Feihe International, Inc. Reports Second Quarter 2012 Financial Results

BEIJING and LOS ANGELES, CA--(Marketwire -08/09/12)- Feihe International, Inc. (ADY) ("Feihe International" or the "Company") one of the leading producers and distributors of premium infant formula, milk powder and soybean, rice and walnut products in China, today announced financial results for the second quarter of 2012. The Company will hold a conference call today at 8:00 am Eastern Time.

Second Quarter 2012 Financial Highlights:

  • Revenue increased $0.5 million, or 0.8%, to $63.4 million in 2Q12 vs. $62.9 million in 2Q11:
    • Revenue from branded milk powder products was $60.7 million in 2Q12, up $6.6 million, or 12.2%, from $54.1 million in 2Q11, and up $1.3 million, or 2.2%, sequentially from $59.4 million in 1Q12
    • Revenue from raw milk powder was $30,000 in 2Q12, compared to $5.2 million in 2Q11 and $0.9 million in 1Q12
  • Revenue from branded milk powder products was $60.7 million in 2Q12, up $6.6 million, or 12.2%, from $54.1 million in 2Q11, and up $1.3 million, or 2.2%, sequentially from $59.4 million in 1Q12
  • Revenue from raw milk powder was $30,000 in 2Q12, compared to $5.2 million in 2Q11 and $0.9 million in 1Q12
  • Gross profit increased $5.8 million, or 19.7%, to $35.3 million in 2Q12 vs. $29.5 million in 2Q11, and up $1.3 million, or 3.8%, sequentially from $34.0 million in 1Q12
  • Gross margin was 55.7% in 2Q12 vs. 47.0% in 2Q11, up from 54.0% in 1Q12
  • Net income attributable to the common shareholders of the Company increased $0.6 million, or 11.5%, to $5.8 million in 2Q12 vs. $5.2 million in 2Q11
  • Diluted net income from continuing operations per common share ("EPS") was $0.29 in 2Q11 vs. $0.25 in 2Q10.

Mr. Leng You Bin, the Company's Chairman and Chief Executive Officer, stated, "We are extremely pleased with our second quarter results. Our sales of branded milk powder products increased 12.2% compared to the previous quarter, and this continues to be an area of strategic focus for us. We will continue our efforts to expand our sales of higher margin products and strengthen our premium quality brand awareness, while improving the efficiency of our distribution network."

The Company's revenue of $63.4 million in the second quarter of 2012 represented an increase of $0.5 million, or 0.8% compared to the second quarter of 2011. This increase was primarily attributable to an increase in sales of milk powder of $6.6 million, offset by a decrease in sales of raw milk powder of approximately $5.2 million and a decrease in sales of soybean powder of approximately $1.1 million. The decrease in sales of raw milk powder reflects the Company's decision to decrease production of raw milk powder, which generated a negative margin in recent periods.

Gross profit was $35.3 million in the second quarter of 2012, up $5.8 million, or 19.7%, from $29.5 million in the second quarter of 2011, and up $1.3 million, or 3.8%, sequentially from $34.0 million in the first quarter of 2012. Gross margin for the second quarter of 2012 was 55.7%, compared to 47.0% in the second quarter of 2011 and 54.0% in the first quarter of 2012. The increase in gross profit and gross margin were primarily due to general increases in sales of high end milk powder and a decrease in the cost of raw milk powder.

Sales and marketing expenses increased approximately $5.1 million, or 25.6%, to $25.0 million in the second quarter of 2012 from $19.9 million in the second quarter of 2011. The increase was primarily due to an increase in advertisement fees of approximately $1.8 million and of marketing promotion of $5.3 million, offset in part by a decrease in other sales and marketing expenses of approximately $0.6 million. General and administrative expenses approximately increased $0.1 million, or 2.0%, to $5.1 million in the second quarter of 2012 from $5.0 million in the second quarter of 2011.

As a result of the foregoing, income from operations was approximately $5.2 million in the second quarter of 2012, representing a slight decrease of approximately $30,000 in the second quarter of 2011.

Net income attributable to common shareholders of the Company for the second quarter of 2012 was $5.8 million, or diluted EPS of $0.29, as compared to net income attributable to common shareholders of the Company of $5.2 million, or diluted EPS of $0.25, in the second quarter in 2011.

