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China Fire has a bad quarter

March 16th, 2010 · No Comments

Due to delays in execution of a big contract. However, 2010 looks like it’s going to be a blow-out..
Because of the nature of the business, not too much importance should be given for quarterly results, which can fluctuate according to recognition of revenue from big orders.

For 2009, EPS are 0.86 per share, but guidance is 89%-105% higher, meaning somewhere around $1.65-$1.70 a share, which gives the company a p/e of less than 10. Having zero debt on it’s balance sheet makes this company a steel. The sell-off this morning is overdone.

Full Year 2009 Financial Results
– FY09 Revenue Increases 18% to $81.2 Million –
– FY09 Operating Income Increases 17% to $27.6 Million –
– Reaffirms FY10 Forecast of 66% – 78% Revenue Growth –
– Reaffirms FY10 Forecast of 89% – 105% Net Income Growth –

Press Release Source: China Fire & Security Group, Inc. On Tuesday March 16, 2010, 6:45 am EDT

BEIJING, March 16 /PRNewswire-Asia/ — China Fire & Security Group, Inc. (Nasdaq:CFSG – News) (“China Fire” or “the Company”), a leading total solution provider of industrial fire protection systems in China, today announced its financial results for the fourth quarter and fiscal year ended December 31, 2009.

Full Year 2009 Results

Revenues for 2009 increased 17.5% to $81.2 million from $69.1 million for 2008, driven primarily by higher total solution and product sales. During 2009, the Company recognized revenues from 445 total solutions, product sales and maintenance services contracts, compared to 319 contracts in 2008. The iron and steel industry remains the Company’s largest vertical, having contributed 75% of the total revenues in 2009, followed by power generation at 16%, and petrochemical and other verticals at 9%.

Gross margin for 2009 was 58.0%, 80 basis points higher than the gross margin of 57.2% in 2008. The increase in the gross margin was primarily attributable to the Company’s successful execution of total solution contracts in the iron and steel industry during the year.

Operating income was $27.6 million for 2009, as compared to $23.6 million for 2008, an increase of $4.0 million, or 17.0%, driven by the strong revenue growth and higher gross margin in 2009. Operating margin in 2009 was 34.0%, compared to 34.1% in 2008, as total operating expenses increased to $19.5 million in 2009, from $15.9 million in 2008. The higher operating expenses were primarily due to increased marketing activities and the expansion into new markets, most notably the retrofitting market in the iron and steel industry.

Net income was $24.4 million for 2009, compared to $24.7 million for 2008, representing a slight decrease of $0.3 million, or 1.2%. This decrease in net income was mainly attributable to the significant increase in the Company’s effective income tax rate during this year, as the Company’s main operating subsidiary, Sureland Industrial Fire Safety, Ltd., began to pay income tax at a rate of 12.5% after the expiration of its tax exemption period in 2008. GAAP fully diluted EPS was $0.86 in 2009, compared to $0.88 in the prior year.

Fourth Quarter 2009 Results

For the fourth quarter of 2009, revenue decreased 19.4% year over year to $16.9 million, compared to $21.0 million for the same period in 2008. This decrease was mainly due to the delay in the signing and executing of the previously announced $92 million retrofitting contract with Wuhan Iron and Steel (Group) Corporation (“Wuhan Iron and Steel”).

Gross margin for the fourth quarter of 2009 was 48.8%, versus a gross margin of 54.3% for the same period of 2008. The decrease in gross margin during the fourth quarter 2009 was primarily due to the lower contribution from the more profitable iron and steel vertical in the total revenue mix. During the fourth quarter of 2009, the iron and steel vertical represented 53% of the total revenue, as compared to 74% in the same period of last year.

Operating income was $3.3 million, as compared to $6.2 million from the same period last year. Operating margin for the period was 19.4%, versus 29.5% a year ago, primarily due to the decrease in gross margin this quarter. Operating expenses were $5.0 million for the fourth quarter of 2009, compared to $5.2 million for the same period of 2008. The improvement in operating expenses during this quarter benefited from lower administrative expenses.

Net income was $2.9 million for the fourth quarter of 2009, as compared to $6.8 million for the same period of 2008. The decrease in net income was mainly due to the decrease in both revenue and gross margin during this quarter as well as the 12.5% income tax on our major operating subsidiary in China. As a result, GAAP fully diluted EPS was $0.10 in the fourth quarter of 2009, versus $0.24 in the fourth quarter of the prior year.

