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China Recycling Energy Corporation Reports Full Year 2011 Financial Results

 
 

Company Reported 2011 Fully Diluted EPS of $0.39 -- an Increase of 16 Percent Year-Over-Year On Lower Revenues

XI'AN, China, March 22, 2012 /PRNewswire-Asia/ -- China Recycling Energy Corp. (NASDAQ: CREG; "CREG" or "the Company"), a leading industrial waste-to-energy solution provider in China, today announced its financial results for the fourth quarter and fiscal year ended December 31, 2011.

Highlights for the Full Year 2011

  • Interest income on sales-type leases increased by 46 percent to $22.10 million as compared to $15.14 million in the year ended December 31, 2010.
  • Net income grew 34 percent to $21.45 million as compared to $16.03 million recorded in the year ended December 31, 2010.
  • Fully diluted earnings per share ("EPS") of $0.39 increased 16 percent from fully diluted EPS of $0.33 in the year ended December 31, 2010.

Summary of Financial Results:

 

(In '000s of U.S. Dollars, except for per share data)

FULL YEAR ENDED DEC 31

 

2011

2010

Total Sales (1) + (2)

31,290

75,606

(1) System Sales

30,106

74,281

(2) Contingent Rental Income

1,184

1,325

Gross Profit

8,276

18,572

Total Operating Income

30,380

33,708

Net Income

21,450

16,033

Comprehensive Net Income

26,650

18,407

Basic EPS

0.51

0.41

Diluted EPS

0.39

0.33

Adjusted Net Income in non-GAAP(1)

15,004

25,882

Adjusted EPS in Non-GAAP(1) (2)

0.35

0.52

 

(1) CREG provides adjusted net income and earnings per share on a non-GAAP basis that excludes non-cash, share-based compensation expense and non-cash interest expense on the amortization of the beneficial conversion feature for the convertible notes and non-cash deferred income tax expenses, as described below, to enable investors to better assess the Company's operating performance. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "Non-GAAP Financial Measures;"

 

(2) Non-GAAP diluted weighted average shares outstanding were calculated based on outstanding shares, issued options, and estimated shares under the assumption that they would be converted from our convertible debentures.

Mr. Guohua Ku, Chairman and CEO of CREG, commented, "Our full year 2011 net results showed significant growth in net income, interest income from the leasing of our systems and earnings for our shareholders, despite lower system sales revenues. During the year, we further strengthened our operations and increased operational efficiencies, while maintaining our fiscal discipline and cost controls; and in 2011 we delivered a very strong operating performance, culminating in our third consecutive year of profit growth, with net earnings of $21.5 million or $0.39 per diluted share."

The Company noted that while systems related revenue declined 59 percent as compared with 2010, it is important to note that the nature of CREG's business model routinely results in a non-linear systems revenue flow. Sales revenue from sales of completed power plants is not necessarily indicative of future revenue flows as the Company cannot complete new systems on a routine basis. The Company's main revenue is from interest income on sales-type leases, which has been growing steadily quarter by quarter.

Positioned for Growth:

"During the year, we made significant advances in positioning the Company for growth," said Mr. Ku. " Most notably, we expanded our waste-to-energy project portfolio with the acquisition of Shenqiu, a power generation system. Xi'an TCH, our wholly owned subsidiary, entered into an asset transfer agreement involving the purchase of a set of 12 MW biomass power generation system from Shenqiu for RMB 70 million (approximately $10,937,500 USD) following the company's completion of the conversion of Shenqiu's non-operating coal fired power generation system into a biomass power generation system. On the same date of purchase, Xi'an TCH leased the biomass power generation system to Shenqiu for a leasing period of 11 years, under which the company receives monthly lease payments of 1.8 million RMB (approximately $281,250) for the entirety of the lease. Upon completion of the lease, Xi'an TCH will transfer the biomass power generation system to Shenqiu at zero cost.   With this acquisition, we now have 11 waste-to-energy systems in operation totaling 107 MW and 2 waste-to-energy projects under construction totaling 48 MW." Mr. Ku added, "The government led consolidation of small players in the coking industry as well as rising coal prices has resulted in the shutting down of numerous coking plants and their power generation capabilities.  Our intent is to make the Shenqiu biomass power generation system as an eco-friendly system fueled off of local agriculture and biomass waste. This system integration not only expands our technological capabilities and aptitude in this area but also contributes to our growing and recurring revenue stream of interest income on sales-type leasing.

