Shengkai Innovations, Inc. Reports FY2013 First Quarter Results

Shengkai Innovations, Inc. Reports FY2013 First Quarter Results

TIANJIN, China, Nov. 14, 2012 (GLOBE NEWSWIRE) -- Shengkai Innovations, Inc.
(Nasdaq:VALV) ("the Company", "Shengkai", "we", or "our"), a leading ceramic
valve manufacturer in the People's Republic of China (the "PRC"), today
announced results for its fiscal year 2013 ("FY2013") first quarter ended
September 30, 2012.

FY2013 First Quarter Highlights

  *Revenues were approximately $4.7 million compared with approximately $11.0
    million in the first quarter of fiscal year 2012 ("FY2012");
  *Revenues from the electric power segment were approximately $0.8 million
    compared with approximately $3.5 million in the first quarter of FY2012;
  *Revenues from the petrochemical and chemical segment were approximately
    $3.4 million compared with approximately $6.7 million in the first quarter
    of FY2012; and
  *Gross profit was approximately $1.8 million with a gross margin of 37.9%,
    compared with approximately $4.8 million and 43.7% in the first quarter of
    FY2012.

FY2013 First Quarter Results

Revenues in the first quarter were approximately $4.7 million as compared to
approximately $11.0 million in the first quarter of FY2012. Quarterly ceramic
valves output was 952 sets as compared to 1,978 sets a year ago. Facing the
general economic slowdown in the PRC, Shengkai continues the transition of
target market segment from the electric power industry to domestic and
international petrochemical and chemical industry.

During the first quarter of FY2013, revenues from electric power industry,
petrochemical and chemical industry, and other industries accounted for 16.4%,
72.9% and 10.7% of the quarterly revenues, respectively, compared with 31.8%,
61.0% and 7.2% in the first quarter of FY2012.

Specifically, revenues from the electric power industry were approximately
$0.8 million compared with approximately $3.5 million in the first quarter of
FY2012. The decrease was primarily due to the general slowdown in economy as
well as the ongoing operational transition into the petrochemical and chemical
industry.

During the first quarter, revenues from the petrochemical and chemical
industry were approximately $3.4 million compared with approximately $6.7
million in the first quarter of FY2012. The decrease was primarily due to the
general slowdown in economy.

Revenues from other industries, including the aluminum and metallurgy
industries were approximately $0.5 million compared with approximately $0.8
million in the first quarter of FY2012. Due to its limited market potential,
other industries will continue to remain peripheral to the Company's core
priorities.

In the first quarter, cost of sales decreased 53.2% year-over-year to
approximately $2.9 million from approximately $6.2 million in the first
quarter of FY2012. Cost of sales as a percentage of revenues was 62.1%
compared with 56.3% in the comparable period a year ago due to decrease in
sales volume and decrease in average selling price of the product mix as we
sold more lower-priced products in this quarter.

Gross profit in the first quarter was approximately $1.8 million compared with
approximately $4.8 million for the first quarter of FY2012. The decrease was
primarily attributable to decrease in sales volume and decrease in average
selling price of the product mix as we sold more lower priced products in this
quarter. Gross margin was 37.9%, compared with 43.7% for the first quarter of
FY2012. The decrease in gross margin was primarily due to increase in material
prices, which were spread over a smaller revenue base.

Selling expenses in the first quarter decreased by 42.0% year-over-year to
approximately $0.6 million from approximately $1.1 million for the comparable
period in FY2012. Commissions paid to agents for introducing new sales
decreased year-over-year to approximately $0.4 million from approximately $0.9
million in the first quarter of FY2012. Since minor components of selling
expenses such as sales staff's salaries, sales offices' administrative
expenses and after-sale service expenses are flat-rate and did not diminish
proportionally to revenue decrease, selling expenses as a percentage of
quarterly sales increased to 13.1% from 9.5% in the first quarter of FY2012.

General and administrative ("G&A") expenses in the first quarter were
approximately $1.0 million, down from approximately $3.4 million for the
comparable period in FY2012. Excluding the non-cash share-based compensation,
G&A expenses in the first quarter were approximately $0.8 million, compared
with approximately $1.3 million for the comparable period of FY2012.

Total operating expenses in the first quarter of FY2013 were approximately
$1.6 million compared with approximately $4.5 million for the comparable
period in FY2012. Operating income in the first quarter of FY2013 was
approximately $0.1 million compared with approximately $0.4 million for the
comparable period in FY2012.

Excluding the non-cash share-based compensation, non-GAAP operating income was
approximately $0.3 million, compared with non-GAAP operating income of
approximately $2.5 million for the comparable period in FY2012.

