Smartheat (NASDAQ:HEAT)

SMARTHEAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 




  
 
YEARS ENDED DECEMBER 31,
 
  
 
2011
 
 
2010
 
  
 
 
 
 
 
 
Net sales
 
$
65,221,104
 
 
$
125,406,862
 
Cost of goods sold
 
 
44,559,093
 
 
 
80,694,945
 
  
 
 
 
 
 
 
 
 
Gross profit
 
 
20,662,011
 
 
 
44,711,917
 
  
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
     Selling
 
 
9,514,588
 
 
 
8,559,665
 
     General and administrative
 
 
25,167,249
 
 
 
9,461,212
 
     Goodwill impairment
 
 
8,956,313
 
 
 
-
 
  
 
 
 
 
 
 
 
 
     Total operating expenses
 
 
43,638,150
 
 
 
18,020,877
 
  
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
(22,976,139
)
 
 
26,691,040
 
  
 
 
 
 
 
 
 
 
Non-operating income (expenses)
 
 
 
 
 
 
 
 
     Interest income
 
 
243,810
 
 
 
433,534
 
     Interest expense
 
 
(925,250
)
 
 
(131,350
)
     Financial expense
 
 
(150,371
)
 
 
(49,751
)
     Foreign exchange transaction gain (loss)
 
 
(407,880
)
 
 
33,932
 
     Other income (expense), net
 
 
(26,230
)
 
 
174,337
 
  
 
 
 
 
 
 
 
 
     Total non-operating income (expenses), net
 
 
(1,265,921
)
 
 
460,702
 
  
 
 
 
 
 
 
 
 
Income (loss) before income tax
 
 
(24,242,060
)
 
 
27,151,742
 
Income tax expense
 
 
186,373
 
 
 
4,533,112
 
  
 
 
 
 
 
 
 
 
Net income (loss) before noncontrolling interest
 
 
(24,428,433
)
 
 
22,618,630
 
Less: Loss attributable to noncontrolling interest
 
 
(468,247
)
 
 
(79,813
)
  
 
 
 
 
 
 
 
 
Net income (loss) to SmartHeat Inc.
 
 
(23,960,186
)
 
 
22,698,443
 
  
 
 
 
 
 
 
 
 
Other comprehensive item
 
 
 
 
 
 
 
 
     Foreign currency translation gain
     attributable to SmartHeat Inc.
 
 
6,867,626
 
 
 
3,282,273
 
  
 
 
 
 
 
 
 
 
     Foreign currency translation gain
     attributable to noncontrolling interest
 
 
81,103
 
 
 
11,681
 
  
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to SmartHeat Inc.
 
$
(17,092,560
)
 
$
25,980,716
 
  
 
 
 
 
 
 
 
 
Comprehensive loss attributable to noncontrolling interest
 
$
(387,144
)
 
$
(68,132
)
  
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
 
3,867,578
 
 
 
3,341,942
 
  
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
 
 
3,867,578
 
 
 
3,345,368
 
  
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
(6.20
)
 
$
6.79
 
  
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
$
(6.20
)
 
$
6.79
 

Despite a very challenging sales environment caused by a continuation of China's restrictive fiscal policy in 2011, we are encouraged by our fourth quarter results due to our efforts to expand into regional areas of China, the development of our marketing force and our restructuring efforts. If not for one-time impairments to goodwill and inventory taken in the fourth quarter of 2011, our operating loss of $8.82 million for the fourth quarter would have resulted in operating income of approximately $3.77 million compared to operating loss of $2.54 million in the third quarter of 2011.

GeoTeam calculated fourth quarter 2011 non-gaap EPS of $0.55 vs $2.55 in prior year.

Mr. James Jun Wang, Chairman and Chief Executive Officer of SmartHeat Inc., made the following comments regarding the performance of SmartHeat during the third quarter of 2011: "We experienced an encouraging increase in sales and deliveries in the third quarter of 2011 compared to the second quarter of 2011, and we are well positioned to take advantage of the results of China’s current anti-inflation policies. The slowdown in the heating-supply and other industrial markets in China continued, caused in part by the Chinese government's ongoing tightening of fiscal policy to fight inflation. We are overcoming the postponement and cancellation of some of our plate heat exchanger (PHE) orders in the first half of 2011, however, and maintaining our gross margin by strengthening our sales efforts through the maturation of our sales force, increasing sales channels, improving cost controls, increasing prices and continuing to improve the efficiency of our manufacturing operations, which may include staff reductions in certain plants.

"Despite the challenging sales environment, we are encouraged by the progress of synergization and integration after the acquisition of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited in the first quarter of 2011. We anticipate increased sales in the heat pump sector from both of these companies. Despite the temporary fiscal tightening impacting our customers in China, we expect that the Chinese government will continue to require implementation of energy savings policies to reduce emissions, which we believe will continue to increase the demand for our energy-saving products in all industrial sectors. We are optimistic about taking advantage of West China's economic development and urbanization trends throughout China as well as positioning ourselves as an international forward-thinking 'green' company."

