SHENZHEN, China, March 5 /PRNewswire-Asia/ --
-- 4Q08 Revenue Increases 70.5% to $143.5 Million
-- 4Q08 Adjusted Net Income Increases 47.1% to $23.7 Million
-- 4Q08 Adjusted EPS Increases 28.9% to $0.49
-- Full Year 2008 Revenue Increases 77.9% to $427.4 Million
-- Full Year Adjusted Net Income Increases 62.1% to $75.6 Million
-- Full Year Adjusted EPS Increases 39.2% to $1.67
China Security & Surveillance Technology, Inc. ("China Security" or "CSST" or the "Company") (NYSE: CSR) (Nasdaq Dubai: CSR), a leading provider of digital surveillance technology in the PRC, today reported its financial results for the fourth quarter and full year ending December 31, 2008.
Fourth Quarter 2008
Fourth quarter 2008 revenue increased 70.5% to $143.5 million, from $84.2 million in the fourth quarter of 2007, as demand for security solutions remains strong in both the government and private sectors. Organic revenue was approximately $124.3 million, or 86.6% of total revenue, while revenue from acquisitions was approximately $19 million or 13.4% of total revenue. As a result, organic revenues grew by $55.0 million, or 79.4% from $69.3 million in the same period of 2007.
In the fourth quarter, gross profits increased $11.0 million, or 44.5%, to $35.8 million, versus $24.8 million in the prior year’s fourth quarter. However, in this challenging environment, more corporate customers insisted on price discounts, and therefore, gross margin decreased to 25.0%, from 29.5% for the same period of 2007. Correspondingly, operating margin decreased to 11.7%, from 16.1% a year ago, while net income decreased to $11.2 million from $14.8 million in the same quarter last year.
GAAP earnings per diluted share for the fourth quarter of 2008 was $0.23, as compared to $0.35 for the fourth quarter of 2007. GAAP results include: (1) approximately $5.6 million, or $0.12 per diluted share, of non-cash expense related to the redemption accretion on convertible notes; (2) approximately $2.7 million, or $0.06 per diluted share, of non-cash expense related to depreciation and amortization of long-lived assets due to our acquisition of subsidiaries, and (3) approximately $4.2 million, or $0.09 per diluted share, of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).
Excluding these non-cash expenses, adjusted net income grew 47.1% to $23.7 million, versus $16.1 million in the fourth quarter of 2007. Adjusted earnings per diluted share was $0.49, a 28.9% increase from $0.38 per diluted share in the fourth quarter of 2007 (see “About Non-GAAP Financial Measures” toward the end of this release). Diluted share count increased 14% to $48.2 million from $42.2 million in the fourth quarter of 2007.
The Company’s cash position at the end of 2008 was $47.8 million as compared to $65.9 million at the end of the third quarter. Working capital increased to $231.0 million, versus $207.1 million at the end of the previous quarter, and total debt was $163.1 million, up from $157.6 million at the end of the third quarter of 2008.
Mr. Guo Shen Tu, Chief Executive Officer of China Security, commented, “In the fourth quarter, we continued to see significant demand from government Safe-City contracts, and we continue to have excellent success in winning ever larger contracts, due to our strong brand and comprehensive product and services offerings. While our pricing and profitability remain firm in the government sector, we nevertheless experienced price erosions in our corporate segment, due to higher emphasis on cost controls by many of our corporate customers. As such, while we continue to project healthy demand and revenue growth over the next 12 months, we are focused on further integrating our operations and generating greater synergies across our portfolio of technologies, products, and subsidiaries. We are also focused on increasing our manufacturing and administrative efficiencies through targeted cost savings initiatives.”
