended March 31, 2010 compared to $541,251 for the three months ended March 31, 2009. This was chiefly due to increases in salaries and wages in the amount of $82,654, or 39.1%, period-on-period, and travelling expenses in the amount of $51,717, or 208.8%, period-on-period, during the three months ended March 31, 2010.
Income/(loss) from Operations
Income from operations increased by $5,350,,393, or 187.3%, period-on-period, to $2,494,311 for the three months ended March 31, 2010 from a loss of $2,856,082 for the three months ended March 31, 2009, as a result of all the factors discussed above.
Other Income
Our other income decreased $66,766, or 87.2%, to $9,790 for the three months ended March 31, 2010 from $76,556 for the three months ended March 31, 2009 mainly due to lower interest rates period-on-period. As a percentage of revenues, other income decreased to less than 0.1% for the three months ended March 31, 2010 from 1.0% for the three months ended March 31, 2009 due to higher revenue and lower interest income during the current period.
Interest Expense . . .
Form 10-Q for CHINA PRECISION STEEL, INC.