Revised Full Year 2011 Earnings Guidance

Due to the impact of significant drops of sales, impact of rising prices on business and the integration costs of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited Company, two companies acquired by SmartHeat in Q1 2011, the Company is revising its full year 2011

• earnings guidance to $18 million to $20 million in net loss
• revenue guidance $40 million to $50 million 

• In the first quarter of 2011, total sales decreased 16% to $7.89 million compared to $9.39 million in Q1 2010 resulting from a decrease in sales of our PHE Units to our customers that are state-owned enterprises.
• Operating loss totaled $4.51 million, compared with operating income of $1.82 million in Q1 2010.
• Net loss in the quarter totaled $3.95 million, down from $1.7 million net income ($0.05 per diluted share) in Q1 2010.

Geoteam® Note: 2011 First quarter analyst EPS estimates were $0.05.

The decrease in sales was primarily due to tightened fiscal policy in China, which impacted state-owned enterprises that are encountering difficulties in obtaining grants from the government and facing an extended bank loan application process. The new fiscal policy resulted in unexpected cancelations of orders and unscheduled delays in the performance of PHE Unit contracts, which decreased revenue from that product line. The company expects that a significant portion of the canceled PHE Unit orders will be reinstated and some of the contracts that have been partially delayed will be performed within this fiscal year or in 2012.

As a result of these delays, we reserved $2.07 million for a bad debt allowance in the first quarter even though we expect a substantial portion of the bad debt to be paid.

Mr. James Jun Wang, Chairman and Chief Executive Officer of SmartHeat Inc., made the following comments regarding the performance of SmartHeat during the first quarter of 2011: “This is the first fiscal quarter in the history of SmartHeat in which we encountered a simultaneous decrease in sales and a net loss. Unfortunately, we are not alone in China with respect to these challenges. Some of our plate heat exchanger (PHE) unit customers postponed or canceled their orders due to the Chinese government’s tightened fiscal policy used to fight inflation. We also faced increased prices of some key materials we use in our manufacturing operations. We expect to overcome these difficulties and maintain our gross margin by strengthening our sales efforts through the maturation of our sales force, increasing sales channels, improving cost controls, increasing prices and continuing to improve the efficiency of our manufacturing operations, which may include staff reductions in certain plants in response to the decrease in revenue from PHE Units.”

“Despite a drop in PHE Unit sales, we are encouraged by the continued strength in sales of heat exchangers and heat meters in this quarter. We also anticipate increased sales in the heat pump sector from our acquisition of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited. In addition, SmartHeat has been selected as the sole supplier of heat exchangers and complete packaged units for a series of projects in North and South America. This program fits with SmartHeat’s energy efficiency mandate because our technology converts waste heat from diesel and gas engine power plants into electricity using no additional fuel and creating no greenhouse gas emissions. Despite the temporary fiscal tightening impacting our PHE Unit customers, we expect that the Chinese government will continue to require implementation of energy savings policies to reduce emissions, which we believe will continue to increase the demand for our energy-saving products in all industrial sectors. We are optimistic about taking advantage of West China’s economic development and urbanization trends throughout China as well as positioning ourselves as a forward-thinking “green” company.”

Revised Full Year 2011 Earnings Guidance

Due to the

• impact of China’s tightened fiscal policy on the company’s PHE Unit customers
• impact of rising prices on business and the integration costs of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited Company, two companies acquired by SmartHeat in Q1 2011,

The company is revising its full year 2011 earnings guidance to

• $9.5 million to $14 million in net income and $63 million to $93 million in revenues
• reflecting $0.25 - $0.36 earnings per share.

Fourth Quarter Highlights and Guidance:

• In the fourth quarter of 2010, total sales increased 60.61% to $41.79 million compared to $26.02 million in 4Q09
• Net income in the fourth quarter totaled $6.50 million, up 122.26% from $2.92 million in 4Q09
• SmartHeat is announcing full year 2011 guidance of $22 - $28 million in net income on $120 - $150 million in revenues, reflecting $0.60 - $0.80 EPS.

Mr. James Jun Wang, Chairman and Chief Executive Officer of Smart Heat Inc., commented: "We maintained the momentum from the first nine months of 2010 and delivered another set of strong results. We thank our hard working employees who are dedicated to executing our operational strategy. We are quite pleased to see the significant payback we expected to receive from investments made to expand our sales and distribution channels."

