Hanwei announces fiscal 2010 financial and operational results
Company takes write downs and provisions in wind power segment
TSX: HE
VANCOUVER, June 30 /CNW/ - Hanwei Energy Services Corp. ("Hanwei" or the "Company") today reported its financial results for the fifteen month period ended March 31, 2010. The Company has changed its fiscal year-end from December 31 to March 31 effective May 2009. For the transition year, the Company will provide audited consolidated financial statements for the fifteen-month period from January 1, 2009 to March 31, 2010 ("fiscal 2010"). The comparative audited period is the twelve months ended December 31, 2008 ("fiscal 2008"). All currency amounts referred to in this news release are in Canadian dollars.
Selected Audited Annual Consolidated Financial Information
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Fifteen Twelve
months months
ended ended
(In thousands of Canadian dollars, except March 31, December 31,
per share amounts) 2010 2008
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Revenues 44,528 96,450
Operating (Loss) Income (41,258) 10,825
Net (Loss) Income (65,666) 7,437
Total Assets 135,037 211,269
(Loss) Income per share - basic (1.08) 0.12
(Loss) Income per share - diluted (1.08) 0.12
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Revenues were $44.5 million for fiscal 2010 compared to $96.5 million in fiscal 2008, a decline of 54 percent. This decline was primarily caused by a delay in the progress of the wind power equipment business due to unfavourable market conditions and loss of sales orders in the FRP pipe business due to a slowdown in the oil and gas industry in Asia driven by the worldwide economic downturn. Net loss for fiscal 2010 was $65.7 million and due primarily to provisions and write downs totaling $54.3 million. Included in that amount is a provision for doubtful accounts related to the wind power business' sole customer in the amount of $27 million and a write down of $17.6 million relating to the acquisition value of the contract with that customer. The customer's account has been outstanding for more than 450 days as of March 31, 2010, and there is uncertainty in the customer's ability to pay. The Company also recorded an allowance for doubtful accounts of $2.2 million in respect of an amount due from Deta shareholders. In addition, the Company also recorded a write-down of $4.8 million for the wind power manufacturing facility in Tianjin to reflect its net realizable value, and $2.0 million due to obsolescence of production equipment at its FRP pipe manufacturing facility in Daqing, China and certain construction assets in Kazakhstan due to the cancellation of the construction project. The Company had a basic and diluted loss per share of $1.08 for fiscal 2010 as compared to basic and diluted earnings per share of $0.12 in fiscal 2008. Excluding the write downs and doubtful account provisions, Hanwei had a loss of $10.8 million or $0.17 per share for the fifteen months ended March 31, 2010.
Revenue for the fifth quarter of fiscal 2010 (or first quarter of calendar year of 2010) was $1.3 million, a decrease of 49 percent compared to the same period of 2008. This includes a decrease of 35 percent in the FRP pipe business and a decline of 105 percent in the wind power business, as there were no deliveries in the wind power business in the quarter.
As at March 31, 2010, the Company had working capital of $5.8 million, as compared to $58 million as at December 31, 2008. This decrease was largely due to a decrease in cash and accounts receivable driven by a provision for doubtful accounts for the wind power equipment business and an increase in accounts payable and short-term loans. Cash balance was $2.8 million as at March 31, 2010.
Segmented Results - Revenues
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Fifteen Twelve
months months
ended ended
March 31, December 31,
In CDN$ 000's 2010 2008
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$ $
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FRP Pipe 33,105 46,627
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Wind Power 9,848 46,604
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FGD 1,575 3,218
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Total 44,528 96,450
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FRP Pipe
Revenues from the pipe business were $33.1 million in fiscal 2010, a decrease of 29 percent as compared to fiscal 2008. This decline was primarily caused by a loss of sales orders in the FRP pipe business due to a slow-down in the oil and gas industry in Asia caused by the economic downturn. Additionally, extremely cold weather conditions during the fourth quarter of 2009 in northern China, where some of the Company's largest customers are located, caused cancellations and delays of oil field installations during this peak season. Despite the decline in revenues, the pipe business remains profitable with an operating profit of $0.6 million for the 15 months ended March 31, 2010. The FRP pipe business accounted for 74 percent of total revenue.