Full Year 2008
Revenue increased 77.9% to $427.4 million, from $240 million in 2007. The strong revenue growth was driven by continued demand for surveillance and safety products in China, and increased government deployment of surveillance and safety systems in public places. During 2008, government customers account for 49.0% of total revenue, while corporate customers account for 51.0%. Organic revenue for 2008 was approximately $361.5 million, or 84.6% or total revenue. Non-organic revenue, or revenue of acquired companies, was approximately $65.9 million or 15.4% of total revenue. As a result, organic revenues grew during the year by $170.8 million, or 89.6%, from $190.7 million in 2007.
Full year 2008 gross profits increased 73.3% to $120.5 million, from $69.5 million for 2007. Gross margin for the year was 28.2%, a slight decrease from 28.9% for 2007. Income from operations in 2008 increased 34.7% to $57.5 million, from $42.7 million in the prior year; however, operating margin decreased to 13.4% from 17.8%, primarily due to higher selling, general and administrative (SG&A) expenses and non-cash expenses.
Accordingly, GAAP net income in 2008 decreased 7.7% to $32.6 million, from $35.3 million in 2007; and, GAAP earnings per diluted share decreased to $0.72 from $0.91 in 2007. GAAP results for the full year of 2008 include: (1) approximately $19.6 million, or $0.43 per diluted share, of non-cash expense related to the redemption accretion on convertible notes (as described below under the caption “Explanation of Redemption Accretion”); (2) approximately $9.5 million, or $0.21 per diluted share, of non-cash expense related to depreciation and amortization of long-lived assets due to our acquisition of subsidiaries, and (3) approximately $13.8 million, or $0.31 per diluted share, of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).
Excluding these non-cash expenses, adjusted net income increased 62.1% to $75.6 million, versus $46.6 million in 2007. Adjusted earnings per diluted share grew 39.2% to $1.67, from $1.20 per diluted share in 2007 (see the “Reconciliation of GAAP to non-GAAP Measures” toward the end of this release).
Financial Outlook
For the full year 2009, the Company reaffirms its revenue projection of $600 to $630 million. The Company also reaffirms adjusted net income of
$108-$113 million and adjusted diluted earnings per share of $2.16-$2.26. The company estimates that non-cash interest expense on redemption accrual, employee stock compensation expense, and depreciation and amortization will be approximately $22.7 million, $18.5 million, and $12 million, respectively.
Mr. Tu concluded, “We remain confident about the business and the growth of the security industry. Our strategy has always been to be the market leader, and we have executed on our strategy successfully. We have built our industry’s leading brand, distribution, product and services breadth, and manufacturing capabilities, and we have begun to realize the benefits of our self-reinforcing foundation, as we continue to see higher revenues, and a greater number of larger Safe City contracts.
In the coming year, we aim to expand our market leadership in China through greater integration of our corporate strengths and assets. We believe that our strategic consolidation efforts during the previous two years provide us with the strongest and most complete capabilities in offering turnkey security solutions demanded by our large corporate and government customers. We also aim to expand our international business through strategic partnerships and targeted market developments. Even taking into account the current global economic situation, we believe this is a great time to leverage our expertise and increase our brand awareness on a more global scale. As such, we continue to evaluate additional strategic partnerships with leading vendors of security technology and services that seek to leverage our leading brand, distribution, and manufacturing capabilities in the Chinese market.”
Explanation of Redemption Accretion
The Company raised $60 million and $50 million through two guaranteed senior unsecured convertible note financings with Citadel Equity Fund Ltd. in February 2007 and April 2007, respectively. These notes bear interest at a rate of 1% per annum and are due in 2012. Under the indentures, if the notes are not converted before their respectively maturities, the notes are to be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the notes then outstanding plus an additional amount of 15% per annum, calculated on a quarterly compounded basis, plus any accrued and unpaid interest.
As of December 31, the Company accrued $19.6 million as a redemption amount payable under the notes, which was included in interest expense. Unlike the annual interest rate of 1% that the Company is actually paying out to the note holders under the notes on a semi-annual basis, the Company would only pay the accrued redemption amount under the notes if the notes are not converted into the Company’s common stock before their respective maturity dates and are redeemed in accordance with their terms. Nevertheless, the Company believes that it must accrue the entire redemption amount under U.S. generally accepted accounting principles.
