China Valves Technology, Inc. Reports Third Quarter FY 2009 Results

KAIFENG, China, Nov. 13 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (OTC Bulletin Board: CVVZ; Nasdaq: CVVT; "China Valves" or the "Company"), a leading metal valve manufacturer with operations in the People's Republic of China (the "PRC"), today announced its financial results for the third quarter ended September 30, 2009.

    Highlights for the Third Quarter 2009 and Recent Developments

    -- Net revenue was $27.9 million, an increase of 30.1% from the third
       quarter of 2008
    -- Gross profit was $13.7 million, an increase of 60.1% from the third
       quarter of 2008, and gross margin was 49.1%, compared to 39.9% for the
       third quarter of 2008
    -- Net income was $3.8 million, or $0.12 per diluted share
    -- Non-GAAP net income for the third quarter of 2009, after excluding non-
       cash compensation expense of $3.8 million and non-cash items related to
       the change in fair value of derivative instruments, was $7.4 million,
       or $0.24 per diluted share, an increase of 61.6% from non-GAAP net
       income of $4.6 million, or $0.20 per fully diluted share in the third
       quarter of 2008
    -- In the process of acquiring 100% equity ownership of Yangzhou Rock
       Valve Lock Technology Co., Ltd. ("Yangzhou Rock") for $7.3 million in
       cash
    -- New production facility at the Company's Henan Kaifeng High Pressure
       Valve Co., Ltd. ("Kaifeng Valve") subsidiary began formal production in
       mid September 2009
    -- Approved to list on the NASDAQ Global Market

"Our third quarter of 2009 was another strong quarter for our high-performance products. Our high temperature, high pressure gate valves and two-way metal sealing butterfly valves have continued as the main drivers of growth and are helping us expand market share in the thermal power and water supply industries," said Mr. Siping Fang, Chairman and CEO of China Valves. "Moreover, we continued with our strategy to expand production capacity, our product portfolio, and our end-user markets through acquisitions. The integration of Yangzhou Rock helps us access a broader customer base and helps us further establish our position as a provider of high-margin valve products."

Third Quarter 2009 Results

For the third quarter of 2009, China Valves' net revenue was $27.9 million, an increase of 30.1% from $21.4 million for the third quarter of 2008.

Net revenue increased primarily because of strong sales of gate valves which are high pressure high temperature valves used in thermal power stations and two-way metal sealing butterfly valves for water supply systems. Together, these products were responsible for $19.4 million of net revenue, approximately 69.2% of net revenue, in the third quarter of 2009. Strong demand of these high-end valve products was mainly attributed to the expansion of water supply networks, the increased demand from thermal power plants, and our established brand presence. Sales to the power industry accounted for 26.3% of net revenue, and sales to the water supply and drainage industry accounted for 33.9% of net revenue for the third quarter of 2009 compared to 19.9% and 22.9% respectively for the third quarter last year.

Gross profit for the third quarter of 2009 was $13.7 million, an increase of 60.1% from $8.6 million for the third quarter of 2008. Gross profit margin was 49.1%, compared to 39.9% for the third quarter of 2008. Gross profit margin increased because of lower production costs due to increased sales of high-end valve products, strengthened production cost control and lower raw material costs compared to the year ago period.

General and administrative expenses excluding the non-cash compensation for the third quarter of 2009 increase 11.9% to $1.8 million from $1.6 million in the third quarter of 2008. The increase is primarily attributable to increase in salary expense to support the Company's sales and administrative as the Company expands. Additionally, travel expenses increased as well due to increase in acquisition activities. Auditing, accounting and legal fees have increased as well. During the quarter, the Company also incurred an accrual of non-cash compensation expense of $3.8 million that relates to 4,194,344 make good shares to be released contingent to the Company meeting its make good target of $21 million in net income for fiscal year 2009. The Company accrues this non-cash expense on a quarterly basis, based on the determination the Company is likely to achieve the make good target for 2009, excluding such non-cash compensation expenses related to the make good. For more information, please refer to the Company's Form 10-Q to be filed on November 13, 2009.

Selling expenses increased 33.0% year-over-year to $1.7 million from $1.3 million for the third quarter of 2008 mainly due to increased sales.

Total other expenses were $0.1 million for the third quarter of 2009, compared to total other income of $0.5 million for the third quarter of 2008.

Income tax expense was $2.5 million, compared to $1.5 million for the third quarter of 2008. Income tax increased mainly due to increased taxable earnings.

