Shengkai Innovations, Inc. Reports FY2013 Second Quarter Results

Shengkai Innovations, Inc. Reports FY2013 Second Quarter Results

TIANJIN, China, Feb. 7, 2013 (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") second quarter ended
December 31, 2012.

FY2013 Second Quarter Highlights

  *Revenues were approximately $3.9 million compared with approximately $10.3
    million in the second quarter of fiscal year 2012 ("FY2012");
  *Revenues from the electric power segment were approximately $0.3 million
    compared with approximately $2.6 million in the second quarter of FY2012;
  *Revenues from the petrochemical and chemical segment were approximately
    $3.2 million compared with approximately $7.1 million in the second
    quarter of FY2012; and
  *Gross profit was approximately $1.4 million with a gross margin of 35.9%,
    compared with approximately $4.3 million and 42.0% in the second quarter
    of FY2012.

FY2013 First Six Months Highlights

  *Revenues were approximately $8.6 million compared with $21.3 million in
    the first six months of FY2012;
  *Revenues from the electric power segment were approximately $1.1 million
    compared with approximately $6.1 million in the first six months of
    FY2012;
  *Revenues from the petrochemical and chemical segment were approximately
    $6.6 million compared with approximately $13.8 million in the first six
    months of FY2012;
  *Gross profit was approximately $3.2 million with a 37.0% gross margin,
    compared with approximately $9.1 million and 42.9% in the first six months
    of FY2012;
  *Net loss was approximately $1.7 million, or loss of $0.10 per diluted
    share;
  *Non-GAAP net loss was approximately $1.3 million, or non-GAAP loss of
    $0.08 per share, after adjusting for non-cash items of share-based
    compensation and loss resulting from changes in the fair value of
    instruments; and
  *First six months ceramic valves output was 1,682 sets compared with 3,762
    sets during the same period a year ago.

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

FY2013 Second Quarter Results

Revenues in the second quarter were approximately $3.9 million as compared to
approximately $10.3 million in the second quarter of FY2012. Quarterly ceramic
valves output was 730 sets as compared to 1,784 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 industries.

During the second quarter of FY2013, revenues from electric power industry,
petrochemical and chemical industries, and other industries accounted for
8.7%, 81.0% and 10.4% of the quarterly revenues, respectively, compared with
25.7%, 68.6% and 5.7% in the second quarter of FY2012. Specifically, revenues
from the electric power industry were approximately $0.3 million compared with
approximately $2.6 million in the second quarter of FY2012; revenues from the
petrochemical and chemical industries were approximately $3.2 million compared
with approximately $7.1 million in the second quarter of FY2012; revenues from
other industries, including the aluminum and metallurgy industries were
approximately $0.4 million compared with approximately $0.6 million in the
second quarter of FY2012.

In the second quarter, cost of sales decreased 57.9% year-over-year to
approximately $2.5 million from approximately $6.0 million in the second
quarter of FY2012. Cost of sales as a percentage of revenues was 64.1%
compared with 58.0% 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 second quarter was approximately $1.4 million compared
with approximately $4.3 million for the second 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 35.9%, compared with 42.0% for the second quarter of
FY2012. The decrease in gross margin was primarily due to the fixed
depreciation costs spread over a smaller revenue base, and sales of more
valves with lower profit margin in the product mix for this second quarter.

Selling expenses in the second quarter decreased by 41.8% year-over-year to
approximately $0.6 million from approximately $1.0 million for the comparable
period in FY2012. Commissions paid to agents for introducing new sales
decreased year-over-year to approximately $0.3 million from approximately $0.8
million in the second quarter of FY2012. Since overseas sales and marketing
expenses increased as a result of the Company's shifted strategy to explore
overseas markets, and 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
15.2% from 10.0% in the second quarter of FY2012.

General and administrative ("G&A") expenses in the second quarter were
approximately $2.8 million, up from approximately $2.0 million for the
comparable period in FY2012. Excluding the non-cash share-based compensation,
G&A expenses in the second quarter were approximately $2.6 million, compared
with approximately $1.0 million for the comparable period of FY2012.

Total operating expenses in the second quarter of FY2013 were approximately
$3.4 million compared with approximately $3.1 million for the comparable
period in FY2012. Operating loss in the second quarter of FY2013 was
approximately $1.9 million compared with operating income of approximately
$1.3 million for the comparable period in FY2012.