Conference Call
The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET on March 05, 2009. The Company invites you to join the call by dialing 1-913-312-9325. A live webcast of the conference call will be available at http://www.csst.com . A replay of the call will be available from March 05, 2009 to March 12, 2009. Listeners may access the replay by dialing 1-719-457-0820, passcode: 1429713.
About China Security & Surveillance Technology, Inc.
Based in Shenzhen, China, China Security manufactures, distributes, installs and services surveillance and safety products and systems as well as develops surveillance and safety related software in China. Its customers are mainly comprised of commercial and government entities and non-profit organizations. China Security has built a diversified customer base through its extensive sales and service network that includes over 150 branch offices and distribution points throughout China. To learn more about the Company visit http://www.csst.com .
About Non-GAAP Financial Measures
This press release contains non-GAAP financial measures for earnings that exclude the accrual for the redemption amount payable under certain outstanding convertible notes issued by the Company and certain other
non-cash charges. China Security believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that China Security’s management excludes when it internally evaluates the performance of China Security’s business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Security. Accordingly, management excludes the expense arising from the accrual of redemption amounts payable under its outstanding convertible notes and certain other non-cash charges when making operational decisions. China Security believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Security’s financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Security’s performance using the same methodology and information as that used by China Security’s management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, China Security’s management compensates for these limitations by providing the relevant disclosure of the items excluded.
The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.
Adjusted Net Income (Unaudited)
All amounts, other than for share and per share amounts, in thousands of
U.S. dollars
Twelve Months Ended Three Months Ended
12/31/2008 12/31/2007 12/31/2008 12/31/2007
GAAP Net Income $32,603 $35,319 $11,223 $14,825
Less:
Gain on disposal of
long lived assets -- (11,587) -- (6,898)
Addition:
Depreciation and amortization 9,491 5,040 2,745 1,714
Non cash employee compensation 13,837 4,157 4,175 2,102
Redemption accretion on
convertible notes 19,641 13,701 5,551 4,363
Non-GAAP Net Income $75,572 $46,630 $23,694 $16,106
Adjusted EPS (Unaudited)
Twelve Months Ended Three Months Ended
12/31/2008 12/31/2007 12/31/2008 12/31/2007
GAAP DILUTED EPS $0.72 $0.91 $0.23 $0.35
Less:
Gain on disposal of
long lived assets -- (0.30) -- (0.16)
Addition:
Depreciation and amortization 0.21 0.13 0.06 0.04
Non-cash employee compensation 0.31 0.11 0.09 0.05
Redemption accretion on
convertible notes 0.43 0.35 0.12 0.10
Adjusted EPS $1.67 $1.20 $0.49 $0.38
Share used in computing net
income per
share (diluted) ‘million 45.28 38.80 48.16 42.23
Safe Harbor Statement
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, our future operating results, our expectations regarding the market for surveillance and safety products, our expectations regarding the continued growth of the surveillance and safety market, 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 our actual results to differ materially from those anticipated, expressed or implied in the forward-looking statements. These risks and uncertainties include, but not limited to, the factors mentioned in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2008, and other risks mentioned in our other reports filed with the Securities Exchange Commission, or SEC. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov. 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. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.
