China Electric Motor (PINK:CELM)

Third Quarter 2010 Financial Highlights

• Total revenue increased by 48.9% year-over-year to $32.9 million.

• Gross profit increased by 44.9% year-over-year to $9.4 million.

• Operating income, including the stock-based compensation expense, was $4.2 million, a 3.8% year-over-year increase.

• Non-GAAP operating income, which excludes a stock-based compensation expense of $2.4 million, was $6.7 million.

• Net income, including the stock-based compensation expense of $2.4 million, was $2.7 million, a 15.6% year-over-year decrease.

• Non-GAAP net income, which excludes a stock-based compensation expense of $2.4 million, was $5.1 million, a 61.0% increase.

• Basic and diluted earnings per share were $0.13 each, based on 20,908,863 and 20,947,303 weighted average shares outstanding, respectively.

• Non-GAAP basic and diluted earnings per share, which excludes a stock-based compensation expense of $2.4 million, were $0.25 each, based on 20,908,863 and 20,947,303 weighted average shares outstanding, respectively. In the third quarter of 2009, basic and diluted earnings per share were $0.25 and $0.24, respectively, based on 12,926,571 and 13,553,465 weighted average shares outstanding, respectively.

Mr. Yue Wang, Chief Executive Officer of China Electric, said, "During the quarter, we granted 1.2 million China Electric shares to key employees, and we believe that this grant will help us to build loyalty among our high-quality employee base, and to assist in our recruiting efforts. This grant resulted in an approximately $2.4 million stock-based compensation expense for the quarter. We are pleased to have exceeded our revenue guidance for the quarter, as we continued our initiative to focus on sales of our higher-priced products. Our average selling price in the quarter increased by 12.6% over the third quarter of 2009. Our focus on higher-margin sales in China and to OEMs was again successful; however, the positive margin implications of these sales on our net income were partially offset by the $2.4 million non-cash stock-based compensation expense. Without this non-cash expense, we would have exceeded our net income and earnings per share guidance for the quarter."

He continued, "We believe that our investments to increase our manufacturing capacity and modernize our factory equipment in a phased manner will play a major role in the successful execution of our strategy to broaden and deepen our market penetration. During the quarter, we made solid headway on our capacity expansion plans. We completed the installation of two new coreless motor and two new AC motor production lines and we now are offering a new product series for consumer electronics and toys to the market. We have received positive and encouraging feedback thus far on our new products. Our new factory in Zhejiang, equipped with two AC motor production lines, was fully up and running in September and two more AC motor lines were added in October. Production of the two new lines will begin in late November.

"As we approach the end of the year, we are tightening our revenue guidance range for 2010, and have updated our net income guidance to include stock-based compensation expenses related to our employee share grant. We continue to believe that market demand for our products is sustainable, and we are implementing our strategy to leverage this demand and build our leadership position in the market," Mr. Wang concluded.

Business Outlook

The Company believes that strong gross domestic product growth in China and recovering export markets, combined with rising disposable income and the Chinese government's stimulus package relating to subsidies for home and kitchen appliances and vehicle purchases will continue to support increased demand for micro motor products. The Company's goal is to become a global leader in the development and manufacture of micro motor products. R&D investments are focused on products that address industry trends to reduce noise, vibration and energy consumption. China Electric continues its initiatives to increase higher-margin direct sales to domestic OEMs as a proportion of total revenue and has devoted resources to increase brand awareness and product recognition and heighten customer loyalty.

Guidance for Fourth Quarter and Fiscal Year 2010

Fourth quarter of 2010

Revenue in the range of $38.0 million to $39.5 million.

Net income in the range of $5.4 million to $5.6 million, including a non-cash stock-based compensation expense of $0.4 millionfor the fourth quarter of 2010.

Basic and diluted earnings per share are expected to be between$0.24 and $0.25, based on 21,942,243 shares outstanding on a fully diluted basis.

Fiscal year 2010

Revenue to be in the range of $117 million to $119 million

Net income for fiscal 2010 to be in the range of $14.9 million and $15.3 million, including the non-cash stock-based compensation expense of $28.7 million for 2010 full year.

Basic and diluted earnings per share for 2010 will be between $0.74 and $0.75, based on 20,467,329 shares outstanding on a fully diluted basis.

Second Quarter 2010 Financial Highlights

• Total revenue increased by 13.3% year-over-year to $25.3 million, compared to $22.3 million in the second quarter of 2009.
  