Third quarter of 2010

• Total sales increased 36.05% to $51.48 million compared to $37.84 million in 3Q09.
• Net income in the quarter totaled $11.11 million ($0.34 per diluted share), up 25.07% from $8.88 million ($0.36 per diluted share) in 3Q09. The higher net income was driven primarily by increased sales from PHEs and PHE units.

Earnings per share decreased by $0.02 per share because of our secondary offering in the third quarter of 2009.

Updates Full Year 2010 Earnings Guidance and Target 2011 Earnings Guidance  

SmartHeat is updating its full year 2010 guidance from

• $106 - $116 millionin revenues to $110 - $120 millionin revenues
• $20 - $22 millionin net income to $22 - $24 million in net income.

In addition, SmartHeat is announcing full year 2011 guidance of $25 - $30 million in net income on $135 - $160 million in revenues.

Outlook

Mr. James Jun Wang, Chairman and Chief Executive Officer of Smart Heat Inc., commented: "We maintained the momentum from the first half of 2010 and delivered another set of strong results. We thank our hard working employees who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China and are very satisfied with the growth across all our existing business lines and the benefits we expect to receive from investments made to expand our sales and distribution channels."

"Government requirements to implement energy savings and emission reduction have increased the demand for our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will be continue to be part of our long-term strategy. Based on the successful expansion to West China's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.

2010 second quarter Financial Highlights:

• Revenues of $22.77 million, up 82% from 2Q09
• Operating income of $4.00 million, up 31% from 2Q09
• Net income of $3.39 million up 30% from 2Q09
• EPS: $0.10 vs $0.11
• Better than Expected Sales from Heat Exchangers

Mr. James Jun Wang, Chairman and Chief Executive Officer of Smart Heat Inc., commented that: "We maintained the momentum from the first quarter of 2010 and delivered another set of strong results. We thank our hard working employees, who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China, are very satisfied with the growth across all our existing business lines and the benefits we expect to receive in restructuring our sales and distribution channels."

"Government requirements to implement energy savings and emission reduction have increased the demand of our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will continue to be part of our long-term strategy.  Based on the successful expansion to West China's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.

Outlook

Mr. James Jun Wang, Chairman and Chief Executive Officer of Smart Heat Inc., commented that: "We maintained the momentum from the first quarter of 2010 and delivered another set of strong results. We thank our hard working employees, who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China, are very satisfied with the growth across all our existing business lines and the benefits we expect to receive in restructuring our sales and distribution channels."

"Government requirements to implement energy savings and emission reduction have increased the demand of our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will continue to be part of our long-term strategy.  Based on the successful expansion to West China's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.

Mr. Wang commented: "Since the beginning of the 2nd half, we have experienced greater customer order flow and willingness among our existing and new customers to increase demand for our energy savings equipment. Our recently completed asset acquisition of one of China's largest PHE manufacturers has not only expanded our production capabilities but also extended our product offerings to new customer segments. We believe SmartHeat's rapid earnings growth momentum will continue well into 2010 as we anticipate broader global economic recovery next year. We are optimistic that SmartHeat is on track to achieve solid 3rd quarter earnings growth and another year of record success in 2009 for our growing list of individual and institutional shareholders."

^a The above forecasts reflect the Company's current and preliminary views and are therefore subject to change. Please refer to the Company's Safe Harbor Statement (usually in press releases) for the factors that could cause actual results to differ materially from those contained in any forward-looking statement.

^b Smartheat did not provide EPS guidance. The GeoTeam® calculated an implied EPS figure using the current outstanding share count of 24,179,900. 

^c 24,179,900 shares as of Aug 10, 2009 (Per second quarter 10Q)

James Jun Wang, CEO of SmartHeat, commented: 'Our first quarter financial results reflected management expectations and the execution of our growth plan as we laid out in early 2009. As a market leader in the rapidly expanding clean technology energy savings industry in China, SmartHeat intends to further expand our business through both organic growth and strategic acquisitions. SmartHeat is exploring synergistic benefits with several acquisition targets in our industry which may be immediately accretive to our 2009 earnings if we acquire them. Operating in a favorable market environment, SmartHeat is on track to achieve another year of record success in 2009.'  We anticipates earnings growth momentum to continue for the rest of 2009.

Source: See Release (May 11, 2009)

James Jun Wang, CEO of SmartHeat, commented: 'Our audited 2008 financial results exceeded management's financial performance targets as we laid out in early 2008. SmartHeat expects to experience significant product sales in 2009 as China has made reduction in air pollution a national priority through stronger environmental protection measures, greater funding efforts and broad mandates for clean technology energy savings equipment use. Based on significantly increased product orders received in the first two months in 2009 compared to the same period in 2008, SmartHeat anticipates strong product sales and earnings growth in 2009 from all sectors of our customer base: government, industrial, commercial and consumers. We look forward to another year of record earnings in 2009.'

Source: PR Newswire (March 18, 2009)