Excluding the non-cash share-based compensation, non-GAAP operating loss was
approximately $1.8 million, compared with non-GAAP operating income of
approximately $2.3 million for the comparable period in FY2012.

Income tax benefits in the second quarter were approximately $32,000 compared
with income tax expense of approximately $0.5 million in the second quarter of
FY2012. In April 2010, Tianjin Shengkai Industrial Technology Development Co.,
Ltd. ("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 receive the official approval for renewal of such treatment
shortly.

GAAP net loss was approximately $1.8 million compared with GAAP net income of
approximately $1.8 million in the second quarter of FY2012. Diluted loss per
share was $0.10 compared to diluted earnings per share of $0.10 in the second
quarter of FY2012.

Excluding the non-cash items of share-based compensation and changes in fair
value of instruments, non-GAAP net loss was approximately $1.6 million in the
second quarter compared with non-GAAP net income of approximately $2.0 million
in the second quarter of FY2012. The decrease was primarily due to the decline
in revenues resulting from slowdown in PRC economy, loss of customers and
operational transition, coupled with lower margin product mix and higher
selling and research and development expenses for new potential markets.
Non-GAAP loss was $0.09 per diluted share compared with Non-GAAP earnings of
$0.11 per diluted share in the second quarter of FY2012.

FY2013 First Six Months Results

Revenues for the first six months of FY2013 were approximately $8.6 million as
compared to approximately $21.3 million for the first six months of FY2012.
Total ceramic valves output was 1,682 sets as compared to 3,762 sets a year
ago. The decrease in revenue was due to loss of business resulting from
unsolicited investigations, the transition into the petrochemical and chemical
segment, and the general economic slowdown in the PRC.

During the first six months of FY2013, revenues from electric power industry,
petrochemical and chemical industries, and other industries accounted for
12.9%, 76.6% and 10.5% of the total revenues, respectively, compared with
28.9%, 64.7% and 6.4% in the same period of FY2012. Specifically, revenues
from the electric power industry were approximately $1.1 million compared with
approximately $6.1 million in the first six months of FY2012; revenues from
the petrochemical and chemical industries were approximately $6.6 million
compared with approximately $13.8 million in the same period of FY2012;
revenues from other industries, including the aluminum and metallurgy
industries were approximately $0.9 million compared with approximately $1.4
million in the same period of FY2012.

Gross profit for the first six months of FY2013 was approximately $3.2 million
compared with approximately $9.1 million for the same period in FY2012. Gross
margin was 37.0% compared with 42.9% one year ago. The decrease in gross
margin was primarily due to the fixed depreciation costs spread over a smaller
revenue base, and sales of more valves with lower profit margin in the product
mix for the first six months of FY2013.

Net loss for the first six months of FY2013 was approximately $1.7 million, or
diluted loss per share of $0.10, compared with a net income of approximately
$2.7 million, or diluted net income per share of $0.15 during the first six
months of FY2012.

Excluding non-cash items of share-based compensation and change in fair value
of instruments, non-GAAP net loss for the first six months of FY2013 was
approximately $1.3 million compared with a non-GAAP net income of
approximately $4.1 million for the comparable period in FY2012. The decrease
was primarily due to the decline in revenues resulting from loss of business
resulting from unsolicited investigations, operational transition, and
slowdown in PRC economy, coupled with lower margin product mix and higher
selling and research and development expenses for new potential markets.
Non-GAAP loss was $0.08 per diluted share compared with Non-GAAP earnings of
$0.23 per diluted share in the first six months of FY2012.

GAAP to Non-GAAP Reconciliation Table (Unaudited)
(in U.S. Dollars)
                          For the Three Months Ended For the Six Months Ended
                           December 31,               December 31,
                          2012           2011       2012        2011
GAAP net (loss) income     $ (1,768,413)   1,782,084  (1,715,636)  2,726,422
Add back/(subtract):                                            
Share-based compensation –
employee options and stock 194,027         1,021,468  388,054      3,168,436
awards
Changes in fair value of   (4,712)         (830,085)  15,824       (1,756,722)
instruments
Non-GAAP net (loss) Income $ (1,579,098)   1,973,467  (1,311,758)  4,138,136
GAAP (loss) earnings per   $ (0.10)        0.10       (0.10)       0.15
share (diluted)
Non-GAAP (loss) earnings   $ (0.09)        0.11       (0.08)       0.23
per share (diluted)