Additionally in fiscal 2010, the Company made significant progress in diversifying its customer base by geography and industry due to investments made in product development and marketing. During this period, Hanwei focused on strengthening its penetration of new segments of the Chinese and Kazakhstan markets. In China, Hanwei introduced its products to the water transmission industry, and the salt mining industry for water injection into salt deposits and transportation of salt water to processing plants. Like the oil and gas segment, FRP is an attractive alternative to steel pipe due to its corrosion resistance, which increases the useful life of the pipe. In Kazakhstan, Hanwei has increased its marketing efforts to non-Chinese-invested oil field developers and operators, and expects to initial sales orders and expressions in fiscal 2011. Hanwei is also expanding its marketing activities into certain international markets such as the Middle East, where it has received expressions of interest as well.
Wind Power
Revenues from the wind power business were $9.8 million in fiscal 2010, a decline of 79 percent as compared to fiscal 2008. Deliveries for the wind power business are driven by the Company's sole customer's wind farm development schedules. As previously noted, the Company has taken provisions and write downs in this segment due to uncertainty in the customer's ability to meet its contractual obligations. In addition, Hanwei has as yet been unable to secure new customers for its wind power equipment due to several significant issues in the wind power equipment industry in China.
Currently there is an over-supply situation, which has led to restrictive policies imposed by the Chinese government to limit new investments in the wind power equipment manufacturing business. China has also relaxed the restrictions placed on foreign wind farm developers by removing the rule that requires 70 percent of wind power equipment components be sourced locally. These issues have negatively impacted Hanwei's competitive position as a local manufacturer in China by increasing competition in the market. In such an unfavourable market and industry environment, Hanwei's wind power equipment business experienced a difficult year. In response, the Company is now reviewing its wind power business with a view to a restructuring. The Company's objective in repositioning its wind power business is to ensure any continued participation is viable from a business perspective and to alleviate the amount of working capital devoted to such business by the Company. Alternatives under active consideration include a joint venture between the Company and a People's Republic of China ("PRC") state-owned enterprise, where the Company would hold a non-controlling interest. A PRC state-owned enterprise has completed preliminary due diligence. However, discussions are at an early stage, and no agreement in principle has been reached.
FGD
Revenues from the FGD business were $1.6 million for fiscal 2010 as compared to $3.2 million in fiscal 2008. The FGD business was also impacted by the economic downturn in 2009 as power output in China decreased and power generators cancelled or delayed their projects. Beginning February 1, 2009, the Company started to account for 50 percent of its joint venture interest in Hanwei Ershigs joint venture on a proportionate consolidated basis. All revenues in this segment were from the Company's spray header products. New products based on the technologies that the Hanwei Ershigs joint venture licensed from Ershigs are currently being introduced to the Chinese market. The FGD business is dependent on regulations in China that require coal power companies to install sulphur dioxide scrubbers, however, China's big five coal power companies have delayed most new coal plant construction due to the reduced demand for new capacity in China caused by the economic slow-down. These projects are expected to proceed in the medium term to long-term as demand for new coal fired energy capacity in China is expected to be strong.
Hanwei Ershigs, continues to make progress on introducing its FRP products, including chimney liners, to the Chinese market, and is ready to bid on a few new projects in China. However, the segment is still at an early stage and the Company does not expect significant growth from this segment in the near future.
Summary Results of Operations
Gross Profit
Gross profit for fiscal 2010 was $12.7 million, a decrease of 50 percent as compared to fiscal 2008. The decrease in gross profit was primarily driven by a decline in revenues. Gross profit as a percentage of revenues for fiscal 2010 was 29 percent as compared to 26 percent for fiscal 2008. The increase in gross profit as a percentage of revenues was driven by product mix. For fiscal 2010, the company made 74 percent of its revenues from the FRP pipe business and 22 percent from the wind power business as compared to 48 percent from the FRP business and 48 percent from the wind power business in fiscal 2008. The FRP pipe business usually has a higher gross profit as a percentage of revenues as compared to the wind power business.
