China Advanced (NASDAQ:CADC)

GeoTeam® Note: 2011 vs. 2010 Adjusted EPS of $0.00 vs. $0.10

Full Year:

Fourth Quarter:

Cost of revenue, which consists of direct labor, rentals, depreciation, other overhead and raw materials, including inbound freight charges, was approximately $35 million for the three months ended December 31, 2011, as compared to approximately $27.8 million for the three months ended December 31, 2010, an increase of approximately $7.2 million, or 26%. The increase of cost of revenue was due to the overall increase in production from our fixed concrete plants in the Beijing area compared to the three months ended December 31, 2010. The increase in cost of revenue was also due to the increase of inflation in China, as well as increases in labor and crude oil prices, which increased the costs of raw materials and transportation during this quarter compared to the prior fiscal year. We are uncertain whether crude oil prices or raw material prices will maintain at the current level in the near future. We intend to adjust our concrete prices to keep pace with changes in raw material pricing, particularly the price of cement.

First Quarter 2012 Results

• Revenue increased 44% year-over-year to $44.6 million
• Gross margin at 24.1%
• Non-GAAP adjusted net income available to common shareholders of $2.9 million
• Non-GAAP adjusted fully diluted EPS to common shareholders of $0.17 vs $0.19 in prior year
• GAAP net income available to common shareholders of $3.1 million or $0.17 EPS

Management Commentary

Mr. Xianfu Han, Chairman and Chief Executive Officer of China ACM, commented, "We experienced another quarter of revenue growth for China ACM. During the first quarter, volumes at our Beijing fixed plants increased as we expanded our customer base in our home market."

"However, in light of ongoing quality inspections at high-speed rail construction sites across the country, and the recent government suspension of new and ongoing high-speed rail projects, we experienced lower volumes at several of our manufacturing services division plants in the quarter. As a result, we continue to focus on managing our cost structure in anticipation of lower volumes from our portable plant network for the foreseeable future."

Fourth quarter and full year 2011 results

Fourth Quarter FY 2011 Financial Highlights

• Revenue increased 59% year over year to $49.3 million
• Gross margin at 21.9%
• Non-GAAP adjusted net income available to common shareholders of $5.3 million
• Non-GAAP adjusted fully diluted EPS to common shareholders of $0.30 vs $0.33 in 2010
• GAAP net income available to common shareholders of $7.0 million or $0.39 EPS

Fiscal Year 2011 Financial Highlights

• Revenue increased 48% year over year to $137.9 million
• Gross margin at 18.6%
• Non-GAAP adjusted net income available to common shareholders increased 2% YOY to $16.0 million
• Non-GAAP adjusted fully diluted EPS to common shareholders of $0.88 vs $0.95 in 2010
• Net income available to common shareholders rose 42% YOY to $17.1 million
• $47.2 million in working capital at June 30, 2011

Management Commentary

Mr. Xianfu Han, Chairman and Chief Executive Officer of China ACM, commented, "Fiscal Year 2011 was another year of growth and profitability for China ACM. During fiscal 2011, our volumes from our Beijing fixed plants increased as we expanded our customer base in that market. We also experienced increased volumes from our portable plant division that primarily services the build out of China's high-speed rail network."

"However, in light of the recent government suspension of new and ongoing high-speed rail projects, our near-term outlook for the manufacturing services division is uncertain. The government is conducting ongoing quality inspections at high-speed rail construction sites across the country, which has resulted in a slowdown in overall construction. As a result, we are focused on managing our cost structure in anticipation of lower volumes from our portable plant network for the foreseeable future."

Third Quarter Results:

• Revenue increased 41% year over year to $23.1 million
• Gross margin at 17.5%
• Non-GAAP adjusted net income available to common shareholders of $2.4 million
• Non-GAAP adjusted fully diluted EPS to common shareholders of $0.13

"Despite having recently terminated one fixed Concrete plant lease, the third quarter 41 percent top line growth was solid and affirms that we have the right product in the right market," said Mr. Xianfu Han, Chairman and Chief Executive Officer of China ACM. "Both our revenue and our bottom line faced headwinds in the quarter with the leadership transition in China's Railway Ministry, slowing HSR business broadly. However, the same drivers of our long term growth remain intact, primarily our growing industry stature, strategic alliances, attrition of marginal concrete providers -- all fueled by China's generational urbanization and modernization.

Second Quarter FY 2011 Financial Highlights

• Revenue increased 32% year over year to $34.5 million
• Gross margin expanded to 19.4% sequentially vs.13.3% in Q1-11
• Non-GAAP adjusted net income available to common shareholders up 14.5%
  YOY to $4.9 million
• Non-GAAP adjusted fully diluted EPS to common shareholders of $0.27 vs. $0.29
• GAAP net income available to common shareholders of $3.2 million,
  decreased from $7.6 million YOY primarily on $4.8 million higher non-
  cash net expense for the change in fair value of warrants
• Quarter end backlog at record $66.7 million, up 15% sequentially from
  Q1-11
• Adjusted EBITDA of $7.1 million, up 21.4% YOY.