"We further solidified our strategic partnership with China Cinda Asset Management Co. Ltd and its affiliates ("Cinda") and signed a leasing agreement which provides CREG with capital for business expansion. In addition, at the end of the year, we received an attractive special energy saving loan for RMB 130 Million (approximately USD $20,312,500) and we repaid Cinda RMB 75 million. As CREG is a highly capital intensive business, we have placed a strategic focus on securing lower borrowing rates from both domestic and international financiers. We are most pleased that Cinda remains a valued and strategic partner to CREG, and will continue to work with us on furthering our project development and operations moving forward.

"Lastly, China's National Development and Reform Commission (NDRC) and Ministry of Finance (MOF) designated three of our wholly owned subsidiaries as a qualified "Energy Saving Service Provider," which makes them each eligible to receive incentive financial awards from the MOF for energy management contract projects signed from July 1, 2011 onward."

Projects in the Development Phase:  

The Company noted that it has temporarily suspended construction of the Erdos Phase III plant, a 25 MW heat power generation system, due to the technical transformation and renovation of certain equipment and machinery by the customer. Construction of Erdos Phase III is expected to resume in May 2012, and the Company currently expects to complete Phase III by the end of fiscal year 2012.

In addition, the Company is also in the process of constructing a 23 MW system for Shanxi Datong Coal. Revenue on these systems will be recognized at the point of system delivery and monthly lease payments, based on off-take agreements with the customers, begin thereafter.

"Due to our first mover advantage and stringent efforts by the government to curb industrial energy usage and waste, CREG is positioned as a market leader in the China waste-to-energy market. While waste-to-energy technology is not new globally, the market for these solutions in China is relatively immature and growing, with numerous heavy industrial companies scrambling to reduce their energy usage and comply with government-issued mandates.  With our proven track record of successful system integration and reliability, as well as our symbiotic partnership with Cinda to provide energy saving solutions to their industrial portfolio companies, we have the ability for significant growth in the coming years.  In addition to evaluating new projects to undertake, we are continuously seeking more cost-effective financing options for our company and our customers in an effort to better grow our business organically and via acquisition.  CREG's business is designed to not only help customers comply with energy savings reform and grow their core business, but also to increase our company's profitability and further grow our recurring revenue stream derived from accruing interest income on sales-type leasing.  We have a track record of successfully completing waste-to-energy projects to specific verticals, such as steel, cement, nonferrous metal and coal mining.  We plan to continue to focus on such core verticals and leverage our expertise to expand our market share.  We intend to expand our waste-to-energy power generating capacity rapidly in order to meet the anticipated growth of demand in China's energy efficiency industrial applications and to gain market share.  We look forward to announcing the completion of projects currently under development now and in the future and bringing more savings to our customers," concluded Mr. Ku.

Financial Results for Three Months Ended December 31, 2011

Total sales for the three months ended December 31, 2011, comprised of system sales and contingent rental income, was $0.52 million, as compared to $18.84 million reported in the third quarter of 2011 and $31.82 million for the fourth quarter of 2010. The decrease from the 2011 third quarter was primarily attributable to lower system sales. In the 2011 third quarter, the Company recorded the completion and sale of the 12MW Shenqiu biomass power generation system, in addition to receiving $0.26 million in contingent rental income. The contingent rental income resulted from actual usage of the electricity in addition to the minimum lease payments received in the third quarter of 2011 from the Company's Shengwei Group - Tongchuan Project and Erdos Project. For sales-type leases, sales and cost of sales are recorded at the time of system delivery.  Interest income from the sales-type leases is CREG's other major revenue source in addition to system sales revenue.