Net income for the third quarter 2009 was $3.8 million, compared with $4.6 million in net income for the third quarter 2008. Diluted earnings per share were $0.12 for third quarter 2009, compared to diluted earnings per share of $0.20 for the third quarter 2008. The Company has approximately 31,446,247 weighted average diluted shares for the three months ended September 30, 2009, compared to approximately 23,244,832 weighted average diluted shares for the corresponding period in fiscal 2008.

After adjusting for the aforementioned $3.8 million in non-cash compensation charges and a gain of $90,491 due to changes in the fair value of warrant liabilities, non-GAAP net income for the third quarter of 2009 was $7.4 million, a 61.6% increase from non-GAAP net income of $4.6 million for the third quarter of 2008. Diluted non-GAAP earnings per share were $0.24 for the quarter ended September 30, 2009, compared to diluted earnings per share of $0.20 for the quarter ended September 30, 2008. Please see the table below for a reconciliation of non-GAAP financial information to GAAP financial information.

Nine Months 2009

Revenue for the first nine months of 2009 was $70.0 million, up 51.5% from revenue of $46.2 million for the first nine months of 2008. Gross profit was $34.4 million, up 86.1% from gross profit of $18.5 million for the nine months of 2008. Gross margin was 49.2%, compared to 40.0% for the first nine months of 2008. Net income was $6.9 million, or $0.23 per diluted share, compared to $8.1 million, or $0.38 per basic and diluted share, for the same period a year ago. After adjusting for the aforementioned $11.3 million in non-cash compensation charges and $0.3 million in changes in fair value of warrant liabilities, non-GAAP net income for the first nine months of 2009 was $18.5 million, or $0.61 per diluted share, a year-over-year increase of 130.5 %.

Financial Condition

As of September 30, 2009, the Company had $16.7 million in cash and cash equivalents, compared to $16.4 million as of December 31, 2008. Accounts receivable were $27.5 million compared to $26.1 million as of December 31, 2008. Working capital was $37.8 million, compared to $33.1 million as of December 31, 2008. As of September 30, 2009, the Company had no long term debt. Shareholders' equity was $105.4 million as of September 30, 2009, compared to $76.6 million as of December 31, 2008.

For the first nine months of 2009, the Company generated $20.1 million in cash from operating activities. The Company estimates that the total capital expenditures in fiscal year 2009 will reach approximately $11.6 million: $8.6 million of which has been used to complete construction and purchase new machinery and equipment for the new plant in Kaifeng and equipment purchase in other two subsidiaries, Zhengdie and Taizhou Taide. The Company expects to use approximately $1.0 million to upgrade Taizhou Taide's production technology and equipment, and the remaining $2.0 million to be used for purchase of new equipment and production line upgrades for the planned acquisition in 2009.

Acquisition of Yangzhou Rock and Commencement of Production at New Facility

In August 2009, the Company entered into agreement to acquire 100% equity ownership of Yangzhou Rock for a total of $7.3 million in cash, and during the third quarter, the Company has made the prepayment of $6.0 million. Yangzhou Rock mainly designs, manufactures and distributes interlock valves, valve lock devices, magnetic lock valves, and mechanical interlock machines that are widely used by manufacturing companies in the petrochemical, chemical, natural gas, thermal power station and metallurgy industries.

In September, 2009, the Company's new production facility at its Kaifeng Valve subsidiary began formal production. This new production facility, expected to reach full utilization by the end of 2009, mainly focuses on the production of high-end large diameter metal valves used in thermal and nuclear power plants, as well as by the oil petrochemical and water supply and drainage industries.

Recent Developments

On November 10, 2009 China Valves received approval to list its common stock on NASDAQ Global Market, and will begin trading on Monday November 16, 2009. The Company will trade on NASDAQ under the ticker symbol "CVVT."

Business Outlook

Supported by governmental infrastructure spending especially on municipal water supply and drainage projects and a replacement cycle within power plants, China Valves expects to see continued demand for high-end valve products in 2009 and 2010. Moreover, the Company expects to see accelerated growth from the nuclear power industry in the future.

"In June we signed a contract with China Guangdong Nuclear Power Group to deliver nuclear valves worth $4.7 million and expect to deliver 50% of this order by the end of November 2009 and the other half within 2010. Although additional orders from the nuclear power industry remain small for the time being, we expect this industry to be a significant contributor to future growth. We have applied for a license to manufacture valves for the core island of nuclear power plants, and expect to receive an approval around the Chinese New Year in February 2010."

As of September 30, 2009, the Company's backlog was RMB 320 million, or approximately $47 million.

For the full year 2009, the Company remains confident in meeting the target of annual net income of $23 million and diluted earnings per share of $0.73, excluding any non-cash compensation charges and changes in fair value of derivative instruments and using 31,446,247 weighed average diluted shares.

