SHENZHEN, China, March 12, 2010—Cogo Group, Inc. (NASDAQ: COGO), a leading provider of customized design solutions for the technology manufacturing sector in China, today announced unaudited financial results for its fourth quarter and full year ended December 31, 2009. The Company reported record quarterly revenue of $88.1 million, up 7.0% year-over-year compared to $82.3 million reported in the fourth quarter of 2008.
Net income attributable to Cogo Group, Inc. for the fourth quarter of 2009 was $4.3 million, up 466.4% from $0.8 million reported in the same period last year, with Non-GAAP net income attributable to Cogo Group, Inc. up 9.1% over the same period last year. Earnings per share (“EPS”) Diluted attributable to Cogo Group, Inc. on a U.S. GAAP basis was $0.11, and Non-GAAP EPS Diluted attributable to Cogo Group, Inc. (excluding share-based compensation expense, acquisition-related costs including amortization of intangible assets and related deferred taxation and extraordinary gain on bargain purchase) was $0.19, up 5.6% from the fourth quarter of 2008.
For the full year 2009, the Company reported revenues of $307.1 million, a 6.9% increase compared to $287.2 million reported for 2008. Net income attributable to Cogo Group, Inc. for 2009 was $11.8 million, down 16.4% from $14.1 million in 2008, and EPS Diluted attributable to Cogo Group, Inc. on a U.S. GAAP basis was $0.32, down from $0.36 reported for the prior year.
Key financial indicators: (All numbers in USD thousands, except share data) Q4 2009(1) Q4 2008(1) Percent (unaudited) (unaudited) Change Net Revenue $82,336 $70,902 16.1% Cost of Sales $70,611 $57,069 23.7% Gross Profit $11,725 $13,833 -15.2% Operating Expenses $11,941 $8,303 43.8% Net Income attributable to Cogo Group, Inc. $759 $6,059 -87.5% EPS Diluted attributable to Cogo Group, Inc. $0.02 $0.15(2) -86.7% Non-GAAP EPS Diluted attributable to Cogo Group, Inc. $0.18 $0.22(2) -18.2% (1) The US dollar amounts are calculated based on the conversion rate of US $1 to RMB 6.8259 as of December 31, 2009 and US $1 to RMB 6.8225 as of December 31, 2008. (2) Included in the Q4 2009 net income attributable to Cogo Group, Inc. was an amount of $2.2 million, a share-based compensation expense recognized in accordance with Accounting Standards Codification(“ASC”) 718,Compensation-Stock Compensation and $0.7 million acquisition related costs, net, such as amortization and impairment of intangible assets and related deferred taxation, and extraordinary gain on bargain purchase. Non-GAAP net income attributable to Cogo Group, Inc., excluding the effects of share-based compensation expense and acquisition related costs, was $7.2 million.
Financial Results
Revenue for the fourth quarter was $88.1 million, an increase of 7.0% compared to $82.3 million reported for the same period in 2008. The revenue breakdown was as follows: $51.3 million, or 58.2% of total sales for digital media (including mobile handsets business), representing a 1.1% increase year-over-year; and $21.7 million, or 24.7% of total sales for telecommunications equipment, representing an 8.7% decrease year-over-year. The Company’s service business contributed $1.2 million in revenues for the fourth quarter and accounted for 1.4% of total sales. During the quarter, Cogo generated revenue of $13.9 million from component sales relating to the Industrial Applications Business. This end-market, which management believes is among the fastest growing markets in China, grew 98.7% versus the fourth quarter of 2008 and represented 15.7% of total sales. The Company is currently targeting opportunities in the electrical grid, smart meter, automotive and railway sectors and over time expects to expand into other verticals in the Industrial sector, such as cleantech, medical and security.