Mr. Gangjin Li, chairman and chief executive officer of China Fire, commented, “In spite of lower than expected revenue in the fourth quarter of 2009, I am satisfied with our business momentum and with the groundwork that we laid out over the past year. Due to the larger than expected size and scope of the Wuhan Iron and Steel retrofitting project, we had a delay in the signing of the contract, from which we had projected a $10 million revenue contribution during the fourth quarter of 2009. The nature of our business as a total solution provider may occasionally result in unexpected changes in the recognition of certain large projects or contracts, thereby impacting our quarterly results. At this point, however, we have successfully signed this record-high contract, as announced earlier this year, and I am more enthusiastic than ever about China Fire’s growth momentum in 2010.”

Liquidity and Capital Resources

As of December 31, 2009, the Company had working capital of $87.1 million and zero debt. Net cash provided by operating activities was $5.5 million in 2009, compared to $13.4 million in 2008. As a result, net cash increased $8.3 million to $35.0 million at the end of 2009, from $26.7 million at the end of 2008.

Financial Outlook for 2010

For the full year 2010, the Company reaffirms its revenues will grow between 66% and 78% to a range of $135 million to $145 million. Net income is estimated to grow 89% to 105% to a range of $47 million to $49 million, or $1.65 to $1.70 per diluted share.

Mr. Li concluded, “We continue to be excited about the growth prospects in our core iron and steel market and customer base. We are particularly excited that the new retrofit market opportunities are essentially an extension of our core iron and steel business, as the projects require our same core products, core technical and core vertical expertise that have made China Fire the market leader with the number one brand in China. Furthermore, in addition to our core iron and steel vertical, we continue to pursue expansions into other verticals, including power generation, transportation, petrochemical, etc., as well as new international markets.”

Conference Call

The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET today, March 16, 2010. The Company invites the participants to join the call by dialing +1-719-325-4763. To listen to the live webcast of the event, please go to http://www.chinafiresecurity.com and click on the Investor Relations section where conference calls are posted. Please go to the website 15 minutes early to download and install any necessary audio software.

A replay of the call will be available from March 16, 2010 to March 23, 2010. Listeners may access the replay by dialing +1-719-457-0820, passcode: 8104346.

About China Fire & Security Group, Inc.

China Fire & Security Group, Inc. (NASDAQ:CFSG – News), through its wholly owned subsidiary, Sureland Industrial Fire Safety Limited (“Sureland”), is a leading total solution provider of industrial fire protection systems in China. Leveraging on its proprietary technologies, China Fire is engaged primarily in the design, manufacture, sales and maintenance services of a broad product portfolio including detectors, controllers, and fire extinguishers. Via its nationwide direct sales force, China Fire has built a solid client base including major companies in iron and steel, power, petrochemical and transportation industries throughout China. China Fire has a seasoned management team with strong focus on standards and technologies. Currently, China Fire has a comprehensive portfolio of patents covering fire detection, system control and fire extinguishing technologies. Founded in 1995, China Fire is headquartered in Beijing with about 430 employees in more than 30 sales and project offices throughout China. For more information about the Company, please go to http://www.chinafiresecurity.com .

Cautionary Statement Regarding Forward Looking Information

This presentation may contain forward-looking information about China Fire & Security Group, Inc. and its wholly owned subsidiary Sureland which are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “seek,” “intend,” or “anticipate” or the negative thereof or comparable terminology, and include discussions of strategy, statements about industry trends and China Fire & Security Groups’ future performance, operations and products. This and other “Risk Factors” are contained in China Fire & Security Groups’ public filings with the SEC.

               CHINA FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2009 AND 2008

                                              December 31,      December 31,
                                                     2009              2008
                                     ASSETS
    CURRENT ASSETS:
      Cash and cash equivalents                $34,976,880       $26,655,333
      Restricted cash                            1,837,134         5,377,933
      Notes receivable                           4,274,268         3,670,259
      Accounts receivable, net of
       allowance for doubtful accounts of
       $6,539,787 and $4,370,362 as of
       December 31, 2009 and
       2008, respectively                       30,989,569        25,826,343
      Receivables from related party               551,792           466,223
      Other receivables                            368,679           419,419
      Refundable bidding and system
       contracting project deposits              1,774,330         1,112,840
      Inventories                                5,360,520         6,538,938
      Costs and estimated earnings in
       excess of billings                       36,562,573        17,821,708
      Employee advances                            953,625           743,868
      Prepayments and deferred expenses          3,397,358         2,816,976
        Total current assets                   121,046,728        91,449,840

