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THTI > SEC Filings for THTI > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for THT HEAT TRANSFER TECHNOLOGY, INC.

Form 10-Q for THT HEAT TRANSFER TECHNOLOGY, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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; 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, including those identified in Item 1A "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011, 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.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

"THT," "Company," "we," "us," or "our" are to the combined business of THT Heat Transfer Technology, Inc., a Nevada corporation, and its consolidated subsidiaries: Megaway, Star Wealth, Siping Juyuan and Beijing Juyuan;

"Megaway" are to Megaway International Holdings Limited, a BVI company;

"Star Wealth" are to Star Wealth International Holdings Limited, a Hong Kong company;

"Siping Juyuan" are to Siping City Juyuan Hanyang Plate Heat Exchanger Co. Ltd., a PRC company;

"Beijing Juyuan" are to Beijing Juyuan Hanyang Heat Exchange Equipment Co., Ltd., a PRC company;

"BVI" are to the British Virgin Islands;

"Hong Kong" are to the Hong Kong Special Administrative Region of the People's Republic of China;

"PRC" and "China" are to the People's Republic of China;

"SEC" are to the Securities and Exchange Commission;

"Exchange Act" are to the Securities Exchange Act of 1934, as amended;

"Securities Act" are to the Securities Act of 1933, as amended;

"Renminbi" and "RMB" are to the legal currency of China; and

"U.S. dollars," "dollars" and "$" are to the legal currency of the United States.

Overview of our Business

We are a leading total solution provider in the heat exchange industry. Our major products are plate heat exchangers, heat exchanger units, air-cooled heat exchangers and shell-and-tube heat exchangers. Unlike most other heat exchanger manufacturers in China, we not only provide heat exchange products, but also provide total solutions to our customers. As a total solutions provider, we analyze the working condition of our customers, provide optimized designs based on analysis and simulation, offer high quality heat exchange products, and continuously assist our customers in improving the heat exchange process.

Over the past ten years, we have successfully completed over 3,000 projects in more than 15 industries, including metallurgy, heat and power, petrochemical, food and beverage, pharmaceutical and shipbuilding. We have provided heat exchange solutions to Fortune 500 companies, including Shell, BP, BASF, LG, Sinopec and China Shenhua. We have also provided heat exchange products for important Chinese and international projects such as the Beijing 2008 Olympics Wukesong Sports Center, Guangdong Lin'ao nuclear plant and BASF Chemical plant in Germany.

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Our operations are headquartered in Siping, Jilin Province, PRC. Our primary Chinese operating subsidiaries are Siping Juyuan and Beijing Juyuan.

Recent Development

The Company received the SEC comments on its accounting treatment of the Make Good Escrow Agreement (the "Make Good Agreement") entered on November 2, 2010 in connection with the Company's issuance of 4,453,500 shares to certain accredited investors for approximately $14,251,200. We are in the process of evaluating whether the treatment of the Make Good Agreement as liability would have had a material effect on our financial statements for the period between November 2, 2010 and February 2013 when the make good pledger eventually releases the make good shares to the investors.

Third Quarter Financial Performance Highlights

The following summarizes certain key financial information for the third quarter of 2012:

Sales revenue: Sales revenue increased by $2.20 million, or 21.33%, to $12.51 million for the three months ended September 30, 2012, from $10.31 million for the same period in 2011.

Gross profit: Gross profit increased by $0.67 million, or 14.89%, to $5.18 million for the three months ended September 30, 2012, from $4.51 million for the same period in 2011. As a percentage of sales revenue, gross profit decreased by 2.32% to 41.43% for the three months ended September 30, 2012, from 43.75% for the same period in 2011.

Net income attributable to stockholders: Net income attributable to our stockholders increased by $0.38 million, or 312.73%, to $0.50 million for the three months ended September 30, 2012, from $0.12 million for the same period in 2011.

Fully diluted net income per share: Fully diluted net income per share was $0.02for the three months ended September 30, 2012, as compared to $0.01 for the same period in 2011.

Results of Operations

Comparison of Three Months Ended September 30, 2012 and September 30, 2011

The following table sets forth key components of our results of operations for
the periods indicated.