Cost of sales, which includes the aggregate purchase of components from suppliers and the direct cost of services, was $75.3 million compared to $70.6 million in the fourth quarter of 2008, representing an increase of 6.6% year-over-year. Gross profit for the fourth quarter was $12.8 million, up 9.2% compared to $11.7 million during the fourth quarter of last year. Gross margin for fourth quarter was 14.5% compared to 14.2% reported for the fourth quarter of 2008.
Operating expenses, including selling, general and administrative, and research and development (R&D) expenses as well as provision of doubtful accounts, totaled $8.5 million, down 29.1%, compared to $11.9 million reported for the fourth quarter of last year.
Net income attributable to Cogo Group, Inc. for the fourth quarter of 2009 was $4.3 million or EPS Diluted attributable to Cogo Group, Inc. of $0.11 on a U.S. GAAP basis, compared to net income of $0.8 million, or EPS Diluted attributable to Cogo Group, Inc. of $0.02, in the fourth quarter of 2008. Included in the fourth quarter of 2009, net income attributable to Cogo Group, Inc. was $2.2 million for share-based compensation expense and $0.7 million for acquisition related costs, including amortization of intangible assets and related deferred taxation. Excluding stock-based compensation expenses and acquisition related costs including amortization of intangible assets and related deferred taxation, the net income attributable to Cogo Group, Inc. would have been $7.2 million or $0.19 Non-GAAP EPS Diluted attributable to Cogo Group, Inc. for the fourth quarter of 2009. The weighted average number of shares used in the calculation of diluted EPS was 38.0 million compared to 36.7 million in the fourth quarter of 2008.
For the full year 2009, the Company reported revenue of $307.1 million, up 6.9% from the year ended 2008. Cost of sales was $263.0 million, an increase of 9.2% compared to the $240.8 million reported last year. Gross profit was $44.1 million, a decrease of 4.9% from $46.4 million in 2008. Gross margin was 14.4% of sales, compared to 16.2% last year.
Operating expenses, including selling, general and administrative expenses, research and development expenses as well as provision for doubtful accounts, totaled $33.4 million, as compared to $35.8 million for last year. Income from operations was $10.7 million, a slight increase of 0.7% from $10.6 million reported in the prior year.
The Company had an effective tax rate of 10.9% compared to 2.2% last year. Included in the income tax expense for the year ended December 31, 2009 was a deferred income tax benefit of $0.7 million, resulting from amortization of intangible assets of $4.2 million. There was income attributable to noncontrolling interest of $0.4 million during the year, compared to $0.2 million for 2008. Net income attributable to Cogo Group, Inc. for 2009 decreased by 16.4% to $11.8 million or $0.32 per fully diluted share, compared to $14.1 million or $0.36 per fully diluted share for the same period last year.
Balance Sheet
The Company completed fiscal year 2009 with cash of $97.8 million, down $100.6 million versus 2008, attributable to the Company’s stock repurchase program and acquisition payments. Pledged bank deposits were $17 million at the end of 2008 and 2009. Inventory increased from $14.1 million at the end of 2008 to $21.4 million as of December 31, 2009. Accounts receivable increased from $73.0 million at the end of 2008 to $90.5 million as of December 31, 2009, and accounts payable decreased from $15.8 million in 2008 to $11.9 million in 2009. Accounts receivable and inventory increased due to the Company’s growth and expansion in the second half of 2009. Intangible assets decreased from $17.7 million at the end of 2008 to $17.0 million as of December 31, 2009, and goodwill increased from $17.1 million at the end of 2008 to $28.8 million as of December 31, 2009. Bank borrowings at the end of 2009 amounted to $17.5 million as compared to no bank borrowings reported as of December 31, 2008. Cogo Group, Inc. equity was $226.1 million as of December 31, 2009, an increase of 9.9% from $205.8 million as of December 31, 2008.
Business Outlook
As announced on February 4, 2010, management’s guidance for the first quarter of 2010 is $70-72 million in revenue and estimated Non-GAAP EPS Diluted of $0.14-0.15. The Company continues to target gross margins of 15% and operating margins of 10%.
Jeffrey Kang, CEO and Chairman of Cogo, remarked, “Management is encouraged by Cogo’s results in the fourth quarter of 2009, and we are very optimistic about 2010. We are seeing promising new lines of business in the automotive, HDTV, smart meters and 3G handset areas. We are using our balance sheet to help drive growth and buyback stock, and we see tremendous new opportunities in the industrial applications end-markets and expect a growing Small and Medium Enterprise customer base. The 3G handset situation is improving with increased demand and increase in dollar content per device. We believe that the opportunities for growth within our telecom business are stronger than popular opinion would suggest. The new, five million share stock repurchase program firmly supports our belief in the Company’s long-term growth potential. I would like to reiterate our view that the worst of China’s economic situation is behind us, and we are ready to move forward into a high-growth and margin expansion mode for 2010.”
Currency Exchange Rates Impacts on Annual Results
The annual revenue for the full year 2009 was $307.1 million. Total revenue normalized by adding the results of the four quarters together would have been $307.0 million*. Normalized Non-GAAP EPS Diluted based on the addition of the results of the four quarters would have been $0.64. Because the Chinese Yuan has appreciated against the US dollar during 2009, the full year revenue was $0.1 million higher than the normalized revenue.
* The US dollar amounts are calculated based on the conversion rates of USD 1 to RMB 6.8329 as of March 31, 2009 for the first quarter, USD 1 to RMB 6.8302 as of June 30, 2009 for the second quarter, USD 1 to RMB 6.8262 as of September 30, 2009 for the third quarter and US $1 to RMB 6.8259 as of December 31, 2009 for the fourth quarter and the consolidated 2009 full year.
About Cogo Group, Inc.:
Cogo Group, Inc. (NASDAQ: COGO) is a leading provider of customized module and subsystem design solutions in China. The Company believes it acts as a proxy to China's technology industry as it works with virtually all the major ODMs and OEMs in China. Cogo leverages these relationships and combines their IP to create designs that Cogo then sells to electronic manufacturers. These designs allow manufacturers to reduce their time to market for new products and ultimately increase sales. Cogo Group focuses on the mobile handset, telecommunications equipment and digital media end-markets for its customized design modules while also offering business and engineering services to their large telecommunications equipment vendor customers. Over the last twelve years, Cogo has grown its customer list to include more than 1,200 manufacturers across the mobile handset, telecommunications equipment, industrial and consumer markets, covering both multinational Chinese subsidiaries and Chinese domestic companies.
About Non-GAAP Financial Measures:
To supplement Cogo's consolidated financial results presented in accordance with GAAP, Cogo uses the following measures defined as Non-GAAP financial measures by the SEC: 1) Non-GAAP net income attributable to Cogo Group, Inc. which is net income attributable to Cogo Group, Inc. excluding share-based compensation expenses and acquisition related costs, net, such as amortization and impairment of intangible assets, related deferred taxation, extraordinary gain on bargain purchase and impairment of goodwill and 2) Non-GAAP basic and diluted earnings per share attributable to Cogo Group, Inc., which is basic and diluted earnings per share excluding share-based compensation expenses and acquisition related costs such as amortization and impairment of intangible assets, related deferred taxation, extraordinary gain on bargain purchase and impairment of goodwill. The presentation of these Non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these Non-GAAP financial measures, please see the table captioned “Unaudited Reconciliations of Non-GAAP measures to the most comparable GAAP measures” set forth at the end of this release.
Cogo believes that these Non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based expenses and acquisition related costs such as amortization and impairment of intangible assets that may not be indicative of its operating performance from a cash perspective. Cogo believes that both management and investors benefit from referring to these Non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These Non-GAAP financial measures also facilitate management's internal comparisons to Cogo's historical performance and liquidity. Cogo computes its Non-GAAP financial measures using the same consistent method from quarter to quarter. Cogo believes these Non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using Non-GAAP net income, Non-GAAP basic and diluted earnings per share, Non-GAAP income from operation and Non-GAAP operating margin is that these Non-GAAP measures exclude share-based compensation charge and acquisition related costs such as amortization and impairment of intangible assets, related deferred taxation, extraordinary gain on bargain purchase and impairment of goodwill that have been and will continue to be for the foreseeable future a recurring expense in our business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each Non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are most directly comparable to Non-GAAP financial measures.
