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| CPSL > SEC Filings for CPSL > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, factors such as: plans to expand our exports outside of China; plans to increase our production capacity and the anticipated dates that such facilities may commence operations; our ability to obtain additional funding for our continuing operations and to fund our expansion; our ability to meet our financial projections for any financial year; our ability to retain our key executives and to hire additional senior management; continued growth of the Chinese economy and industries demanding our products; our ability to secure at acceptable prices the raw materials we need to produce our products; political changes in China that may impact our ability to produce and sell our products in our target markets; general business conditions and competitive factors, including pricing pressures and product development; and changes in our relationships with customers and suppliers. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K for our fiscal year ended June 30, 2011.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I, Item 1, "Financial Statements," of this quarterly report. Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion and analysis covers the Company's unaudited consolidated financial condition at March 31, 2012 and June 30, 2011, the end of its prior fiscal year, and its unaudited consolidated results of operation for the three and nine months ended March 31, 2012 and 2011.
Use of Terms
Except as otherwise indicated by the context, all references in this report to:
· "CPSL," "Company," "Group," "we," "us" or "our" are to China Precision Steel, Inc., a Delaware corporation, and its direct and indirect subsidiaries;
· "PSHL" are to our subsidiary Partner Success Holdings Limited, a BVI company;
· "Blessford International" are to our subsidiary Blessford International Limited, a BVI company;
· "Shanghai Blessford" are to our subsidiary Shanghai Blessford Alloy Company Limited, a PRC company;
· "Chengtong" are to our subsidiary Shanghai Chengtong Precision Strip Company Limited, a PRC company;
· "Tuorong" are to our subsidiary Shanghai Tuorong Precision Strip Company Limited, a PRC company;
· "China" and "PRC" are to the People's Republic of China;
· "BVI" are to the British Virgin Islands;
· "SEC" are to the United States Securities and Exchange Commission;
· "Securities Act" are to the Securities Act of 1933, as amended;
· "Exchange Act" are to the Securities Exchange Act of 1934, as amended;
· "RMB" are to Renminbi, the legal currency of China; and
· "U.S. dollar," "USD," "US$" and "$" are to the legal currency of the United States.
Overview of our Business
We are a niche and value-added steel processing company principally engaged in the manufacture and sale of high precision cold-rolled steel products, in the provision of heat treatment and in the cutting and slitting of medium and high-carbon hot-rolled steel strips. We use commodity steel to create a value-added specialty premium steel. Specialty precision steel pertains to the precision of measurements and tolerances of thickness, shape, width, surface finish and other special quality features of highly-engineered end-use applications.
We produce and sell precision ultra-thin and high strength cold-rolled steel products ranging from 7.5 mm to 0.03 mm. We also provide heat treatment and cutting and slitting of medium and high-carbon hot-rolled steel strips not exceeding 7.5 mm thickness. Our process puts hot-rolled de-scaled (pickled) steel coils through a cold-rolling mill, utilizing our patented systems and high technology reduction processing procedures, to make steel coils and sheets in customized thicknesses according to customer specifications. Currently, our specialty precision products are mainly used in the manufacture of automobile parts and components, steel roofing, plane friction discs, appliances, food packaging materials, saw blades, textile needles, and microelectronics.
We conduct our operations principally in China through our wholly-owned operating subsidiaries, Chengtong and Shanghai Blessford, which are wholly owned subsidiaries of our direct subsidiary, PSHL. Most of our sales are made domestically in China; however, we began exporting during fiscal 2007 and our overseas market currently covers Indonesia, Thailand, the Caribbean, Nigeria and Ethiopia. We intend to further expand into additional overseas markets in the future, subject to suitable market conditions and favorable regulatory controls.
Third Quarter Financial Performance Highlights
During the quarter ended March 31, 2012, we saw slightly improving demand but lower selling prices compared to the same period a year ago. There were significant decreases in sales volume for our high carbon products over the three months ended March 31, 2012 and we are faced with multiple challenges including high inflation, high raw material costs and the slowdown of the Chinese economy.