First Half of 2012 Financial Highlights

Revenue decreased $4.2 million, or 3.2%, to $126.3 million in the six months ended June 30, 2012 from $130.5 million in the same period of 2011. Contributions from milk powder products were approximately $120.1 million in the six months ended June 30, 2012, up approximately $18.1 million, or 17.7%, from $102.0 million in the same period of 2011. This decrease in revenue was mainly due to a decrease in sales of raw milk powder of approximately $20.4 million and a decrease in sales of soybean powder of approximately $2.6 million, offset by an increase in sales of milk powder of approximately $18.2 million and an increase in sales of other products of approximately $1.3 million. The decrease in sales primarily reflected our strategic efforts to improve the sales of our high margin infant formula milk powder, particularly our premium Feifan series and super premium AstroBaby series. Gross profit increased approximately $15.3 million, or 28.3%, to $69.3 million in the six months ended June 30, 2012 from $54.0 million in the same period of 2011, primarily attributable to an increase in sales of branded milk powder with a higher margin, a decrease in sales of raw milk powder with a lower margin, and decreased costs of raw milk powder to $1.2 million for the six months ended June 30, 2012 from $22.4 million in the same period of 2011. Gross margin increased from 41.3% for the six months ended June 30, 2011 to 54.9% for the six months ended June 30, 2012. Operating expenses increased by $7.9 million, or 17.0%, to $54.5 million in the six month period ended June 30, 2012 from $46.6 million in same period of 2011, primarily due to an $8.0 million, or 22.3%, increase in sales and marketing expenses. Income from operations increased approximately $4.7 million, or 46.1%, to $14.9 million in the six months ended June 30, 2012, compared to $10.2 million in the prior year period. Net income attributable to common shareholders of the Company for the first six months of 2012 was $14.1 million, or diluted EPS of $0.69, as compared to net income attributable to common shareholders of the Company of $9.9 million, or diluted EPS of $0.48, in the prior year period.

As of June 30, 2012, the Company had cash and cash equivalents of $2.6 million and a working capital of approximately $20.8 million, compared to a working capital deficiency of approximately $8.0 million as of December 31, 2011. The Company has significant cash commitments in the upcoming year, including maturity of short-term bank loans of $46.7 million and the current portion of long term bank loans of $5.9 million. However, the Company believes that will be able to refinance much of its short-term bank loans when they become due and intends to do so.

Mr. Liu Hua, the Company's Vice Chairman and Chief Financial Officer, stated, "We are pleased to report our second quarter 2012 financial results today. The Company's financial performance has significantly improved since last quarter in terms of total sales, gross profit, net income and EPS. We are very confident in our business and will continue focus on sales of premium products. We will maintain quality and safety first and look forward to bringing value to consumers and our shareholders."

Conference Call Details

The Company will hold a conference call on August 9, 2012 at 8:00 am Eastern Time to discuss its results. Listeners may access the call by dialing the following numbers:

United States toll free: 1-888-397-5362
Hong Kong toll free: 800-968-835
Northern China toll free: 10-800-712-0046
Southern China toll free: 10-800-120-0046
International: 1-719-325-2108

The replay will be accessible through August 16, 2012 by dialing the following numbers:

United States toll free: 1-877-870-5176
International: 1-858-384-5517
Password: 2996349

About Feihe International, Inc.

Feihe International, Inc. (ADY) is one of the leading producers and distributors of premium infant formula, milk powder, and soybean, rice and walnut products in the People's Republic of China. Feihe International conducts operations in China through its wholly owned subsidiary, Feihe Dairy, and other subsidiaries. Founded in 1962, Feihe Dairy is headquartered in Beijing, China, and has processing and distribution facilities in Kedong, Qiqihaer, Gannan, Longjiang, Shanxi, and Langfang. Using proprietary processing techniques, Feihe International makes products that are specially formulated for particular ages, dietary needs and health concerns. Feihe International has over 200 company-owned milk collection stations, six production facilities with an aggregate milk powder production capacity of approximately 2,020 tons per day and an extensive distribution network that reaches over 80,000 retail outlets throughout China. For more information about Feihe International, Inc., please visit http://ady.feihe.com.

