SORL Auto Parts Reports Financial Results For the Second Quarter of 2012

ZHEJIANG, China, Aug. 14, 2012 /PRNewswire-Asia-FirstCall/ -- SORL Auto Parts, Inc. (NASDAQ: SORL) ("SORL" or the "Company"), a leading manufacturer and distributor of automotive brake systems as well as other key safety-related auto parts in China, announced today its financial results for the second quarter ended June 30, 2012.

Second Quarter 2012 Financial Highlights

• Revenues for the second quarter of 2012 were $52.1 million;
  
• Gross margin was 27.2% in the second quarter of 2012, up from 27.1% in the second quarter of 2011;
  
• Net Income attributable to shareholders was $3.0 million, or $0.16 per diluted share, in the second quarter of 2012;
  
• In the first six months, cash flow from operating activities was $10.2 million and free cash flow of $9.8 million was generated.

Mr. Xiaoping Zhang, SORL's Chief Executive Officer and Chairman, stated, "We produced a strong quarter in a very difficult global commercial vehicle market. While our revenue in the domestic OEM, domestic aftermarket and international market all experienced different levels of year-over-year declines, we managed to hold our market shares and protect our gross margin. Despite the negative sentiment in the marketplace, there is also a bright side to the story. The large and increasing base of commercial vehicles in operation in China, stricter safety measures and the expiration of OEM warranties helped SORL's aftermarket sales, as braking systems are one of the most critical controls of a vehicle's safety. In addition, the continuing growth of China's many large urban centers, new school bus regulations and the Chinese government's increased support for public transportation supports the bus aftermarket and OEM markets. Internationally, we also see opportunities as Chinese-made product quality has reached the same level of global counterparts, but with a better pricing advantage, especially in the standard product category."

Ms. Jinrui Yu, SORL's Chief Operating Officer, commented, "In a market with excess capacity, our balanced revenue sources enable us to stay competitive financially and operationally. We continue to execute our product strategy by introducing new products with new features, which helped to stabilize sales in the OEM market and aftermarket and defend our gross margin. Our penetration into the bus and light-duty vehicle OEM markets helped offset the sales decline in the medium-duty and heavy-duty OEM truck market in the second quarter of 2012. We increased our receivables and inventory management and improved our balance sheet through much stronger free cash flow generation in the quarter. Due to our improved cash flow in the first half of 2012, we have also significantly reduced our bank loans and lowered our financial expenses."

Financial Performance

For the second quarter of 2012, net sales were $52.1 million, compared to $61.1 million for the second quarter of 2011. Revenues from the Company's domestic OEM customers were $25.6 million, compared to $32.6 million for the second quarter of 2011. Revenues from China's domestic aftermarket were $11.7 million, a 7.9% decrease over the previous year's second quarter. Revenues from international markets were $14.8 million, compared to $15.7 million from the same period in 2011.

China's macroeconomic climate resulted in lower GDP growth of 7.6%, the lowest quarterly rate in the past three years, and commercial vehicle sales were affected. According to the China Association of Automobile Manufacturers (CAAM), commercial vehicle sales declined by 10.2% during the 2012 second quarter and sales of heavy-duty truck and trailers were 35.2% lower in the 2012 second quarter as compared with the same quarter last year. For the first time since China entered its industrialization and urbanization business phase, the growth rate of automotive vehicle sales declined in China over the first six month periods in two consecutive years. International sales decreased by 5.7% to $14.8 million for the second quarter of 2012. The decrease in international sales has several causes. The ongoing European debt crisis and currency depreciation in certain markets continued to cause some international customers to lower their inventory levels. Unstable situations in the Middle Eastern countries restricted some customers' purchases from those countries.

The gross profit for the second quarter of 2012 was $14.2 million, compared with the gross profit of $16.6 million, for the second quarter of 2011. Gross margin was 27.2%, slightly higher than the 27.1% gross margin in the second quarter of 2011. The stability of the gross margin was primarily the result of increasing production efficiency, improving the technologies of products, and improving the Company's product portfolio, especially in the passenger vehicle braking segment. The Company believes that its focus on improving production efficiencies and increasing the sales of higher-profit, higher-technology new products will help maintain or improve its gross profit margin.

Operating expenses decreased by 4.8% to $9.8 million in the second quarter of 2012 from $10.3 million in the second quarter of 2011.