"Given our adjusted year-to-date net income of $18.5 million, we are very well positioned to meet our guidance for 2009. Because of many of our customers slowing orders in the last months of the year in anticipation of reduced capacity utilization in the first quarter for the Chinese New Year holiday, we expect our fourth quarter to be slightly slower than our third quarter," said Mr. Fang, "In 2010, we expect growth to come from our expansion in manufacturing capacity throughout 2009, which includes the construction of a new facility, upgrades to existing production capacity, and two completed acquisitions. Moreover, we are constantly evaluating new acquisition targets that complement our existing business and that expand our product offerings and exposure to growing end-user markets."

Conference call

China Valves' management will host a conference call at 8:00 a.m. Eastern Standard Time on Friday, November 13, 2009 to discuss its financial results for the third quarter 2009 ended September 30, 2009. To participate in this live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: 888 339-2688. International callers should call +1 617 847-3007. The Conference Pass Code is 657 997 54.

If you are unable to participate in the call at this time, a replay will be available for fourteen days starting from 10:00 a.m. Eastern Standard Time on Friday, November 13, 2009. To access the replay, call 888-286-8010. International callers should call +1 617-801-6888. The Conference Pass Code is 21500853.

Non GAAP Financial Measures

To supplement the Company's condensed consolidated financial statements for the three and nine months ended September 30, 2009 and September 30, 2008 presented on a GAAP basis, the Company provided non-GAAP financial information in this release that exclude the impact of non-cash stock compensation expense related to the Company's private placement financings and non cash income or expense related to changes in the fair value of warrant liabilities. The Company's management believes that these non-GAAP measures, non-GAAP net income and non-GAAP diluted earnings per share, provide investors with a better understanding of how the results relate to the Company's current and historical performance. The additional non-GAAP information is not meant to be considered in isolation or as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies. Management believes that these non-GAAP financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes that these non-GAAP measures reflect the essential operating activities of the Company. In addition, the provision of these non-GAAP measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each non-GAAP measures to the nearest GAAP measure is appears in the table below.

                  RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
      FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

                            Three Months Ended         Nine Months Ended
                                September 30              September 30
                              2009       2008          2009          2008
    Income From
     Operations             6,402,334  5,661,653    12,950,279    10,377,905
    Add back (Deduct):
    Non-Cash Compensation
    Expenses                3,779,849         --    11,279,336            --
    Adjusted Income from
    Operations             10,182,183  5,661,653    24,229,615    10,377,905

    Net Income (Loss)       3,753,970  4,641,328     6,934,032     8,071,696
    Add back (Deduct):
    Non-Cash Change in
     Warrant Liabilities      (90,491)   (34,740)      310,143       (34,774)
    Non-Cash Compensation
     Expenses               3,779,849         --    11,279,336            --
    Adjusted Net Income     7,443,328  4,606,588    18,523,511     8,036,956
                                61.6%                   130.5%

    Diluted EPS                  0.12       0.20          0.23          0.38
    Add back (Deduct):
    Non-Cash Change in
     Warrant Liabilities        0.003      0.001          0.01            --
    Non-Cash Compensation
     Expenses                    0.12         --          0.37            --
    Adjusted EPS                 0.24       0.20          0.61          0.38

About China Valves Technology, Inc.

China Valves Technology, Inc. through its subsidiaries, Zhengzhou Zhengdie Valve Co, Ltd. and Henan Kaifeng High Pressure Valve Co., Ltd., is engaged in development, manufacture and sale of high-quality metal valves for the electricity, petroleum, chemical, water, gas and metallurgy industries. The Company has one of the best known brand names in China's valve industry, and its history can be traced back to 1959 when it was formed as a state-owned enterprise. The Company develops valve products by extensive research and development and owns a number of patents. It enjoys significant domestic market shares and exports to Asia and Europe. For more information, visit http://www.cvalve.com .