For more information, please contact:
Company Contact:
Terence Yap
Tel: +86-755-8351-6102
Email: terence.yap@csst.com
Kewa Luo
Tel: +1-212-984-0688
Email: ir@csst.com
Investor Contact:
ICR:
Michael Tieu
Tel: +86-10-6599-7960
Email: michael.tieu@icrinc.com
Bill Zima
Tel: +1-203-682-8200
Email: bill.zima@icrinc.com
Media Contact:
Patrick Yu
Fleishman-Hillard Hong Kong
Tel: +852-2530-2577
Email: patrick.yu@fleishman.com
CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED DECEMBER 31, 2008 AND 2007
Expressed in thousands of U.S. dollars
(Except for share and per share amounts)
Three Months Ended
December 31
2008 2007
Revenues $143,548 $84,174
Cost of goods sold 107,728 59,384
Gross profit 35,820 24,790
Selling and marketing 3,547 2,709
General and administrative 13,026 7,047
Depreciation and amortization 2,499 1,498
Income from operations 16,748 13,536
Rental income received from
related party -- 103
Interest income 47 60
Interest expense (6,167) (4,819)
Gain on disposal of fixed assets -- 8,115
Equity in net loss of affiliated
companies -- --
Other income, net 1,069 1,483
Income before income taxes and
minority interest 11,697 18,478
Minority interest in income of
consolidated subsidiaries 2 (32)
Income taxes (476) (3,621)
Net income 11,223 14,825
NET INCOME PER SHARE
BASIC 0.2362 0.3536
DILUTED 0.2331 0.3517
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
BASIC 47,514,443 41,922,449
DILUTED 48,156,574 42,149,873
CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
Expressed in thousands of U.S. dollars
(Except for share and per share amounts)
2008 2007 2006
Revenues $427,354 $240,188 $106,989
Cost of goods sold
(including depreciation and
amortization for the years ended
December 31, 2008, 2007 and 2006
of $762, $216 and $0,
respectively) 306,813 170,649 75,976
Gross profit 120,541 69,539 31,013
Selling and marketing 12,056 5,622 1,511
General and administrative 42,295 16,442 3,036
(including non-cash employee
compensation for the years ended
December 31, 2008, 2007 and 2006
of $13,837, $4,157 and $0,
respectively)
Depreciation and amortization 8,729 4,824 1,124
Income from operations 57,461 42,651 25,342
Rental income from related parties -- 483 496
Interest income 218 374 63
Interest expense (21,765) (15,011) (108)
Gain on sale of affiliated company -- -- 307
Gain on disposal of land use rights
and properties -- 13,632 --
Other income, net 2,236 2,530 711
Income before income taxes and
minority interest 38,150 44,659 26,811
Minority interest in (income) loss
of consolidated subsidiaries 33 (49) 9
Income taxes (5,580) (9,291) (3,889)
Net income 32,603 35,319 22,931
Foreign currency translation gain 17,294 9,664 1,664
COMPREHENSIVE INCOME $49,897 $44,983 $24,595
NET INCOME PER SHARE
BASIC $0.73 $0.95 $0.88
DILUTED $0.72 $0.91 $0.85
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
BASIC 44,721,421 37,368,549 26,052,519
DILUTED 45,284,070 38,795,241 26,940,215
CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
Expressed in thousands of U.S. dollars
(Except for share and per share amounts)
ASSETS
2008 2007
Cash and cash equivalents $47,779 $89,071
Accounts receivable, net 148,205 63,206
Related party receivables -- 549
Inventories, net 117,042 40,606
Prepayment and deposits 7,280 3,225
Advances to suppliers 17,120 2,877
Other receivables 14,065 13,171
Tax refundable -- 92
Deferred tax assets - current portion 32 137
Total current assets 351,523 212,934
Deposits paid for acquisition of
subsidiaries, properties and
intangible assets 7,855 46,443
Plant and equipment, net 74,523 24,066
Land use rights, net 7,675 1,379
Intangible assets 56,913 39,800
Contingently returnable acquisition
consideration 1,176 --
Goodwill 73,216 52,369
Deferred financing cost 1,082 150
Deferred tax assets –
non-current portion 253 262
TOTAL ASSETS $574,216 $377,403
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable - short term $10,242 $12,814
Obligation under product financing
arrangements - short term 2,469 --
Accounts payable 50,756 21,864
Accrued expenses 10,263 5,108
Advances from customers 28,621 8,352
