China Wind Systems, Inc. Reports Fourth Quarter and Full Year 2010 Results

Fourth Quarter 2010 Financial Highlights

• Revenue increased 41.5% year-over-year to $22.5 million
• Revenue from the sale of forged products to the wind power and other industries increased 62.8% year-over-year to $17.0 million, or 75.8% of revenue
• Revenue from the sale of forged products exclusively to the wind power industry increased 76.5% year-over-year to $12.1 million, or 53.6% of revenue
• Operating income increased 17.9% year-over-year to $4.4 million
• Earnings before interest, taxes, depreciation and amortization (EBITDA), a non-GAAP measurement, increased 26.5% year-over-year  to $5.5 million
• Net income increased 16.6% to $3.1 million, or $0.13 per diluted share
• The Company received a new $3.0 million order to supply 1,500 units of high-speed shafts to Nanjing Chang Feng New Energy Holdings ("Nanjing Chang Feng"). The Company commenced shipping the order in December 2010 and expects to complete the order by June 30, 2011
• The Company received a conditional purchase order for approximately $1.0 million to supply precision manufactured subassemblies for solar cell manufacturing equipment, for which the initial units were delivered in March 2011.

Full Year 2010 Financial Highlights:

• Revenue increased 48.8% year-over-year to $79.5 million
• Revenue from the sale of forged products to the wind power and other industries increased 63.3% year-over-year to $58.3 million, or 73.4% of revenue
• Revenue from the sale of forged products exclusively to the wind power industry increased 102.3% year-over-year to $40.6 million, or 51.1% of revenue
• Operating income increased 44.8% year-over-year to $15.5 million
• EBITDA increased 47.8% year-over-year  to $18.8 million
• Net income increased 45.5% to $11.1 million, or $0.44 per diluted share

"In the fourth quarter of 2010, we continued to expand our market presence in the wind sector.  We reported strong year-over-year and quarter-over-quarter revenue growth from our business selling forged products to the wind industry," commented Mr. Jianhua Wu, Chairman and Chief Executive Officer of China Wind Systems. "During the quarter, we delivered precision forged products from our newly built electro-slag remelting (ESR) facility while maintaining output from our traditional forged rolled ring facility. However, gross margin for our ESR products did not meet our previously anticipated level and we are revising down our margin guidance for our ESR products to 32%-35% range. In addition, our next generation, energy efficient and environmentally friendly dyeing machines continue to gain increased traction and we are receiving strong customer interest."

Fourth Quarter 2010 Results

Revenue for the fourth quarter of 2010 increased 41.5% to $22.5 million, compared to $15.9 million in the same period of 2009. The increase was primarily due to strong sales growth of forged rolled rings and related components sold to the wind power and other industries, as well as the addition of ESR products. The Company's dyeing and finishing equipment segment also contributed to the quarter's revenue growth as a result of increased interest and order flow from the Company's next generation and energy efficient dyeing machines and positive growth in China's textile industry following a year in which the industry suffered as a result of the worldwide economic decline. Revenue from the sale of forged rolled rings to the wind power industry and other industries grew 62.8% to $17.0 million, or 75.8% of revenue, compared to $10.5 million, or 65.9% of net revenue, in the same period last year.

Revenue from the sale of forged rolled rings exclusively to the wind power industry rose 76.5% to $12.0 million, representing 53.6% of revenue, compared to $6.8 million, or 43.0% of revenues in the comparable period last year.  

Revenue from the sale of forged rolled rings to other industries increased 37.1% to $5.0 million, or 22.1% of revenue, compared with $3.6 million for the comparable period of the prior year.  

Revenue from the Company's dyeing and finishing equipment segment increased 11.0% to $5.4 million, or 24.2% of net revenues, compared to $4.9 million, or 30.9% of revenue, for the fourth quarter of 2009.

Gross profit for the fourth quarter of 2010 increased 41.0% to $6.1 million, compared to $4.3 million for the same period in 2009. Gross margin remained similar at 27.2% during the fourth quarter of 2010 compared to 27.3% for the same period a year ago. Gross margins for the Company's forged rolled rings and other components and dyeing and finishing equipment were 29.0% and 21.4%, respectively, during the fourth quarter of 2010.

Operating expenses increased 194.7% to $1.7 million, compared to $0.6 million in the comparable period last year, as a result of higher selling, general, and administrative expenses related to increased payroll expenses, stock-based compensation, traveling expenses and shipping expenses reflecting the Company's growth. The Company also significantly increased its bad debt allowance based on its evaluation of its account receivable balances.

Operating income increased 17.9% to $4.4 million, compared to $3.8 million for the same period of 2009. Operating margin was 19.7% compared to 23.7% in the fourth quarter last year.

EBITDA, a non-GAAP measurement, rose 26.5% to $5.5 million, compared to $4.3 million in the same period last year.  The reconciliation of EBITDA to net income is provided in Table 4 below.

Net income increased 16.6% to $3.1 million, compared to $2.7 million in the comparable period last year. Basic earnings per share in 2010 and 2009 were $0.17 and $0.17, respectively. Basic earnings per share were calculated using basic weighted average shares of 18,493,325 and 15,514,682 for the three months ended December 31, 2010 and 2009, respectively. Diluted earnings per share were $0.13, compared to $0.11 in the same period of 2009. Diluted earnings per share were calculated using diluted weighted average shares of 24,285,100 and 24,006,547 for the three months ended December 31, 2010 and December 31, 2009, respectively.  

