Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SUTR > SEC Filings for SUTR > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for SUTOR TECHNOLOGY GROUP LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUTOR TECHNOLOGY GROUP LTD


14-May-2013

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 June 30, 2012, 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 as otherwise indicated by the context, all references in this report to:

"Company," "we," "us" and "our" are to the combined business of Sutor Technology Group Limited, a Nevada corporation, and its subsidiaries: Sutor BVI, Sutor Technology, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua;

"Sutor BVI" are to our wholly-owned subsidiary Sutor Steel Technology Co., Ltd., a BVI company;

"Sutor Technology" are to our wholly-owned subsidiary Sutor Technology Co., Ltd., a PRC company;

"Changshu Huaye" are to our wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a PRC company;

"Jiangsu Cold-Rolled" are to our wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a PRC company;

"Ningbo Zhehua" are to our wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a PRC company;

"Shanghai Huaye" are to Shanghai Huaye Iron & Steel Group Co., Ltd., a PRC company of which Lifang Chen, our major shareholder and chief executive officer, and her husband Feng Gao, are 100% owners, and its subsidiaries;

"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.

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

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

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

Overview of our Business

We are one of the leading China-based, non-state-owned manufacturers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically hot-dip galvanized steel, or HDG steel, and pre-painted galvanized steel, or PPGI. In addition, we produce acid pickled steel, or AP steel, and cold-rolled steel, which represent the least processed of our finished products. Since November 2009, our product offerings have included welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products.

We sell most of our products to customers who operate primarily in the solar energy, appliances, automobile, construction, infrastructure, medical equipment and water resource industries. Most of our customers are located in China. Our primary export markets are Europe, the Middle East, Asia, and South America.

Our manufacturing facilities, located in Changshu, China, have three HDG steel production lines, one PPGI production line, one AP steel production line and one cold-rolled steel line. Our current annual production capacity is approximately 700,000 metric tons (MT) for HDG steel, 200,000 MT for PPGI, 500,000 MT for AP steel and 250,000 MT for cold-rolled steel. Ningbo Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of 400,000 MT for welded steel pipe products.

Executive Overview of Quarterly Results

In the third quarter of fiscal 2013, our revenue increased 26.9% as compared with same period last year primarily due to increased sales of acid-pickled and cold rolled products driven by increased demands from high-end steel producers who normally use these two types of steel products as feedstock to produce other value-added steel products. The strong demands from high end steel producers, whose products are used in a number of industries such as manufacturing, infrastructure, and consumer durables, reflected their desires to restock raw materials as a result of the recovery of Chinese economy in the fourth quarter of last year.

Our net income increased 204.3% in the third quarter of fiscal 2013 as compared with the same period last year. The improvement in net income was primarily due to improved gross margin of 7.8% in the third quarter of fiscal 2013 as compared to 7.2% in the same quarter last year. The main reasons for the improved gross margin included increased production of our higher-margin products like PPGI and steel pipe products, more exports as well as the fact that the price of raw materials declined more than the decline of the average sales price, or ASP, of our HDG products.

Our diversified product mix combined with a vertically integrated business model protected the company from the major impact of the recent changing global economy and customer demands. Looking forward, with the planned addition of the 500,000 MT of cold rolled production capacity, which is expected to start trial production in the second half of this year, and our efforts to improve the supply chain with our suppliers and customers, we believe we are well positioned to benefit from China's urbanization and industrialization process in the years to come.

The following summarizes the major financial information for the third fiscal quarter:

Revenue: Revenue was $139.5 million for the three months ended March 31, 2013, an increase of $29.6million, or 26.9%, from $109.9 million for the same period last year.

Gross profit and margin: Gross profit was $10.9 million for the three months ended March 31, 2013, as compared to $7.9 million for the same period last year. Gross margin was7.8% for the three months ended March 31, 2013, as compared to 7.2% for the same period last year.

Net income: Net income was $3.9 million for the three months ended March 31, 2013, an increase of $2.6 million, or 204.3%, from $1.3 million for the same period of last year.

Fully diluted earnings per share: Fully diluted earnings per share were approximately $0.10for the three months ended March 31, 2013, as compared to approximately $0.03 for the same period last year.

Reportable Operating Segments

We have four reportable operating segments - Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology. Changshu Huaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel. Ningbo Zhehua manufactures and sells steel pipe products. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other in Changshu, Jiangsu province, and use largely the same management resources. Ningbo Zhehua is located in Ningbo, Zhejiang province. Sutor Technology, our steel trading subsidiary, was recently established and has had limited operations so far. See Note 17, "Segment Information" to the condensed consolidated financial statements included elsewhere in this report.