Tables Attached
COGO GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
(in thousands, except share data)
December 31,
2009 2009 2008
$'000 RMB'000 RMB'000
ASSETS
Current assets:
Cash 97,764 667,320 686,379
Pledged bank deposits 17,000 116,040 115,983
Accounts receivable, net 90,481 617,613 497,992
Bills receivable 2,577 17,592 13,555
Inventories 21,408 146,132 95,855
Income taxes receivable 185 1,263 -
Prepaid expenses and other
receivables 4,114 28,083 20,211
Total current assets 233,529 1,594,043 1,429,975
Property and equipment, net 2,637 17,993 17,848
Intangible assets, net 17,677 120,602 148,659
Goodwill 17,095 116,632 99,474
Investment in an affiliated
company 61 416 416
Other assets 175 1,192 1,063
TOTAL ASSETS 247,242 1,686,810 1,840,540
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable 11,887 81,140 107,512
Bank borrowings 17,492 119,402 -
Income taxes payable 1,736 11,847 8,225
Accrued expenses and other
liabilities 20,218 138,008 141,925
Total current liabilities 51,333 350,397 257,662
Deferred tax liabilities 2,799 19,108 19,693
Total liabilities 54,132 369,505 277,355
Equity:
Common stock
Par value: USD0.01
Authorized: 200,000,000 shares
Issued: 40,079,336 shares
Outstanding: 35,770,025 shares
in 2009 35,231,661 shares in 2008 477 3,258 3,196
Additional paid in capital 178,957 1,221,538 1,146,840
Retained earnings 88,554 604,464 524,240
Accumulated other comprehensive
loss (15,732) (107,384) (107,645)
252,256 1,721,876 1,566,631
Less cost of common stock in
treasury, 4,309,311 shares in
2009 and 3,944,411 shares in 2008 (26,122) (178,309) (162,687)
Total Cogo Group, Inc. equity 226,134 1,543,567 1,403,944
Noncontrolling interest 1,239 8,455 5,511
Total equity 227,373 1,552,022 1,409,455
Commitments and contingencies
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 281,505 1,921,527 1,686,810
COGO GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(in thousands, except share data)
Year ended December 31,
2009 2009 2008 2007
USD RMB RMB RMB
Net revenue
Product sales 302,790 2,066,815 1,931,845 1,597,818
Services revenue 4,307 29,401 27,695 68,690
307,097 2,096,216 1,959,540 1,666,508
Cost of sales
Cost of goods sold (259,477) (1,771,166) (1,624,101) (1,297,225)
Cost of services (3,475) (23,716) (18,664) (46,368)
(262,952) (1,794,882) (1,642,765) (1,343,593)
Gross profit 44,145 301,334 316,775 322,915
Selling, general
and administrative
expenses (18,290) (124,842) (152,898) (120,580)
Research and
development
expenses (9,889) (67,504) (50,947) (40,973)
Provision for
doubtful accounts (5,272) (35,992) (6,847) (15,051)
Impairment loss of
goodwill and
intangible assets - - (33,759) -
Other operating
income, net 17 116 214 170
Income from
operations 10,711 73,112 72,538 146,481
Interest expense (288) (1,963) (1,056) (2,335)
Interest income 2,123 14,490 27,895 25,637
Earnings before
income taxes and
extraordinary item 12,546 85,639 99,377 169,783
Income tax expense (1,349) (9,207) (2,215) (14,275)
Income before
extraordinary item 11,197 76,432 97,162 155,508
Extraordinary item,
net of nil tax 987 6,737 - -
Net income 12,184 83,169 97,162 155,508
Less net income
attributable to
noncontrolling
interest. (431) (2,945) (1,255) (3,065)
Net income
attributable to
Cogo Group, Inc. 11,753 80,224 95,907 152,443
Earnings per share
attributable to
Cogo Group, Inc.