Selling and distribution expenses were $3.52 million, or 6.8% of quarterly revenue compared with $3.46 million, or 5.7% of revenues in the same quarter of 2011.The higher expenses were mainly due to higher travel and wage expenses in an effort to enhance the Company's marketing campaigns in both domestic OEM and aftermarket sectors.

General and administrative (G&A) expenses in the second quarter of 2012 were $3.5 million, or 6.7% of revenue, compared with $3.8 million, or 6.2%, in the second quarter of 2011. The higher percentage of G&A expenses to revenues in the second quarter of 2012 was mainly due to lower sales.

Research and development (R&D) expenses were $2.3 million, or 4.4% of revenue in the second quarter of 2012 compared with $2.2 million, or 3.6% in the second quarter of 2011. The R&D program was mainly focused on developing higher-margin, electronically controlled mechatronic products, upgrades to the Company's traditional valve products to capture market share, and improvement in production techniques.

Operating income was $4.3 million for the second quarter of 2012 compared to $6.2 million for the same quarter of 2011. The reduced operating income reflects lower sales and gross profit. The operating margin percentage was 8.3% in the second quarter of 2012, lower than 10.2% in the second quarter of 2011, but higher than 7.5% in the first quarter of 2012. 

Income tax expense was $1.3 million  and $1.0 million for the quarters ended June 30, 2012 and 2011, respectively.  For the quarter ended June 30, 2012, the effective income tax rate was 25%. However, the Company is in the process of renewing its "High-Tech Enterprise" certificate. When this renewal is completed, the effective income tax rate will be reduced to 15% later in 2012. Upon receiving High-Tech Enterprise certificate, the company will expect a tax refund of partial tax payment in the previous quarters, adjusting to the new tax rate.

Net income attributable to stockholders for the second quarter of 2012 was $3.0 million, or $0.16 per basic and diluted share, compared with $5.0 million, or $0.26 per basic and diluted share, in the second quarter of 2011.

First Six Months Financial Results

SORL's net sales for the first six months of 2012 were $96.7 million, compared with $113.1 million during the same period in 2011.   

For the six months ended June 30, 2012, domestic OEM sales were $51.4 million, a 20.4% decrease from the same period in 2011. Aftermarket sales were $21.5 million reflecting a slight increase from a year ago. International sales declined 12.2% to $23.8 million compared with last year's first six month period.

SORL's gross profit declined to $26.4 million from $31.2 million during the first six months in 2011. Gross margin was 27.3% in 2012 compared with 27.6% for the first six months of 2011.

Income from operations declined to $7.7 million from $12.3 million for the first six months of 2011. Operating margin was 7.9% versus 10.9% in the year ago same period.

The net income attributable to stockholders was $5.3 million, compared with $9.8 million in the first six months of 2011, with basic and diluted earnings per share ("EPS") of $0.28 and $0.51, respectively.

Balance Sheet

As of June 30, 2012, the Company had cash and cash equivalents of $21.3 million compared with $17.1 million on December 31, 2011. Bank acceptance notes from customers decreased to $11.7 million from $18.0 million at December 31, 2011. Short term bank loans were reduced to $12.1 million from $18.4 million at the end of 2011. Total equity increased to $179.3 million at the end of June 2012 compared with $174.1 million at December 31, 2011. The Company had working capital of $122.6 million as compared to working capital of $115.1 million at December 31, 2011. The current ratio was 3.76 to 1 at June 30, 2012. Net cash flow from operating activities was $10.2 million for the first six months of 2012, compared with $10.6 million in the year ago same period. Capital expenditures in the first six months of 2012 were $0.4 million as compared to $4.9 million in the same period of 2011.

Recent Developments

On July 20, 2012, SORL announced that a large retail auto parts and service retail chain in the U.S. is now offering SORL hydraulic replacement brake parts to its customers. In 2011, SORL's international sales increased by 17.7% as its products were sold into more than 104 countries and regions in the world and accounted for 26.3% of sales. Three of the top 7 international customers in 2011 were located in the United States.