Revenue

Our revenue is primarily generated from sales of our HDG, PPGI, AP, cold-rolled steel products, as well as our steel pipe products, such as longitudinally welded steel pipes and spiral welded steel pipes. Our revenue has historically been affected by sales volume, sales price of our products and our product mix.

In the three months ended March 31, 2013 and 2012, Changshu Huaye generated revenue of $33.8 million and $32.3 million, which represented 24.2% and 29.4% of our total revenue, respectively. Jiangsu Cold-Rolled generated revenue of $96.7million and $70.1 million in the three months ended March 31, 2013 and 2012, which represented 69.3% and63.8% of our total revenue, respectively. In the three months ended March 31, 2013 and 2012, Ningbo Zhehua generated revenue of $7.3 million and $5.1 million, which represented 5.2% and 4.6% of our total revenue, respectively. In addition, in the three months ended March 31, 2013 and 2012, Sutor Technology generated revenue of $1.7 million and $2.4 million, which represented 1.3% and 2.2% of our total revenue, respectively.

A portion of our products are sold through our affiliate Shanghai Huaye, which also supplies to us a significant portion of our raw materials. Approximately 39.1% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended March 31, 2013, as compared to 29.7% last year. We intend to expand our own sales channel to gain more market share. At the same time, we also take advantage of Shanghai Huaye's extensive sales network and to build brand value.

Cost of Revenue

Cost of revenue includes direct costs to manufacture our products, including the cost of raw materials, labor, overhead, energy, handling charges and other expenses associated with the manufacture and delivery of product. Direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs and higher raw material costs. As production volume increases, we typically improve manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities.

In the three months ended March 31, 2013, approximately $75.6 million of raw material procurement was conducted through Shanghai Huaye and its affiliates. Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves.

Gross Profit and Gross Margin

Gross profit is equal to the difference between revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. For the three months ended March 31, 2013, gross margin for domestic and international sales was 7.5% and 13.3%, respectively. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua's gross margins were approximately 13.3%, 5.6% and 14.9%, respectively. For Sutor Technology, its gross margin was approximately 6.6% for the third quarter of fiscal 2013.

To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins.

We implemented a vertical integration strategy where we use our own AP steel and cold-rolled steel products as raw materials for HDG steel and PPGI products. We believe our vertically integrated operations will allow us to provide customers with one-stop solution services, build customer loyalty, and maintain stable operating margins.

Operating Expenses

Our operating expenses primarily consist of general and administrative expenses and selling expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative staff, professional and advisory fees, bad debts reserves, and other expenses incurred in connection with general corporate purposes. We expect most components of our general and administrative expenses will increase as our business grows and as we incur increased costs as a public company.

Selling Expenses

Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, sales commissions, the cost of advertising, promotional and travel activities, transportation expenses, after-sales support services and other sales related costs.

Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. Transportation costs for our international sales are generally higher than domestic sales. In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of transportation. In contrast, when we sell products to unrelated customers, we generally bear the transportation costs, but we are able to charge a higher price.

Provision for Income Taxes

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. Sutor BVI was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.

On March 16, 2007, the National People's Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on December 6, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified enterprise income tax, or EIT, of 25.0% on all domestic-invested enterprises and foreign invested enterprises, or FIEs, established in the PRC, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008. Despite these changes, the EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments.

Changshu Huaye was subject to an EIT of 15% from calendar years 2010 to 2012 because it qualified as a high-tech enterprise. Changshu Huaye paid EIT at the 25% tax rate for the period between July and December 2010 and we have received a refund on the over-paid portion of the EIT. It paid an income tax rate of 15% for the third quarter of fiscal 2013. The Company filed documents to local tax bureau to renew the reduced tax rate in April 2013. Now it is waiting for final approval. The management believes it is highly possible to get that approval. Jiangsu Cold-Rolled was subject to an EIT of 12.5% for the calendar years 2009, 2010 and 2011 and is subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua and Sutor Technology are subject to an EIT of 25% and have no preferential tax treatments.

