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Shengkai Innovations, Inc. Reports FY2013 Third Quarter Results

Shengkai Innovations, Inc. Reports FY2013 Third Quarter Results

TIANJIN, China, May 15, 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") third quarter ended
March 31, 2013.

FY2013 Third Quarter Highlights

  *Revenues were approximately $3.0 million compared with approximately $5.7
    million in the third quarter of fiscal year 2012 ("FY2012");
  *Revenues from the electric power segment were approximately $0.5 million
    compared with approximately $1.3 million in the third quarter of FY2012;
  *Revenues from the petrochemical and chemical segment were approximately
    $2.4 million compared with approximately $4.0 million in the third quarter
    of FY2012; and
  *Gross profit was approximately $0.8 million with a gross margin of 27.1%,
    compared with approximately $2.6 million and 46.2% in the third quarter of
    FY2012.

FY2013 First Nine Months Highlights

  *Revenues were approximately $11.6 million compared with $27.0 million in
    the first nine months of FY2012;
  *Revenues from the electric power segment were approximately $1.6 million
    compared with approximately $7.5 million in the first nine months of
    FY2012;
  *Revenues from the petrochemical and chemical segment were approximately
    $8.9 million compared with approximately $17.8 million in the first nine
    months of FY2012;
  *Gross profit was approximately $4.0 million with a 34.5% gross margin,
    compared with approximately $11.8 million and 43.6% in the first nine
    months of FY2012;
  *Net loss was approximately $3.1 million, or loss of $0.18 per diluted
    share;
  *Non-GAAP net loss was approximately $2.5 million, or non-GAAP loss of
    $0.14 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 nine months ceramic valves output was 2,282 sets compared with 4,667
    sets during the same period a year ago.

Note: The earnings per share data for the third quarter and first nine months
of FY2013 have been retroactively restated to reflect the 1-for-2 reverse
stock split effected on March 9, 2012.

FY2013 Third Quarter Results

Revenues in the third quarter were approximately $2.9 million as compared to
approximately $5.7 million in the third quarter of FY2012. Quarterly ceramic
valves output was 600 sets as compared to 905 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 third quarter of FY2013, revenues from electric power industry,
petrochemical and chemical industries, and other industries accounted for
17.5%, 79.7% and 2.8% of the quarterly revenues, respectively, compared with
23.1%, 70.2% and 6.8% in the third quarter of FY2012. Specifically, revenues
from the electric power industry were approximately $0.5 million compared with
approximately $1.3 million in the third quarter of FY2012; revenues from the
petrochemical and chemical industries were approximately $2.4 million compared
with approximately $4.0 million in the third quarter of FY2012; revenues from
other industries, including the aluminum and metallurgy industries were
approximately $0.1 million compared with approximately $0.4 million in the
third quarter of FY2012.

In the third quarter, cost of sales decreased 29.4% year-over-year to
approximately $2.2 million from approximately $3.1 million in the third
quarter of FY2012. Gross profit in the third quarter was approximately $0.8
million compared with approximately $2.6 million for the third 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-end products in this quarter. Gross margin was 27.1%, compared with
46.2% for the third quarter of FY2012. The decrease in gross margin was
primarily due to the fixed depreciation costs spread over a smaller revenue
base, and increase in sales of valves with lower profit margin in the product
mix in this third quarter.

Selling expenses in the third quarter decreased by 3.2% year-over-year to
approximately $0.7 million. Commissions paid to agents for introducing new
sales decreased year-over-year to approximately $0.2 million from
approximately $0.5 million in the third 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 23.8% from 12.8% in the third quarter of FY2012.

General and administrative ("G&A") expenses in the third quarter were
approximately $1.6 million, down from approximately $2.2 million for the
comparable period in FY2012. Excluding the non-cash share-based compensation,
G&A expenses in the third quarter were approximately $1.4 million, compared
with approximately $1.2 million for the comparable period of FY2012.