Commenting on the quarter's results and outlook for the balance of Fiscal Year 2011, China ACM President and Chief Financial Officer Jeremy Goodwin, stated, "While we produced solid growth in the second quarter, with the blended gross margin at 19.4 percent, we expect meaningful margin improvements in the current quarter and second half of the fiscal year as we move beyond the transition phase of a number of HSR projects underway. We have six new HSR plants coming on line. We are bidding and winning increasingly longer term HSR manufacturing contracts to minimize project transition time. I am confident we will expand HSR margins in the second half to our customary levels approaching the 40 percent range."

"Further, the third and subsequent quarters' margins will benefit by our mid-second quarter termination of one leased Concrete Sales fixed plant that had been underperforming. We plan to redeploy those resources into high-margin portable plants to support contracts in the Beijing area or for new HSR business in outlying provinces. Additionally, Concrete Sales margins will benefit from capturing the current, full quarter's 25 percent average price increase, announced midway through the second fiscal quarter, against costs that increased 20 percent at that time."

"Our diversified backlog has grown to a record $66.7 million while the new business pipeline is a healthy $28.4 million. With recently established strategic alliances with CSCEC, and others in process, our new business development is becoming more efficient, and leveraged, as we begin jointly bidding projects along with major SOE contractors, some of whom will fund capital expenditures for certain projects," Mr. Goodwin said. "Our balance sheet is strong with $3.2 million in cash, $36.0 million in working capital and no long term debt. Our accounts receivable is primarily composed of large, highly creditworthy state owned enterprises."

"Also in the second fiscal quarter, we launched our new corporate website featuring major upgrades to content to provide greater transparency for our shareholders and clients," he added. "At the end of December 2010, we engaged Friedman LLP as our independent auditor. They assisted in the preparation of this second quarter's unaudited report. In the months ahead, we target geographic expansion, joint ventures, strategic alliances and will evaluate acquisitions -- all of which increases our requirement for Friedman's world class financial management and reporting expertise."

Backlog

China ACM reported that its December 31, 2010 backlog, or bids in house, increased by 15% sequentially from September 30, 2010 to a record $66.7 million. 83% of the Dec. 31 backlog is contracted with Government State Owned Enterprise contractors and 17% is contracted with private sector developers. The backlog is comprised of $43.9 million in contracted unfilled orders for its Concrete Sales segment, and $22.8 million in contracted unfilled order for its Manufacturing Services segment. Based on its historical experience, the Company's estimated time to convert these contracted orders into recognized revenues averages between four and 12 months for Concrete Sales, and six to 24 months for Manufacturing Services, depending on the scope of the projects.

The Company's new business pipeline, or bids outstanding, which is a measure of the value of bids it has submitted for Concrete Sales and Manufacturing Services business, was $2.5 million and $25.9 million, respectively, or $28.4 million total.

Fiscal 2011 First Quarter Ended Septermber

Fully Diluted Non-GAAP EPS was  $0.19 vs. $0.23

Commenting on the quarter's results and outlook for Fiscal Year 2011, China ACM President and Chief Financial Officer Jeremy Goodwin, said, "Operationally, the first quarter of Fiscal Year 2011 was highlighted by rapidly increasing sales, higher capacity and growing new business opportunities. The start up of an unusually high number of new long term HSR contracts is quite positive, so despite a dip in first quarter margins from portable plant redeployment and start ups, the outlook for the 2011 fiscal year is robust and on track. We generated $4.93 million in EBITDA and finished the quarter with $28.8 million in working capital.

"The first quarter reflected a large number of new HSR portable plant start ups in ramp-up stage as well as an unusually high number of plants in redeployment transition whose downtime was lengthened due to a client SOE contractor's local permit issue. While start dates were delayed, those newly contracted projects will require the same number of cubic meters of the Company's premium RMC to be delivered by the originally scheduled project completion date, so that full revenue is expected to be realized subsequently.

"Concrete Sales in the quarter were impacted by higher commodity raw materials costs that increased our overall cost of goods by about two percent. As many of our Concrete Sales fixed-price contracts signed prior to the material cost increase have ended or will soon be ending, the price raise we announced today averaging 25 percent across the range of our concrete sales products is expected to boost margins back to normal levels in our second quarter. Our Manufacturing Services portable plants are unaffected by raw material costs as the client provides the raw materials.

