Recon Technology Announces Second Quarter Fiscal 2011 Financial Results

BEIJING, Feb. 15, 2011 /PRNewswire-Asia/ -- Recon Technology, Ltd. (Nasdaq: RCON) ("Recon" or the "Company"), a leading Chinese non-state-owned oilfield services provider to oil and gas companies and their affiliates, today announced its financial results for the second fiscal quarter ended December 31, 2010. Summary financial data is provided below:

Second Quarter Fiscal 2011 Financial Highlights

• Revenues for the second quarter of fiscal year 2011 decreased by 6.2% year-over-year to $7.1 million, down from $7.6 million in the second quarter of fiscal 2010
• Net income attributable to Recon for the second quarter decreased 51.1% year-over-year to $0.93 million compared with $1.9 million for the second quarter of fiscal 2010
• Gross margin for the second quarter was 42.2% based on gross profit of $3.0 million, compared with a 49.3% margin based on gross profit of $3.7 million in the same period last year
• Operating income and operating margin for the second quarter were $1.4 million and 19.2%, respectively, compared to $2.6 million and 34.5%, respectively, in the second quarter of fiscal 2010
• Earnings per diluted share were $0.23 for the quarter, down 50.0% from diluted EPS of $0.47 achieved in the same period a year ago

Six Months Financial Highlights

• Revenues for the first half of fiscal year 2011 decreased by 5.2% year-over-year to $10.4 million, down from $11.0 million in the first half of fiscal 2010
• Net income attributable to Recon for the first half of fiscal 2011 decreased 46.2% year-over-year to $1.06 million, compared with $1.96 million for the first half of fiscal 2010
• Gross margin for the first half of fiscal 2011 was 40.1% based on gross profit of $4.2 million, compared with a 42.8% margin based on gross profit of $4.7 million in the same period last year
• Operating income and operating margin for the six months ended December 31, 2010 were $1.6 million and 15.6%, respectively, compared to $2.8 million and 25.6%, respectively, for the same period in 2009
• Earnings per diluted share were $0.27 for the six-month period, down 49.7% from diluted EPS of $0.53 achieved in the same period a year ago

Shenping Yin, Recon's Chief Executive Officer, stated, "Our second quarter was a challenging one for Recon, as we faced several unanticipated obstacles to our growth strategy. Due to delays in several of our clients' oilfield construction projects, we were unable to provide equipment to the clients on schedule, which prevented us from recognizing the corresponding revenues. Raw material costs and manufacturers' equipment prices have also risen recently, driving some of our customers to adjust their procurement policies and cut costs by purchasing hardware, especially some foreign-brand products, directly from the manufacturers instead of through Recon."

Mr. Yin continued, "We are currently working to adjust and streamline our business structure in order to develop our automation and services segment and maintain higher margins, which have historically been a key component of our competitive advantage. We still see strong potential in our industry as China's oil consumption grows and major domestic oil and gas companies upgrade their equipment, and we remain committed to growing our business in the niche domestic oilfield services market we serve."

Second Quarter Fiscal 2011 Results of Operations

Revenues

Revenues for the three months ended December 31, 2010 were $7.1 million as compared to $7.6 million for the three months ended December 31, 2009. The slight decrease of 6.2% was primarily due to some of Recon's clients shifting their equipment procurement policies to increase direct purchases from manufacturers rather than through third-party agents such as Recon. Additionally, a number of clients experienced temporary delays in their oilfield projects, which prevented Recon from providing equipment to them and recognizing the corresponding revenues.

Gross Profit

Gross profit for the second quarter of fiscal 2011 was $3.0 million as compared to $3.7 million for the second quarter of fiscal 2010.  The decrease of 19.6% was primarily due to raw material price increases and less preferential policies and higher prices from the Company's contracted manufacturers. Costs of sales for the three-month period were $4.1 million as compared to $3.8 million for the same period a year ago. The Company's gross margin was 42.2% and 49.3% for the three months ended December 31, 2010 and 2009, respectively.

Income from Operations

Operating income for the three months ended December 31, 2010 amounted to $1.4 million as compared to $2.6 million for the three months ended December 31, 2009. The decrease of 47.8% or $1.2 million was primarily attributable to advanced payments to equipment suppliers related to contracts that could not be finished on schedule due to clients' delays, increased expenses related to being a public company, and an increase in expenses related to Recon's secondary offering, which was withdrawn due to unfavorable market conditions. Operating expenses for the three-month period totaled $1.6 million as compared to $1.1 million for the same period a year ago.

Net Income

Net income attributable to Recon for the fiscal 2011 second quarter was $0.93 million as compared to $1.9 million for the same period a year ago, due to the reasons set forth above. Earnings per diluted share were $0.23 for the quarter, a decrease of 50.0% compared with diluted EPS of $0.47 for the same period a year ago.

First Half Fiscal 2011 Results of Operations

Revenues

Revenue for the six months ended December 31, 2010 was $10.4 million as compared to $11.0 million for the six months ended December 31, 2009. The decrease of 5.2% was primarily due to the same factors that affected revenues for the three months ended December 31, 2010.

Gross Profit

Gross profit for the first half of fiscal 2011 was $4.2 million as compared to $4.7 million for the six months ended December 31, 2009. The decrease of 11.4% was primarily due to the decrease in revenues and an increase in the price of both raw materials and equipment the Company purchases from manufacturers. Costs of sales for the six-month period were $6.2 million, down slightly from $6.3 million for the same period a year ago. The Company's gross margin was 40.1% and 42.8% for the six months ended December 31, 2010 and 2009, respectively.

Income from Operations

Operating income for the six months ended December 31, 2010 amounted to $1.6 million as compared to $2.8 million for the six months ended December 31, 2009. The decrease of 42.3% or $2.2 million was primarily due to the decrease in revenues and an increase in administrative expenses. General and administrative expenses for the six-month period increased 81.3% over the first half of fiscal 2010, driven by higher expenses related to being a public company and expenses related to the planned secondary offering, which was withdrawn due to unfavorable market conditions. The increase in general and administrative expenses was partially offset by a 15.4% decrease in selling and distribution expenses.

Net Income

Net income attributable to Recon for the six months ended December 31, 2010 was $1.06 million as compared to $1.96 million for the six months ended December 31, 2009, due to the reasons set forth above. Earnings per diluted share were $0.27 for the six-month period, compared with diluted EPS of $0.53 for the same period a year ago.

Liquidity and Capital Resources

As of December 31, 2010, the Company's current assets were $29.2 million and current liabilities were $10.2 million. Cash and cash equivalents totaled $1.8 million as of December 31, 2010. The Company has no long-term liabilities, and total shareholders' equity at December 31, 2010 was $19.4 million. The Company had cash used in operating activities of $474,462 during the six months ended December 31, 2010, compared to cash used in operating activities of $2.56 million for the six months ended December 31, 2009. The Company used $3,758 in cash for investing activities during the six months ended December 31, 2010, compared to $20,199 for the six months ended December 31, 2009. The Company generated $475,151 in cash from financing activities during the six months ended December 31, 2010, compared to $8.98 million for the six months ended December 31, 2009.

About Recon Technology, Ltd.

Recon Technology, Ltd. has been providing leading Chinese oil and gas companies with automation services that increase efficiency and profitability in exploring, extracting, producing, processing, refining and transporting petroleum products for over 10 years. The Company's proprietary computerized process control system manages oil production in real-time to increase extraction levels, reduce impurities in extracted petroleum and lower production costs. In addition, as one of only two acoustic system providers in the world, Recon's acoustic pipeline monitoring system is widely used to prevent gas leakage in the transport pipeline. Recon's technology is based on three software copyrights, eight product patents and four pending patents. Recon Technology is the first Chinese non-state-owned oil and gas service company to go public in the U.S.

More information may be found at http://www.recon.cn or via e-mail at info@recon.cn.

Forward-Looking Statements

This news release contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks contained in reports field by the company with the Securities and Exchange Commission. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, the company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.

This information is intended to be reviewed in conjunction with the Company's filings with the Securities and Exchange Commission, which includes the accompanying notes.