Provision for income taxes in the first quarter was approximately $0.2 million
compared with approximately $0.5 million in the first quarter of FY2012. In
April 2010, Tianjin Shengkai, the Company's operating entity in Tianjin, PRC,
was awarded the status of "High Technology" enterprise by the local
government. The tax rate for a "High Technology" enterprise is 15% and Tianjin
Shengkai was taxed at that rate from January 1, 2010 through December 31,
2011. The Company expects to renew such treatment in calendar 2012.

GAAP net income was approximately $53,000 compared with approximately $0.9
million in the first quarter of FY2012. Diluted earnings per share were $0.003
compared to $0.052 in the first quarter of FY2012.

Excluding the non-cash items of share-based compensation and changes in fair
value of instruments, non-GAAP net income was approximately $0.3 million in
the first quarter compared with approximately $2.2 million in the first
quarter of FY2012. The decrease was primarily due to the decline in revenues
resulting from slowdown in PRC economy and operational transition, coupled
with higher raw material costs. Non-GAAP earnings were $0.015 per diluted
share compared with $0.12 per diluted share in the first quarter of FY2012.

Note: The earnings per share data for the first quarter of FY2012 have been
retroactively restated to reflect the 1-for-2 reverse stock split effected on
March 9, 2012.

GAAP to Non-GAAP Reconciliation Table (Unaudited)
(in U.S. Dollars)                                                           
                                               For the Three Months Ended
                                                September 30,
                                               2012         2011
GAAP Net Income                                $52,777    $944,338
Add back/(Subtract):                                        
Share-based compensation – employee options and 194,027      2,146,968
stock awards
Changes in fair value of instruments           20,536       (926,637)
Non-GAAP Net Income                            $267,340   $2,164,669
GAAP Earnings per share (diluted)               $0.003     $0.052
Non-GAAP Earnings per share (diluted)           $0.015     $0.120

Financial Condition

As of September 30, 2012, the Company had cash and cash equivalents of
approximately $66.7 million and accounts receivable of approximately $8.5
million compared to approximately $64.8 million cash and cash equivalents and
approximately $9.4 million of accounts receivable as of June 30, 2012. Total
current liabilities as of September 30, 2012 were approximately $2.9 million,
compared with approximately $3.5 million as of June 30, 2012. Additionally,
the Company has no short-term or long-term debts.

Net cash flow provided by operating activities was approximately $2.2 million
for the first quarter of FY2013 compared with approximately $2.0 million in
the first quarter of FY2012. The increase was primarily attributable to the
reduced working capital requirements in the first quarter of FY2013 despite
the decrease in net income.

Business
Outlook

In response to the business disruptions and changes in the global ceramic
valves industry as well as in PRC's economic conditions, management of the
Company has decided to gradually phase out its less profitable domestic market
segments including the electric power market and focus on expanding its
presence in the more profitable domestic and foreign oil and chemical
industries where ceramic valve products typically command higher prices. The
Company has increased its product sales price to match industry levels and to
reflect its superior product quality. The Company has also been making efforts
to streamline operations through headcount reduction and other cost-saving
measures to conserve capital and reduce the impact of revenue loss.

Additionally, the Company will continue to leverage its self-developed ceramic
material technologies to continue in-house and joint research and development
of innovative and superior-performance products for the international oil and
chemical markets and commit its resources to expanding the acceptance of its
products overseas.

As such, we expect that in the immediately following quarter ended December
31, 2012, total revenues would remain flat, and major contribution to our
sales would be from the petrochemical and chemical industry. Such situation
may persist until our marketing and sales efforts on some new customers and
projects pay off, and the expansion in the international market picks up
meaningfully. Successful penetration into international oil and chemical
markets would also require the Company to obtain various certifications,
including but not limited to different class API certification, such as API 6A
which covers higher pressure valve products, and other firm-specific supplier
qualifications, which will take time to go through various application
procedures, develop new products and invest in additional or different
equipment.

Non GAAP Financial Measures

To supplement the Company's consolidated financial statements for the three
months ended September 30, 2012 and 2011 presented on a GAAP basis, the
Company provided non-GAAP financial information in this release that excludes
the impact of non-cash items of i) share-based compensation costs related to
the stock options and stock awards granted to independent directors and
management staff, and (ii) changes in the fair value of instruments as a
result of adoption on July 1, 2009 of FASB ASC Topic 815, "Derivative and
Hedging" ("ASC 815"). The Company's management believes that these non-GAAP
measures, namely non-GAAP operating and net income and non-GAAP diluted
earnings per share, provide investors with a better understanding of how the
results relate to the Company's current and 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. Management believes that these non-GAAP financial measures
are useful to investors because they exclude non-cash expenses that management
excludes when it internally evaluates the performance of the Company's
business and makes operating decisions, including internal budgeting, and
performance measurement, because these measures provide a consistent method of
comparison to historical periods. Moreover, management believes that these
non-GAAP measures reflect the essential operating activities of the Company.
In addition, the provision of these non-GAAP measures allows investors to
evaluate the Company's performance using the same methodology and information
as that used by the Company's management. Non-GAAP measures are subject to
inherent limitations because they do not include all of the expenses included
under GAAP and because they involve the exercise of judgment of which charges
are excluded from the non-GAAP financial measure. However, the Company's
management compensates for these limitations by providing the relevant
disclosure of the items excluded.