Cautionary Note Regarding Forward-Looking Statements

This document contains forward-looking information about the Company's operating results and business prospects that involve substantial risks and uncertainties. Statements that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements include, but are not limited to, statements about the Company's plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words "may," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "targets," "could," "would," and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, the Company's actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors" in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011 and in other reports filed with the United States Securities and Exchange Commission and available at www.sec.gov. The Company assumes no obligation to update any such forward-looking statements.

  FEIHE INTERNATIONAL, INC CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) December 31, June 30, 2012 2011 ------------- ------------- US$ US$ Assets Current assets: Cash and cash equivalents 2,586,713 15,353,882 Restricted cash 2,272,790 1,056,579 Notes and loans receivable, net of allowance for doubtful accounts of $3,350,056, as of June 30, 2012 and December 31, 2011 - - Trade receivables, net of allowance for doubtful accounts of $802,799 and $810,864, as of June 30, 2012 and December 31, 2011, respectively 14,617,647 40,690,638 Due from related parties 33,886 194,759 Advances to suppliers 21,936,585 11,841,936 Inventories, net 39,567,572 33,328,949 Prepayments and other current assets - 50,427 Income taxes receivable 2,053,603 1,406,653 Input value-added taxes 2,226,351 965,685 Other receivables 14,160,865 13,742,625 Consideration receivable - current 79,649,378 79,337,423 Investment in mutual funds - available-for- sale 118,534 111,116 Assets held for sale 2,362,061 2,384,391 ------------- ------------- Total current assets 181,585,985 200,465,063 ------------- ------------- Investments: 283,312 285,990 ------------- ------------- Investment at cost 283,312 285,990 ------------- ------------- Property, plant and equipment: Property, plant and equipment, net 124,202,480 128,739,637 Construction in progress 15,374,883 14,895,512 ------------- ------------- 139,577,363 143,635,149 ------------- ------------- Other assets: Advance to suppliers - non-current 5,091,746 3,741,454 Long term deposits 77,486,070 46,139,913 Consideration receivable - non-current - 19,450,201 Deferred tax assets - non-current 9,805,701 9,805,701 Prepaid leases for land use rights 17,890,781 18,280,745 ------------- ------------- Total assets 431,720,958 441,804,216 ------------- ------------- Liabilities Current liabilities: Short term bank loans 46,746,624 54,616,375 Accounts payable 45,051,264 39,077,499 Accrued expenses 7,130,063 6,943,370 Income tax payable 5,142,662 734,389 Advances from customers 12,244,205 17,899,560 Due to related parties 103,205 86,213 Advances from employees 326,456 415,253 Employee benefits and salary payable 7,679,626 9,777,537 Other payables 30,322,310 39,561,388 Current portion of long term bank loans 5,888,973 5,945,439 Current portion of capital lease obligation 131,204 288,066 Accrued interest - 395,783 Redeemable common stock (US$0.001 par value, nil and 1,312,500 shares issued and outstanding as of June 30, 2012 and December 31, 2011) - 32,696,658 ------------- ------------- Total current liabilities 160,766,592 208,437,530 Long term bank loans, net of current portion 2,943,969 5,943,726 Capital lease obligation, net of current portion 280,235 430,180 Other long term loan 59,222,577 32,803,289 Accrued interest - 170,555 Unrecognized tax benefits - non-current 14,914,231 14,806,768 Deferred income 4,817,198 3,711,033 ------------- ------------- Total liabilities 242,944,802 266,303,081 ------------- ------------- Commitments and contingencies Equity Feihe International, Inc. shareholders' equity: Common stock (US$0.001 par value, 50,000,000 shares authorized; 19,784,291 and 19,714,291 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively) 19,784 19,714 Additional paid-in capital 60,576,396 58,920,283 Common stock warrants 1,774,151 1,774,151 Statutory