Expenses
Sales and marketing expenses were $5.9 million or 13 percent of revenues for fiscal 2010 as compared to $4.9 million or 5 percent of revenues for fiscal 2008. The increase of selling expenses was partially caused by an additional quarter in the current fiscal year due to the change of year end.
Research and development ("R&D") expenses for fiscal 2010 were $1.6 million compared with $1.0 million for fiscal 2008.
General and administrative ("G&A") expenses for fiscal 2010 were $46.4 million compared to $8.4 million for fiscal 2008. The increase in G&A expenses was due to several factors including the addition of the first quarter in the calendar year of 2010 due to change of year end, certain unusual costs such as increased allowance for doubtful accounts, overhead related to the cancelled construction project in Kazakhstan, and severance payments related to the downsizing of the wind power business unit. The Company has accrued an allowance for doubtful accounts for accounts receivables in the amount of $28.3 million and $0.5 million at March 31, 2010 and December 31, 2008, respectively, to cover potential bad debts. The amount has been recorded in general administration expense for the year ended March 31, 2010.
The allowance for doubtful accounts is consisted of the following:
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As at As at
March 31, Dec. 31,
In CDN $000,000's 2010 2008
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FRP pipe business 1.1 0.5
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Wind power equipment business 27.0 -
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FGD business 0.3 -
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Total 28.3 0.5
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For the wind power business, the Company has a balance of $37.4 million of accounts receivable from a customer which is a private Chinese Company. This amount has been outstanding for more than 450 days as of March 31, 2010. Due to the impact of the economic downturn and changes in industry and market conditions, there is uncertainty in the customer's ability to pay. The Company therefore recorded an allowance for doubtful accounts of the outstanding amount less amounts received in advance from this customer in the amount of $10.8 million.
For the FRP pipe business, with the impact of the economic downturn on certain customers' financial strength in 2009, the Company reviewed its accounts receivable amounts on a case by case basis. As a result of such review, the Company increased its allowance for doubtful accounts from $0.5 million as at December 31, 2008 to $1.1 million as at March 31, 2010.
Impairment Loss and Write-Down
Impairment Loss and Write-Down for fiscal 2010 was $24.4 million compared to nil for fiscal 2008. The impairment loss and write down includes:
- impairment loss of $17.6 million for customer contracts and
relationships in its wind power equipment business segment due to
uncertainty in the customer's ability to execute the contract
- a write-down of $4.8 million relating Hanwei Green's manufacturing
facility and production equipment to their fair value because these
assets were idle and the wind power equipment business was being
restricted.
- a write-down of $2.0 million due to obsolescence of production
equipment at Harvest and certain construction assets at Hanwei
Kazakhstan due to the cancellation of the construction project.
Operating Income
The Company had an operating loss of $41.3 million for fiscal 2010 compared to operating income of $10.8 million for fiscal 2008. The decline in operating income was due to lower revenues and increased expenses in G&A.
Interest Income and Expense
Interest income decreased from $0.7 million for fiscal 2008 to $0.4 million for fiscal 2010 due to withdrawals from short-term investments to support operations.
Interest expense was $4.4 million for fiscal 2010 as compared to $1.7 million for fiscal 2008. The increase of interest expenses was partially due to an additional quarter in the current fiscal year and partially due to the increased utilization of debt facilities to support operations.
Income Tax Expense
Income tax recovery for fiscal 2010 was $4.5 million as compared to income tax expense of $1.3 million for fiscal 2008. Income tax recovery for fiscal 2010 was mainly driven by the elimination of the future income tax liability relating to the acquired intangible business contracts that were written down during the period.
Non-controlling Interest
Non-controlling interest was $44,000 for fiscal 2010 compared to $397,000 for fiscal 2008, which was primarily an allocation of 9 percent of the net income of Harvest to its minority shareholder. Hanwei acquired this minority interest in November 2008 and now owns 100 percent of Harvest. The $44,000 non-controlling interest amount relates to the 1% non-controlling interest in Deta.
