NF Energy Saving Corporation Announces Third Quarter 2010 Results

-- Revenue for the quarter increased 6.3% over the prior year period to $8.1 million

-- Net income for the quarter was $2.1 million, representing a net margin of 25.7%

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Nov 12, 2010, 07:00 ET

SHENYANG, Liaoning, China, Nov. 12, 2010 /PRNewswire-Asia-FirstCall/ -- NF Energy Saving Corporation. (Nasdaq: NFEC) ("NF Energy" or the "Company"), a leading energy saving services and solutions provider for China's power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries, today reported financial results for its third quarter ended September 30, 2010.

Third Quarter 2010 Highlights

Revenues increased 6.3% year-over-year to $8.1 million
Gross profit rose 4.8% year-over-year to $2.9 million, representing a gross margin of 35.4% compared to 35.9% in the year ago period
GAAP net income was $2.1 million or $0.38 per diluted share, representing a net margin of 25.7%
Common stock listed on NASDAQ Global Market

"We are pleased with our third quarter operating results, particularly since the business was affected significantly by the move to our new facility during the quarter," noted Mr. Gang Li, Chief Executive Officer of NF Energy Saving Corporation. "The logistics involved in moving and temporarily shutting down our largest machines meant deferring product deliveries until the fourth quarter and subcontracting work to third parties. Even so, we more than made up these revenue declines by increased project revenues from the sale of power from biomass and other projects and from increased service revenues and from taking on subcontracting work of our own to utilize spare capacity on our smaller machines."

Third Quarter 2010 Results

NF Energy has three business segments: (1) the products segment which includes flow control equipment (valves) and energy saving equipment (wind power components); (2) the services segment which includes auditing, consulting, project reporting, and outsourced production; and, (3) the project segment which consists of project design and implementation as well as revenue sharing with third parties related to work on projects. Revenue for the third quarter of 2010 increased 6.3% to $8.1 million, from $7.6 million in the same period of 2009. The growth in revenue is primarily attributable to a significant increase in revenues from the Company's services and projects segments, which was offset by a decline in revenue for the products segment. The decline in product revenue was attributable to the Company's move to its new manufacturing facility which caused the Company to delay filling some product orders.

Gross profit for the third quarter of 2010 was $2.9 million, an increase of 4.8% over the $2.7 million in gross profit generated in the third quarter of 2009. The increase in gross profit was largely the result of higher revenues and lower raw materials prices in the projects segment compared to the prior year quarter. Gross margin for the third quarter of 2010 was 35.4% compared to 35.9% during the same period of 2009. The decline in gross margins was primarily the result of lower gross margins in the services segment as the Company provided more services on government related projects compared to the prior year quarter for which the Company cannot pass on price increases on raw materials costs to the customer and was also the result of lower margin subcontracting revenues.

Operating expenses in the third quarter increased 40.2% to $0.3 million, from $0.2 million in the same period of the prior year. The increase in operating expenses was the result of expenses associated with the move to the Company's new manufacturing facility and expenses related to the Company's common stock listing on the NASDAQ Global Market.

Income from operations for the third quarter of 2010 was $2.5 million, an increase of 1.6% from the $2.5 million of income from operations generated in the year ago period. Operating margins declined to 31.4% from 32.9% in the year ago period.

Net income for the 2010 third quarter was $2.1 million, or $0.38 per diluted share compared to net income of $2.2 million or $0.40 per diluted share in the third quarter of 2009.

Financial Condition

As of September 30, 2010, the Company had $0.5 million in cash and cash equivalents compared to $0.2 million in cash and cash equivalents on December 31, 2009.

The Company generated $3.1 million in net cash from operating activities for the nine months ending September 30, 2010, compared to $2.8 million in the same period of 2009.

Recent Events and Updates

On August 23, 2010, NF Energy announced the signing of a contract with PT. Multinas Indonesia for technical consultancy services and energy saving drying and cooling equipment from which the Company expects to generate U.S. GAAP revenue of $290,000. NF Energy will provide technical consultancy services (comprising approximately 50% of the total revenue), in addition to energy saving drying and cooling equipment (accounting for the remaining 50% of the total contractual revenue).

On September 14, 2010, NF Energy announced the signing of a contract for work on an energy saving project with Fuxin HF Bio-energy Development Company for which the Company expects to generate U.S. GAAP revenue of approximately $882,000, all of which will be recorded in the fourth quarter of 2010. NF Energy will provide technical consultancy and project design, including equipment set up and testing. The project will help 800 households in the Fuxin Mongolian Autonomous County of Liaoning province China upgrade their energy system by transitioning to a clean energy source that will use crop waste and straw. The principal objective of the project is to develop bio-fuels to replace the previous coal powered energy source, reducing coal utilization by 15,000 tons per year thereby lowering environmental pollution.