On July 18, 2012, Company announced it had launched a new generation of electric air brake compressors to be used in electric buses.  Air brake compressors used in traditional vehicles are powered by an internal combustion engine. SORL's new generation of electric air brake compressors are powered by an electric motor, thereby increasing fuel conservation and reducing pollution. The new compressors have an extended life span as it is far easier to make them start or stop working. An electric air compressor is a necessity for all electric buses with an air brake system.  The new compressors have completed all quality and performance tests and are currently being evaluated by the major electric bus manufacturers. The State Council issued the "energy-saving and new energy automotive industry development plan (2012-2020)" directive identifying that pure electric drive is the main strategic orientation of new energy vehicles. SORL's mission is to help industrialize pure electric and plug-in hybrid vehicles, promote and popularize non-plug-in hybrid vehicles, and enhance energy-saving combustion engine vehicles, to increase the overall technological level of China's automotive industry.

On July 2, 2012, the Company announced it had recently qualified as a supplier to Beijing Foton Daimler Automotive Co., Ltd. ("BFDA") after passing a number of rigorous on-site inspections and evaluations. In May 2012, BFDA's assessment panel conducted a two-day, on-site inspection at SORL to determine the Company's qualifications to become a potential domestic supplier. The assessment process included various elements such as evaluations of the Company & Management, Project & Supplier Management, Engineering, Quality, Production, and Supply & Logistics. SORL successfully met all requirements, and entered into BFDA's supplier system to become a potential supplier.

Business Outlook

For the fiscal year 2012, management revised their expectations for net sales to be approximately $198 million and net income to be approximately $11.1 million. The net income guidance is currently based upon 25% tax rate which is subject to change upon the renewal approval of High-Tech Enterprise status. These targets are based on the Company's current views on the operating and market conditions, which are subject to change.

"Going into second half of the year, there remains uncertainties in many markets. However, we remain confident that we will increase our market share domestically and internationally. With our improved understanding of global market coupled with an increased number of SKUs, we will continue to increase our penetration into more developed and emerging markets. On the cost control side, we will reduce headcounts and continue to focus on productivity improvement by utilizing more automated equipment. We also expect to continue to generate solid free cash flow. We believe that with our strong financial discipline, solid product execution and invaluable experience throughout the 2008-2009 periods, we are well positioned to weather another storm and build strength for the next wave of growth in coming years." Ms. Yu concluded.

Conference Call

Management will host a conference call on Tuesday, August 14, 2012 at 8:00 a.m. EDT / 8:00 p.m. Beijing Time to discuss its 2012 second quarter financial results. Listeners may access the call by dialing U.S. toll free number +1-877-407-0778, or +1-201-689-8565 for international callers, and China toll free 00-800-4626-6666. A live web cast of the conference call will also be available at http://www.sorl.cn.
 
A replay of the call will be available shortly after the conference call through 11:59 p.m. EDT on September 14, 2012. The replay dial-in numbers are:  U.S. toll free number +1-877-660-6853, or the international number is +1-201-612-7415; using Account "286" and Conference ID "398776" to access the replay.

About SORL Auto Parts, Inc.

As a global tier one supplier of brake and control systems to the commercial vehicle industry, SORL Auto Parts, Inc. is the market leader for commercial vehicles brake system, such as trucks and buses in China. The Company distributes products both within China and internationally under the SORL trademark. SORL is listed among the top 100 auto component suppliers in China, with a product range that includes 65 categories with over 2000 specifications in brake system and others. The Company has four authorized international sales centers in UAE, India, the United States and Europe. SORL is working to establish a broader global sales network. For more information, please visit http://www.sorl.cn.

Safe Harbor Statement

This press release may include certain statements that are not descriptions of historical facts, but are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as "will", "believes", "expects" or similar expressions. These forward-looking statements may also include statements about the Company's proposed discussions related to its business or growth strategy, which are subject to change. Such information is based upon expectations of the Company's management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and contingencies beyond the Company's control and upon assumptions with respect to future business decisions, which are subject to change. The Company does not undertake to update the forward-looking statements contained in this press release. For additional information regarding known material factors that could cause the Company's results to differ from its projected results, please see its filings with the SEC, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.  Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at http://www.sec.gov.

Contact Information

Raymond Lin
86+13967776556 
86+577+65817721
Email: [email protected]

Phyllis Huang
86+15167705972
86+577+65817721
Email: [email protected]

Kevin Theiss
Grayling
+1-646-284-9409
Email: [email protected]
      

- Tables follow –

SOURCE SORL Auto Parts, Inc.

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