Results of Operations

Comparison of Three Months Ended March 31, 2013 and March 31, 2012

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

(All amounts, other than percentages, in thousands of U.S. dollars)

                                            Three Months Ended               Three Months Ended
                                              March 31, 2013                   March 31, 2012
                                                           % of                             % of
                                          Amount          Revenue          Amount          Revenue
Revenue
Revenue from unrelated parties          $    84,994            60.9 %    $    77,293            70.3 %
Revenue from related parties                 54,555            39.1 %         32,642            29.7 %
Total                                       139,549           100.0 %        109,935           100.0 %
Cost of Revenue
Cost of revenue from unrelated
parties                                      77,127            55.3 %         71,782            65.3 %
Cost of revenue from related parties         51,489            36.9 %         30,282            27.5 %
Total                                       128,616            92.2 %        102,064            92.8 %
Gross Profit                                 10,933             7.8 %          7,871             7.2 %
Operating Expenses
Selling expense                               1,417             1.0 %            875             0.8 %
General and administrative expense            2,491             1.8 %          2,272             2.1 %
Total Operating Expenses                      3,908             2.8 %          3,147             2.9 %
Income from Operations                        7,025             5.0 %          4,724             4.3 %
Other Income (Expense)
Interest income                                 968             0.7 %            369             0.3 %
Other income                                    159             0.1 %             85             0.1 %
Interest expense                             (2,579 )          (1.8 )%        (3,485 )          (3.2 )%
Other expense                                    73             0.1 %             79             0.1 %
Changes in fair value of warrant
liabilities                                    (147 )          (0.1 )%            57             0.1 %
Income from equity method investments            51             0.0 %
Total Other Income (Expense)                 (1,475 )          (1.0 )%        (2,895 )          (2.6 )%
Income Before Taxes                           5,550             4.0 %          1,829             1.7 %
Income tax (expense)/benefit                 (1,670 )          (1.2 )%          (554 )          (0.5 )%
Net Income                              $     3,880             2.8 %    $     1,275             1.2 %

Revenue. For the three months ended March 31, 2013, revenue was $139.5 million, compared to $109.9 million for the same period last year, an increase of $29.6 million, or 26.9%. The increase was mainly attributable to higher sales volume for AP products and cold rolled products at Jiangsu Cold-Rolled. As a feedstock for processing a variety of value-added steel products, some high-end steel producers ordered more AP products and cold rolled products as a result of the recovery of Chinese economy during the quarter ended March 31 2013. The sales volume of AP products and cold rolled products increased 184% and 1,102%, respectively, in the third quarter of fiscal 2013 as compared to the same period last year. However, as AP and cold-rolled products are at the early stage of our integrated production process, they usually have a limited contribution to our gross profits.

After several quarters' consecutive declining in the GDP growth rate, the Chinese economy started to improve in the second half of 2012. We think the recent economic conditions were good for the following reasons: (1) the growth rate of the GDP stopped declining, leading to improved consumers' confidence;
(2) the annual GDP growth rate for 2012 was 7.8%, exceeding the goal of 7.5% set by the government; (3) China's PMI has been above 50% for seven consecutive quarters since last October; and (4) the Chinese Academy of Science forecasts that Chinese GDP will growth 8.4% in 2013. Although the latest economic indicators showed some uncertainties, the overall improving trend was evident. We believe the improved economic conditions contributed to our recently improved performance over the same period last year.

The following table sets forth revenue by geography and by business segments for the three months ended March 31, 2013 and 2012.

(All amounts, other than percentages, in thousands of U.S. dollars)

                          Three Months Ended             Three Months Ended
                            March 31, 2013                 March 31, 2012
                                         % of                           % of
                         Amount         Revenue         Amount         Revenue
Geographic Data
China                 $    129,660          92.9 %   $    103,597          94.2 %
Other Countries              9,889           7.1 %          6,338           5.8 %

Segment Data
ChangshuHuaye         $     33,792          24.2 %   $     32,335          29.4 %
Jiangsu Cold-Rolled         96,735          69.3 %         70,132          63.8 %
NingboZhehua                 7,299           5.2 %          5,105           4.6 %
Sutor Technology             1,723           1.3 %          2,363           2.2 %

On a geographic basis, revenue generated from outside of China was $9.9 million, or 7.1% of the total revenue, for the three months ended March 31, 2013, as compared to $6.3 million, or 5.8% of the total revenue, for the same period in 2012. The increase was mainly resulted from our continuous efforts to improve our brand recognition in the overseas markets.

On a segment basis, after eliminating intercompany sales and adjusting reconciliation items, revenue contributed by Changshu Huaye was $33.8 million for the three months ended March 31, 2013, an increase of $1.5 million, or 4.6%, from $32.3 million for the same period last year. The increase mainly resulted from the increased sales volume of PPGI steel products. Despite the increase, the current production level of PPGI products is still near its historical average.