                                       Three Months Ended              $             %
                                          September 30,              Change        Change
                                      2012            2011
Sales revenue                    $  12,508,183   $  10,309,768   $  2,198,415        21.33
Cost of sales                       (7,325,961 )    (5,799,160 )   (1,526,801 )      26.33
Gross profit                         5,182,222       4,510,608        671,614        14.89
Operating expenses:
       Administrative expenses       2,382,820       1,645,904        736,916        44.77
       Research and development        315,229         365,037        (49,808 )     (13.64 )
expenses
     Selling expenses                1,637,436       2,300,748       (663,312 )     (28.83 )
Total operating expenses             4,335,485       4,311,689         23,796         0.55
Income from operations                 846,737         198,919        647,818       325.67
Interest income                          7,055          10,568         (3,513 )     (33.24 )
Other income                           282,791          62,275        220,516       354.10
Finance costs                         (474,587 )      (360,702 )      113,885        31.57
Income (loss) before income            661,996         (88,940 )      750,936      (844.32 )
taxes and noncontrolling
interests
Income taxes                          (123,732 )       (89,283 )       34,449        38.58
Net income (loss) before               538,264        (178,223 )      716,487      (402.02 )
noncontrolling interests
Net income(loss) attributable to       (34,270 )       300,336       (334,606 )    (111.41 )
noncontrolling interests
Net income attributable to THT         503,994   $     122,113   $   381,881    $   312.73
common stockholders

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Sales revenue. Our sales revenue is generated from sales of heat exchange products. Sales revenue increased by $2.20 million, or 21.33%, to $12.51 million for the three months ended September 30, 2012, from $10.31 million for the same period in 2011. Our sales volume in the three months ended September 30, 2012 amounted to 704 units, anincrease of 59 units, from 645 units for the same period in 2011. Such increase was mainly due to the increased sales revenue from shell-and-tube heat exchangers and heat exchange units in the 2012 period as compared with the 2011 period. Sales revenue from shell-and-tube heat exchangers increased by $1.39 million, or 178.62%, to $2.17 million for the three months ended September 30, 2012, from $0.78 million for the same period in 2011. Sales from heat exchange unitsincreased by $3.13 million, or 223.93%, to $4.52 million for the three months ended September 30, 2012, from $1.40 million for the same period in 2011. The increase was a result ofincreasingdemand of our products in heating industry in third quarter in 2012 as a result of the resurgence in China's economy.

The following table shows our sales revenue by product for the three months ended September 30, 2012 and 2011:

                                         Three Months Ended September 30,
                                        2012                        2011
                                     $             %             $             %
Plate heat exchanger          $   4,373,947      34.97%   $   4,610,381      44.72%
Heat exchange unit                4,521,785      36.15%       1,395,911      13.54%
Air-cooled heat exchanger           127,165       1.02%       1,053,963      10.22%
Shell-and-tube heat exchanger     2,174,145      17.38%         780,316       7.57%
Others                            1,311,141      10.48%       2,469,197      23.95%
TOTAL                         $  12,508,183     100.00%   $  10,309,768     100.00%

Cost of sales. Our cost of sales is primarily comprised of the costs of our raw materials, labor and factory overhead. Our cost of sales increased by $1.53 million, or 26.33%, to $7.33 million for the three months ended September 30, 2012, from $5.80 million for the three months ended September 30, 2011. The increase was generally in line with the increase in our sales revenue. Cost of sales as a percentage of sales revenue were 58.57% and 56.25% for the three months ended September 30, 2012 and 2011, respectively, anincrease of 2.32 percentage points. The increase was mainly attributable to the increase in the labor costs and raw material costs.

Gross profit. Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit increased by $0.67 million, or 14.89%, to $5.18 million for the three months ended September 30, 2012, from $4.51 million for the same period in 2011. The increase was mainly attributable to increased sales revenue from shell-and-tube heat exchangers and heat exchange units. Although the average salesprice per unit increased 11.15% in the three months ended September 30, 2012 in comparison with the same period in 2011, gross profit margin for the three months ended September 30, 2012decreased to 41.43% from 43.75% for the same period in 2011. The decrease in our gross profit margin was mainly attributable to the increase in labor costs and raw material costs as noted above.

