Sutor Technology Group Limited Reports Audited Fiscal Year 2011 Financial Results

CHANGSHU, China, Oct. 13, 2011 /PRNewswire-Asia-FirstCall/ -- Sutor Technology Group Limited (the "Company", "Sutor") (Nasdaq: SUTR), a leading China-based non-state-owned manufacturer and distributor of high-end fine finished steel products and welded steel pipes used by a variety of downstream applications, today announced its audited financial results for the fiscal year ended June 30, 2011.

Fiscal year 2011 results highlights:

Commenting on Sutor's operations, Ms. Lifang Chen, Chairwoman and CEO, said, "We ended fiscal year 2011 with improved gross margin, net income and earnings per share despite challenging economic condition. The fiscal year 2011 is a year of both challenges and achievements with the following highlights:

• Net income and EPS grew 23.9% and 17.2%, respectively, and gross margin improved to approximately 9.4% from approximately 6.9%, in fiscal year 2011 as compared with fiscal year 2010. We believe the results validate our integrated one-stop service model and our strategies of pursuing sustainable growth;
• Our export sales grew 15.8% from $53.7 million to $62.2 million from fiscal year 2010 to 2011 despite global economic uncertainties, which we believe demonstrates the growing brand recognition and competitive strengths of our products;
• Changshu Huaye Steel Strip Company Ltd., one of our three directly owned operating subsidiaries, was certified as a high-tech enterprise by Jiangsu provincial government, which allows the subsidiary to enjoy a lower income tax rate than the statutory income tax rate;
• We announced and started a share repurchase program to repurchase up to $5 million of the Company's common stock which reflects our confidence in the long-term prospects for Sutor, and underscores our continuous commitment to maximize value for our shareholders;
• We relocated our headquarters into a new office building and broke ground for an integrated cold-roll production line of 500,000 metric tons annual production capacity. While pursuing selected capacity expansion opportunities, we will also continue to capitalize on our existing revenue base and diversified product offerings to improve profit margins."

Ms. Chen continued: "Since we were listed on Nasdaq Capital Market in February 2008, we have added 400,000 metric tons of hot-dipped galvanization and 400,000 metric tons of heavy steel pipe production capacities. In addition, a cold-roll production line of 500,000 metric tons annual capacity is planned for commercial operations next year. We would like to invite our investors to visit our manufacturing facilities and witness themselves how their investments are put into use. Despite the high volatility in the capital markets, we will remain focused on seeking operating excellence and pursuing outstanding customer services. We are committed to our shareholders, employees, and customers for the years to come."

Fiscal Year 2011 Results

Revenue. For the fiscal year ended June 30, 2011, revenue was $431.7 million compared to $478.7 million last year, a decrease of approximately 9.8%. Total sales volume in tons decreased approximately 18.6% in fiscal year 2011 as compared to the same period last year, which reflected the Company's continuing efforts to exit the lower-margin steel trading business and optimize its product mix, leading to improved profit margins. The impact of the lower sales volumes on revenue was partially offset by an increase of approximately 10.8% in overall average selling price.

The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for fiscal years 2011 and 2010.

On a geographic basis, revenue generated from outside of China was $62.2 million, or 14.4% of total revenue, for fiscal year 2011, as compared to $53.7 million, or 11.2% of total revenue, for fiscal year 2010. The increase was mainly attributable to our efforts to expand product penetration into new markets, increase brand recognition and foster acceptance of our products in the international markets.

On a segment basis, after eliminating intercompany sales, revenue contributed by Changshu Huaye Steel Strip Company Ltd. (Changshu Huaye) decreased to $185.3 million for fiscal year 2011, a decrease of $32.3 million, or 14.8%, from $217.6 million in fiscal year 2010. Due to increasing market demand, we produced more advanced PPGI products in fiscal year 2011 which resulted in decrease of sales volume and revenue, but an increase in our gross margin. In addition, more HDG steel products were produced at Jiangsu Cold-Rolled Technology Company Ltd. (Jiangsu Cold-Rolled) to take advantage of its newer production lines which generally have lower production costs. As a result, the overall production volume at Changshu Huaye was reduced during fiscal year 2011.

After eliminating the inter-company sales, revenues contributed by Jiangsu Cold-Rolled were $214.9 million for fiscal year 2011, an increase of $16.3 million from $198.6 million last year, mainly as a result of higher sales volume and the increased output of our 400,000 MT HDG production lines.

Revenues contributed by Ningbo Zhehua Heavy Steel Pipe Manufacturing Company Ltd. (Ningbo Zhehua) were $31.5 million for fiscal year 2011, a decrease of approximately $31.0 million from $62.5 million in fiscal year 2010, primarily resulting from our strategic decision to reduce its lower-margin steel trading businesses and focus on higher-margin production businesses.

In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in fiscal year 2011 increased $31.5 million, or 13.4%, to $266.1 million from $234.6 million in fiscal year 2010.

Cost of revenue. Cost of revenue decreased $54.7 million, or 12.3%, to $391.2 million in fiscal year 2011 from $445.9 million in fiscal year 2010. As a percentage of revenue, cost of revenue decreased to 90.6% in fiscal year 2011 from 93.1% last year. Decreased cost of revenue was mainly due to the decreased sales volume.

