"Demand for steel materials in China continued to be weak in the first half of 2013," said Dr. Liang Tang, Chairman of Ossen Innovation. "During the first half of 2013, the Chinese government continued its prudent monetary policy and there was a temporary shortage of liquidity in the China inter-bank market in the late second quarter of 2013. Despite a challenging environment, Ossen achieved significant reductions in SG&A expenses, and coupled with raw material price declines, resulted in margin improvement and increased earnings for the second quarter and six months ended June 30, 2013. Although the domestic market environment remains challenging, with lower demand for high strength rare earth coated products, we remain optimistic about the opportunity in the second half of 2013 and 2014 to bid on other infrastructure projects and will continue to focus on increasing sales and further improvements in corporate cost controls," concluded Dr. Tang.
(in millions ex- EPS)
*Net income attributable to Ossen Innovation Co., Ltd.
Second Quarter 2013 Financial Results
Revenue for the three months ended June 30, 2013 was $24.2 million, down 23% from the same period a year ago. Sales of coated pre-stressed steel materials, including rare earth and zinc coated products, were approximately $21.3 million, down 7% compared to approximately $22.9 million in the second quarter of 2012 due to lower demand of coated pre-stressed steel materials because of a decrease in large scale bridge projects and increased price competition.
Gross profit increased from $2.2 million to $2.9 million, a 30% year-over-year increase. Gross margin was 12.1%, up from 7.1% in the second quarter of 2012. Gross profit and gross margin were higher as a result of lower raw material prices, partially offset by a decrease in product sales prices.
Selling expenses were reduced by 3% to $0.02 million due to lower sales commissions. General and administrative expenses were $1.0 million, down 25% compared to $1.3 million in the second quarter of 2012 due to lower R&D expenses. Operating income was approximately $1.7 million, an increase of 136% from the same period a year ago.
Net income attributable to Ossen Innovation Co., Ltd. was $0.7 million in the second quarter of 2013 compared to $0.1 million in the year-ago period. Earnings per share were $0.04 versus $0.003 a year ago. The weighted average diluted shares outstanding were 19.9 million compared to 20.0 million.
Six Months Ended June 30, 2013 Financial Results
Revenue for the six months ended June 30, 2013 was $38.8 million, down 28% from the same period a year ago. Sales of coated pre-stressed steel materials, including rare earth and zinc coated products, were approximately $34.2 million, down 17% compared to approximately $41.3 million in the same period of 2012 due to lower demand of coated pre-stressed steel materials because of a decrease in large scale bridge projects and increased price competition.
Gross profit decreased from $4.8 million to $4.6 million, a 4% year-over-year decrease. Gross margin was 11.9%, up from 8.9% in the same period of 2012. Gross margin was higher as a result of lower raw material prices and due to more coated products sold as a percentage of total sales in 2013 compared to the prior year period, partially offset by a decrease in product sales prices.
Selling expenses were reduced by 16% to $0.03 million due to lower sales commissions. General and administrative expenses were $1.6 million, down 35% compared to $2.4 million in the same period of 2012 due to lower audit fees and R&D expenses. Operating income was approximately $2.8 million, an increase of 33% from the same period a year ago.
Net income attributable to Ossen Innovation Co., Ltd. was $0.8 million in the six months ended June 30, 2013 compared to $0.3 million in the year-ago period. Earnings per share were $0.04 versus $0.02 a year ago. The weighted average diluted shares outstanding were 19.9 million compared to 20.0 million.
Balance Sheet and Cash Flows
Ossen had approximately $33.5 million of cash and restricted cash as of June 30, 2013 compared to $27.4 million at December 31, 2012. Total accounts receivable on June 30, 2013 increased to $49.8 million from $45.7 million on December 31, 2012. The average accounts receivable days sales outstanding were 164 days in the second quarter of 2013 compared to 145 days in the second quarter of 2012. The balance of prepayments to suppliers of raw materials was $72.8 million as of June 30, 2013, a decrease of $5.2 million compared with December 31, 2012. The decrease was mainly due to the Company receiving delivery of raw materials from several major suppliers during the first half of 2013. Accordingly, inventories increased from $9.8 million at December 31, 2012 to $15.2 million at June 30, 2013. Total working capital was $74.0 million at June 30, 2013. The balance due to related parties was $1.6 million as of June 30, 2013, and represents a payable to Shanghai Zheng Fang Xing, a supplier of the Company, for the purchases of raw materials.
The Company generated positive cash flows from operations of $12.4 million in the six months ended June 30, 2013 as compared to $15.8 million of outflows in the same period of 2012. The primary reason for the increase in cash generated in operations was an increase in accounts payable, an increase in customer deposits, and a decrease in prepayments to suppliers during the first and second quarters of 2013, which was partially offset by higher inventories and accounts receivable.
Cash flow used by financing activities was $14.9 million in the six months ended June 30, 2013 as compared to cash flow provided by financing activities of $15.4 million in the same period of 2012. The primary reason was an increase in repayment of short-term bank loans, an increase in restricted cash and a decrease in proceeds from short-term bank loans due to the Chinese government's prudent monetary policy and a temporary shortage of liquidity in Chinese inter-bank market in June 2013.
Business Updates and Outlook
Ossen expects that China will still depend on investment to stimulate its economy. This time it will probably not be a nationwide stimulus package but will likely focus on injecting capital into developing regions like central or western China and will be mainly be for infrastructure development such as highways and railroads, which could create business opportunities for OSN. There are also signs that local governments will continue to invest in infrastructure and it appears that the Chinese central government will encourage private investment to enter infrastructure building.
For the second half of 2013, Ossen expects to bid on bridge projects in Jiangxi province and on bridge and highway projects in Guangdong province, all of which need the Company's plain surface products. In addition, Ossen is one of three companies to enter the final bidding process for a major bridge project in Zhejiang province that will need both plain surface products and rare earth coated products.
With the focus on the developing regions by the new political administration, combined with several newly launched infrastructure projects on which Ossen plans to bid, the Company expects Q3 2013 sales will be improved compared to the first two quarters of 2013. Furthermore, the management currently anticipates Ossen's 2014 financial results to improve significantly as compared to 2013, provided that the industry is not impeded by the problems it encountered this past year, including government regulation and lack of liquidity among lending institutions.
To attend the call, please use the information below for either dial-in access or webcast access. When prompted on dial-in, ask for "Ossen Innovation Second Quarter 2013 Conference Call" or be prepared to utilize the conference ID.
Ossen Innovation Second Quarter 2013 Conference Call
Monday, September 30, 2013
9:00 am Eastern Time, US
Conference Line Dial-In (U.S.):
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Please dial in at least 10 minutes before the call to ensure timely participation. A playback will be available through October 8, 2013. To listen, please call +1-855-452-5696 within the United States or +1-646-254-3697 if calling internationally. Utilize the pass code 70652577 for the replay.
Ossen Innovation Co., Ltd. manufactures and sells a wide variety of plain surface pre-stressed steel materials and rare earth coated and zinc coated pre-stressed steel materials. The Company's products are mainly used in the construction of bridges, as well as in highways and other infrastructure projects. Ossen has two manufacturing facilities located in Maanshan, Anhui Province, and Jiujiang, Jiangxi Province.
Safe Harbor Statements
This press release may contain 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, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including risks outlined in the Company's public filings with the Securities and Exchange Commission, including the Company's annual report on Form 20-F, as amended. All information provided in this press release is as of the date hereof. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.