Total operating expenses in the third quarter of FY2013 were approximately
$2.3 million compared with approximately $2.9 million for the comparable
period in FY2012. Operating loss in the third quarter of FY2013 was
approximately $1.5 million compared with approximately $0.3 million for the
comparable period in FY2012.

Excluding the non-cash share-based compensation, non-GAAP operating loss was
approximately $1.3 million, compared with non-GAAP operating income of
approximately $0.7 million for the comparable period in FY2012.

Income tax expense for the third quarter was $0 due to the loss incurred
during the period, compared with approximately $0.3 million for the third
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. In April 2013, the Company officially received the approval to renew
such "high technology" enterprise status and extend the 15% preferential
enterprise income tax treatment for another three years.

GAAP net loss was approximately $1.4 million compared with approximately $0.1
million in the third quarter of FY2012. Diluted loss per share was $0.08
compared to $0.01 in the third 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 $1.1 million in the
third quarter compared with non-GAAP net income of approximately $0.8 million
in the third 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, marketing and research and development expenses for new potential
markets. Non-GAAP loss was $0.07 per diluted share compared with Non-GAPP
earnings of $0.05 per diluted share in the third quarter of FY2012.

FY2013 First Nine Months Results

Revenues for the first nine months of FY2013 were approximately $11.6 million
as compared to approximately $27.0 million for the first nine months of
FY2012. Total ceramic valves output was 2,282 sets as compared to 4,667 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 nine months of FY2013, revenues from electric power industry,
petrochemical and chemical industries, and other industries accounted for
14.1%, 77.4% and 8.5% of the total revenues, respectively, compared with
27.6%, 65.8% and 6.5% in the same period of FY2012. Specifically, revenues
from the electric power industry were approximately $1.6 million compared with
approximately $7.5 million in the first nine months of FY2012; revenues from
the petrochemical and chemical industries were approximately $8.9 million
compared with approximately $17.8 million in the same period of FY2012;
revenues from other industries, including the aluminum and metallurgy
industries were approximately $1.0 million compared with approximately $1.8
million in the same period of FY2012.

Gross profit for the first nine months of FY2013 was approximately $4.0
million compared with approximately $11.8 million for the same period in
FY2012. Gross margin was 34.5% compared with 43.6% one year ago. The decrease
in gross margin was primarily due to the fixed depreciation costs spread over
a smaller revenue base, and increase in sales of valves with lower profit
margin in the product mix for the first nine months of FY2013.

Net loss for the first nine months of FY2013 was approximately $3.1 million,
or diluted loss per share of $0.18, compared with a net income of
approximately $2.6 million, or diluted earnings per share of $0.14 during the
first nine 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 nine months of FY2013 was
approximately $2.5 million compared with a non-GAAP net income of
approximately $5.0 million for the comparable period in FY2012. The decrease
was primarily due to the decline in revenues because of loss of business
resulting from unsolicited investigations, operational transition, and
slowdown in PRC economy, coupled with lower margin product mix and higher
selling, marketing and research and development expenses for new potential
markets. Non-GAAP loss was $0.14 per diluted share compared with Non-GAPP
earnings of $0.27 per diluted share in the first nine months of FY2012.

GAAP to Non-GAAP Reconciliation Table (Unaudited)
(in U.S. Dollars)                                              
                         For the Three Months Ended For the Nine Months Ended
                          March 31,                 March 31,
                         2013            2012       2013         2012
GAAP net (loss) income   $(1,433,809)  (103,237)  (3,149,445)  2,623,185
Add back/(subtract):                                           
Share-based compensation
– employee options and    194,027         1,011,742  582,081      4,180,178
stock awards
Changes in fair value of  91,358          (79,808)   107,182      (1,836,530)
instruments
Non-GAAP net (loss)       $(1,148,424)  828,697    (2,460,182)  4,966,833
Income
GAAP (loss) earnings per  $(0.08)       0.01       (0.18)       0.14
share (diluted)
Non-GAAP (loss) earnings  $(0.07)       0.05       (0.14)       0.27
per share (diluted)

Financial Condition

As of March 31, 2013, the Company had cash and cash equivalents of
approximately $66.3 million and net accounts receivable of approximately $6.5
million compared to cash and cash equivalents of approximately $64.8 million
and net accounts receivable of approximately $9.4 million as of June 30, 2012.
Total current liabilities as of March 31, 2013 were approximately $2.4
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 $1.3 million
for the first nine months of FY2013 compared with approximately $7.7 million
in the first nine months of FY2012. The decrease was primarily attributable to
the net loss incurred in the first nine months of FY2013 as compared to a net
income for the same period in FY2012.

