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Longhai Steel, Inc. (LGHS) Reports Substantial Rise in Profitability; Cash Position Greater than Current Market Cap

Longhai Steel, a leading producer of high-quality steel wire in eastern China with annual capacity of 1.5 million metric tons, recently announced its financial results for the three and six months ended June 30, 2012.

“We experienced a very productive first six months of 2012,” stated Steven Ross, Executive Vice President of Longhai Steel. “We achieved record shipment volumes for the second consecutive quarter as the expanded production from our second facility continued to ramp. While revenue was impacted from lower steel prices, the Company sold 295,635 metric tons of steel in the second quarter, a sequential increase of 22% from the first quarter and an increase of 10% compared to the same quarter last year. As we ship more higher value steel wire to a more diversified customer base beginning in the third quarter, we expect further margin upside.”

Gross profit for the three-month period ended June 30, 2012, totaled $4.8 million, representing a gross margin of 3.0% compared to $3.6 million and 2.1%, respectively, in the second quarter of 2011. The company attributed the majority of the gains to a higher spread between steel wire prices and steel billet prices, as billet prices decreased more than wire prices.

Selling, general, and administrative expenses for the three months ended June 30, 2012, were $1.1 million compared to $0.3 in the second quarter of 2011. Capital markets related expenses were the primary cause of the year-over-year increase. Operating income for the three months ended June 30, 2012 increased 13.3% to $3.7 million.

Net income attributable to Longhai common shareholders was reported at $2.4 million, an increase of 31.9% compared to $1.8 million in the second quarter of 2011. Earnings per diluted share was $0.22, an increase of 22.2% compared to $0.18 in the second quarter of 2011, based on 10.7 million and 9.9 million weighted average shares outstanding, respectively.

Consolidated net revenue for the three-month period totaled $160.5 million compared to $165.7 million in the corresponding period a year ago, a decrease of 3.1%. Longhai sold 295,635 metric tons (“MT”) of steel in the second quarter of 2012 compared to 267,938 MT in the same period in 2011.

Net sales for the first half of this year were $296.3 million, an increase of 1.5% compared to the same period a year ago. Longhai shipped 538,011 MT of steel in the first half of 2012 compared to 478,167 MT in the first half of 2011.

Gross profit increased 37.4% in the first six months of 2012 to $10.3 million, representing a gross margin of 3.5%.

Operating income was $7.9 million, up 23.4% from $6.4 million in the first half of 2011. Net income from continuing operations was $5.1 million and fully diluted EPS was $0.49 for the first six months of 2012.

Longhai Steel had approximately $18.0 million of cash and cash equivalents at June 30, 2012, compared to $2.8 million at December 31, 2011. Cash flows from operations were $4.6 million for the first six months of 2012 as higher net income was offset by increases in advances to suppliers related to higher sales activity.

The company had $3.7 million of short-term loans and $9.5 million of banker’s acceptance outstanding at June 30, 2012, compared to $3.6 million and nil, respectively, at December 31, 2011. Total shareholders’ equity increased to $64.3 million at June 30, 2012, from $57.5 million at December 31, 2011. Longhai Steel raised gross proceeds of $1.2 million through an equity financing in the second quarter of 2012.

At the end of the second quarter, Longhai began producing high quality steel wire from its second facility in Xingtai, Hebei province, China. The state-of-the-art facility has a high-speed production line capable of producing a wide variety of conventional and higher value steel wire used in a variety of specialized applications steel wire rope, steel strand, steel belted radial tires, and steel welding rod. According to yesterday’s release, Longhai sold all of its initial production to a major distributor in Hebei for domestic and export markets, which significantly reduces transportation costs and inventory risks. The company also received positive feedback on its new higher value steel wire products and anticipates ramping up production of high quality steel wire to full capacity by the end of this year.

For more information on Longhai Steel, visit www.Longhaisteelinc.com

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