SORL Auto Parts, Inc. Reports Fiscal Third Quarter 2008 Financial Results


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Revenue increased 11.0% year-over-year to $33.0 million

9-Month revenue increased 27% year-over-year to $ 105.8

Gross profit margin of 25.5% as compared with 22.3% in the prior year

ZHEJIANG, China, November 12, 2008: SORL Auto Parts, Inc., a leading manufacturer and distributor of commercial vehicle air brake valves and other auto parts in China, today announced financial results for the third quarter ended September 30, 2008.

Third Quarter Results

Revenue for the third quarter of 2008 was $33.0 million, an 11.0% increase from $29.7 million for the same period in 2007. Revenue from China's domestic OEM market, China's domestic aftermarket and international markets for the third quarter of 2008 were $10.4 million, $8.4 million, and $14.1 million, respectively. For the nine months ending September 30, 2008, revenues increased 27% to $105.8 million as compared to $83.3 million during the first nine months of 2007. The increase in revenue over the ninth month period was the result of the continued expansion of the Chinese commercial vehicle market, the introduction of new products and systems, and the continued growth of our export business. For several reasons, including the introduction of new emission standards in China and the impact of the 2008 Olympics in Beijing, OEM customers in China skewed their production toward the first half of 2008 with the result that their parts orders increased at a greater rate in the first half of the year than in the third quarter. This adjustment in OEM order patterns is the primary reason why third quarter revenue growth was below the level achieved over the nine month period.

Gross profit for the third quarter of 2008 was $8.4 million, a 26.8% increase as compared to $6.6 million for the same period in 2007. Gross profit margin reached 25.5% as compared 22.3% in the same quarter last year. For the nine months ended September 30, 2008, gross profit grew by $9.8 million to $28.5 million, and gross margin increased 450 basis points to 26.9% as compared to 22.4% for the same period in 2007. The higher gross margin was the result of various factors including price increases, the sale of more systems versus individual components, and ongoing improvements in manufacturing efficiency.

Operating expenses increased $1.5 million from $4.0 million in the third quarter of 2007 to $5.5 million in the same quarter in 2008. As a percentage of revenue, operating expenses increased from 13.3% in the third quarter of 2007 to 16.7% in the same quarter in 2008. For the nine months ended September 30, 2008 operating expenses as a percentage of revenue were 14.7% as compared to 11.3% during the prior year period. In addition to the general growth of the business, several factors contributed to the increase in operating expenses. The most significant increase in operating expense was a 160% increase in research and development expense, from $0.9 million during the first nine months of 2007 to $2.5 million during the first nine months of 2008, a reflection of increased investment in new product development such as electronic components. Other factors included increases in packaging costs, increased wages and benefits for employees, and an increase in bad debt allowance due to concerns about the possible impact of the global credit crisis on collections from accounts receivable.

Operating income increased 8.9% from $2.7 million in the third quarter of 2007 to $2.9 million in the third quarter of 2008. As a percentage of revenue, operating income was 8.8% in the third quarter of 2008 as compared to 9.0% in the prior year period. For the nine months ended September 30, 2008, operating income increased 39.8% to $12.9 million, as compared to the same period in 2007. Also, for the nine months ended September 30, 2008, operating income as a percentage of revenue was 12.2% as compared to 11.1% during the prior year period.

Net income increased 10.9% from $2.1 million in the third quarter of 2007, or $0.12 per share, to $2.3 million in the third quarter of 2008, or $0.13 per share. Net margin of 7.1% in the third quarter of 2008 was the same as in the third quarter of 2007. For the nine months ended September 30, 2008, net income grew by 27.3% to $10.6 million, or $0.58 per diluted share, as compared $8.3 million, or $0.45 per diluted share, during the prior year period. For both the first nine months of both 2007 and 2008, net margin was 10%, a result of the increase in gross margin offset by the increase in operating expenses.

"We are satisfied with our overall performance in the third quarter of 2008," said Xiaoping Zhang, SORL Auto Parts' CEO and Chairman. "Despite the stagnant global economic environment, our third quarter revenue continued to experience growth by 11% year-over-year, and we maintained a relatively high gross margin of 26.9% for the first three quarters of 2008. As we look to the future we have to recognize that the current condition of the global economy may present us with great challenges. The credit crisis that started in the US has spread throughout the global economy and now appears to be having an impact on the real economy. The US seems likely to experience negative economic growth over the next few quarters and vehicle sales in the US have fallen off dramatically. There are signs that similar trends will be felt throughout the global economy. This includes China which recently reported that growth has slowed significantly as compared to the 2007 level. We also believe that this slowdown has begun to impact the vehicle market in China. Given changes in the economic environment since the onset of the financial crisis we will make the follow adjustments. We will put maximum effort into developing high potential market segments including buses and agricultural vehicles. We will also continue to work to sell more systems, as opposed to individual components, as systems sales provide higher margins and also secure better customer relationships.

Also in the interest of better customer relationships, we will put more resources into serving our better customers, including having more SORL technical personnel onsite regularly, while at the same time paring relationships with customers that present unacceptable credit risk. We will also develop new customers cautiously, particularly as relates to credit risk. Finally, we will continue our efforts relative to manufacturing efficiency in order to sustain and build upon the gross margin improvement we have been making.

In summary, we will continue to pursue growth while minimizing our risk and improving our gross margins by ongoing improvements in operating efficiency."

Management will host a conference call at 8:30 am ET on Wednesday, November 12, 2008. Listeners may access the call by dialing (913) 312-0955. A live webcast of the conference call will also be available at VIAVID . A replay of the call will be available from November 12, 2008 to November 19, 2008. Listeners may access the replay by dialing (719) 457-0820; passcode: 2602254.

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