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 since fiscal 2012 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 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 ending June 30,
2013, total revenues would remain flat on a quarter-over-quarter basis; 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 nine months ended March 31, 2013 and 2012 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 MARCH 31, 2013 AND JUNE 30, 2012                  
(Stated in US Dollars)                                  
                                                       
                                         March 31,      June 30,
                                          2013           2012
                                                       
ASSETS                                                  
Current Assets                                          
Cash and cash equivalents                 $66,271,537  $64,819,870
Restricted cash                           207,201        124,433
Accounts receivable, net                  6,468,644      9,388,820
Notes receivable                          --             167,873
Other receivables                         2,945,488      2,879,422
Advances to suppliers                     4,804,119      2,339,362
Inventories                               2,343,192      2,750,907
Total Current Assets                      83,040,181     82,470,687
Property, plant and equipment, net        51,697,441     54,068,143
Land use rights, net                      2,504,288      2,533,684
Other intangible assets, net              3,839,375      4,524,058
TOTAL ASSETS                              $141,081,285 $143,596,572
                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY                    
Current Liabilities                                     
Notes payable                             207,201        124,433
Accounts payable                          1,005,471      1,942,262
Advances from customers                   604,452        316,020
Other payables and accrued expenses       623,715        899,491
Income tax payable                        --             240,438
Total Current Liabilities                 2,440,839      3,522,644
Warrant liabilities                       89             1,761
Preferred (conversion option) liabilities 589,982        481,128
TOTAL LIABILITIES                         $3,030,910   $4,005,533

                                                              
                                                              
SHENGKAI INNOVATIONS, INC.                                     
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)                        
AS AT MARCH 31, 2013 AND JUNE 30, 2012                         
(Stated in US Dollars)                                         
                                                              
                                                March 31,      June 30,
                                                 2013           2012
                                                             
STOCKHOLDERS' EQUITY                                           
Preferred stock – $0.001 par value 15,000,000
shares authorized; 1,971,842 and 1,971,842
issued and outstanding; aggregate liquidation    $1,971       $1,971
preference being $5,000,000 and $5,000,000 as of
March 31, 2013 and June 30, 2012, respectively.
Common stock -- $0.001 par value 100,000,000
shares authorized; 17,196,071 and 17,196,071     17,197         17,197
shares issued and outstanding as ofMarch 31,
2013 and June 30, 2012, respectively.
Additional paid-in capital                       72,277,648     71,695,567
Statutory reserves                               11,196,604     11,196,604
Retained earnings                                41,942,066     45,091,511
Accumulated other comprehensive income           12,614,889     11,588,189
TOTAL STOCKHOLDER'S EQUITY                       138,050,375    139,591,039
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $141,081,285 $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 AND NINE MONTHS ENDED MARCH 31, 2013 AND 2012
(Stated in US Dollars)
                                                             
                   For the Three Months Ended    For the Nine Months Ended
                    March 31,                     March 31,
                   2013           2012           2013           2012
                                                            