"Additionally, two of our high margin consulting contracts in the Technical Services business expired. This Segment has been trending higher in recent years but has been highly variable, and the Company will be selectively pursuing more such contracts in our target markets around the country to replace and grow this business.

"Driven by modernization and urbanization, our addressable markets, infrastructure, continue to accelerate in growth -- unaffected by China's import/export markets. According to the Investment Research Institute of China's State Development and Reform Commission, during the 12th 5-year plan from 2011-2015 the Chinese Government will invest $450 billion in railway plus another $460 billion in rural infrastructure which plays to our strength in commercial and industrial real estate, utilities, airports rail and subway stations.

"Our diversified backlog and new business pipeline are strong, near record levels at $58 million and $31 million respectively. Given our increasing capacity, they support the outlook for a record year," Mr. Goodwin concluded.

China ACM reported first quarter Fiscal Year 2011 non-GAAP adjusted net income available to common shareholders increased 35 percent, year over year, to $3.3 million on 59 percent higher revenue of $31.0 million. The non-GAAP adjusted net income available to common shareholders is before non-cash change in fair value of warrants, option and equity-based compensation.

First quarter Manufacturing Services revenue increased by 59 percent to a record $4.5 million year over year with a 28.1 percent gross margin. Technical Services revenue decreased by 7 percent to $1.2 million with a 91 percent gross margin. Concrete Sales revenue at our fixed plants in Beijing increased by 70 percent to $25.3 million with a gross margin of 7.2 percent.

The Company's first quarter blended gross margin was 13.3 percent, declining from 16.9 percent a year ago temporarily reflecting portable plant projects completion ramp down, relocation delays and new portable plant projects ramp up, higher seasonal concrete sales raw material costs as well as higher margin Technical Services contracts expiring.

Backlog

China ACM reported that, on September 30, its backlog, or bids in house, was $58 million, 82% of which is contracted with Government State Owned Enterprise contractors and 12% contracted with private sector developers. This is comprised of $33 million in contracted unfilled orders for its Concrete Sales segment, and $25 million in contracted unfilled order for its Manufacturing Services segment. Based on its historical experience, the Company's estimated time to convert these contracted orders into recognized revenues averages is between six and twelve months for Concrete Sales, and 12 to 30 months for Manufacturing Services depending on the scope of the project.

The Company's new business pipeline, or bids outstanding, which is a measure of the value of bids it has submitted for either Concrete Sales and Manufacturing Services business, was $16 million and $15 million, respectively, or $31 million total.

Market Opportunity

The China Ministry of Rail has announced its plans to invest $120.75 billion in 70 new projects upgrading rail infrastructure in calendar 2010 which together with future planned rail infrastructure investment will total $730 billion by 2020. China's State Development and Reform Commission recently announced plans to expand China's subway system to 6,100 KM investing $105 billion through 2020.

According to a recent article in The Journal of Commerce, infrastructure spending in Asia (not including Japan) could total roughly $1.4 trillion in the next two years, with China committing $585 billion or more. India is also projected to spend more than $500 billion by 2015. China is already at work on 12 major highway projects connecting rural areas to urban centers, which will give the country 53,000 miles of highways by 2020.

China is also in the midst of a $200 billion campaign to expand its railways and freight-handling facilities, and plans to build 97 new airports by 2020, including 10 with the capacity to handle more than 30 million passengers per year. All told, China is expected to account for more than 28 percent of global infrastructure spending totaling $70 trillion over the next two decades, reports CG/LA Infrastructure LLC, a Washington-based consulting firm for the construction industry.

Comparison of the years Ended June 30, 2010 and 2009

• Revenue of $93,040,847 compared to $39,714,802 during the same period of 2009, an increase of $53,326,045 or 134%.
  
• Cost of Sales  was $73,704,701 for the year ended June 30, 2010, as compared to $24,518,042 for the year ended June 30, 2009, an increase of $49,186,659, or 201%. The increase of cost of revenue was due to overall increase in production from our five fixed concrete plants in the Beijing area and increased production on manufacturing and technical services as well as other services compared to the same period in 2009. The increase in cost of sales was also due to the addition of seven new portable plants, the increases in crude oil prices which increased the costs of raw materials and transportation during this quarter compared to the same period last year. We are uncertain whether crude oil prices will maintain at the current level in the near future.
  
• GAAP net income of $13,006,395 for the year ended June 30, 2010, as compared to net income of $12,068,489 for the same period in 2009, an increase of $937,906.
  
• GAAP EPS of $0.79 vs. $0.86.
  
• Company provided non-GAAP EPS of $0.95 vs $0.82.

GeoTeam® Note: We adjusted EPS by adding back non-cash charges, subtracting subsidy income and applying a tax rate of 25.0%.  This yields EPS 0.65 vs. 0.76. The company did not subtract subsidy income in its non-GAAP EPS calculation.