Full Year 2010 Results

For the year ended December 31, 2010, revenues increased 48.8% to $79.5 million from $53.5 million in 2009. Gross profit increased 61.9% to $20.9 million, compared to $12.9 million last year.  Gross margin for the forged rolled rings segment was 28.2% compared to 25.5% in 2009. The increase in gross margin was due to the Company's increased operational efficiency. For the dyeing and finishing equipment segment, gross margin was 20.9% compared to 21.4% in 2009. The slight decrease in gross margin was due to an increase in raw material costs that could not be passed on to customers and a decline in selling prices due to stronger competition in China's textile industry. Overall, gross margin for 2010 was 26.3%, up 210 basis points from 24.2% in 2009. Operating income increased 44.8% to $15.5 million from $10.7 million in 2009. EBITDA, a non-GAAP measurement, rose 47.8% to $18.8 million, compared to $12.7 million last year. Net income was $11.1 million, a 45.5% increase from $7.6 million last year. Basic earnings per share in 2010 and 2009 were $0.62 and $0.37, respectively. Diluted earnings per share in 2010 and 2009 were $0.44 and $0.24, respectively.

Financial Condition

As of December 31, 2010, China Wind Systems held cash and cash equivalents of $0.9 million, accounts receivable of $8.2 million, and total current assets of $15.7 million. The Company had $1.8 million in short-term loans payable, no long-term debt and stockholders' equity stood at $62.6 million.  

In fiscal 2010, the Company generated $14.7 million in operating cash flow and had capital expenditures of $19.4 million, primarily for property and equipment related to the Company's ESR production line.  The Company also added heat treatment related equipment, machining equipment, a hydraulic press for its forging factory, and purchased a large scale machining center for its new solar division.

Recent Events

In January 2011, the Company announced it has appointed Mr. Fernando Liu, CPA, as its new Chief Financial Officer, effective January 1, 2011. The Company also announced that it sold 35,014 shares of its common stock to its Mr. Liu at the market price, for a total purchase price of $125,000.

On January 12, 2011, the Company engaged Shanghai KRC Business Consulting Co., Ltd. to assist the Company in preparing for the compliance of the internal control over financial reporting requirements of Article 404 of the Sarbanes-Oxley Act.

In March 2011, announced the appointment of Mr. Jason Carline as the Company's Chief U.S. Sales Director effective March 15, 2011.

Business Outlook

As previously announced in November 2010, China Wind received a conditional purchase order for approximately $1.0 million to supply precision manufactured subassemblies for solar cell manufacturing equipment. The Company has completed delivery of two initial units to the customer and has received purchase orders to supply 15 additional units by May 2011.

In addition, the Company has received positive customer feedback on its next generation air dye machine equipment which it launched in November 2010. The next generation dye machine model is designed to be environmentally friendly and energy and cost efficient as it uses mostly airflow instead of water to help dye clothing. Since its introduction, the Company has recorded sales of approximately $1.0 million through March 29, 2011, reflecting, in part, government policies which encourage the use of energy efficient and environmentally friendly equipment. The Company also expects to deliver another 11 units of air dye machine for total revenue of $0.9 million by the second quarter of fiscal 2011. Mr. Wu concluded, "In addition to supplying components to the wind industry, we have made significant progress in delivering clean energy products and solutions in other sectors.  In the solar market, we are pleased with the initial feedback from our customer.  We are confident that our products will meet our customer's requirements and look forward to entering into a long term supply contract. This will mark a major milestone for China Wind Systems as we diversify our product offering to the solar industry.  

"Our next generation dye machine models continue to generate increased interest from new and existing customers and we expect to achieve a higher sales contribution from this segment. We believe clean energy solutions will drive our future growth and profitability and we are committed to focusing on this area to create both environmental benefits and sustainable shareholder value."

Conference Call

China Wind Systems will conduct a conference call at 8:00 a.m. Eastern Time on Wednesday, March 30, 2011 to discuss results for the fourth quarter and fiscal year 2010.

To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (866) 759-2078. International callers should dial (706) 643-0585. When prompted, please enter conference passcode: 548 37 040

If you are unable to participate in the conference call at this time, a replay will be available for 14 days starting on March 30, 2011 at 10:00 a.m. ET. To access the replay, dial (800) 642-1687. International callers dial (706) 645-9291, and enter passcode: 548 37 040

About China Wind Systems, Inc.

China Wind Systems, Inc. is a profitable, rapidly growing supplier of precision forged components primarily to the wind industry in China - the world's leading wind-power market. The Company also supplies forged and other components and fabricated products to other industries. For more information on the Company, visit http://www.chinawindsystems.com. Information on the Company's Web site or any other Web site does not constitute a portion of this release.

Safe Harbor Statement

This release contains certain "forward-looking statements" relating to the business of the Company and its subsidiary and affiliated companies. These forward looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions. Such forward looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website. All forward-looking statements attributable to the Company or to persons acting on its behalf are expressly qualified in their entirety by these factors other than as required under the securities laws. The Company does not assume a duty to update these forward-looking statements.

Use of Non-GAAP Financial Information

To supplement the Company's consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information, namely earnings before interest, taxes, depreciation and amortization (EBITDA). The Company's management believes that this non-GAAP measure provides investors with an understanding of how the results relate to the Company's historical performance. The non-GAAP information is not meant to be considered in isolation or as a substitute for GAAP financials. A reconciliation of each non-GAAP measures appear below: