"The year 2012 was marked by a challenging environment in China that impacted capital spending and demand from customers in our key end markets, particularly during the first half of the year.
Despite these challenges, we closed the year with 28.3% growth in revenue in the fourth quarter, driven by strong demand for our patented airflow dyeing machines and improving sales of forged products to customers in the wind power industry.
Although we recorded a non-cash impairment loss related to equipment which we are no longer using and which is being held for sale during the fourth quarter, we were still profitable due to greater operational efficiencies and careful cost control," said Mr. Jianhua Wu, Chairman and CEO of Cleantech Solutions.
Fourth quarter 2012 results
Revenue for the fourth quarter of 2012 increased 28.3% to $17.6 million, compared to $13.7 million for the same period of 2011. Revenue increased slightly compared to the third quarter of 2012.
Revenue from the sale of forged rolled rings to the wind power industry and other industries increased 2.6% to $8.3 million, or 47.2% of net revenue, compared to $8.1 million, or 59.1% of net revenue, in the same period last year.
The increase in revenue was mainly due to improving demand from existing customers in the wind power industry following several quarters of reduced order flow, which was counterbalanced by lower market demand for capital equipment related to the Company's forged rolled rings and related products for other industries.
The increase in revenue is summarized as follows:
Revenue from the sale of forged rolled rings exclusively to the wind power industry increased by 15.5% to $5.6 million, representing 31.7% of net revenue, compared to $4.8 million, or 35.2% of net revenue, in the comparable period last year.
Revenue from the sale of forged rolled rings to other industries decreased 16.5% to $2.7 million, or 15.5% of net revenue, compared with $3.3 million, or 23.9% of net revenue for the comparable period of the prior year.
Revenue from the company's dyeing and finishing equipment segment increased 65.5% to $9.3 million, or 52.8% of net revenues, compared to $5.6 million, or 40.9% of net revenue, for the fourth quarter of 2011. This increase was largely attributable to the dyeing industry's response to local government's policies which encourage the purchase of low-emission airflow dyeing machines.
Gross profit for the fourth quarter of 2012 increased 38.2% to $4.2 million, compared to $3.1 million for the same period in 2011. Gross margin increased to 24.1% during the fourth quarter of 2012 compared to 22.4% for the same period a year ago.
The increase in gross margin for the fourth quarter was primarily attributable to (i) the increased operational and cost efficiencies for forged rolled rings and related products segment, including the allocation of fixed costs primarily consisting of depreciation, to cost of revenues as the company operated at higher production levels in response to higher revenues, and (ii) the significant portion of revenue for the dyeing and finishing equipment segment generated from the sale of airflow dyeing machinery, which generates a higher gross margin than the company's traditional dyeing machinery. The principal source of dyeing revenue in the fourth quarter of 2011 was traditional dyeing machinery.
Operating expenses increased 90.8% to $3.5 million, compared to $1.8 million in the comparable period last year. The increase was primarily due to a non-cash impairment loss of $2.2 million as a result of writing down the carrying value of equipment to its estimated fair value based on an impairment assessment conducted on the equipment held for sale at December 31, 2012. This equipment had been used to manufacture certain electro-slag re-melted ("ESR") equipment that was used to produce forged products for the high performance components market. Because the Company did not generate any revenue from these products since 2011, the Company decided to try to sell the equipment, which it classified at December 31, 2012 as equipment held for sale. The Company did not record any impairment loss in the fourth quarter of 2011.
Selling, general and administrative expenses for the three months ended December 31, 2012 decreased 27.6% to $0.9 million, as compared to $1.2 million for the three months ended December 31, 2011, primarily due to the decrease in bad debt expense in the fourth quarter of 2012 as compared to the bad debt expense for the fourth quarter of 2011.
Operating income decreased 40.8% to $0.7 million, compared to $1.2 million for the same period of 2011. Operating margin was 4.1% compared to 8.9% in the fourth quarter last year. Adjusted operating income, a non GAAP measurement, which adds back to operating income the impairment loss, was $2.9 million, up 139.0% from the same quarter last year. Adjusted operating margin was 16.7% in the fourth quarter of 2012.