Financial Condition

As of December 31, 2012, the Company had cash and cash equivalents of
approximately $65.1 million and accounts receivable of approximately $7.7
million compared to cash and cash equivalents of approximately $64.8 million
and accounts receivable of approximately $9.4 million as of June 30, 2012.
Total current liabilities as of December 31, 2012 were approximately $2.8
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 $0.2 million
for the first six months of FY2013 compared with approximately $7.7 million in
the first six months of FY2012. The decrease was primarily attributable to the
net loss incurred in the first six months of FY2013 as compared to a net
income for the same period in FY2012, as well as advance payments totaling
approximately $2.5 million incurred during the first six months of FY2013.

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. Meanwhile,
the Company has invested more money in overseas sales and marketing activities
and in research and development of new products for new potential markets.

As such, we expect that in the immediately following quarter ending March 31,
2013, total revenues would slightly decrease on a quarter-over-quarter basis
as we usually experience due to long holidays in China during that quarter,
such as the New Year and the Lunar Spring Festival; and major contribution to
our sales would continue to 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
and six months ended December 31, 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 DECEMBER 31, 2012 AND JUNE 30, 2012
(Stated in US Dollars)
                                                          
                                         December 31, 2012 June 30, 2012
                                                          
ASSETS                                                      
Current Assets                                              
Cash and cash equivalents                 $ 65,072,742      $ 64,819,870
Restricted cash                           --                124,433
Accounts receivable, net                  7,717,619         9,388,820
Notes receivable                          47,611            167,873
Other receivables                         2,896,076         2,879,422
Advances to suppliers                     4,821,515         2,339,362
Inventories                               2,490,074         2,750,907
Total Current Assets                      83,045,637        82,470,687
Property, plant and equipment, net        52,375,750        54,068,143
Land use rights, net                      2,508,702         2,533,684
Other intangible assets, net              4,066,795         4,524,058
TOTAL ASSETS                              $ 141,996,884     $ 143,596,572
                                                           
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Current Liabilities                                         
Notes payable                             --                124,433
Accounts payable                          1,703,349         1,942,262
Advances from customers                   446,247           316,020
Other payables and accrued expenses       655,789           899,491
Income tax payable                        --                240,438
Total Current Liabilities                 2,805,385         3,522,644
Warrant liabilities                       226               1,761
Preferred (conversion option) liabilities 498,487           481,128
TOTAL LIABILITIES                         $ 3,304,098       $ 4,005,533
                                                           



SHENGKAI INNOVATIONS, INC.
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT DECEMBER 31, 2012 AND JUNE 30, 2012
(Stated in US Dollars)
                                                               
                                              December 31, 2012 June 30, 2012
                                                               
STOCKHOLDERS' EQUITY                                            
Preferred stock – $0.001 par value 15,000,000
shares authorized; 1,971,842 and 1,971,842     $ 1,971           $ 1,971
issued and outstanding as of December 31, 2012
and June 30, 2012, respectively.
Common stock -- $0.001 par value 100,000,000
shares authorized; 17,196,229 and 17,196,071   17,197            17,197
shares issued and outstanding as ofDecember
31, 2012 and June 30, 2012, respectively.
Additional paid-in capital                     72,083,621        71,695,567
Statutory reserves                             11,196,604        11,196,604
Retained earnings                              43,375,875        45,091,511
Accumulated other comprehensive income         12,017,518        11,588,189
TOTAL STOCKHOLDER'S EQUITY                     138,692,786       139,591,039
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $ 141,996,884     $ 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 DECEMBER 31, 2012 AND 2011
(Stated in US Dollars)
                                                              
                     For the Three Months Ended   For the Six Months Ended
                      December 31,                 December 31,
                     2012           2011          2012           2011
                                                              