About Shengkai Innovations, Inc.

Shengkai Innovations is primarily engaged in the design, manufacture and sale
of ceramic valves, high-tech ceramic materials and the provision of technical
consultation and related services. The Company's industrial valve products are
used by companies in the electric power, petrochemical and chemical,
metallurgy and other industries as high-performance, more durable alternatives
to traditional metal valves. The Company was founded in 1994 and is
headquartered in Tianjin, PRC.

The Company is one of the few ceramic valve manufacturers in the world with
research and development, engineering, and production capacity for structural
ceramics and is able to produce large-sized ceramic valves with calibers of 6"
(150mm) or more. The Company's product portfolio includes a broad range of
valves that are sold throughout the PRC, to Europe, North America, United Arab
Emirates, and other countries in the Asia-Pacific region. The Company has over
200 customers, and is the only ceramic valve supplier qualified to supply
SINOPEC. The Company joined the supply network of China National Petroleum
Corporation ("CNPC") in 2006 and subsequently received a CNPC Certificate of
Material Supplier for valve products in 2011.

Safe Harbor Statements

Under the Private Securities Litigation Reform Act of 1995: 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 effect of political, economic, and market
conditions and geopolitical events, legislative and regulatory changes, the
Company's ability to expand and upgrade its production capacity, the actions
and initiatives of current and potential competitors, 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. All
forward-looking statements attributable to the Company or to persons acting on
its behalf are expressly qualified in their entirety by these factors other
than as required under the securities laws. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

SHENGKAI INNOVATIONS, INC.                                               
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES                    
CONSOLIDATED BALANCE SHEETS                                              
AS AT SEPTEMBER 30, 2012 AND JUNE 30, 2012                               
(Stated in US Dollars)                                                   
                                                       
                                         September 30,  June 30,
                                          2012           2012
                                                       
ASSETS                                                  
Current Assets                                          
Cash and cash equivalents                 $66,738,082  $64,819,870
Restricted cash                           --             124,433
Accounts receivable, net                  8,546,808      9,388,820
Notes receivable                          --             167,873
Other receivables                         2,873,169      2,879,422
Advances to suppliers                     2,378,166      2,339,362
Inventories                               2,577,088      2,750,907
Total Current Assets                      83,113,313     82,470,687
Property, plant and equipment, net        53,062,298     54,068,143
Land use rights, net                      2,513,714      2,533,684
Other intangible assets, net              4,293,434      4,524,058
TOTAL ASSETS                              $142,982,759 $143,596,572
                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY                    
Current Liabilities                                     
Notes payable                             --             124,433
Accounts payable                          1,814,606      1,942,262
Advances from customers                   235,062        316,020
Other payables and accrued expenses       673,557        899,491
Income tax payable                        183,582        240,438
Total Current Liabilities                 2,906,807      3,522,644
Warrant liabilities                       784            1,761
Preferred (conversion option) liabilities 502,641        481,128
TOTAL LIABILITIES                         $3,410,232   $4,005,533
                                                      
Commitments and Contingencies             $--          $--

                                                          
                                                          
SHENGKAI INNOVATIONS, INC.                                                  
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES                       
CONSOLIDATED BALANCE SHEETS (Continued)                                     
AS AT SEPTEMBER 30, 2012 AND JUNE 30, 2012                                  
(Stated in US Dollars)                                                      
                                                          
                                                          
                                            September 30,  June 30,
                                             2012           2012
                                                         
STOCKHOLDERS' EQUITY                                       
Preferred stock – $0.001 par value
15,000,000 shares authorized; 1,971,842 and
1,971,842 issued and outstanding as of       $1,971       $1,971
September 30, 2012 and June 30, 2012,
respectively.
Common stock -- $0.001 par value 100,000,000
shares authorized; 17,196,229 and 17,196,071
shares issued and outstanding as             17,197         17,197
ofSeptember 30, 2012 and June 30, 2012,
respectively.
Additional paid-in capital                   71,889,594     71,695,567
Statutory reserves                           11,196,604     11,196,604
Retained earnings                            45,144,288     45,091,511
Accumulated other comprehensive income       11,322,873     11,588,189
TOTAL STOCKHOLDER'S EQUITY                   139,572,527    139,591,039
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $142,982,759 $143,596,572