Gross profit and gross margin. Gross profit increased $7.7 million to $40.5 million in fiscal year 2011 from $32.8 million in fiscal year 2010. Gross profit as a percentage of revenue (gross margin) was 9.4% in fiscal year 2011, as compared to 6.9% in fiscal year 2010. The increased gross margin mainly resulted from increased international sales volume and increased sales volume of higher margin products by Changshu Huaye. In addition, improved capacity utilization at Jiangsu Cold Rolled, which reduced the average cost of production, combined with the elimination of the lower margin steel trading business of Ningbo Zhehua, also contributed to the increase in gross margin. Finally, higher average selling prices year-over-year also improved gross margin.  

On a segment basis, gross margin for Changshu Huaye increased to 13.5% in fiscal year 2011 from 10.4% last year, mainly because it produced and sold more higher-margin advanced PPGI products and exported more products in fiscal year 2011 than the same period last year. Gross margin for Jiangsu Cold-Rolled increased to 5.3% in fiscal year 2011 from 4.1% last year, mainly due to the higher capacity utilization of the new HDG production lines and higher average selling prices. Gross margin for Ningbo Zhehua increased to 13.7% in fiscal year 2011, as compared to 4.8% in fiscal year 2010, mainly because we reduced our lower-margin steel trading business.

Total operating expenses. Our total operating expenses increased approximately $0.9 million to $15.3 million in fiscal year 2011 from $14.4 million in fiscal year 2010. As a percentage of revenue, our total operating expenses increased to 3.5% in fiscal year 2011 from 3.0% in fiscal year 2010.  

Selling expenses. Our selling expenses decreased approximately $0.6 million to $7.5 million in fiscal year 2011, from $8.1 million in fiscal year 2010. As a percentage of revenue, our selling expenses remained stable at approximately 1.7% of total revenue in fiscal year 2011. The dollar decrease of selling expenses was primarily due to effective cost control measures and lower international shipping costs.

General and administrative expenses. General and administrative expenses increased $1.5 million, or 22.9%, to $7.8 million, or 1.8% of revenue, in fiscal year 2011, from $6.4 million, or 1.3% of revenue, in fiscal year 2010. Higher general and administrative expenses were primarily due to higher bad debt allowance of approximately $1.7 million resulting from more direct sales and higher office expenses of $0.7 million for fiscal year 2011 than the same period last year. During fiscal year 2011, we relocated our headquarters into a new office building to prepare for anticipated future business needs.

Interest expense. Our interest expense increased $2.2 million to $8.0 million in fiscal year 2011, from $5.8 million in fiscal year 2010. As a percentage of revenue, our interest expenses increased to 1.8% in fiscal year 2011, from 1.2% in fiscal year 2010. The increase in interest expense was mainly attributable to the increase in benchmark interest rates. From October 2010 and continuing through the end of the 2011 fiscal year, China Central Bank raised its one-year lending interest rate by 1.0%, or 20.0% increase as compared with the interest rate during the 2010 fiscal year.

Provision for income taxes. We incurred income tax expense of $3.4 million in fiscal year 2011 as compared to $2.4 million last year, partially due to the higher taxable income.

Net income. Net income, without including the foreign currency translation adjustment, increased $2.7 million, or approximately 23.9%, to $14.0 million in fiscal year 2011, from $11.3 million in fiscal year 2010, as a cumulative result of the above factors.

Financial Condition and Liquidity

The Company's cash, restricted cash and cash equivalents as of June 30, 2011 were $93.7 million, compared to $61.7 million as of June 30, 2010. The total debt was approximately $119.1 million. As of June 30, 2011, the Company had working capital of approximately $138.1 million. Stockholders' equity increased 14.5% to $195.5 million, compared to $170.8 million as of June 30, 2010.

In September 2010, Sutor established a non-binding strategic cooperation framework with China Construction Bank. With the cash and cash equivalents on the balance sheet and existing lines of credit, the management expects to have sufficient liquidity to carry out normal operations for the foreseeable future.

Outlook

The management anticipates both revenue and net income to grow at a compound annual growth rate (CAGR) of approximately 25% to 35% for the next two fiscal years.

Conference Call Information

Sutor's management will host an earnings conference call on October 14, 2011, at 8:30 a.m. eastern time. Listeners may access the call by dialing US: +1-877-847-0047, CN: 800 876 5011, HK: +852 30068101, access code: SUTR. A recording of the call will be available shortly after the call for through November 13, 2011. Listeners may access it by dialing US: +1-866-572-7808, CN: 800 876 5013, HK: +852 3012 8000 access code: 656546

Forward-Looking Statements

This press release 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 (the "Exchange Act"). Such statements include, among others, those concerning our financial and business outlook in the next two years, our expectation regarding cash flow and liquidity, our new facility and capacity expansion, and its expected impact on the Company's business and financial performance, our expectations regarding the market for our existing products and new products, our expected financial performance and strategic and operational plans, 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 that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to 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; uncertainties related to conducting business in China and the current global economic crisis on our business and on our customers' business; the factors discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in this report, and any of the factors and risks mentioned in the "Risk Factors" sections of our Annual Report on Form 10-K for the year ended June 30, 2011 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

SOURCE Sutor Technology Group Limited

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