Administrative expenses. Our administrative expenses consist of the costs associated with staff and support personnel who manage our business activities. Our administrative expenses increased by $0.74million, or 44.77%, to $2.38million for the three months ended September 30, 2012, from $1.65 million for the same period in 2011. As a percentage of sales revenue, administrative expenses increased to19.05% for the three months ended September 30, 2012, as compared to 15.96% for the same period in 2011. The increase in administrative expenses was primarily due to an increase of allowance for doubtful accounts. Allowance for doubtful accounts increased to $1.07million in the threemonths ended September 30, 2012 compared with a reversal of allowance for doubtful accounts of $0.15million for the same period in 2011.The increase in the allowance for doubtful accounts was mainly due to our policies for bad debt reserves. We record an allowance for doubtful accounts at a rate of 25% for receivables aged between 1 to 2 years, 50% for receivables aged between 2 to 3 years and 100% for receivables aged over 3 years.Our account receivables age between 1 to 2 years increased by $1.65 million in the three months ended September 30, 2012 compare to the same period in 2011.

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Research and development expenses. Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses decreased by $0.05 million, or 13.64%, to $0.32 million for the three months ended September 30, 2012, from $0.37 million for the same period in 2011. Decrease in research and development expenses was because the company had less new products in the process.

Selling expenses. Our selling expenses include sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, after-sale support services and other sales-related costs. Our selling expenses decreased by $0.66 million, or 28.83%, to $1.64 million for the three months ended September 30, 2012, from $2.30million for the same period in 2011. As a percentage of sales revenue, selling expenses decreased to 13.09% for the three months ended September 30, 2012, as compared to 22.32% for the same period in 2011. The decrease was mainly attributable to the decreased travelling expenses of our sales personnel. Travelling expenses decreased by $0.33 million, or 29.46%, to $0.79 million for the three months ended September 30, 2012, from $1.12 million for the same period in 2011.

Income (loss) before income taxes and noncontrolling interests. Income before income taxes and noncontrolling interests increased by $0.75 million, or 844.32%, to a net income of $0.66 million for the three months ended September 30, 2012, from a net loss of $0.09 million for the same period in 2011. Such increase was mainly attributable to the increase in our sales revenue.

Income taxes. Our income taxes increased to $0.12 million for the three months ended September 30, 2012, from $0.09 million for the same period in 2011, as a result of the increased taxable income.

Net income attributable to common stockholders. As a result of the cumulative effect of the foregoing factors, our net income attributable to common stockholders increased by $0.38 million, or 312.73%, to $0.50 million for the three months ended September 30, 2012, from $0.12 million for the same period in 2011. As a percentage of sales revenue, our net income attributable to common stockholders was 4.03% and 1.18% for the three months ended September 30, 2012 and 2011, respectively.

Comparison of Nine Months Ended September 30, 2012 and September 30, 2011

The following table sets forth key components of our results of operations for
the periods indicated.

                                Nine Months Ended September
                                            30,                       $              %
                                   2012              2011           Change         Change
Sales revenue                $    35,152,955    $  38,542,434   $  (3,389,479 )      (8.79 )
Cost of sales                    (20,549,861 )    (21,911,721 )     1,361,860        (6.22 )
Gross profit                      14,603,094       16,630,713      (2,027,619 )     (12.19 )
Operating expenses:
       Administrative
expenses                           4,423,011        3,386,046       1,036,965        30.62
       Research and
development expenses                 814,509        1,149,699        (335,190 )     (29.15 )
     Selling expenses              5,845,212        5,524,796         320,416         5.80
Total operating expenses          11,082,732       10,060,541       1,022,191        10.16
Income from operations             3,520,362        6,570,172      (3,049,810 )     (46.42 )
Interest income                       19,796           34,484         (14,688 )     (42.59 )
Other income                         649,987          914,962        (264,975 )     (28.96 )
Finance costs                     (1,377,799 )       (762,688 )      (615,111 )      80.65
Income before income taxes
and noncontrolling interests       2,812,346        6,756,930      (3,944,584 )     (58.38 )
Income taxes                        (234,630 )     (1,006,821 )       772,191       (76.70 )
Net income before
noncontrolling interests           2,577,716        5,750,109      (3,172,393 )     (55.17 )
Net (income)loss
attributable to
noncontrolling interests             (76,833 )        341,986        (418,819 )    (122.47 )
Net income attributable to
THT common stockholders      $     2,500,883    $   6,092,095   $  (3,591,212 )     (58.95 )