During the quarter ended March 31, 2012, we sold a total of 38,898 tons of products, an increase of 2,423 tons from 36,475 tons a year ago, mainly due to an increase in demand for our low carbon cold-rolled products. However, our low-carbon products have a lower margin among our product categories and gross margin for the quarter ended March 31, 2012 was negative as average cost per unit sold decreased only 8.9% while average selling prices decreased 12.2%, period-on-period. We were not able to fully pass on our cost to our customers due to an increased level of competition in the domestic market for some of our product categories and the strengthening of the RMB over the recent years that has made the price of our products less competitive in the global market. Increased concentration in sales of low-carbon products coupled with decreasing selling prices have led to a gross loss of $1,117,208 and a net loss of $3,313,023 for the three months ended March 31, 2012. Total Company backlog as of March 31, 2012 was $19,017,998.
To combat high inflation and rising costs in China and to increase overall profitability, we are actively working on expanding our customer base to increase total demand which reduces per unit cost, optimizing our product mix by carrying out research and development ("R&D") to improve profitability of existing products and launch new high value-add products, and prioritizing higher margin products among existing customers and markets. We will also continue to take appropriate actions to perform business and credit reviews of customers and suppliers and strengthen collection of accounts receivable with the goal to maintain overall healthy sales volume, margins and cash positions.
We believe that high barriers to entry in the Chinese domestic precision cold-rolled steel industry still exist because of the level of technological expertise and the amount of capital required for operation. Although we expect a continuation of volatility in demand in both domestic and international markets, and a difficult operating environment due to a weakening Chinese economy and rising costs which could continue to have adverse impacts on our gross margins in the near future, the medium to long term prospects of our niche remain optimistic. We believe that our unique capabilities and know-how give us a competitive advantage to grow sales and build a globally recognized brand as we continue to carry out R&D and expand to new segments, customers and markets.
The following are some financial highlights for the third fiscal quarter:
· Revenues: Our revenues were approximately $29.5 million for the third quarter, a decrease of 6.3% from last year.
· Gross Margin: Gross margin was (3.8)% for the third quarter, as compared to
(0.1)% last year.
· (Loss) from operations before income tax: Loss from operations before income tax was approximately $3.3 million for the third quarter, as compared to approximately $0.9 million last year.
· Net (loss): Net loss was approximately $3.3 million for the third quarter, as compared to approximately $0.9 million last year.
· Fully diluted (loss) per share: Fully diluted loss per share was $0.07 for the third quarter, as compared to $0.02 last year.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated, in USD and as a percentage of revenues.
Comparison of Three and Nine Months Ended March 31, 2012 and 2011
Three Months Ended March 31, Nine months Ended March 31,
2012 2011 2012 2011
Amount % of Revenues Amount % of Revenues Amount % of Revenues Amount % of Revenues
Revenues $ 29,494,865 100.0 $ 31,489,118 100.0 $ 105,324,043 100.0 $ 105,154,101 100.0
Cost of sales (including
depreciation and amortization) 30,612, 073 103.8 31,530,734 100.1 108,178,198 102.7 100,902,769 96.0
Gross (loss)/profit (1,117,208 ) (3.8 ) (41,616 ) (0.1 ) (2,854,155 ) (2.7 ) 4,251,332 4.0
Selling and marketing expenses 63,734 0.2 93,172 0.3 172,223 0.2 201,554 0.2
Administrative expenses 781,221 2.7 111,068 0.4 2,007,777 1.9 1,708,188 1.6
