Harbin Electric Reports Third Quarter 2010 Financial Results

HARBIN, China, Nov. 10, 2010 /PRNewswire-Asia-FirstCall/ -- Harbin Electric, Inc. ("Harbin Electric" or the "Company", Nasdaq: HRBN), a leading developer and manufacturer of a wide array of electric motors in the People's Republic of China, reported its financial results and filed its Quarterly Report on Form 10-Q for the third quarter of 2010 today after close of the market.

Financial Highlights

• Total revenues were $109.35 million, up 133% from $46.93 million in 3Q09
• Operating income totaled $21.85 million, up 68 % from $13.04 million in 3Q09
• Adjusted net income attributable to controlling interest (excluding non-cash, non recurring items) was $20.21 million, up 85% from $10.95 million in 3Q09
• GAAP earnings attributable to controlling interest were $0.57 per diluted share, compared with a net loss of $(0.07) in 3Q09
• Adjusted earnings attributable to controlling interest (excluding non-cash item, non recurring items) were $0.65 per diluted share, compared with $0.40 in 3Q09

Quarterly Financial Summary:

"We are pleased to report another outstanding quarter. Despite some unfavorable factors in the market place such as escalating raw material prices and cost inflation in China, we managed to deliver continued top line and bottom line growth in the third quarter, and indeed in the first nine months, when compared to the same period of last year. This is a result of continued successful execution of our strategy to grow and improve our businesses: optimizing the product portfolio, expanding channels to market, and capitalizing on new technologies. We also benefited from the integration of and continued growth at Xi'an Tech Full Simo which we acquired in October 2009 to enhanced our product offering." said Mr. Yang, Chairman and Chief Executive Officer of Harbin Electric.

"On the operations front, the development of a servo-motor for high precision machinery is near completion and the new car seat motor developed for Magna began production in October for GM China. We also started the development of a new model of micro-motors for automated car windows and continued the development of an explosion-proof motor for the mining industry."

Revenues

For the third quarter of 2010, total revenues were $109.35 million, up $62.42 million or 133%, compared with $46.93 million in the third quarter of 2009. The $62.42 million growth was mainly attributable to $2.91 million growth in linear motors, $6.86 million growth in specialty micro motors, $51.75 million growth in industrial rotary motors, and $0.9 million growth in other products. The year-over-year sales growth was mainly due to the acquisition of Xi'an Tech Full Simo in October 2009 and higher sales volume in all product lines driven by a stronger economy in China in 2010 compared to 2009. Excluding the acquisition, organic growth was 29% year over year.

By product line, the $51.75 million or 250% higher revenues in industrial rotary motors reflect a $48.93 million contribution from the acquisition of Xi'an Tech Full Simo and $2.82 million or 14% higher revenues at Weihai Tech Full Simo. Sales growth of $2.91 million or 18% in linear motors was primarily due to new product sales from our linear motor propulsion systems developed for coal transportation trains ($3.21 million in the third quarter of 2010 while none in the third quarter of 2009). The $6.86 million or 81% sales increase in specialty micro motors was driven by higher volumes in 2010 than in 2009.

International sales totaled $5.66 million, or 5.2% of total sales, for the quarter, a 72% increase compared with $3.30 million, or 7.0% of total sales, in the third quarter of 2009, when the global economic downturn severely hurt our international business. The international sales growth was driven primarily by increased sales in our specialty micro motor and rotary motor products.

The following table presents the revenue contribution by percentage for each major product line in the third quarter of 2010 in comparison with the third quarter of 2009.

Net Income

The Company recorded a net income attributable to controlling interest of $17.87 million ($0.57 per diluted share) in the third quarter of 2010, compared with a net loss of $1.91 million (a loss of $0.07 per diluted share) in the same period of 2009. The net loss in the third quarter of 2009 included special non-cash and non-recurring items totaling a net loss of $12.86 million or $(0.47) per diluted share.

The following table provides the non-GAAP financial measure and a reconciliation of the non-GAAP measure to the GAAP net income.

Gross Profit Margin

The following table presents the average gross profit margin by product line for the third quarter of 2010, in comparison with the third quarter of 2009.

The overall gross margin declined to 30.7% in this quarter from 35.7% in the same quarter of prior year. This change was primarily due to two factors: (1) Changes in product mix where the percentage of lower margin rotary motors increased to 66% of total sales from 44% of total sales in the prior year due to acquisition of Xian Tech Full Simo; and (2) Gross margin for the special micro-motors and other products declined. By product line, the gross margin for linear motors improved slightly attributable to new sales of higher margin products - linear motor propulsion system for coal trains. The gross margin for specialty micro-motors and other products declined primarily as a result of moving the production from Harbin to the new plant in Shanghai, where manufacturing costs such as labor and fixed costs are relatively higher, particularly at the start-up stage. Higher raw material prices also hurt the margin.

Operating Income and Expenses

Operating income in the third quarter of 2010 totaled $21.85 million, compared with $13.04 million in the third quarter of 2009, representing a 68% year-over-year growth. Higher operating income was mainly due to increased sales in all product lines, including the contribution from the acquisition of Xi'an Tech Full Simo.