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Sales revenue. Our sales revenue decreased by $3.39 million, or 8.79%, to $35.15 million for the nine months ended September 30, 2012, from $38.54 million for the same period in 2011. Our sales volume in the nine months ended September 30, 2012 amounted to 1,943 units, a decrease of 622 units, from 2,565 units for the same period in 2011. Such decrease was mainly due to the decreased sales revenue from plate heat exchangersand air coolers in the 2012 period as compared with the 2011 period. Sales revenue from plate heat exchangers decreased by $6.62 million, or 33.06%, to $13.39 million for the nine months ended September 30, 2012 from $20.01 million for the same period in 2011. Sales revenue from air-coolers decreased by $1.52 million, or 57.68%, to $1.12 million for the nine months ended September 30, 2012, from $2.64 million for the same period in 2011. The decrease was caused by decreasingdemand for our products as a result of an overall slowdown of China's economy in the first half of 2012. Although sales revenue from heat exchange units and other products increased, the increase was not enough to offset the decreased sales revenue from plate heat exchangers and air coolers.

The following table shows our sales revenue by product for the nine months ended September 30, 2012 and 2011:

                                          Nine Months Ended September 30,
                                         2012                        2011
                                    $              %            $              %
Plate heat exchanger          $  13,393,408      38.10%   $  20,009,468      51.92%
Heat exchange unit               11,837,940      33.68%       7,860,800      20.40%
Air-cooled heat exchanger         1,117,187       3.17%       2,640,027       6.85%
Shell-and-tube heat exchanger     4,271,045      12.15%       4,137,442      10.73%
Others                            4,533,375      12.90%       3,894,697      10.10%
TOTAL                         $  35,152,955     100.00%   $  38,542,434     100.00%

Cost of sales. Our cost of sales decreased by $1.36 million, or 6.22%, to $20.55 million for the nine months ended September 30, 2012, from $21.91 million for the nine months ended September 30, 2011. The decrease in the cost of sales was generally in line with the decrease in our sales revenue. Cost of sales as a percentage of sales revenue were 58.46% and 56.85% for the nine months ended September 30, 2012 and 2011, respectively, an increase of 1.61 percentage points. The increase was mainly attributable to the increased total labor costs and raw material costs in the first half of 2012.

Gross profit. Our gross profit decreased by $2.03 million, or 12.19%, to $14.60 million for the nine months ended September 30, 2012, from $16.63 million for the same period in 2011. The decrease in our gross profit was mainly attributable to decreased sales revenue from plate heat exchangers and air coolers. Although the average sales price per unit increased 20.40% in the nine months ended September 30, 2012 in comparison with the same period in 2011, gross profit margin for the nine months ended September 30, 2012 dropped to 41.54% from 43.15% for the same period in 2011. The decrease in our gross profit margin was mainly attributable to the increase in labor costs and raw material costs in the first half of 2012.The increase of gross profit in the third quarter was not enough to offset the decreased profit in the first half of 2012.

Administrative expenses. Our administrative expenses increased by $1.04 million, or 30.62%, to $4.42 million for the nine months ended September 30, 2012, from $3.39 million for the same period in 2011. As a percentage of sales revenue, administrative expenses increased to12.58% for the nine months ended September 30, 2012, as compared to 8.79% for the same period in 2011. The increase in administrative expenses was primarily due to an increase of allowance for doubtful accounts. Allowance for doubtful accounts increased by $1.44 million to $1.44 million in the nine months ended September 30, 2012 compared with a reversal of allowance for doubtful accounts of $0.11million for the same period in 2011. The increase in the allowance for doubtful accounts was mainly due to our policies for bad debt reserves. We record an allowance for doubtful accounts at a rate of 25% for receivables aged between 1 to 2 years, 50% for receivables aged between 2 to 3 years and 100% for receivables aged over 3 years. Our account receivables age between 1 to 2 years increased by $3.03 million in the nine months ended September 30, 2012 compare to the same period in 2011.