Safe Harbor Statements

This press release contains certain statements that may include "forward looking statements". All statements other than statements of historical fact included herein are "forward-looking statements". These forward looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

                         --Financial Tables Follow--




                  CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES

        CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
     FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
                                   (Unaudited)

                        Three months ended              Nine months ended
                          September 30,                   September 30,
                       2009           2008            2009            2008

    SALES        $   27,890,991 $   21,441,850  $   70,008,554 $    46,208,006

    COST OF
     GOODS SOLD      14,191,615     12,884,586      35,565,231      27,702,722

      GROSS
       PROFIT        13,699,376      8,557,264      34,443,323      18,505,284

    OPERATING
     EXPENSES:
     Selling          1,739,431      1,307,590       4,654,287       3,170,950
     General and
      Administrative  1,762,085      1,513,622       5,520,928       4,783,324
     Research and
      development        15,677         74,399          38,493         173,105
     Non-cash stock
      compensation
      expense         3,779,849             --      11,279,336              --
         Total
          operating
          expenses    7,297,042      2,895,611      21,493,044       8,127,379

    INCOME FROM
     OPERATIONS       6,402,334      5,661,653      12,950,279      10,377,905

    OTHER EXPENSE
    (INCOME):
     Other expense
      (income), net     224,352       (621,229)       (812,743)       (908,213)
     Interest and
      finance
      expense, net       11,879        132,026         138,031         423,620
     Change in
      fair value
      of warrant
      liabilities       (90,491)       (34,740)        310,143         (34,740)
         Total
          other
          expense
          (income),
          net           145,740       (523,943)       (364,569)       (519,333)

    INCOME BEFORE
     PROVISION FOR
     INCOME TAXES     6,256,594      6,185,596      13,314,848      10,897,238

    INCOME TAX
     EXPENSE          2,502,624      1,544,268       6,380,816       2,825,542

    NET INCOME        3,753,970      4,641,328       6,934,032       8,071,696

    OTHER
     COMPREHENSIVE
     INCOME:
     Foreign
      currency
      translation
      (loss) gain        65,058         49,582         (16,007)      2,376,660

    COMPREHENSIVE
     INCOME      $    3,819,028 $    4,690,910  $    6,918,025 $    10,448,356

    BASIC EARNINGS
     PER SHARE:
     Weighted
      average
      number of
      shares         31,398,770     23,244,832      30,559,609      21,124,876
     Earnings per
      share                0.12           0.20            0.23            0.38

    DILUTED EARNINGS
     PER SHARE:
      Weighted
       average
       number of
       shares        31,446,247     23,244,832      30,670,673      21,124,876
      Earnings
       per
       share     $         0.12 $         0.20  $         0.23 $          0.38




                CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

                                  ASSETS

                                                  September 30,  December 31,
                                                      2009           2008
                                                   (Unaudited)
    CURRENT ASSETS:

     Cash and cash equivalents                     $ 16,669,586 $ 16,427,883

     Restricted cash                                  3,180,091    3,191,237
     Notes receivable                                   243,522      880,200
     Accounts receivable, net of allowance
      for doubtful accounts of $1,163,457
      and  $1,163,457 as of September 30,
      2009 and December 31, 2008, respectively       27,483,141   26,119,447
     Other receivables                                5,082,414    4,841,691
     Inventories                                     10,358,228   11,244,442

     Advances on inventory purchases                  2,206,656    1,108,512
     Advances on inventory purchases - related
      party                                           1,281,316    1,367,446

     Prepaid expenses                                    44,777       52,921

                     Total current assets            66,549,731   65,233,779

    PLANT AND EQUIPMENT, net                         26,580,568   16,184,894

    OTHER ASSETS:
     Accounts receivable - retainage, long term       2,788,490    2,541,418

     Deposit for acquisition                          6,014,700           --

     Advances on equipment purchases                  1,405,860    2,001,733

     Long term receivable                               300,802      382,552
     Goodwill - purchased                            20,811,767   20,811,767
     Intangibles, net of accumulated
      amortization                                    8,980,342      823,331
     Other investments, at lower of cost or
      market                                            764,515      764,515

                     Total other assets              41,066,476   27,325,316



                        Total assets               $134,196,775 $108,743,989

                   LIABILITIES AND SHAREHOLDERS' EQUITY

    CURRENT LIABILITIES:

     Accounts payable - trade                      $  8,439,279 $  6,630,574
     Short term loans                                 4,139,811    7,839,960
     Short term loans - related parties                 456,511      596,791

     Other payables                                   3,327,025    4,453,881
     Other payables - related party                   1,470,313    1,975,462
     Notes payable                                    2,347,200    2,934,000
     Accrued liabilities                              2,984,031    2,382,138
     Customer deposits                                3,015,111    3,129,708
     Taxes payable                                    2,101,853    1,227,338
     Warrant liabilities                                478,422      924,291

                     Total current liabilities       28,759,556   32,094,143

    COMMITMENTS AND CONTINGENCIES

    SHAREHOLDERS' EQUITY:
     Common stock, $0.001 par value;
      300,000,000 shares authorized;
      31,398,878 shares and 31,192,552 shares
      issued and outstanding as of September
      30, 2009 and December 31, 2008,
      respectively                                       31,402       31,192