Other expense was $46,070, relatively unchanged compared to the same period in 2011.
Adjusted EBITDA, a non-GAAP measurement, which adds back to net income interest expense, income tax, warrant modification expense, impairment loss, depreciation and amortization, was up 60.4% to $4.8 million, compared to $3.0 million in the same quarter last year.
Net income for the fourth quarter of 2012 was $469,313, or $0.17 per diluted share, compared to $0.8 million, or $0.31 per diluted share, in the fourth quarter of 2011. Adjusted net income, a non-GAAP measurement which does not deduct impairment loss and warrant modification expense, was $2.7 million, or $0.98 diluted earnings per share, up 238.5% from the same quarter of last year. Diluted earnings per share were calculated using diluted weighted average shares of 2,742,040 and 2,553,213 for the three months ended December 31, 2012 and 2011, respectively. All share and per share information has been adjusted to reflect a one-for-ten reverse stock split effective March 6, 2012.
Results for full year 2012
For the year ended December 31, 2012, revenues increased 2.9% to $57.2 million from $55.6 million in 2011. Gross profit decreased 1.3% to $13.1 million, compared to $13.3 million last year. Gross margin for the year ended December 31, 2012 was 23.0%, compared to 23.9% in 2011. Operating income decreased 22.5% to $6.3 million from $8.2 million in 2011. Adjusted operating income, a non GAAP measurement which adds back the impairment loss, was $8.5 million, up 4.5% from 2011.
Adjusted EBITDA, a non GAAP measurement which adds back to net income interest expense, income tax, warrant modification expense, impairment loss, depreciation and amortization, was $15.3 million, compared to $13.7 million last year. Net income was $4.2 million, or $1.58 per diluted share, a 27.1% decrease from $5.8 million, or $2.30 per diluted share, in 2011. Adjusted net income, a non GAAP measurement which adds back impairment loss and warrant modification expense, was $6.6 million, or $2.51 per diluted share, in 2012. All share and per share information has been adjusted to reflect a one-for-ten reverse stock split effective March 6, 2012.
Financial condition
As of December 31, 2012, Cleantech Solutions held cash and cash equivalents of $1.4 million compared with $1.2 million at December 31, 2011. Accounts receivable were $10.1 million and total current assets of $19.1 million. The Company had $2.2 million in short-term bank loans payable and stockholders' equity was $78.0 million. In 2012, the Company generated $10.6 million in cash flow from operations.
Recent Events
In the first quarter of 2013, the Company announced that it has received a total of five purchase orders from new and existing customers to supply 147 units of dyeing machines, including 85 airflow dyeing machines using the company's patented production technique, for an aggregate amount of $8.9 million.
On January 4, 2013, the Company renewed its loan with Bank of China in the amount of $949,953. The loan is due January 3, 2014 with interest at the annual rate of 7.35% and secured by certain assets of the Company.
On January 29, 2013, the Company appointed RBSM LLP as its independent registered public accounting firm, following Sherb & Co., LLP's, combining its practice with RBSM LLP effective January 1, 2013.
Business outlook
"Despite a challenging environment in 2012, we saw modest growth in our top line as we diversified and expanded our product offering. More importantly, we achieved strong growth in profitability, on an adjusted basis, and generated solid cash flow from operations to fund our capital expenditures and product development initiatives.
"Thus far in 2013, we have seen strong order flow in our dyeing machine segment which we expect to continue throughout the year. As a result, we have added shifts, increased staff and placed orders for additional equipment to expand capacity and meet anticipated demand. We saw a nice increase in demand from wind power customers in the fourth quarter of 2012 and expect sales to remain near these levels in the remainder of 2013. We are also hopeful that favorable Chinese government policy towards domestic solar companies will influence demand by year end.
"We continue to utilize our expertise in manufacturing precision products to meet demand in new and existing end markets. We recently shipped a prototype of a new model of after-treatment textile equipment and have another model in the late stages of development. We are optimistic about sales of forged products to non-wind customers and are currently seeking to expand into other industries including oil and natural gas," Mr. Wu concluded.