Cost of sales for the fourth quarter of 2011 was $0.16 million, while cost of sales for the third quarter of 2011 was $14.33 million and $24.27 million for the fourth quarter of 2010. The decrease from the 2011 third quarter was attributed to lower system sales.

Gross profit for the fourth quarter of 2011 was $0.35 million, as compared with gross profit of $4.52 million for the third quarter of 2011 and $7.55 million for the fourth quarter of 2010, reflecting a gross margin of 68 percent for the 2011 fourth quarter, 24 percent for the 2011 third quarter and 24 percent for the 2010 fourth quarter. The increase in gross profit was mainly from the contingent income received as a higher proportion than the systems gross profit. The Company noted that due to the uneven sales of its systems in any given year and the recurring revenue stream from sales-type leasing, gross margin can fluctuate significantly and therefore is not the best indicator of the Company's profitability.

Interest income on sales-type leases for the fourth quarter of 2011 was $6.01 million, as compared with $5.47 million reported in the 2011 third quarter and $4.77 million recorded in the fourth quarter of 2010. During the fourth quarter of 2011, interest income was derived from 12 systems in operation.

Net income for the fourth quarter of 2011 was $4.54 million, as compared with $8.66 million for the third quarter of 2011 and $5.81 million for the fourth quarter of 2010. The decrease in net income from the 2011 third quarter was mainly due to a decline in gross profit and system sales in the fourth quarter and an increase in non-operating expenses from interest cost and changes in fair value in conversion feature of liability.

For the fourth quarter of 2011, GAAP diluted EPS was $0.06 with approximately 56.18 million shares of common stock outstanding. This compares with GAAP diluted EPS for the 2011 third quarter of $0.16 with approximately 54.95 million shares of common stock outstanding, and $0.12 in the fourth quarter of 2010 when the Company had 50.18 million shares of common stock outstanding.

Financial Results for Full Year Ended December 31, 2011

For the year ended December 31, 2011, total sales, including system sales and contingent rental income, was $31.29 million, while total sales for the comparable year of 2010 was $75.61 million. The decrease of $44.32 million is a result of decreases in system sales and in contingent rental income. Of the total sales, sales of systems for the year ended December 31, 2011 was $30.11 million, as compared to $74.28 million for the comparable year in 2010, a decrease of $44.17 million. In the year ended December 31, 2011, the company recorded: (1) the completion and sale of the 3rd 9MW capacity power station of Erdos Phase II project through sales-type leasing arrangements, (2) the completion and sale of the 12MW Shenqiu biomass power generation system and (3) $1.18 million from contingent rental income. In comparison, net sales of systems for the comparable year 2010 reflected  (1) the completion and sale of the second 9MW capacity power station of Erdos Phase I project through sales-type lease in the first quarter of 2010; Phase I project included two 9MW units, the first 9MW capacity power station was completed and sold in December of 2009; (2) the completion of transformation and sale of Pucheng Biomass Power Generation System; (3) the completion and sale of Zhongbao Waste Heat Power Generation System; (4) the completion and sale of two 9MW capacity waste heat power generation systems of Erdos Phase II project through sales-type lease in the fourth quarter of 2010; Phase II project included three 9MW units; and (5) contingent rental income of $1.32 million from actual usage of the electricity in addition to the minimum lease payments from our Shengwei Group - Tongchuan Project, Erdos Project and Shenmu Project. For the sales-type lease, sales and cost of sales are recorded at the time of leases; interest income from the sales-type leases is our other major revenue source in addition to sales revenue. 

Cost of sales for the year ended December 31, 2011 was $23.01 million, while cost of sales for the comparable year of 2010 was $57.03 million, a decrease of $34.02 million. The decrease was primarily attributable to the fact that the 3rd 9MW capacity power station for the Erdos Phase II project and the Shenqiu biomass power generation system were completed and sold during the year ended December 31, 2011, compared to the year of 2010 when cost of sales consisted of the second 9MW capacity power station of Erdos Phase I project, the first and the third 9MW waste heat power generation system of Erdos Phase II project, the Pucheng biomass power generation system and the Zhongbao WHPG System.