On September 28, 2010, NF Energy announced that it had received certification as a recognized "Energy Service Company" by the National Development and Reform Commission (NDRC), one of China's main economic planning agencies, qualifying NF Energy to bid on energy conservation reconstruction projects that enjoy preferential benefits from the government of China, including income tax deductions, value-added tax and business tax exemptions, government-encouraged financing and direct government subsidies.

On October 4, 2010, NF Energy's common stock began trading under the symbol "NFEC" on the NASDAQ Global Market. As part of the Company's efforts to list on the NASDAQ Global Market, NF Energy executed a 2.5-for-1 reverse split of its common stock that was effective with the opening of the stock market on September 16, 2010.

On October 25, 2010, NF Energy announced that it had signed an agreement with the Gaizhou municipal government's Gaizhou Gas Industry Company to jointly invest in the Gaizhou Biomass Gas Supply Project. Once fully operational, the project is projected to generate revenue of up to RMB 96 million annually (approximately $14.1 million) and save 40,600 tons of standard coal per year. The total cost of the project is expected to amount to RMB 240 million (approximately $35.5 million). The two companies will split revenues generated from the project according to their respective investments, with NF Energy investing 62.2% of the capital required over a two-year time frame and Gaizhou Gas contributing the remaining 37.8%. NF Energy will be responsible for managing the project, including project design and construction.

Guidance and Business Outlook

NF Energy continues to anticipate full fiscal year 2010 revenue to be in the range of $28 million to $30 million and net income to be in the range of $5.6 million to $6.0 million. The estimation excludes any possible additional expenses arising from the Company's upgrade to the NASDAQ or any financing expense. Successful on time completion of the testing phase of the manufacturing equipment at the new facility is also assumed by the aforementioned financial expectations.

Conference Call

NF Energy will host a conference call at 9:00 a.m. ET on Friday, November 12, 2010, to discuss the Company's third quarter 2010 financial results. Hosting the call will be Mr. Gang Li, Chief Executive Officer, and Ms. Lihua Wang, Chief Financial Officer. The Company plans to distribute its earnings press release prior to the call.

To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: 877-533-0441. International callers should dial 706-634-7331. The conference call pass code is 23621927.

If you are unable to participate in the call at this time, a replay will be available for 14 days starting on Friday, November 12, 2010 at 10:00 a.m. ET. To access the replay, dial 800-642-1687. International callers should dial 706-645-9291. The conference pass code is 23621927.

About NF Energy Saving Corporation

NF Energy Saving Corporation (NASDAQ:NFEC) is a China-based provider of integrated energy conservation solutions utilizing energy-saving equipment, technical services and energy management re-engineering project operations to provide energy saving services to clients. The Company's customers are mainly concentrated in the electrical generation (large-scale thermal power generation, hydroelectric power, wind power, and nuclear power), water supply, and heat supply industries. The majority of revenues are from energy efficient flow control equipment and energy efficiency projects. For more information, visit http://www.nfenergy.com

Safe Harbor Statement

The statements contained herein that are not historical facts are considered "forward-looking statements." Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. In particular, statements regarding the efficacy of investment in research and development are examples of such forward-looking statements. The forward-looking statements include risks and uncertainties, including, but not limited to, the effect of political, economic, and market conditions and geopolitical events; legislative and regulatory changes that affect our business; the availability of funds and working capital; the actions and initiatives of current and potential competitors; investor sentiment; and our reputation. We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events, which may cause actual results to differ from those expressed or implied by any forward-looking statements. The factors discussed herein are expressed from time to time in more detail in our filings with the Securities and Exchange Commission available at http://www.sec.gov.

-- FINANCIAL TABLES FOLLOW --

NF ENERGY SAVING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Currency expressed in United States Dollars ("US$"), except for number of shares) (Unaudited)
	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
REVENUES, NET
Products	$	3,680,336	$	6,697,102	$	9,845,180	$	13,426,663
Services		3,987,846		869,319		7,506,297		1,778,294
Project		377,176		-		752,333		-
Total revenues, net		8,045,358		7,566,421		18,103,810		15,204,957

COST OF REVENUES:
Cost of products		2,569,018		4,200,439		6,833,561		9,016,453
Cost of services		2,318,911		647,932		5,103,747		1,266,213
Cost of project		308,028		-		614,406		-
Total cost of revenues		5,195,957		4,848,371		12,551,714		10,282,666

GROSS PROFIT		2,849,401		2,718,050		5,552,096		4,922,291

OPERATING EXPENSES:
Sales and marketing		25,786		32,040		58,438		106,493
General and administrative		290,972		193,955		644,482		533,201
Stock based compensation		-		-		-		349,000
Total operating expenses		316,758		225,995		702,920		988,694