Allowance for bad and doubtful
debts 522,118 1.8 126 <0.1 522,118 0.5 19,823 <0.1
Depreciation and amortization
expense 54,173 0.2 50,173 0.2 162,610 0.2 143,884 0.1
Total operating expenses 1,421,246 4.8 254,539 0.8 2,864,728 2.7 2,073,449 2.0
(Loss)/income from operations (2,538,454 ) (8.6 ) (296,155 ) (0.9 ) (5,718,883 ) (5.4 ) 2,177,883 2.1
Other revenues 20,434 0.1 627 <0.1 89,505 0.1 3,239 <0.1
Interest and finance costs (794,895 ) (2.7 ) (591,118 ) (1.9 ) (2,273,473 ) (2.2 ) (1,908,969 ) (1.8 )
Total other (expense) (774,461 ) (2.6 ) (590,491 ) (1.9 ) (2,183,968 ) (2.1 ) (1,905,730 ) (1.8 )
(Loss)/income from operations
before income tax (3,312,915 ) (11.2 ) (886,646 ) (2.8 ) (7,902,851 ) (7.5 ) 272,153 0.3
Income tax expense/(benefit) 108 <(0.1 ) (14,149 ) <(0.1 ) 27,189 <0.1 298,358 0.3
Net (loss) $ (3,313,023 ) (11.2 ) $ (872,497 ) (2.8 ) $ (7,930,040 ) (7.5 ) $ (26,205 ) <(0.1 )
Basic (loss) per share $ (0.07 ) $ (0.02 ) $ (0.17 ) $ (0.00 )
Diluted (loss) per share $ (0.07 ) $ (0.02 ) $ (0.17 ) $ (0.00 )
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Sales Revenues. Sales volume increased by 2,423 tons, or 6.6%, period-on-period, to 38,898 tons, for the period ended March 31, 2012, from 36,475 tons for the period ended March 31, 2011, however, due to decrease in average selling prices, sales revenues decreased by $1,994,253, or 6.3%, period-on-period, to $29,494,865 for the period ended March 31, 2012, from $31,489,118 for the period ended March 31, 2011.
Sales by Product Line
A break-down of our sales by product line for the three months ended March 31,
2012 and 2011 is as follows:
Period-
Three Months ended March 31, on-
2012 2011 Period
Quantity % of Quantity % of Qty.
Product Category (tons) $ Amount Sales (tons) $ Amount Sales Variance
Low-carbon hard-rolled 2,245 1,597,893 5 225 278,168 1 2,020
Low-carbon cold-rolled 32,971 23,828,512 81 27,827 23,031,005 73 5,144
High-carbon hot-rolled 144 133,371 <1 715 733,907 2 (571 )
High-carbon cold-rolled 3,464 3,384,305 11 7,065 6,775,354 22 (3,601 )
Subcontracting income 74 10,374 <1 643 96,601 <1 (569 )
Sales of scrap metal - 540,410 2 - 574,083 2 -
Total 38,898 29,494,865 100 36,475 31,489,118 100 2,423
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There were different trends of demand across various product categories during the three months ended March 31, 2012. High-carbon cold-rolled steel products accounted for 11% of the current sales mix at an average selling price of $977 per ton for the period ended March 31, 2012, compared to 22% of the sales mix at an average selling price per ton of $959 for the period ended March 31, 2011. The products in this category are mainly used in the automobile industry. Sales volume decreased period-on-period as a result of the slow-down of the auto sector during the period. Low-carbon cold-rolled steel products accounted for 81% of the current sales mix at an average selling price of $723 per ton for the three months ended March 31, 2012, compared to 73% of the sales mix at an average selling price per ton of $828 for the three months ended March 31, 2011. The increase in demand in this category during the period was a result of increased orders of steel used in the production of home appliances. Low-carbon hard-rolled steel products accounted for 5% of the current sales mix at an average selling price of $712 per ton for the three months ended March 31, 2012, compared to 1% of the sales mix at an average selling price per ton of $1,236 for the three months ended March 31, 2011, due to an increased tonnage sold in the international market period-on-period as we saw an improvement of purchasing activity in the global space at the current price level and the return of old customers who had been holding off orders in the prior periods. Subcontracting income revenues accounted for $10,374, or less than 1% of the sales mix for the three months ended March 31, 2012, as compared to $96,601, or less than 1%, of the sales mix for the three months ended March 31, 2011.