reserves 11,341,427 11,341,427 Accumulated other comprehensive income 40,297,121 42,730,802 Retained earnings 74,767,277 60,696,815 ------------- ------------- Total Feihe International, Inc. shareholders' equity 188,776,156 175,483,192 Noncontrolling interests - 17,943 ------------- ------------- Total equity 188,776,156 175,501,135 ------------- ------------- Total liabilities and equity 431,720,958 441,804,216 ------------- ------------- FEIHE INTERNATIONAL, INC CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 2012 2011 2012 2011 ----------- ----------- ----------- ----------- US$ US$ US$ US$ Sales 63,383,324 62,870,057 126,319,401 130,548,570 Cost of goods sold (28,064,460) (33,348,301) (57,021,933) (76,590,243) ----------- ----------- ----------- ----------- Gross profit 35,318,864 29,521,756 69,297,468 53,958,327 ----------- ----------- ----------- ----------- Operating and administrative expenses: Sales and marketing (24,982,001) (19,879,882) (43,750,179) (35,824,218) General and administrative (5,142,087) (5,034,635) (10,732,322) (10,754,868) ----------- ----------- ----------- ----------- Total operating expenses (30,124,088) (24,914,517) (54,482,501) (46,579,086) ----------- ----------- ----------- ----------- Other operating income, net 3,449 618,807 93,903 2,839,258 ----------- ----------- ----------- ----------- Income from operations 5,198,225 5,226,046 14,908,870 10,218,499 Other income (expenses): Interest income 17,032 24,514 40,505 45,418 Interest and finance costs (1,139,160) (1,029,167) (2,285,113) (2,046,892) Government subsidy 4,636,893 2,473,983 6,198,241 3,994,133 Gain on deregistration of subsidiaries 180,077 - 180,077 - ----------- ----------- ----------- ----------- Income from continuing operations before income tax expenses and noncontrolling interests 8,893,067 6,695,376 19,042,580 12,211,158 Income tax expenses (3,056,413) (1,290,696) (4,939,314) (2,632,379) ----------- ----------- ----------- ----------- Net income from continuing operations 5,836,654 5,404,680 14,103,266 9,578,779 (Loss) Income from discontinuing operations, net of tax - (219,441) - 346,003 ----------- ----------- ----------- ----------- Net income 5,836,654 5,185,239 14,103,266 9,924,782 Net income attributable to noncontrolling interests - (18,942) (24,209) (61,809) ----------- ----------- ----------- ----------- Net income attributable to common shareholders of Feihe International, Inc.     5,836,654 5,166,297 14,079,057 9,862,973 ----------- ----------- ----------- ----------- Net income 5,836,654 5,185,239 14,103,266 9,924,782 Other comprehensive income, net of tax Foreign currency translation adjustments (2,361,407) 3,141,609 (2,491,846) 5,441,060 Change in fair value of available for sale investments 4,757 2,254 7,418 904 ----------- ----------- ----------- ----------- Other comprehensive (loss) income (2,356,650) 3,143,863 (2,484,428) 5,441,964 ----------- ----------- ----------- ----------- Comprehensive income 3,480,004 8,329,102 11,618,838 15,366,746 Comprehensive income (loss) attributable to the noncontrolling interest 42,159 (18,941) 17,943 (43,373) ----------- ----------- ----------- ----------- Comprehensive income attributable to common shareholders of Feihe International, Inc.     3,522,163 8,310,161 11,636,781 15,323,373 =========== =========== =========== =========== Net income from continuing operations per share of common stock Basic 0.29 0.25 0.69 0.48 Diluted 0.29 0.25 0.69 0.48 Net income from continuing operations per share of redeemable common stock Basic 0.29 0.25 0.69 0.43 Diluted 0.29 0.25 0.69 0.43 Net (loss) income from discontinued operations, net of tax per share of common stock Basic - (0.01) - 0.02 Diluted - (0.01) - 0.02 Net (loss) income from discontinued operations, net of tax per share of redeemable common stock Basic - (0.01) - 0.02 Diluted - (0.01) - 0.02 Weighted average shares used in calculating net income per share of common stock Basic 19,742,753 19,671,291 19,728,522 19,671,291 Diluted 19,742,753 19,685,851 19,728,522 19,687,893 Weighted average shares used in calculating net income per share of redeemable common stock Basic 216,346 2,170,673 548,077 2,396,581 Diluted 216,346 2,170,673 548,077 2,396,581