Research and development expenses. Our research and development expenses decreased by $0.34 million, or 29.15%, to $0.81 million for the nine months ended September 30, 2012, from $1.15 million for the same period in 2011. The decrease in research and development expenses was mainly attributable to the company having a few new products in the process.

Selling expenses. Our selling expenses increased by $0.32 million, or 5.80%, to $5.85 million for the nine months ended September 30, 2012, from $5.52 million for the same period in 2011. As a percentage of sales revenue, selling expenses increased to 16.63% for the nine months ended September 30, 2012, as compared to 14.33% for the same period in 2011. The increase was mainly attributable to the increased travelling expenses of our sales personnel. Traveling expense increased by $0.23 million, or 8.02%, to $3.16 million for the nine months ended September 30, 2012, from $2.92 million for the same period in 2011. The increase in travelling expenses was mainly due to our efforts to expand our market share in the first half of 2012.

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Income before income taxes and noncontrolling interests. Income before income taxes and noncontrolling interests decreased by $3.94 million, or 58.38%, to $2.81 million for the nine months ended September 30, 2012, from $6.76 million for the same period in 2011. Such decrease was mainly attributable to decreased gross profit and increased total expenses.

Income taxes. Our income taxes decreased to $0.23 million for the nine months ended September 30, 2012, from $1.01 million for the same period in 2011, as a result of decreased taxable income.

Net income attributable to common stockholders. As a result of the cumulative effect of the foregoing factors, our net income attributable to common stockholders decreased by $3.59 million, or 58.95%, to $2.50 million for the nine months ended September 30, 2012, from $6.09 million for the same period in 2011. As a percentage of sales revenue, our net income attributable to common stockholders was 7.11% and 15.81% for the nine months ended September 30, 2012 and 2011, respectively.

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of $7.23 million, primarily consisting of cash on hand and demand deposits. We can use our land as collateral to borrow approximately $4.76 million. In addition, we have an approximately $2.38 million credit line from Bank of Communications. We anticipate that cash on hand and borrowing capacity under our bank loans will be sufficient to satisfy our ongoing obligations.

We believe our allowance for doubtful accounts is appropriate. We have an installment payment arrangement with our customers. The current economic slowdown and China's tightened credit policy led to delayed payments and delayed delivery schedules by our customers, which in turn caused us to increase our allowance for doubtful accounts from a reversal of allowance of $0.11million in the nine months ended September 30, 2011 to $1.44 million in the same period in 2012. To control inflation after a massive stimulus plan, the Chinese government tightened its credit policy. As a result, state-owned banks limited their lending to large state-owned corporations and privately held companies continue to have difficulty accessing capital. Most of our customers have been affected by the tightened credit policy and have limited access to capital. The Company records an allowance for doubtful accounts at a rate of 25% for receivables aged between 1 to 2 years, 50% for receivables aged between 2 to 3 years and 100% for receivables aged over 3 years.

Our allowance of obsolete inventory is also appropriate because we purchase raw materials after we receive purchase orders. Although our customers may delay their payment or delivery schedules, which increase our inventories, they do not cancel their orders so as to cause us to classify the delayed inventories as obsolete inventories.

We expect that the trend of delayed customer payments and delayed delivery schedules will continue in the future. We have been taking the following measures to mitigate the situation: 1) send the collection letters or call the customers to request payment; 2) appoint specialists to visit our customers to collect payment; 3) file law suits.

PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRCGAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Given that the Company and the PRC subsidiaries do not intend to pay dividends for the foreseeable future, we consider the impact of restrictions on our liquidity, financial condition and results of operations is not significant.

. . .

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