     Additional paid-in-capital                      78,971,106   66,935,968

     Common stock subscription receivable                    --   (9,834,000)

     Statutory reserves                               4,892,263    2,958,659

     Retained earnings                               15,399,478   10,399,050

     Accumulated other comprehensive income           6,142,970    6,158,977

                     Total shareholders' equity     105,437,219   76,649,846

                       Total liabilities and
                        shareholders' equity       $134,196,775 $108,743,989





                  CHINA VALVES TECHNOLOGY INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE NINE MONTHS ENDED SEPTEMBER 30
                                   (Unaudited)

                                                   2009              2008

    CASH FLOWS FROM OPERATING ACTIVITIES:

     Net income                          $       6,934,032  $      8,071,696
     Adjustments to reconcile net income
      to cash provided by operating
      activities:
         Depreciation                            1,111,294           683,455
         Amortization                              175,413            46,359
         Bad debt provision                        200,595           554,672
         Loss (gain) on disposal of
          fixed assets                              52,098           (24,705)
         Change in fair value of warrant
          liabilities                              310,143           (34,740)
         Stock compensation cost                11,279,336                --
     Change in operating assets and
      liabilities:
       Restricted cash due to sales
        covenant                                  (571,331)          (96,857)

       Note receivable                             636,201           (57,348)

       Accounts receivable-trade                (1,609,558)       (7,749,222)

       Other receivables                          (441,139)         (738,305)

       Inventories                                 885,549         1,146,008

       Advance on inventory purchases           (1,097,320)         (212,157)
       Advance on inventory
        purchases-related party                    106,946          (122,415)

       Prepaid expenses                              8,138           347,644

       Accounts payable-trade                    1,807,350          (107,055)
       Long term receivable                         81,689                --

       Other payables                           (1,136,336)       (2,652,648)

       Accrued liabilities                         601,564         1,653,736

       Customer deposits                          (114,511)        1,087,270

       Taxes payable                               873,859           497,363
          Net cash provided by operating
           activities                           20,094,012         2,292,751

    CASH FLOWS FROM INVESTING ACTIVITIES:

     Acquisition of intangible assets             (768,192)         (252,938)

     Advance on equipment purchases                     --        (1,485,584)

     Purchases of plant and equipment           (8,636,494)       (3,243,024)

     Proceeds from sale of equipment                    --            62,366
     Investment deposit                         (6,010,190)               --
          Net cash used in investing
           activities                          (15,414,876)       (4,919,180)

    CASH FLOWS FROM FINANCING ACTIVITIES:

     Restricted cash due to covenant                (3,894)       (1,628,130)
     Restricted cash due to notes
      payable                                      586,360                --
     Repayment from notes payable                 (586,360)               --

     Other payables-related party                 (505,130)       (2,246,978)

     Proceeds from short term debt               3,037,517         6,904,760
     Proceeds from short term
      loans-related parties                         99,307           796,633

     Repayments of short term debt              (6,733,530)       (4,994,553)
     Repayments of short term
      loans-related parties                       (251,638)               --

     Proceeds from shareholder                          --         1,317,095
     Proceeds from private placement
      financing                                         --        27,288,231
          Net cash (used in) provided by
           financing activities                 (4,357,368)       27,437,058

    EFFECTS OF EXCHANGE RATE CHANGES ON
     CASH                                          (80,065)          275,980

    INCREASE IN CASH                               241,703        25,086,609

    CASH and CASH EQUIVALENTS, beginning        16,427,883         2,773,262

    CASH and CASH EQUIVALENTS, ending    $      16,669,586  $     27,859,871


    SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:
     Cash paid for interest              $         138,133  $        376,939
     Cash paid for income taxes          $       1,324,470  $      2,326,037

     Additional Non-cash investing and
      financing activities
       Cashless exercise of warrants     $         756,012  $             --
       Common stock issued for real
        estate acquisition               $       9,834,000  $             --


    For more information, please contact:

    China Valves Technology, Inc.
     Ray Chen, VP of Investor Relations
     Tel:   +1-650-281-8375
            +86-139-2527-9478
     Email: raychen@cvalve.net
     Web:   http://www.cvalve.com

    CCG Investor Relations
     Crocker Coulson, President
     Tel:   +1-646-213-1915
     Email: crocker.coulson@ccgir.com
     Web:   http://www.ccgirasia.com

SOURCE China Valves Technology, Inc.

RELATED LINKS
http://www.cvalve.com
http://www.ccgirasia.com