• Net income was $4.1 million, a 93.2% increase compared to net income of $2.1 million in the second quarter of 2009.
  
• Basic and diluted earnings per share were $0.20 versus basic and diluted earnings per share of $0.18 and $0.17 in the second.

Mr. Yue Wang, Chief Executive Officer of China Electric, said, "Our strong second quarter results, which exceeded our guidance, were fueled by growing demand for our products and for home appliance motors in particular. We were able to convert favorable industry trends and a robust macroeconomic environment into a larger customer base, and I am pleased to report that we are executing sales and attracting new customers in an increasingly efficient manner. Our intention is to build the proportion of higher-margin sales in China and to original equipment manufacturers ("OEMs") in our sales mix. Our second quarter results demonstrate that we have been able to achieve this yet again."

He continued, "We believe that the strength of market demand is sustainable, and that the quality and flexibility of our products give us the opportunity to gain share and build a leadership position in the market. Therefore, we are building capacity in a phased manner in order to continue to expand our product offering and capture favorable trends in new industry verticals.

"Due to a delay in the expected government approval of our application for a tax reduction in 2010, we have updated our net income outlook for the year. We are confirming our full year revenue guidance," Mr. Wang concluded.

The Company estimates that for the second quarter of 2010

• Revenue will be in the range of $22.1 million to $24.0 million.
• Net income for the second quarter of 2010 to be in the range of $3.4 million to $3.7 million.
• Basic and diluted earnings per share for the second quarter of 2010 will be between $0.16 and $0.18, based on 20,832,957 shares outstanding (on a fully diluted basis).

Management had previously estimated

• Revenue in the range of $20.0 million to $23.3 million
• Net income for the second quarter of 2010 would be in the range of $3.0 million to $3.5 million.
• Basic and diluted earnings per share for the second quarter of 2010 to be between $0.141 and $0.165, based on 21,244,743 shares outstanding (on a fully diluted basis).

The Company is constructing new production equipment, which management believes should be capable of producing up to approximately 24 million units annually at full capacity. The testing process for the new production equipment construction is underway. Management expects the first phase of the construction to be completed by the end of July 2010; the delay of roughly one month is the result of strong micro motor demand, which created backlog with equipment providers. Management expects the second phase of construction to be completed before the end of October 2010, and the new production equipment should be fully operational by March 2011.

Mr. Yue Wang, Chief Executive Officer of China Electric, said, "Our revised estimates for the second quarter reflect sustained strong demand for home appliance motors, as well as successful execution of our plan to grow our customer base. We also benefited from an increase in the average selling price during the quarter, particularly in motors used in home appliances. While we expect the strength in the market for home appliance motors to be sustainable, the second quarter is typically one of the strongest for our company and the industry from a demand perspective."

Source: PR Newswire (July 28, 2010)

Mr. Yue Wang, Chief Executive Officer of China Electric, said, "Our first quarter results were in line with guidance and demonstrate progress on our strategy to grow revenue and income by focusing on higher margin sales and initiatives to grow our customer base. While we did sell a higher volume of our lower-priced products in the quarter, the average selling price increased compared to last year. Sales to OEMs continued to grow as a percentage of sales, contributing to margin expansion. This quarter, G&A expenses were exceptionally high due to expenses related to our IPO, and we expect this line item to decrease as the year continues.

"We are confirming our full year guidance as we are confident in our ability to produce micro-motor products that continue to meet growing customer demand in China and internationally."

Management estimates for second quarter 2010:

• Revenue: Range $20.0 million to $23.3 million.
• Net income: Range of $3.0 million to $3.5 million. 
• Basic and diluted earnings per share:  Between $0.141 and $0.165, based on 21,244,743 shares outstanding (on a fully diluted basis).

Management estimates for  2010:

• Revenue:  Range of $110 million to $120 million
• Net income: Range of  $17.1 million and $19.8 million.

The Company believes that strong gross domestic product growth in China and recovering export markets, combined with rising disposable income and the extension of the Chinese government's stimulus package relating to subsidies for home appliance and vehicle purchases will continue to support increased demand for micro-motor products. The Company's goal is to become a global leader in the development and manufacture of micro-motor products. R&D investments are focused on products that address industry trends to reduce noise, vibration and energy consumption. China Electric continues its initiatives to increase higher-margin direct sales to domestic OEMs as a proportion of total revenue and has devoted resources to increase brand awareness and product recognition and heighten customer loyalty.