Revenues              $ 3,920,943    $ 10,293,828  $ 8,595,228    $ 21,304,955
Cost of sales         (2,514,475)    (5,966,161)   (5,415,618)    (12,162,812)
Gross profit          1,406,468      4,327,667     3,179,610      9,142,143
Operating expenses:                                            
Selling expenses      (596,271)      (1,024,253)   (1,206,652)    (2,075,733)
General and
administrative        (2,757,901)    (2,040,607)   (3,792,394)    (5,446,642)
expenses
Total operating       (3,354,172)    (3,064,860)   (4,999,046)    (7,522,375)
expenses
Income from           (1,947,704)    1,262,807     (1,819,436)    1,619,768
operations
Other income, net     13,752         40,568        13,752         54,041
Interest income, net  128,784        180,740       257,434        346,682
Changes in fair value
of instruments - gain 4,712          830,085       (15,824)       1,756,722
(loss)
(Loss) income before  (1,800,456)    2,314,200     (1,564,074)    3,777,213
income taxes
Income taxes benefits 32,043         (532,116)     (151,562)      (1,050,791)
(expenses)
Net (loss) income     (1,768,413)    1,782,084     (1,715,636)    2,726,422
Foreign currency
translation           694,645        925,698       429,329        2,211,482
adjustment
Comprehensive (loss)  $ (1,073,768)  $ 2,707,782   $ (1,286,307)  $ 4,937,904
income
                                                              
Basic (loss) earnings $ (0.10)       $ 0.11        $ (0.10)       $ 0.17
per share*
                                                              
Diluted (loss)        $ (0.10)       $ 0.10        $ (0.10)       $ 0.15
earningsper share*
                                                              
Basic weighted
average shares        17,196,229     16,638,306    17,196,224     16,506,920
outstanding*
                                                              
Diluted weighted
average shares        17,196,229     18,181,990    17,196,224     18,117,452
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 SIX MONTHS ENDED DECEMBER 31, 2012 AND 2011
(Stated in US Dollars)
                                                               
                                                Six months ended December 31,
                                                2012            2011
Cash flows from operating activities                            
Net (loss) income                                $ (1,715,636)   $ 2,726,422
Adjustments to reconcile net income to net cash                  
provided by operating activities:
Depreciation                                     1,806,030       1,866,042
Amortization                                     517,545         510,253
Provision for doubtful accounts                  11,015          110,259
(Gain) on disposal of property, plant and        --              (10,584)
equipment
Changes in fair value of instruments – (gain)    15,824          (1,756,722)
loss
Stock based compensation                         388,054         3,168,436
Changes in operating assets and liabilities:                     
(Increase) decrease in assets:                                   
Accounts receivable                              1,678,436       6,227,905
Notes receivable                                 119,860         45,972
Other receivables                                (10,648)        31,363
Advances to suppliers                            (2,482,116)     (26,318)
Inventories                                      266,141         (177,693)
Increase (decrease) in liabilities:                              
Notes payable                                    (124,209)       (1,139,952)
Accounts payable                                 41,453         (1,480,002)
Advances from customers                          130,317         389,850
Other payables                                   (182,760)       (1,363,226)
Accruals                                         (61,993)        (128,055)
Income tax payable                               (241,106)       (1,300,673)
Net cash provided by operating activities        156,207       7,693,277
Cash flows from investing activities                            
Proceeds from disposition of property, plant and --              (487)
equipment
Purchase of property, plant and equipment        (286,214)       (176,591)
Payment of construction in progress              --              (492,277)
Purchase of intangible assets                    (20,983)        --
Decrease in restricted cash                      124,209         1,139,952
Net cash (used in) provided by investing         (182,988)       470,597
activities




SHENGKAI INNOVATIONS, INC.
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2012 AND 2011
(Stated in US Dollars)
                                                              
                                                Six months ended December 31,
                                                2012           2011
                                                              
                                                              
Net (decrease) increase in cash and cash         $ (26,781)     $ 8,163,874
equivalents
                                                               
Effect of exchange rate changes on cash and cash 279,653        917,989
equivalents
                                                               
Cash and cash equivalents–beginning of year      64,819,870     59,870,108
                                                               
Cash and cash equivalents–end of year            $ 65,072,742   $ 68,951,971
                                                               
Supplementary cash flow information:                           
                                                               
Interest received                                $ 257,440      $ 346,682
                                                               
Taxes paid                                       $ 424,711      $ 2,351,462
                                                              
Non-cash transaction:                                          
Preferred stock conversion to common stock       $ --           $ --
Common stock issuance                            $ --           $ --

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