Research and development ("R&D") expense totaled $1.66 million in the third quarter of 2010, $1.19 million higher than the total of $0.47 million in the third quarter of 2009. As technology and R&D is the Company's long term strategic focus, we have been making every effort to enhance our R&D projects and invest in new product development in order to capture additional market share and well position the Company for future growth. During the quarter, we incurred more expenses associated with a few new key development projects such as the automated control system for linear servo motors, servo motor for high precision digital controlled machinery, a new model of oil pumps, specialty explosion-proof rotary motors, and new models of specialty micro-motors for new generation of automobiles. However, due to rapid sales growth, our R&D expense remains below our budget of 2-3% of total revenues.

Selling, general and administrative ("SG&A") expenses totaled $10.06 million or 9.2% of total sales, compared with $3.25 million or 6.9% one year ago. The acquisition of Xi'an Tech Full Simo and expansion of other facilities resulted in higher depreciation expenses, and higher operating and administrative expenses in this quarter compared to the same period last year. Particularly, shipping and handling costs increased $0.99 million. The higher shipping and handling costs were related to higher sales activities and many changes in the customer and product mix at Xi'an Tech Full Simo after the acquisition. We have sold more high voltage motors – one of our best selling products at the facility, and signed on more customers located farther away from Xi'an in other provinces such as Shandong, Sichuan, Hubei provinces. In an effort to meet customer requirements, improve customer satisfaction, and shorten the product delivery time, starting in the third quarter of 2010 the Company has made a major change by shifting some of its product deliveries from railroad shipping to truck shipping. Although truck shipping is a more expensive method of transportation, it is faster and can help the Company to respond to customer demand at a faster rate, ensuring timely delivery of its products and helping the Company gain market share. Additionally, the high voltage motors usually require special handling and are mainly transported by truck shipping. As more of our customers buying high voltage motors are located long distances from the manufacturing site, it further increases shipping costs due to distance.  Another major factor that contributed to higher SG&A costs is associated with the production start-up at our new plant in Shanghai, which had not yet begun start up in the third quarter of 2009.

During the third quarter of 2010, management also increased the reserve for accounts receivables by $2.0 million according to our accounts receivable aging policy, which further drove our SG&A expense higher in this quarter than the historical average level.

The higher operating costs, in conjunction with lower gross margin, have caused the decline in operating margin from 27.8% in the same quarter last year to 20.0% in this quarter.

Outlook

"We remain optimistic about economic growth in China and our business prospects. While our existing business and operations remain strong, we will continue to improve our manufacturing capabilities, expand capacity, strengthen and accelerate product development, and enhance our management system in order to sustain future growth and reach a higher performance level" concluded Mr. Yang.

Conference Call Details  

The Company will host a conference call to discuss the third quarter 2010 financial results at 8:30 AM ET on Wednesday, November 10, 2010. Tianfu Yang, Chairman and Chief Executive Officer, Zedong Xu, Chief Financial Officer, and Christy Shue, Executive Vice President, will be on the call.

To participate in the conference call, please dial any of the following numbers:

The conference ID for the call is 4696673.

A replay of the call will be available beginning at 12:00 PM ET on November 10, 2010 and will remain available through 12:00 PM ET on November 24, 2010.

To access the replay, please dial either of the following numbers:

The passcode is 4696673.

This conference call will be broadcast live over the Internet. To listen to the live webcast, go to www.harbinelectric.com and click on "Harbin Electric Q3 2010 Financial Results Conference Call." The replay of the webcast will be available for 30 days and will be archived on the Investor Kits page of the website after 30 days.

About Harbin Electric, Inc.

Harbin Electric, headquartered in Harbin, China, is a leading developer and manufacturer of a wide array of electric motors with a focus on innovative, customized, and value-added products. Its major product lines include industrial rotary motors, linear motors, and specialty micro-motors. The Company's products are purchased by a broad range of domestic and international customers, including those involved in the energy industry, factory automation, food processing, packaging, transportation, automobile, medical devices, machinery and tool manufacturing, chemical, petrochemical, as well as in the metallurgical and mining industries. The Company operates four manufacturing facilities in China located in Xi'an, Weihai, Harbin, and Shanghai.

Harbin Electric has built a strong research and development capability by recruiting talent worldwide and through collaborations with top scientific institutions. The Company owns numerous patents in China and has developed award-winning products for its customers. Relying on its own proprietary technology, the Company developed an energy efficient linear motor driven oil pump, the first of its kind in the world, for the largest oil filed in China. Its self-developed linear motor propulsion system is powering China's first domestically made linear motor driven metro train. As China continues to grow its industrial base, Harbin Electric aspires to be a leader in the industrialization and technology transformation of the Chinese manufacturing sector. To learn more about Harbin Electric, visit www.harbinelectric.com.

Safe Harbor Statement

The actual results of Harbin Electric, Inc. could differ materially from those described in this press release. Detailed information regarding factors that may cause actual results to differ materially from the results expressed or implied by statements in this press release may be found in the Company's periodic filings with the U.S. Securities and Exchange Commission, including the factors described in the section entitled "Risk Factors" in its annual report on Form 10-K for the year ended December 31, 2009. The Company does not undertake any obligation to update forward-looking statements contained in the press release. This press release contains forward-looking information about the Company that is intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and the Company's future performance, operations and products.

CONTACT: Christy Shue, Executive VP, Finance & Investor Relations of Harbin Electric, Inc., +1-631-312-8612, or IR@HarbinElectric.com; or Kathy Li of Christensen Investor Relations, +1-212-618-1978, or kli@christensenir.com