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| WUHN > SEC Filings for WUHN > Form 10-Q on 21-May-2012 | All Recent SEC Filings |
21-May-2012
Quarterly Report
Cautionary Statement Regarding Forward-Looking Statements
The information contained in this report includes some statements that are not purely historical fact and that are "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. Such forward-looking statements include, but are not limited to, statements regarding our management's expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, available liquidity, ability to refinance outstanding debt, and our ability to collect on our accounts receivable. The words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "projects," "should," and similar expressions, or the negatives of such terms, identify forward-looking statements.
The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results to be materially different from those expressed or implied by these forward-looking statements, including the following:
· vulnerability of our business to general economic downturn;
· our ability to obtain financing on favorable terms;
· our ability to comply with the covenants and other terms of our loan agreements;
· operating in the PRC generally and the potential for changes in the laws of the PRC that affect our operations, including tax law;
· remediating material weaknesses in our internal control over financial reporting;
· our failure to meet or timely meet contractual performance standards and schedules;
· our dependence on the steel and iron markets;
· exposure to product liability and defect claims;
· our ability to obtain all necessary government certifications and/or licenses to conduct our business;
· the cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and
· the other factors referenced in this report.
These risks and uncertainties, along with others, are also described in the Risk Factors section in Part II, Item 1A of this Form 10-Q and in our other SEC filings. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Overview
Wuhan General Group (China), Inc. (the "Company") is a holding company whose primary business operations are conducted through our wholly owned subsidiary, Universe Faith Group Limited ("UFG"), which has no operations of its own and only serves to hold our Chinese operating subsidiaries, Wuhan Blower Co., Ltd. ("Wuhan Blower"), Wuhan Generating Equipment Co., Ltd. ("Wuhan Generating") and Wuhan Sungreen Environment Protection Equipment Co., Ltd. ("Wuhan Sungreen"). Wuhan Blower is a manufacturer of industrial blowers that are principally components of steam-driven electrical power generation plants. Wuhan Generating manufactures industrial steam and water turbines, which also are principally used in electrical power generation plants. Wuhan Sungreen manufactures silencers, connectors and other general parts for industrial blowers and electrical equipment, and it produces general machinery equipment. Wuhan Blower, Wuhan Generating and Wuhan Sungreen conduct all of their operations in the People's Republic of China, which we refer to in this report as the PRC or China. Prior to our acquisition of UFG in February 2007, we were a publicly held shell company with no operations other than efforts to identify suitable parties for a merger transaction. Our corporate structure is as follows:
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The information and data contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the operating results for the three month periods ended March 31, 2012 and 2011 and the financial condition at March 31, 2012. The amounts shown below that were originally denominated in RMB were translated into U.S. dollars at the rate of 6.3122 RMB per 1 U.S. dollar, which is the March 31, 2012 period end exchange rate that the Company used in the accompanying financial statements.
Recent Developments
Effective December 29, 2010, we decided to sell the assets and business of Wuhan Sungreen. Accordingly, the results of Wuhan Sungreen's operations have been excluded from continuing operations and reported as discontinued operations in the financial statements for the three month periods ended March 31, 2012 and 2011. Wuhan Sungreen is continuing its operations pending further action. As of March 31, 2012, we estimate that the fair market value of Wuhan Sungreen's assets is approximately $18 to 24 million. We anticipate that all of the Wuhan Sungreen assets will be sold prior to October 1, 2012, and that any proceeds from the sale of such assets will be used to meet the working capital needs of Wuhan Blower and Wuhan Generating and/or to purchase new equipment for Wuhan Blower and Wuhan Generating.
Unless otherwise indicated, information presented in this Quarterly Report on Form 10-Q relates only to the Company's continuing operations, which include the businesses conducted by Wuhan Blower and Wuhan Generating. See Note 21 to the financial statements included in "Part I Financial Information-Item 1. Financial Statements" for information related to the business we have classified as discontinued operations, which includes the business conducted by Wuhan Sungreen.
Results of Operations
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Sales. Sales increased $0.9 million, or 3.19%, to $28.29 million for the three months ended March 31, 2012 from $27.39 million for the same period in 2011. This increase was the result of increase sales gained from of lower price competition in obtained more sales order.
Cost of Sales. Our cost of sales increased $1.46 million, or 6.54%, to $22.26 million for the three months ended March 31, 2012 from $20.81 million during the same period in 2011. As a percentage of sales, the cost of sales was 78.70% during the three months ended March 31, 2012 compared to 75.98% in the same period of 2011. This increase as a percentage of sales was primarily attributable to inflationary pressures in the general economy of China relative to the overall cost of production.
Gross Profit. Our gross profit Decreased $0.55 million, or 9.17%, to $6 million for the three months ended March 31, 2012 from $6.58 million for the same period in 2011. Gross profit as a percentage of sales was 21.30% for the three months ended March 31, 2012 compared to 24.02% during the same period in 2011.
Selling Expenses. Our selling expenses for the three months ended March 31, 2012 decreased by $53,541 or 14.12%, to $379,155 from $432,696 for the same period in 2011. As a percentage of sales, selling expenses were 1.34% for the three months ended March 31, 2012 and 1.58% for the three months ended March 31, 2011. This decrease as a percentage of sales was primarily attributable to the decrease in transportation cost
General and Administrative Expenses. Our general and administrative expenses decreased approximately $0.49 million, or 29.09%, to $1.69 million for the three months ended March 31, 2012 from approximately $2.18 million for the same period in 2011. As a percentage of sales, general and administrative expenses were 0.06% for the three months ended March 31, 2012 compared to 0.08% for the same period in 2011.
Warranty Expense. Our warranty expense increased to $228,219 for the three months ended March 31, 2012 from $174,030 for the same period in 2011. As a percentage of sales, warranty expense was 0.81% for the three months ended March 31, 2012 compared to 0.64% for the same period in 2011.
Operating Income. Our operating income decreased by approximately $63,022, or 1.69%, to a loss of $3,73 million for the three months ended March 31, 2012 from $3,80 million for the same period in 2011. As a percentage of sales, operating loss was -0.66% for the three months ended March 31, 2012 compared to 13.86% for the same period in 2011. This decrease as a percentage of sales was primarily attributable to a decrease in gross profit margin
Interest Income. Our interest income increased to $37,610 for the three months ended March 31, 2012 from $8,763 for the same period in 2011. This increase was due to increase in interest earning bank deposits.
Interest Expense. Our interest expense increased $583,238, or 31,47%, to approximately $1.85 million for the three months ended March 31, 2012 from approximately $1.27 million for the same period in 2011. This increase was due to an increase in loans from banks and other financial institutions in the current period.
Income Tax. Our income tax liability for the three months ended March 31, 2012 was $620,524, which is a increase of $233,112, or 37,57% over the prior year period. Wuhan Blower and Wuhan Generating were subject to 25% PRC income tax during the three months ended March 31, 2012 , but 12.5% PRC income tax during three months ended March 31, 2011. Wuhan General did not incur any U.S. income tax liability during the three months ended March 31, 2012 and March 31, 2011.
Net Income. Net income increased approximately $2.96 million, or 190.9%, to being a net income of $2.96 million during the three months ended March 31, 2012 from approximately net loss $1.41 million during the same period in 2011. This increase was primarily the result of the factors described above.
Liquidity and Capital Resources
Our primary capital needs have been to fund the working capital requirements necessitated by the expansion of our manufacturing facilities. We finance our business operations primarily through cash generated by our operations, bank loans and various financing transactions. As of March 31, 2012, we had cash and cash equivalents of approximately $80.96million, including restricted cash of approximately $13.96 million.
The collection of our accounts receivable and other receivables is important to solidifying our liquidity position. Although we are still experiencing payment delays, we continue to focus on the collection of accounts receivable. Our accounts receivable ratio increased to 187 days at March 31, 2012, compared to 166 days at March 31, 2011.
The majority of our customers pay us in installments at various stages of project completion. The percentage of the purchase price due at the various stages varies somewhat between contracts. In our standard sales contract, our customers are required to pay us 60% of the purchase price of a piece of equipment at the time of delivery. Alternatively, some sales contracts provide for 15% due upon signing and 45% due upon delivery. Our customers are generally required to pay us an additional 30% of the purchase price when the equipment has been installed and has performed properly for 72 hours. However, since our equipment is generally a component of a larger project, there are times that customers do not allow us to install the equipment immediately upon delivery. Our standard sales contract generally requires payment of the remaining 10% no later than 18 months following the installation. Some customers have not strictly adhered to the contractual payment terms. This has increased our accounts receivable, which is discussed in detail below. Although the payment terms in our standard sales contract result in a long payment cycle, we believe our payment terms are typical in our industry in China. Nonetheless, we are seeking more aggressive payment schedules on new sales contracts in order to improve our liquidity position.