Taxes payable 4,115 4,153
Payable for acquisition of
businesses, properties and land use
rights 11,915 --
Deferred income 1,207 915
Total current liabilities 119,588 53,206
LONG TERM LIABILITIES
Notes payable - long term 2,853 698
Obligation under product financing
arrangements - long term 4,214 --
Convertible notes payable 143,342 123,701
Total liabilities 269,997 177,605
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 32 61
SHAREHOLDERS’ EQUITY
Preferred stock, $0.0001 par value;
10,000,000 shares authorized,
0 shares issued and outstanding
Common stock, $0.0001 par value;
290,000,000 shares authorized
49,142,592 (2008) and 42,506,150
(2007) shares issued and outstanding 5 4
Additional paid-in capital 164,806 110,254
Retained earnings 109,405 76,802
Statutory surplus reserve fund 804 804
Accumulated other comprehensive
income 29,167 11,873
Total shareholders’ equity 304,187 199,737
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY $574,216 $377,403
CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
Expressed in thousands of U.S. dollars
(Except for share and per share amounts)
2008 2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $32,603 $35,319 $22,931
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,491 5,040 1,124
Allowance for doubtful accounts 401 74 113
Provision for obsolete inventories 14 8 230
Amortization of loan origination fees -- -- 37
Common stock issued for services -- -- 250
Issue of warrants for investor
relation services -- -- 185
Amortization of consultancy services 135 122 --
Non-cash compensation expense 13,837 4,157 --
Amortization of deferred
financing cost 206 26 --
Redemption accretion on
convertible notes 19,641 13,701 --
Gain on disposal of land use rights,
properties, plant and equipment -- (13,632) (15)
Gain on sale of affiliated company -- -- (307)
Deferred taxes 142 7 107
Minority interest (33) 49 (9)
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (73,827) (28,539) (13,992)
Related party receivables 587 (80) 3,768
Other receivables (2,060) (6,932) (401)
Inventories (63,306) (7,851) (13,328)
Prepayment and deposits (2,381) 453 (3,233)
Advances to suppliers (12,850) 1,178 (1,323)
Increase (decrease) in:
Accounts payable and accrued expenses 21,312 10,094 6,300
Advances from customers 17,077 1,376 --
Taxes payable (318) 2,271 582
Related party payable -- -- (9)
Deferred income 229 141 (26)
Net cash (used in) provided by
operating activities (39,100) 16,982 2,984
2008 2007 2006
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (6,129) (11,382) (5,114)
Additions to intangible assets, other
than through business acquisitions (2,320) (1,016) (107)
Additions to land use rights, other
than through business acquisitions (5,101) (591) --
Deposits paid for acquisition of
subsidiaries (3,790) (22,545) --
Deposits refunded for acquisition of
subsidiaries 1,943 -- --
Deposits paid for acquisition of
properties and intangible assets (357) (23,898) --
Net cash outflow on acquisition of
net assets of businesses acquired
(net of cash acquired) (10,997) (36,378) (6,539)
Proceeds from dispositions of
non-current assets -- -- 592
Proceeds from disposal of land use
rights and properties 3,379 12,844 --
Net cash used in investing activities (23,372) (82,966) (11,168)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from (advanced to)
directors -- (71) 9
New borrowings, net of issuing cost 17,401 124,883 3,495
Repayment of borrowings (19,386) (8,045) --
New borrowings from obligation under
product financing arrangements 6,687 -- --
Repayment of obligation under product
financing arrangements (1,143) -- --
Issue of common stock upon
exercise of warrants 277 3,905 123
Issue of common stock, net of
issuing expenses 9,700 -- 32,285
Net cash provided by financing
activities 13,536 120,672 35,912
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (48,936) 54,688 27,728
Effect of exchange rate changes
on cash 7,644 3,403 975
Cash and cash equivalents, beginning
of year 89,071 30,980 2,277
CASH AND CASH EQUIVALENTS,
END OF YEAR $47,779 $89,071 $30,980