After eliminating inter-company sales and adjusting reconciliation items, revenue contributed by Jiangsu Cold-Rolled was $96.7 million for the three months ended March 31, 2013, as compared at $70.1 million for the same period last year. As explained above, the increase in sales revenue was mainly because of the significant increases in sales volume for AP steel products and cold rolled steel products.

Revenue contributed by Ningbo Zhehua was $7.3 million for the three months ended March 31, 2013, an increase of $2.2million, or 43.1%, from $5.1 million for the same period in 2012, primarily resulting from the higher sales volume generated from outside of China. While the total quarterly sales volume was approximately 11,275 MT, approximately 6,300 MT of steel pipes were exported during the quarter ended March 31 2013, representing an increase of 186.4% as compared to the same period last year. In the second half of 2012, we developed some new international customers, leading to higher sales for the third quarter of fiscal 2013.

In terms of related party sales as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended March 31, 2013increased by $7.7million, or 10.0%, to $85.0 million, from $77.3 million in the same period in 2012.

Cost of revenue. Cost of revenue increased by$26.5 million, or 26.0%, to $128.6 million in the three months ended March 31, 2013, from $102.1 million in the same period in 2012. As a percentage of revenue, cost of revenue decreased to 92.2% in the three months ended March 31, 2013, as compared to 92.8% in the same period last year.

Gross profit and gross margin. Gross profit increased by$3.0 million to $10.9 million in the three months ended March 31, 2013, from $7.9 million in the same period in 2012. Gross profit as a percentage of revenue (gross margin) was 7.8% for the three months ended March 31, 2013, as compared to 7.2% for the same period last year. The main reasons for improved gross margin included increased production of our higher-margin products like PPGI and steel pipe products, more exports as well as the fact that the price of raw materials declined more than the decline of the ASP of our HDG products.

On a segment basis, gross margin for Changshu Huaye increased to 13.3% in the three months ended March 31, 2013, from 8.7% in the same period last year, mainly because of increased PPGI product sales and more exports. Sales volume of PPGI was up approximately 149% from 3,723 MT in the third quarter of last year to 8,093 MT in the third quarter of fiscal 2013. During the third quarter of fiscal 2013, the sales revenue from PPGI products and exports increased by approximately 88.9% and 57.1%, respectively. Both higher production and more exports contributed to improved gross margin.

Gross margin for Jiangsu Cold-Rolled decreased to 5.6% in the three months ended March 31, 2013, from 7.2% in the same period last year, mainly due to changes in the product mix. We had significantly higher revenue from lower-margin products like AP steel and cold-rolled steel products in the third quarter of fiscal 2013 than the same period last year. For the third quarter ended March 31, 2013, revenue from AP steel and cold-rolled steel products was approximately $34.6 million and $18.8 million, respectively, compared with $14.1 million and $1.9 million for the same period last year. Because high-end steel producers were experiencing a restocking period during the third fiscal quarter 2013, the demand for AP and cold rolled products was particularly strong. As a result, we produced relatively more of these products to meet the needs of our customers.

Gross margin for Ningbo Zhehua increased to 14.9% in the three months ended March 31, 2013, as compared to 2.2% in the same period in 2012. The increase in gross margin was mainly resulted from both higher production and higher sales revenue generated from international sales. During the quarter, we completed and delivered a number of contracts signed in the prior quarters.

Total operating expenses. Our total operating expenses increased by $0.8 million to $3.9 million in the three months ended March 31, 2013, from $3.1 million in the same period in 2012. As a percentage of revenue, our total operating expenses decreased to 2.8% in the three months ended March 31, 2013, from 2.9% in the same period in 2012.

Selling expenses. Our selling expenses increased by $0.5 million to $1.4 million in the three months ended March 31, 2013, from $0.9 million in the same period in 2012. As a percentage of revenue, our selling expenses increased to 1.0% for the three months ended March 31, 2013, from 0.8% for the same period last year. The increase was mainly due to increased shipping and shipping-related expenses, especially for exports. The international shipment rate increased approximately 25% in the third quarter of fiscal 2013 as compared with the same period last year while our international sales were up approximately 56%.

General and administrative expenses. General and administrative expenses was $2.5 million, or 1.8% of the total revenue, in the three months ended March 31, 2013, as compared with $2.3 million, or 2.1% of the revenue, in the same period in 2012. The increase was primarily due to increased employee compensation and benefits.

Interest expense. Our interest expense decreased by $0.9 million to $2.6 million in the three months ended March 31, 2013, from $3.5 million in the same period in 2012. As a percentage of revenue, our interest expense was 1.8% of total . . .

  Add SUTR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SUTR - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.