Accounts receivable are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. Pursuant to the Company's accounting policies, the allowance for doubtful accounts is determined by applying a rate of 5% on outstanding accounts receivable. In addition, the Company uses a specific review process to determine if any additional allowances for doubtful accounts are required. Bad debts are charged against the allowance when outstanding accounts receivable have been determined to be uncollectible. We provide for bad debts principally based upon the aging of accounts receivable, the collectability of specific customer accounts, our experience in the collection of bad debts and the general condition of the industry.
Accounts receivable increased from approximately $56.57 million to $60.99 million from December 31, 2011 to March 31, 2011. The allowance for bad debt provided in accordance with the Company's accounting policy was $232,798 at March 31, 2012. The Company applied a rate of 5% on outstanding accounts receivable, which results in an ending balance of approximately $3.2million. Our accounts receivable are currently at an appropriate level considering the Company's recent increase in sales. However, we remain committed to a sustained focus on debt collection and management of our accounts receivable levels.
We have devoted increased resources to our collection efforts with respect to our outstanding accounts receivable. We have also aligned more closely the sales commission structure with the collection on sales. The accounts receivable balance increased by approximately $4.42 million from December 31, 2011 to March 31, 2012.
At March 31, 2012, we had approximately $21.83 million in other receivables, which is an increase of $3.34 million compared to the balance at December 31, 2011.
We also had advances to suppliers of approximately $24.46 million at March 31, 2012, which decreased by $0.73million compared to the balance at December 31, 2011. We typically need to place a deposit in advance with our suppliers on a portion of the purchase price, and for some suppliers, we must maintain a deposit for future orders.
We had inventory turnover of 59.48 times for the three months ended March 31, 2012. We calculate inventory turnover as sales divided by average inventory. Inventory decreased approximately $2.46 million in raw materials, increase approximately $1.26 million in work in progress and $4.02 million in finished goods for the three month period ended March 31, 2012. The increased inventory related to the Company's increase in sales.
Net cash sourced in operating activities for the three months ended March 31, 2012 was approximately $9.30 million, as compared to approximately $3.28 million provided in the three months ended March 31, 2011. This change was primarily due to an decrease in payments to suppliers and tax payments and increase in continue operation.
Net cash used by investing activities for the three months ended March 31, 2012 was approximately $1.12 million, as compared to approximately $15.25 million used for the three months ended March 31, 2011. This change was mainly the result of a decrease in restricted cash and a decrease in plant and equipment expenditures.
Net cash provided by financing activities for the three months ended March 31, 2012 was approximately $221,635, as compared to approximately $2.54 million for the three months ended March 31, 2011. This change was primarily due to the decrease in bank loans and notes.
We intend to maintain the current loan facilities with local banks and various financial institutions for new projects that we have obtained. The Company believes that its currently available working capital, combined with cash from operations and bank financing, should be adequate to sustain operations at current levels through at least the next 12 months. For our long-term strategic growth, the Company will continue to rely upon debt and capital markets for any necessary long-term funding not provided by operating cash flows. Funding decisions will be guided by our capital structure planning objectives. The primary objectives of the Company's capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense.
Bank Loans and Notes Generally
As of March 31, 2012, we had bank loans and debt from other non-bank entities totaling approximately $120.24 million (based on an exchange rate of 6.3122RMB per 1 U.S. dollar). Information regarding these loans and notes is set forth below in U.S. dollars.