Income before
extraordinary item 0.29 2.01 2.49 4.12
Extraordinary item 0.03 0.19 - -
- Basic 0.32 2.20 2.49 4.12
Income before
extraordinary item 0.29 1.95 2.42 3.98
Extraordinary item 0.03 0.18 - -
- Diluted 0.32 2.13 2.42 3.98
Weighted average
number of common
shares outstanding
- Basic 36,541,037 38,488,861 36,974,100
- Diluted 37,673,351 39,585,921 38,306,969
Amounts
attributable to
Cogo Group, Inc.
Income before
extraordinary item 10,766 73,487 95,907 152,443
Extraordinary item 987 6,737 - -
Net income
attributable to
Cogo Group, Inc. 11,753 80,224 95,907 152,443
Comprehensive
income:
Net income 12,184 83,169 97,162 155,508
Other comprehensive
income (loss), net
of tax
Foreign currency
translation
adjustments 38 260 (44,570) (45,766)
Comprehensive
income 12,222 83,429 52,592 109,742
Less:
comprehensive
income, net of tax
attributable to
noncontrolling
interest (431) (2,944) (1,256) (2,955)
Comprehensive
income
attributable to
Cogo Group, Inc. 11,791 80,485 51,336 106,787
COGO GROUP, INC.
UNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO THE MOST COMPARABLE GAAP
MEASURES
FOR THE QUARTERS ENDED DECEMBER 31, 2009 AND 2008
(in thousands, except share data)
For the For the
quarter ended quarter ended
Dec 31, 2009 Dec 31, 2008
(unaudited) (unaudited)
Net Income $' 000 $' 000
GAAP net income attributable to
Cogo Group, Inc. 4,299 759
Share-based compensation expense 2,191 1,504
Acquisition related costs, net
-amortization and impairment of
intangible assets and related
deferred taxation, extraordinary
gain on bargain purchase and
impairment of goodwill 734 4,332
Non-GAAP net income attributable
to Cogo Group, Inc. 7,224 6,595
Earnings per share $ $
GAAP net income attributable to
Cogo Group, Inc. per common
share-Diluted 0.11 0.02
Non-GAAP net income attributable
to Cogo Group, Inc. per common
share-Diluted 0.19 0.18
COGO GROUP, INC.
UNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO THE MOST COMPARABLE
GAAP MEASURES
FOR THE QUARTERS ENDED MARCH 31, JUNE 30, SEPTEMBER 30 AND
DECEMBER 31, 2009
(in thousands, except share data)
Quarters Ended
Mar 31 Jun 30 Sep 30 Dec 31 Total
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
$'000 $'000 $'000 $'000 $'000
Revenue 63,268 73,589 82,042 88,084 306,983
Net Income
GAAP net income
attributable to
Cogo Group, Inc. 1,555 2,532 3,363 4,299 11,749
Share-based
compensation
expense 2,082 2,183 2,191 2,191 8,647
Acquisition related
costs, net
- amortization and
impairment of
intangible assets,
related deferred
taxation and
extraordinary gain
on bargain
purchase 899 966 1,129 734 3,728
Non-GAAP net
income 4,536 5,681 6,683 7,224 24,124
Earnings per share $ $ $ $ $
GAAP net income
attributable to
Cogo Group, Inc.
per common share-
Diluted 0.04 0.07 0.09 0.11 0.31
Non-GAAP net income
attributable to
Cogo Group, Inc.
per common share-
Diluted 0.12 0.15 0.18 0.19 0.64
Weighted average
number of shares
outstanding # # # #
- Basic 35,929,788 36,330,036 36,809,304 37,086,445
- Diluted 37,264,100 37,698,805 37,745,926 37,996,249
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