Cash Position
Cash balance was $2.8 million as at March 31, 2010, representing a decrease of $9.1 million from December 31, 2008. Cash used in operating activities was $25.62 million for fiscal 2010 as compared to $34.8 million for fiscal 2008. The decrease in cash applied to operating activities was due to the decrease in revenues. Cash used in investing activities was $4.7 million for fiscal 2010, primarily due to the addition of manufacturing equipment, as compared to $5.6 million in fiscal 2008. Cash generated from financing activities was $20.5 million for fiscal 2010 as compared to $34.3 million for fiscal 2008. Subsequent to March 31, 2010, the Company completed a private placement of 10,000,000 common shares for gross proceeds of $3,500,000.
Working Capital
Working capital was $5.8 million as at March 31, 2010 as compared to $58 million as at December 31, 2008, a decrease of $52 million. This decrease was largely due to a decrease in cash and accounts receivable driven by a provision for doubtful accounts for the wind power equipment business and an increase in accounts payable and short-term loans. Prepayments increased by $10.3 million primarily driven by the increase of manufacturing activities in the pipe business unit. Current liabilities increased by $10.6 million due to increases in accounts payable and short term loans.
Plant, Equipment and Construction in Progress
Plant and equipment, net of accumulated depreciation and amortization, was $37.4 million as at March 31, 2010, a decrease of $10.8 million compared with $48.1 million as at December 31, 2008. The decrease was mostly due to write down of Hanwei Green's manufacturing facility, the write-down of certain obsolete pipe manufacturing equipment at the Company's facility in Daqing, and the write-off of capitalized development construction costs in Kazakhstan due to the cancellation of the Kazakhstan construction project.
Conference Call
Hanwei will be holding a conference call to discuss its financial results for the fifteen month period ended March 31, 2010.
Date: Wednesday, June 30, 2010
Time: 10:30 a.m., Eastern Time
Dial in number: 1-800-319-9003 or 1-719-325-2328
Taped Replay: 1-877-870-5176 or 1-858-384-5517 (available for 14 days)
Taped Replay
Pass Code: 3150345
Live Webcast
Link: http://viavid.net/dce.aspx?sid=0000774E
FORWARD-LOOKING INFORMATION AND NON-GAAP MEASURES
Certain information in this press release is forward-looking within the meaning of certain securities laws, and is subject to important risks, uncertainties and assumptions. This forward-looking information includes, among other things, information with respect to the expansion of the Company's pipe business to new markets, and the repositioning of the Company's wind power equipment business, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions. The words "may", "could", "should", "would", "suspect", "outlook", "believe", "anticipate", "estimate", "expect", "intend", "plan", "target" and similar words and expressions are used to identify forward-looking information. The forward-looking information is based on certain assumptions, which could change materially in the future, including the assumption that the Company will expand its pipe business to new markets, and the Company will conclude and implement a repositioning of its wind power business. The forward-looking information in this press release describes the Company's expectations as of the date of this press release. Material factors or risks which could cause actual results or events to differ materially from a conclusion in such forward-looking information include the risk that the the Company is unable to expand its pipe business to new markets, and the Company is unable to implement its downsizing plan at all, partially or in a way substantially different than planned, , as well as the risks set out in the risk factors section of Hanwei's Annual Information Form dated June 29, 2010, filed with Canadian securities regulators and available on SEDAR at www.sedar.com.
The Company has included in this press release figures based on, gross profit working capital, sales orders and expressions of interest, which are non-GAAP measures. Readers are cautioned that such measures are not recognized under Canadian GAAP and should not be construed to be an indicator of performance or liquidity or cash flows. The Company's method of calculating this measure may differ from the method used by other entities and accordingly the Company's measure may not be comparable to the measure used by other entities.
THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS PRESS RELEASE PRESENTS THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS PRESS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, THE COMPANY DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.
For further information: Yucai (Rick) Huang, Chief Financial Officer, Telephone: (604) 685-2239, [email protected]; Kevin O'Connor, Investor Relations, Telephone: (416) 962-3300, [email protected]
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