    PLANT AND EQUIPMENT, net                     8,617,521         8,445,254

    OTHER ASSETS:
      Restricted cash – non current              3,602,906         1,872,828
      Accounts receivable – retentions           3,463,998         1,107,450
      Deferred expenses – non current              116,045                —
      Advances on building and equipment
       purchases                                        —           249,859
      Investment in joint ventures                 477,837         1,167,238
      Intangible assets, net                     1,041,156         1,116,449
        Total other assets                       8,701,942         5,513,824

          Total assets                        $138,366,191      $105,408,918

                             LIABILITIES AND EQUITY
    CURRENT LIABILITIES:
      Accounts payable                           $6,903,961       $6,664,090
      Accounts payable to related party             272,994               —
      Customer deposits                           2,182,790        6,102,026
      Billings in excess of costs and
      estimated earnings                          1,429,999        4,237,528
      Other payables                                333,121          837,973
      Accrued liabilities                        13,841,300        6,785,409
      Taxes payable                               9,002,470        2,092,745
        Total current liabilities                 3,966,635       26,719,771

    COMMITMENTS AND CONTINGENCIES

    EQUITY:
      Common stock, $0.001 par value,
       65,000,000 shares authorized,
       27,595,541 and 27,586,593 shares
       issued and outstanding as of
       December 31, 2009 and 2008,
       respectively                                  27,595           27,586
      Additional paid-in-capital                 20,601,138       19,357,409
      Statutory reserves                          7,147,795        7,148,827
      Retained earnings                          69,266,049       44,850,181
      Accumulated other comprehensive
      income                                      7,324,237        7,305,144
        Total shareholders’ equity              104,366,814       78,689,147
      Noncontrolling interest                        32,742               —
        Total equity                            104,399,556       78,689,147

          Total liabilities and equity         $138,366,191     $105,408,918

               CHINA FIRE & SECURITY GROUP, INC. AND SUBSIDIARIES
        CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

                                         2009             2008          2007
    REVENUES
      System contracting
       projects                   $62,514,475      $57,101,984   $34,581,376
      Products                     15,718,815        9,673,922    10,592,683
      Maintenance services          2,947,908        2,303,213     1,579,778
          Total revenues           81,181,198       69,079,119    46,753,837

    COST OF REVENUES
      System contracting
       projects                    26,769,508       25,805,086    16,158,844
      Products                      5,589,310        2,558,844     4,329,067
      Maintenance services          1,769,104        1,217,316       602,943
          Total cost of
           revenues                34,127,922       29,581,246    21,090,854

    GROSS PROFIT                   47,053,276       39,497,873    25,662,983

    OPERATING EXPENSES
      Selling and marketing         8,908,697        6,434,887     3,907,067
      General and
       administrative               8,154,801        6,680,992     5,661,356
      Depreciation and
       amortization                   773,907          712,269       535,751
      Research and development      1,631,435        2,102,976       672,379
          Total operating
           expenses                19,468,840       15,931,124    10,776,553
    INCOME FROM OPERATIONS         27,584,436       23,566,749    14,886,430

    OTHER INCOME (EXPENSES)
       Other income                   678,530          929,919       581,192
       Other expenses                  (6,907)        (127,620)      (14,932)
       Interest income                269,081          382,227       148,236
       Change in fair value of
        derivative instruments             —               —     1,205,791
          Total other income
           (expenses)                 940,704        1,184,526     1,920,287

    INCOME BEFORE PROVISION
     FOR INCOME TAXES AND
     NONCONTROLLING INTEREST       28,525,140       24,751,275    16,806,717

    PROVISION FOR INCOME TAXES      4,165,548           47,423         5,081

    NET INCOME BEFORE
     NONCONTROLLING INTEREST       24,359,592       24,703,852    16,801,636

    Less: Net loss attributable
     to noncontrolling interest       (55,244)              —            —

    NET INCOME ATTRIBUTABLE TO
     CONTROLLING INTEREST          24,414,836       24,703,852    16,801,636

    OTHER COMPREHENSIVE INCOME
       Foreign currency
        translation adjustment         19,093        3,737,027     2,502,595

    COMPREHENSIVE INCOME          $24,433,929      $28,440,879   $19,304,231

    BASIC EARNINGS PER SHARE
       Weighted average number
        of shares                  27,590,523       27,568,214    26,873,742
       Earnings per share               $0.88            $0.90         $0.63

    DILUTED EARNINGS PER SHARE
       Weighted average number
        of shares                  28,311,955       28,210,620    27,721,171
       Earnings per share               $0.86            $0.88         $0.61

Tags: CFSG