INCOME FROM OPERATIONS		2,532,643		2,492,055		4,849,176		3,933,597

Other (expense) income:
Interest income		193		1,493		787		10,498
Other income		-		4		-		10,165
Subsidy income		-		-		-		33,613
Interest expense		(152,369)		-		(387,149)		-
Total other (expense) income		(152,176)		1,497		(386,362)		54,276

INCOME BEFORE INCOME TAXES		2,380,467		2,493,552		4,462,814		3,987,873

Income tax expense		(310,705)		(317,084)		(655,550)		(560,544)

NET INCOME	$	2,069,762	$	2,176,468	$	3,807,264	$	3,427,329

Other comprehensive income:
– Foreign currency translation gain		429,251		26,493		525,496		66,822

COMPREHENSIVE INCOME	$	2,499,013	$	2,202,961	$	4,332,760	$	3,494,151

Net income per share:
– Basic	$	0.39	$	0.41	$	0.71	$	0.64
– Diluted	$	0.38	$	0.40	$	0.70	$	0.64

Weighted average common stock outstanding:
– Basic		5,326,485		5,316,555		5,326,485		5,316,555
– Diluted		5,413,819		5,496,555		5,401,019		5,389,128

NF ENERGY SAVING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 (Currency expressed in United States Dollars ("US$"), except for number of shares)
	September 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	491,844	$	227,329
Accounts receivable, trade		11,237,197		12,510,875
Retention receivable, current		649,542		874,759
Inventories		1,583,246		638,775
Deferred tax assets		1,437		1,408
Prepayments and other receivables		1,564,466		603,456

Total current assets		15,527,732		14,856,602

Retention receivable, non-current		418,468		-
Plant and equipment, net		2,028,114		2,169,740
Construction in progress		12,808,645		9,045,332

TOTAL ASSETS	$	30,782,959	$	26,071,674

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade	$	2,734,320	$	2,055,839
Customer deposits		53,667		152,850
Income tax payable		315,247		201,480
Convertible promissory notes, net		486,843		-
Current portion of obligation under finance lease		572,400		437,917
Amount due to a related party		188,500		-
Other payables and accrued liabilities		619,443		1,928,494

Total current liabilities		4,970,420		4,776,580

Long-term liabilities:
Obligation under finance lease		108,809		675,809

TOTAL LIABILITIES		5,079,229		5,452,389

Commitments and contingencies

Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 5,326,485 and 5,326,485 shares issued and outstanding, respectively		5,326		5,326
Additional paid-in capital		8,728,906		7,977,221
Statutory reserve		1,449,345		1,449,345
Accumulated other comprehensive income		1,873,878		1,348,382
Retained earnings		13,646,275		9,839,011

Total stockholders' equity		25,703,730		20,619,285

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	30,782,959	$	26,071,674

NF ENERGY SAVING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Currency expressed in United States Dollars ("US$")) (Unaudited)
	Nine months ended September 30,
	2010		2009
Cash flows from operating activities:
Net income	$	3,807,264	$	3,427,329
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		218,760		233,085
Stock based compensation		-		349,000
(Gain) loss on disposal of plant and equipment		(223)		4,844
Warrant expenses, non-cash		278,528		-
Change in operating assets and liabilities:
Accounts receivable, trade		1,506,879		(3,713,394)
Retention receivable		(172,046)		(435,252)
Inventories		(915,044)		712,676
Prepayments and other receivables		(870,742)		(165,247)
Accounts payable, trade		624,753		1,651,801
Customer deposits		(100,580)		(5,286)
Income tax payable		107,681		317,003
Other payables and accrued liabilities		(1,323,997)		370,515
Net cash provided by operating activities		3,161,233		2,747,074

Cash flows from investing activities:
Purchase of plant and equipment		(36,345)		(179,089)
Payments to construction in progress		(3,513,416)		(3,317,133)
Proceeds from disposal of plant and equipment		1,254		7,869
Net cash used in investing activities		(3,548,507)		(3,488,353)

Cash flows from financing activities:
Advance from a director		188,500		-
Payments on finance lease		(447,738)		(1,075,731)
Proceeds from private placement		900,000		-
Net cash provided by (used in) financing activities		640,762		(1,075,731)

Effect on exchange rate change on cash and cash equivalents		11,027		30,008

NET CHANGE IN CASH AND CASH EQUIVALENTS		264,515		(1,787,002)

BEGINNING OF PERIOD		227,329		2,252,771

END OF PERIOD	$	491,844	$	465,769

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	547,869	$	243,100
Cash paid for interest	$	55,661	$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Settlement of note payable to offset with accounts receivable	$	528,138	$	-
Equipment purchased under finance leases	$	-	$	2,331,019
See accompanying notes to condensed consolidated financial statements in the Company's SEC filings.