                                                     
SHENGKAI INNOVATIONS, INC.                                                  
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES                       
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME              
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011                      
(Stated in US Dollars)                                                      
                                                     
                                 Three months ended September 30,
                                  2012                2011
                                                     
Revenues                           $ 4,674,285        $ 11,011,127
Cost of sales                      (2,901,143)         (6,196,651)
Gross profit                       1,773,142           4,814,476
Operating expenses:                                   
Selling expenses                   (610,381)           (1,051,480)
General and administrative         (1,034,493)         (3,406,035)
expenses
Total operating expenses           (1,644,874)         (4,457,515)
Income from operations             128,268             356,961
Other income, net                  --                  13,473
Interest income, net               128,650             165,942
Changes in fair value of           (20,536)            926,637
instruments – gain (loss)
Income before income taxes         236,382             1,463,013
Income taxes                       (183,605)           (518,675)
Net income                         52,777              944,338
Foreign currency translation       (265,316)           1,285,784
adjustment
Comprehensive income (loss)        (212,539)           2,230,122
                                                    
Basic earnings per share*          $0.003            $0.058
                                                    
Diluted earnings per share*        $0.003            $0.052
                                                    
Basic weighted average shares      17,196,219          16,375,534
outstanding*
                                                    
Diluted weighted average shares    18,182,140          18,052,914
outstanding*
                                                     
* The earnings per share data and the weighted average shares outstanding
for all periods have been retroactively restated to reflect the 1-for-2
reverse stock split effected on March 9, 2012.

                                                        
SHENGKAI INNOVATIONS, INC.                                                  
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES                       
CONSOLIDATED STATEMENTS OF CASH FLOWS                                       
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011                      
(Stated in US Dollars)                                                      
                                        Three months ended September 30,
                                         2012            2011
Cash flows from operating activities                     
Net income                                $52,777       $944,338
Adjustments to reconcile net income to
net cash provided by operating                           
activities:
Depreciation                              902,503         929,917
Amortization                              257,999         254,089
Provision for doubtful accounts           (74,384)        44,402
Changes in fair value of instruments –    20,536          (926,637)
(gain)
Stock based compensation                  194,027         2,146,968
Changes in operating assets and                          
liabilities:
(Increase) decrease in assets:                           
Accounts receivable                       898,394         2,850,347
Notes receivable                          167,570         (133,619)
Other receivables                         700             (3,304)
Advances to suppliers                     (43,283)        23,259
Inventories                               168,535         207,172
Increase (decrease) in liabilities:                      
Notes payable                             (124,209)       (1,093,491)
Accounts payable                          160,272         (951,308)
Advances from customers                   (80,358)        306,793
Other payables                            (162,440)       (1,251,412)
Accruals                                  (61,789)        (71,761)
Income tax payable                        (56,400)        (1,313,407)
Net cash provided by operating activities 2,220,450       1,962,346
Cash flows from investing activities                     
Proceeds from disposition of property,    --              (43,661)
plant and equipment
Purchase of property, plant and equipment (808)           (403,440)
Payment of construction in progress       --              (131,198)
Purchase of intangible assets             (20,983)        --
(Decrease) in accounts payable related to (284,198)       --
equipment purchase
Decrease in restricted cash               124,209         1,093,491
Net cash provided by (used in) investing  (181,780)       515,192
activities

                                                         
SHENGKAI INNOVATIONS, INC.                                                  
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES                       
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)                           
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011                      
(Stated in US Dollars)                                                      
                                                         
                                        Three months ended September 30,
                                         2012             2011
                                                        
                                                         
Net increase (decrease) in cash and cash  $2,038,670     $2,477,538
equivalents
                                                        
Effect of exchange rate changes on cash   (120,458)        587,698
and cash equivalents
                                                        
Cash and cash equivalents–beginning of    64,819,870       59,870,108
year
                                                        
Cash and cash equivalents–end of year     $ 66,738,082    $ 62,935,344
                                                         
Supplementary cash flow information:                      
                                                        
Interest received                         $128,655       $165,942
                                                        
Taxes paid                                $240,005       $1,832,081
                                                         
Non-cash transaction:                                     
Preferred stock conversion to common      $--            $2,900
stock
Common stock issuance                     $--            $600

CONTACT: Shengkai Innovations, Inc.
         Linbin Zhang, Interim CFO
         +86-22-5883-8509
         ir@shengkai.com
         http://www.shengkaiinnovations.com
 
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