Gross profit was $8.28 million for the year ended December 31, 2011, compared to $18.57 million for the year 2010, with a gross margin of 26 percent and 25 percent for the years of 2011 and 2010, respectively.

Interest income on sales-type leases for the year ended December 31, 2011 was $22.10 million, a $6.96 million increase from $15.14 million for the year 2010. During the year ended December 31, 2011, the interest income was derived from twelve systems: two TRT systems, two CHPG systems, one WGPG system, two waste heat power generating systems associated with our Erdos Phase I project and three systems of Erdos Phase II project, and the Pucheng biomass power generation system and Zhongbao WHPG system. During the year ended December 31, 2010, interest income was generated from eight systems: two TRT systems, two CHPG systems, one WGPG system, two waste heat power generating systems associated with our Erdos Phase I project, and the Pucheng biomass power generation system.

Operating expenses consisted of selling, general and administrative expenses totaling $4.74 million for the year ended December 31, 2011 as compared to $6.34 million for the year 2010, a decrease of $1.6 million or 25 percent. The decrease was mainly due to $1.46 million for stock option compensation during the year ended December 31, 2011, compared to $3.54 million for the year of 2010, and partially offset by the proportional increases in payroll, welfare, business trip and marketing expenses as a result of the continuous expansion of the Company's business.

Net income for the year ended December 31, 2011 was $21.45 million compared to $16.03 million for the year 2010, an increase of $5.42 million. This increase in net income was mainly due to the decreased operating expense and income tax expense, and increased interest income from lease payments for energy saving systems compared with the year 2010.

For the year ended December 31, 2011, GAAP diluted EPS was $0.39 with approximately 46.5 million shares of common stock outstanding, as compared with $0.33 for the year ended 2010, when the Company had approximately 39.2 million shares of common stock outstanding.

Financial Position as of December 31, 2011

As of December 31, 2011, the Company had cash and cash equivalents of $14.95 million, other current assets were $31.42 million and current liabilities were $30.98 million.  Total shareholders' equity was $108.21 million, as compared to $70.81 million as of December 31, 2010.

Net Investment in Sales-Type Leases as of December 31, 2011
The Company, through its subsidiary, Shanghai TCH Energy Technology Co., Ltd ("Shanghai TCH"), sells and leases energy saving systems and equipment. Under sales-type leases, Shanghai TCH leased the following: TRT systems to Xingtai and Zhangzhi with terms of 5 and 13 years, respectively; CHPG systems to Tong Chuan Shengwei and Jin Yang Shengwei for 5 years, respectively; WGPG systems to Shenmu for 10 years; BMPG systems to Pucheng and Shenqiu for terms of 15 years and 11 years, respectively; and power and steam generating system from waste heat from metal refining to Erdos for 20 years. The components of the net investment in sales-type leases as of December 31, 2011 and December 31, 2010 are as follows:

 

2011

2010

Total future minimum lease payments receivable

$400,972,427

$379,641,671

Less: executory cost

(106,560,187)

(99,866,170)

Less: unearned interest income

(158,110,200)

(154,564,733)

Net investment in sales - type leases

136,302,040

125,210,768

Current portion

8,725,345

7,624,637

Noncurrent portion

$127,576,695

$117,586,131

As of December 31, 2011, the future minimum rentals to be received on non-cancelable sales-type leases by years are as follows: 

2012

$37,140,831

2013

33,910,375

2014

27,905,951

2015

25,528,105

2016

25,528,105

Thereafter

250,959,059

Total

$400,972,426

Non-GAAP Financial Measures

The Company believes that "adjusted net income" and "adjusted earnings per share" information, when taken in conjunction with reported results, provide a useful measure of financial performance since they eliminate the impact of certain non-recurring, non-cash charges. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Additionally, the non-GAAP financial measures used by CREG may not be comparable to non-GAAP financial measures used by other companies.