Revenues            $2,962,309   $5,680,510   $11,557,537  $26,985,465
Cost of sales       (2,158,649)    (3,058,282)    (7,574,267)    (15,221,094)
Gross profit        803,660        2,622,228      3,983,270      11,764,371
Operating expenses:                                           
Selling expenses    (704,123)      (727,696)      (1,910,775)    (2,803,429)
General and
administrative      (1,566,375)    (2,172,307)    (5,358,769)    (7,618,949)
expenses
Total operating     (2,270,498)    (2,900,003)    (7,269,544)    (10,422,378)
expenses
(Loss) Income from  (1,466,838)    (277,775)      (3,286,274)    1,341,993
operations
Other income, net   2,294          20,802         16,046         74,843
Interest income,    122,093        371,290        379,527        717,972
net
Changes in fair
value of            (91,358)       79,808         (107,182)      1,836,530
instruments -
(loss) gain
Income before       (1,433,809)    194,125        (2,997,883)    3,971,338
income taxes
Income taxes        --             (297,362)      (151,562)      (1,348,153)
Net (loss) income   (1,433,809)    (103,237)      (3,149,445)    2,623,185
Foreign currency
translation         597,370        881,061        1,026,699      3,092,543
adjustment
Comprehensive       $(836,439)   $777,824     $(2,122,746) $5,715,728
(loss) income
                                                            
Basic (loss)        $(0.08)      $(0.01)      $(0.18)      $0.16
earnings per share*
                                                            
Diluted (loss)      $(0.08)      $(0.01)      $(0.18)      $0.14
earnings per share*
                                                            
Basic weighted
average shares      17,196,229     16,638,307     17,196,226     16,550,398
outstanding*
                                                            
Diluted weighted
average shares      17,196,229     16,638,307     17,196,226     18,138,809
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 NINE MONTHS ENDED MARCH 31, 2013 AND 2012
(Stated in US Dollars)
                                                                
                                                 Nine Months Ended March 31,
                                                  2013           2012
Cash flows from operating activities                             
Net (loss) income                                  $(3,149,445) $2,623,185
Adjustments to reconcile net income to net cash                  
provided by operating activities:
Depreciation                                       2,710,561      2,819,280
Amortization                                       777,284        768,943
Provision for doubtful accounts                    128,719        185,531
(Gain) on disposal of property, plant and          --             (10,584)
equipment
Changes in fair value of instruments – loss (gain) 107,182        (1,836,530)
Stock based compensation                           582,081        4,180,178
Changes in operating assets and liabilities:                     
(Increase) decrease in assets:                                   
Accounts receivable                                2,841,429      6,302,473
Notes receivable                                   167,620        183,875
Other receivables                                  (47,555)       18,132
Advances to suppliers                              (2,444,015)    (213,519)
Inventories                                        423,555        (332,232)
Increase (decrease) in liabilities:                              
Notes payable                                      82,751         (1,394,120)
Accounts payable                                   (662,935)      (2,887,770)
Advances from customers                            286,420        430,011
Other payables                                     (217,483)      (1,561,822)
Accruals                                           (62,126)       --
Income tax payable                                 (241,106)      (1,540,673)
Net cash provided by operating activities          1,282,937      7,734,358
Cash flows from investing activities                             
Proceeds from disposition of property, plant and   --             (487)
equipment
Purchase of property, plant and equipment          (288,092)      (52,973)
Payment of construction in progress                --             (494,230)
Purchase of intangible assets                      (20,983)       --
Increase in advances to suppliers for purchase of  --             (132,035)
equipment and construction
Decrease/(increase) in restricted cash             (82,751)       1,276,189
Net cash provided by (used in) investing           (391,826)      596,464
activities

                                                               
                                                               
SHENGKAI INNOVATIONS, INC.
(F/K/A SOUTHERN SAUCE COMPANY, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED MARCH 31, 2013 AND 2012
(Stated in US Dollars)
                                                               
                                                 Nine Months Ended March 31,
                                                  2013          2012
                                                               
Net increase (decrease) in cash and cash           $891,111    $8,330,822
equivalents
                                                              
Effect of exchange rate changes on cash and cash   560,556       1,361,842
equivalents
                                                              
Cash and cash equivalents–beginning of year        64,819,870    59,870,108
                                                              
Cash and cash equivalents–end of year              $66,271,537 $69,562,772
                                                               
Supplementary cash flow information:                            
                                                              
Interest received                                  $379,551    $717,972
                                                              
Taxes paid                                         $424,711    $2,888,824
                                                               
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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