Three Months ended
March 31,
2012 2011 Variance
Average Selling Prices ($) ($) ($) (%)
Low-carbon hard-rolled 712 1,236 (524 ) (42 )
Low-carbon cold-rolled 723 828 (105 ) (13 )
High-carbon hot-rolled 926 1,026 (100 ) (10 )
High-carbon cold-rolled 977 959 18 2
Subcontracting income 140 150 (10 ) (7 )
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The average selling price per ton decreased to $758 for the three months ended March 31, 2012, compared to $863 last year, representing a decrease of $105, or 12.2%, period-on-period. This decrease was mainly due to decreases in the average selling prices of low-carbon products, period-on-period.
Sales Breakdown by Major Customer
2012 2011
% of % of
Customers $ Sales $ Sales
Shanghai Bayou Manufacturing Co.,
Ltd. 13,708,730 46 - * - *
Changshu Jiacheng Steel Plating Co.,
Ltd. 3,661,289 12 - * - *
Jiangsu Sumec Group Corporation 3,495,647 12 - * - *
Zhejiang Yejin Materials Co., Ltd 2,687,696 9 - * - *
Shanghai Shengdejia Metal Products
Co., Ltd. 2,353,098 8 4,548,200 14
Shanghai Changshuo Steel Co., Ltd. - * - * 5,063,932 16
Wuxi Xingyu Thin Plate Co., Ltd. - * - * 3,559,802 11
Sinolight Materials Corporation - * - * 3,293,373 11
Zhejiang Aoguan Thin Plate Co. Ltd. - * - * 2,994,056 10
25,906,460 87 19,459,363 62
Others 3,588,405 13 12,029,755 38
Total 29,494,865 100 31,489,118 100
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* Not major customers for the relevant periods
Sales revenues generated from our top five major customers as a percentage of total sales increased to 87% for the period ended March 31, 2012, compared to 62% for the period ended March 31, 2011. Four top customers are new major customers for the period ended March 31, 2012. This change in customer mix reflects management's continuous efforts in expanding our customer base and geographical coverage during the course of the quarter.
Cost of Goods Sold. Cost of sales decreased by $918,661, or 2.9%, period-on-period, to $30,612,073 for the period ended March 31, 2012, from $31,530,734 for the period ended March 31, 2011. Cost of sales represented 103.8% of sales revenues for the period ended March 31, 2012, compared to 100.1% for the period ended March 31, 2011. Average cost of production per ton decreased to $787 for the period ended March 31, 2012, compared to an average cost of production per ton of $864 for the period ended March 31, 2011, representing a decrease of $77 per ton, or 8.9%, period-on-period.
2012 2011 Variance
($) ($) ($) (%)
Cost of goods sold
- Raw materials 28,139,271 28,587,486 (448,215 ) (1.6 )
- Direct labor 132,304 136,986 (4,682 ) (3.4 )
- Manufacturing overhead 2,340,498 2,806,262 (465,764 ) (16.6 )
30,612,073 31,530,734 (918,6661 ) (2.9 )
Cost per unit sold
Total units sold (tons) 38,898 36,475 2,423 6.6
Average cost per unit sold ($/ton) 787 864 (77 ) (8.9 )
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The decrease in cost of sales is represented by the combined effect of:
· a decrease in cost of raw materials per unit sold of $61, or 7.8%, from $784 for the period ended March 31, 2011, to $723 for the period ended March 31, 2012; and
· a decrease in manufacturing overhead per unit sold of $17, or 22.1%, from $77 for the period ended March 31, 2011, to $60 for the period ended March 31, 2012.
The cost of raw materials consumed decreased by $448,215, or 1.6%, period-on-period, to $28,139,271 for the period ended March 31, 2012, from $28,587,486 for the period ended March 31, 2011. This decrease was mainly due to a decrease in average raw material cost per unit sold and was offset by an increase in total units sold.