 

 

(In '000s of U.S. Dollars, except for per share data)

3 Months

Ended Dec 31

Full Year  
Ended Dec 31

Adjusted Net Income and EPS

2011

2010

2011

2010

Net Income

4,537

5,806

21,450

16,033

Adjustments

 

 

 

 

Deferred Income Taxes

(2,009)

2,021

6

4,517

Interest expense related to beneficiary conversion feature
of convertible debentures

7,696

464

12,116

1,790

Stock based compensation expenses

(156)

1,022

1,455

3,543

Interest income from changes in fair value of conversion liability

(1,793)

 

(11,772)

 

Gain on settlement of debt

(8,251)

0

(8,251)

 

Adjusted Net Income (1)

23

9,312

15,005

25,882

Basic Weighted Average Shares Outstanding (Shares)

44,811,946

38,778,035

42,454,304

38,837,656

Adjusted EPS in Non-GAAP (1)

0.00

0.24

0.35

0.67


For the year ended December 31, 2011, Non-GAAP net income was $15.01 million, as compared to $25.88 million in the same period of 2010.

(1) CREG provides adjusted net income and earnings per share on a non-GAAP basis that excludes non-cash, share-based compensation expense and non-cash interest expense on the amortization of the beneficial conversion feature for the convertible notes and non-cash deferred income tax expenses, as described below, to enable investors to better assess the Company's operating performance. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "About Non-GAAP Financial Measures."

Fourth Quarter 2011 Financial Results Conference Call

The Company will host a conference call at 8:00 am. EDT on Friday, March 23, 2012, to discuss the Company's 2011 fourth quarter and year-end financial results.  Mr. Guohua Ku, Chief Executive Officer, and Mr. David Chong, Chief Financial Officer, will be hosting the call.

Conference Call Friday March 23, 2012 8:00 a.m. EDT

Investors are invited to participate on the live call by dialing 1 (877) 941-1427 for domestic callers and +1 (480) 629-9664 for international callers.

Live Webcast Friday March 23, 2012 8:00 a.m. EDT

Investors that would like to listen to a live webcast of the call, please access the following URL approximately 5 minutes before the start of the conference call:
http://event.on24.com/r.htm?e=443660&s=1&k=198108B1F049448DBD2C71C47343AE2B.

Telephonic Replay and Webcast Archive

If you are unable to participate in the live call or webcast, a telephonic replay of the call will be available for one week following the call's conclusion. To listen to the replay, domestic investors can dial +1 (800) 406-7325 and international investors can dial +1 (303) 590-3030.  The pass code for the replay is: 4526814.

An archive of the webcast will be available for 90 days following the call's conclusion by accessing the following URL: http://event.on24.com/r.htm?e=443660&s=1&k=198108B1F049448DBD2C71C47343AE2B

For more information regarding China Recycling Energy Corp's financial performance during the year ended December 31, 2011, please refer to the Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 22, 2012.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the effect of non-cash, non-operating expenses related to the Convertible Notes issued in April 2008, and the compensation expenses for the fair value of stock options, as well as deferred income tax expenses. The Company uses non-GAAP financial measures when it internally evaluates the performance of its business and makes operating decisions, including internal budgeting and performance measurement. The Company believes that providing the non-GAAP measures is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand CREG's financial performance in comparison to historical periods, and it allows investors to evaluate CREG's performance using the same methodology and information as that used by the Company's management. However, investors need to be aware that non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP, and they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure.

About China Recycling Energy Corp.

China Recycling Energy Corp. (NASDAQ: CREG or "the Company") is based in Xi'an, China and provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources. The Chinese government has adopted policies to encourage the use of recycling technologies to optimize resource allocation and reduce pollution. Currently, recycled energy represents only an estimated 1 percent of total energy consumption and this renewable energy resource is viewed as a growth market due to intensified environmental concerns and rising energy costs as the Chinese economy continues to expand. The management and engineering teams have over 20 years of experience in industrial energy recovery in China. For more information about CREG, please visit http://www.creg-cn.com.

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Recycling Energy Corp. and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements." These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. 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 at http://www.sec.gov. All forward-looking statements attributable to the Company or 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.

For more information, please contact:

Mr. David Chong
Chief Financial Officer
China Recycling Energy Corp.
Tel:   +86-1370-1813139
Email: chongscd@creg-cn.com

SOURCE China Recycling Energy Corp.

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