Continuing Operations
Interest At
Rate At December
Per March 31, 31,
Subsidiary Type Name of Lender Due Date Annum 2012 2011
Short-term
Wuhan Blower Bank Loans Hankou Bank 7/13/2012 5.47 % 1,584,234 1,571,166
Wuhan Blower Bank Loans Hankou Bank 10/14/2012 5.47 % 1,584,234 1,571,166
Wuhan Blower Bank Loans Gansu Trust Co., Ltd. 12/15/2012 8.53 % 11,089,636 10,998,162
China Minsheng Banking
Wuhan Blower Bank Loans Corp., Ltd. 1/8/2012 9.60 % - 3,927,915
China Minsheng Banking
Wuhan Blower Bank Loans Corp., Ltd. 4/19/2012 9.60 % 3,960,584 -
Wuhan Blower Bank Loans Wuhan Jiang Han District
Fu Bang Petty Loan Co.,
Ltd. 12/09/2012 18 % 919,252 1,571,166
Wuhan Min Ze Investment
Wuhan Blower Bank Loans Co., Ltd. 12/1/2012 0.00 % 3,770,476 3,739,375
Agricultural Bank of
Wuhan Blower Bank Loans China 9/21/2012 5.40 % 12,990,716 12,883,561
Wuhan Blower Bank Loans China Construction Bank 7/1/2012 5.40 % 3,326,891 3,299,449
Wuhan Generating Bank Loans Hankou Bank 6/13/2012 6.56 % 4,752,701 4,713,498
Industrial Bank Co.,
Wuhan Generating Bank Loans Ltd. 5/19/2012 8.30 % 7,921,169 7,855,830
Industrial Bank Co.,
Wuhan Generating Bank Loans Ltd. 6/13/2012 8.30 % 4,752,701 4,713,498
Industrial Bank Co.,
Wuhan Generating Bank Loans Ltd. 6/16/2012 8.30 % 6,336,935 6,284,664
Agricultural Bank of
Wuhan Generating Bank Loans China 6/15/2012 6.63 % 6,812,205 6,756,014
Agricultural Bank of
Wuhan Generating Bank Loans China 7/14/2012 6.89 % 2,693,196 2,670,982
Shenzhen Development
Wuhan Generating Bank Loans Bank 6/2/2012 7.57 % 4,752,701 4,713,498
Shenzhen Development
Wuhan Generating Bank Loans Bank 3/12/2012 6.10 % - 3,142,331
Shenzhen Development
Wuhan Generating Bank Loans Bank 4/12/2012 6.10 % 1,584,234 -
Total 78,831,865 80,412,274
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Notes Payable Wuhan Blower Notes Payable Hankou Bank 1/11/2012 - - 2,670,982 Wuhan Blower Notes Payable Hankou Bank 2/5/2012 - - 4,713,498 Wuhan Blower Notes Payable Hankou Bank 4/7/2012 - 4,752,701 4,713,498 Wuhan Blower Notes Payable Hankou Bank 6/8/2012 - 11,406,483 11,312,395 Wuhan Blower Notes Payable Hankou Bank 7/12/2012 - 2,693,197 - Wuhan Blower Notes Payable Hankou Bank 8/6/2012 - 4,752,701 - Wuhan Blower Notes Payable Shenzhen Development Bank 1/1/2012 - - 442,211 Wuhan Blower Notes Payable Shenzhen Development Bank 2/2/2012 - - 452,316 Wuhan Blower Notes Payable Shenzhen Development Bank 3/19/2012 - - 693,970 Wuhan Blower Notes Payable Shenzhen Development Bank 3/12/2012 - - 180,383 Wuhan Blower Notes Payable Shenzhen Development Bank 6/10/2012 - 388,016 384,815 Wuhan Blower Notes Payable Shenzhen Development Bank 6/12/2012 - 539,904 535,451 Wuhan Blower Notes Payable Shenzhen Development Bank 2/18/2012 - - 227,176 Wuhan Blower Notes Payable Shenzhen Development Bank 8/6/2012 - 3,168,467 - Wuhan Generating Notes Payable Hankou Bank 6/19/2012 - 7,604,323 7,227,364 Total $ 35,305,792 $ 33,554,059 |
Total Short Term Bank Loans and Notes $ 114,137,657 $ 113,966,333 Long-term Wuhan Generating Bank Loans Hankou Bank 9/30/2013 6.65 % 4,594,278 4,556,380 Wuhan Generating Bank Loans Hankou Bank 10/11/2013 6.65 % 1,505,022 1,492,609 |
Total Long Term Bank Loans and Notes $ 6,099,300 $ 6,048,989
We plan to either repay this debt as it matures or refinance this debt with other debt.
Loan Facilities with Hankou Bank
On June 28, 2010, Wuhan Blower, Wuhan Generating and Wuhan Sungreen (collectively, the "Borrowers"), entered into a Loan Facility Agreement with Hankou Bank for a loan facility totaling RMB 320,000,000 (approximately $48.71 million) in secured debt financing. The Borrowers, upon application, may access this loan facility from June 28, 2010 to June 28, 2013. Pursuant to certain Financial Consulting Service Agreements entered into between the Borrowers and Hankou Bank, dated June 29, 2010, the Borrowers must pay financial consultancy fees that aggregate to approximately RMB 2.84 million (approximately $0.43 million) in connection with the loan facility with Hankou Bank.
Under this loan facility, Wuhan Blower executed a Loan Agreement on July 13, 2011, for a short-term loan for RMB 10,000,000 (approximately $1.58 million). This short-term loan was obtained for working capital purposes. This short-term loan matures on July 13, 2012 and has a floating interest rate, which was 6.56% per annum as of March 31, 2012. On October 14, 2011, for a short-term loan for RMB 10,000,000 (approximately $1.58 million). This short-term loan was obtained for working capital purposes. This short-term loan matures on October 14, 2012 and has a floating interest rate, which was 6.56% per annum as of March 31, 2012. If Wuhan Blower fails to make timely payments on this short-term loan, then it will be subject to a penalty rate of 150% of the effective interest rate. In addition, Wuhan Blower is subject to a penalty rate of the effective interest rate plus 100% if it fails to use the loan for the agreed upon purpose. Upon Hankou Bank's request, Wuhan Blower must provide copies of financial statements and other requested information. If Wuhan Blower breaches the terms of the short-term loan, among other rights, Hankou Bank may charge compound interest and penalty interest, accelerate the maturity date of the loan and withhold or deduct such amounts from Wuhan Blower's other accounts with Hankou Bank. This short-term loan is subject to an early repayment fee.
The obligations under the Loan Facility Agreement and Loan Agreements with Hankou Bank are secured by the real property of the Borrowers and guaranteed by Wuhan Blower and Wuhan Sungreen. The Loan Facility Agreement and the Loan Agreements are governed by the laws of the People's Republic of China.
Loan Facilities with China Minsheng Banking Corp., Limited
On July 14, 2011, Wuhan Blower entered into a Loan Agreement with China Minsheng Banking Corp., Limited for a short term loan for RMB 25,000,000 (approximately $3.96 million). This short-term loan was obtained for working capital purposes. This short-term loan matures on October 14, 2011 and has a fixed interest rate, which was 9.60% per annum as of March 31, 2012. If Wuhan Blower fails to make timely payments on this short-term loan, the interest rate will remain as stated in calculation for the extended period with no extra penalty rate.
Loan Facilities with Agricultural Bank of China
On July 15, 2011, Wuhan Generating entered into a Loan Agreement with Agricultural Bank of China for a short term loan for RMB 17,000,000 (approximately $2.66 million). This short-term loan was obtained for purchase of equipment purposes. This short-term loan matures on July 14, 2012 and has a floating interest rate, which was 6.89% per annum as of March 31, 2012. On June 16, 2011, Wuhan Generating entered into a Loan Agreement with Agricultural Bank of China for a short term loan for RMB 43,000,000 (approximately $6.8 million). This short-term loan was obtained for purchase of equipment purposes. This short-term loan matures on June 15, 2012 and has a floating interest rate, which was 6.89% per annum as of March 31, 2012. If Wuhan Generating fails to make timely payments on this short-term loan, then it will be subject to a penalty rate of 150% of the effective interest rate. In addition, Wuhan Generating is subject to a penalty rate of the effective interest rate plus 100% if it fails to use the loan for the agreed upon purpose. There are covenants that require Wuhan Generating to maintain an asset to liability ratio over 80% during the entire term of the loan, and non-occurrence of continuous 3 years record of negative cash flow from operating activities.
Loan Facilities with Shenzhen Development Bank
On June 3, 2011, Wuhan Generating entered into a Loan Agreement with Shenzhen Development Bank for a short term loan for RMB 30,000,000 (approximately $4.75million). This short-term loan was obtained for working capital and equipment purchase purposes. This short-term loan matures on three months after the release day of the loan and has a floating interest rate, which was 6.10% per annum as of March 31, 2012. On December 13, 2011, Wuhan Generating entered into a Loan Agreement with Shenzhen Development Bank for a short term loan for RMB 20,000,000 (approximately $3.16million). This short-term loan was obtained for working capital and equipment purchase purposes. This short-term loan matures on three months after the release day of the loan and has a floating interest rate, which was 6.10% per annum as of March 31, 2012.If Wuhan Generating fails to make timely payments on this short-term loan, then it will be subject to a penalty rate of 150% of the effective interest rate. In addition, Wuhan Generating is subject to a penalty rate of the effective interest rate plus 100% if it fails to use the loan for the agreed upon purpose.
Critical Accounting Policies
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