Direct labor costs decreased by $4,682, or 3.4%, period-on-period, to $132,304 for the period ended March 31, 2012, from $136,986 for the period ended March 31, 2011. The decrease was due to a decrease in average direct labor cost per unit sold due to increased economies of scale during the period and was offset by an increase in total units sold.
Manufacturing overhead costs decreased by $465,764, or 16.6%, period-on-period, to $2,340,498 for the period ended March 31, 2012, from $2,806,262 for the period ended March 31, 2011. The decrease was mainly attributable to the combined effect of a decrease in consumables of $82,717 or 22.9%, period-on-period, to $279,233 for the period ended March 31, 2012, from $361,950 for the period ended March 31, 2011, and a decrease in utilities of $172,064, or 22.4%, period-on-period, to $594,746 for the period ended March 31, 2012, from $766,810 for the period ended March 31, 2011.
Gross Loss. Gross loss in absolute terms increased by $1,075,592, or 2,584.6%, period-on-period, to a loss of $1,117,208 for the period ended March 31, 2012, from a loss of $41,616 for the period ended March 31, 2011, while gross loss margin increased to 3.8% for the period ended March 31, 2012, from 0.1% for the period ended March 31, 2011. The increase in gross loss was mainly attributable to a 6.3% period-on-period decrease in sales revenues, and was offset by a 2.9% period-on-period decrease in cost of goods sold. The increase in gross loss margin principally resulted from a decrease in average selling price per unit sold period-on-period.
Selling Expenses. Selling expenses decreased by $29,438, or 31.6%, period-on-period, to $63,734 for the period ended March 31, 2012, compared to the corresponding period in 2011 of $93,172. The decrease was mainly attributable to decreased sales commissions period-on-period.
Administrative Expenses.Administrative expenses increased by $670,153, or 603.4%, period-on-period, to $781,221 for the period ended March 31, 2012 compared to $111,068 for the period ended March 31, 2011. This increase was chiefly associated with an inventories write down in the amount of $636,405 during the period ended March 31, 2012.
Provision for Bad Debt. Provision for bad debt was $126 based on our policy for allowance for doubtful accounts for the period ended March 31, 2011 and $522,118 for the period ended March 31, 2012.
(Loss) from Operations. Loss from operations before income tax was $3,312,915 for the period ended March 31, 2012 as compared to $886,646 for the period ended March 31, 2011, as a result of the factors discussed above.
Other Income. Our other income increased by $19,807, or 3,159.0%, to $20,434 for the period ended March 31, 2012 from $627 for the period ended March 31, 2011. The increase in other income was primarily due to gain on disposal of a motor vehicle during the period ended March 31, 2012.
Interest Expense. Total interest expense increased $203,777 or 34.5%, to $794,895 for the period ended March 31, 2012, from $591,118 for the period ended March 31, 2011, due to increased interest rates period-on-period.
Income Tax. For the period ended March 31, 2011, we recognized an income tax benefit of $14,149, compared to an expense of $108 for the period ended March 31, 2012.
Net Loss. Net loss increased by $2,440,526, or 279.7%, period-on-period, to a net loss of $3,313,023 for the period ended March 31, 2012 from $872,497 for the period ended March 31, 2011. The increase in net loss is attributable to a combination of the factors discussed above, but principally the negative gross profit margin and higher operating expenses period-on-period.
Comparison of Nine months Ended March 31, 2012 and 2011
Sales Revenues. Sales volume decreased by 1,871 tons, or 1.5%, period-on-period, to 124,353 tons for the period ended March 31, 2012 from 126,224 tons for the period ended March 31, 2011 while sales revenues increased by $169,942 or 0.2%, period-on-period, to $105,324,043 for the period ended March 31, 2012, from $105,154,101 for the period ended March 31, 2011. The increase in sales revenues is mainly attributable to a small increase in average selling price period-on-period.
Sales by Product Line
A break-down of our sales by product line for the nine months ended March 31,
2012 and 2011 is as follows:
Nine months Ended March 31, Period-on-
2012 2011 Period
Quantity % of Quantity % of Qty.
. . .
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