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American Dairy Reports Second Quarter 2006 Financial Results

Posted on: Monday, 14 August 2006, 18:00 CDT

American Dairy, Inc. (NYSE Arca: ADY), one of the leading producers and distributors of milk powder and soybean products in China, today announced second quarter 2006 financial results. The Company plans to file its SEC Form 10-Q today.

Financial highlights from the second quarter of 2006 versus the second quarter of 2005 include:

-- Net income increased 86% to $5.3 million, or $0.31 per diluted

share in 2Q06, from $2.8 million, or $0.18 per diluted share

in 2Q05

-- Revenue increased 72% to $26.1 million in 2Q06 from $15.1

million in 2Q05

-- Gross profit grew 75% to $13.2 million in 2Q06 from $7.5

million in 2Q05

-- Gross margin increased to 50.7% in 2Q06 from 49.9% in 2Q05

-- Income from operations increased 52% to $4.3 million from $2.8

million in 2Q05

Leng You Bin, Chief Executive Officer and President of American Dairy stated, "Our leading infant formula and milk powder products continued to drive significant year over year revenue growth in the second quarter, despite the seasonal slowness associated with the hot summer months. We also reinvested in the business with a focus on brand strength and expanding our geographical presence, while continuing to deliver improved gross margin and operating income performance."

Quarter Ended June 30, 2006

Net income increased 86% to $5.3 million in the second quarter of 2006 from $2.8 million in the second quarter of 2005. Earnings per diluted share increased 72% to $0.31 in the second quarter of 2006 from $0.18 in the second quarter of the previous year. During this period, diluted shares outstanding increased to 17.1 million from 15.4 million in the second quarter of 2005. Net income performance reflects continued revenue growth, gross margin improvement, and the continued benefit of Value Added Tax (VAT) rebates received from the Heilongjiang Province.

Revenue for the second quarter was $26.1 million, an increase of $11.0 million or 72% from $15.1 million in the second quarter of 2005. The increased popularity of the Feihe brand in mainland China continued to drive revenue growth in the second quarter. Sales quantities increased 53% to 6.1 million kilograms in the second quarter of 2006, up from 4.0 million kilograms in the prior year period, driven by increased sales quantities of major products. Specifically, sales volume for the Company's milk power with nucleotides increased 168%, rice powder increased 89%, CPP series increased 37%, and the Ca+Zn product increased 25% as compared to the second quarter of 2005.

Gross profit increased $5.7 million, or 75%, to $13.2 million from $7.5 million in the second quarter of 2005. Gross margin of 50.7% compared to 49.9% in the prior year's period reflects the successful ramp-up of a new processing facility, which allows the Company to process all whey products in-house. Previously, the Company had to purchase processed whey from other providers in China, which was more expensive.

Income from operations increased $1.5 million, or 52% to $4.3 million from $2.8 million in the second quarter of 2005, despite increased distribution and general and administrative expenses. The Company's distribution expenses, which grew 88% during the second quarter on a year over year basis, reflect continued advertising and promotional efforts, as well as transportation costs associated with improving distribution capacity. General and administration expenses, which increased 149% during the second quarter of 2006 compared to the prior year's period, reflect additional administrative and business expansion activities.

The Company benefited from $1.2 million of other income in the second quarter of 2006 due to VAT rebates received from the Heilongjiang Province. American Dairy, Inc. recognizes VAT rebates at the time of receipt and these rebates are made from the government on a strictly voluntary basis, as an economic incentive to the Company.

Interest and finance costs were $179,000 during the second quarter, related to additional convertible debt issued in 2006.

Leng You Bin explained, "In the second quarter, we continued to benefit from VAT rebates, which the local province has consistently provided to us as an economic incentive. The timing and amount of this payment is discretionary, although it is tied to our sales volume by product category. Our goal is to constantly enhance the health of the Chinese people by expanding our premium brand and delivering mothers and infants the nutrients they need from our high-quality products. We appreciate the Chinese government's continued support in our mutual efforts."

Six Months Ended June 30, 2006

For the six months ended June 30, 2006, revenue increased 78% to $52.0 million from $29.3 million in the first six months of 2005. During this same time period, gross profit improved 86% to $26.8 million from $14.4 million. Income from operations increased 68% to $9.1 million from $5.4 million in the first half of 2005, and net income improved 84% to $10.0 million, or $0.61 per diluted share, from $5.5 million, or $0.36 per diluted share, in the first six months of 2005.

Balance Sheet

As of June 30, 2006, the Company had $16.2 million of cash, compared to $13.0 million at December 31, 2005 and $11.6 million at March 31, 2006. American Dairy had working capital of approximately $12.6 million in at June 30, 2006. The Company had long term debt of $5.5 million as of June 30, 2006.

Guidance

American Dairy is reiterating its previously announced financial expectations for 2006.

The Company continues to expect revenue of $120.0 million, up 76% from $68.0 million in 2005, as well as net income of $20.0 million, up 72% from $11.6 million in 2005. Based on a diluted sharecount of 17.1 million shares, the Company expects net income per diluted share of $1.17 in 2006.

American Dairy's guidance takes into account the following expectations:

-- Increased demand for the Company's products in the seasonally

strong fourth quarter

-- Continued marketing and advertising expenditure in the second

half of 2006

-- Continued VAT rebates in the second half of 2006

About American Dairy, Inc.

American Dairy, Inc. conducts operations in The People's Republic of China ("China") through its wholly owned subsidiary, Feihe Dairy. Founded in 1962, Feihe Dairy is one of the leading producers and distributors of milk powder and soybean products in China. Feihe Dairy is located in Kedong County, China, and has been in operation since 2001. American Dairy also has a milk powder processing plant, BaiQuan Feihe Dairy in Kedong County, and also has a milk powder processing plant in the city of QiQiHaEr, Heilongjiang Province. http://www.feihe.com/

Certain of the statements made herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements typically involve risks and uncertainties and may include financial projections or information regarding our future plans, objectives or performance. Actual results could differ materially from the expectations reflected in such forward-looking statements as a result of a variety of factors, including the risks associated with the effect of changing economic conditions in The People's Republic of China, variations in cash flow, reliance on collaborative retail partners and on new product development, variations in new product development, risks associated with rapid technological change, and the potential of introduced or undetected flaws and defects in products, and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time. AMERICAN DAIRY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, ------------------------- ------------------------- 2006 2005 2006 2005 ------------ ------------ ------------ ------------ SALES $26,110,028 $15,143,413 $52,003,246 $29,264,329 COST OF GOODS SOLD 12,880,859 7,593,697 25,245,965 14,891,055 ------------ ------------ ------------ ------------ Gross Profit 13,229,169 7,549,716 26,757,281 14,373,274 ------------ ------------ ------------ ------------ OPERATING AND ADMINISTRATIVE EXPENSES: Distribution expenses 7,575,358 4,023,034 15,130,920 7,914,636 General and administrative expenses 1,268,021 509,820 2,336,021 779,975 Depreciation 117,133 201,645 167,784 238,608 ------------ ------------ ------------ ------------ 8,960,512 4,734,499 17,634,725 8,933,219 ------------ ------------ ------------ ------------ Income from operations 4,268,657 2,815,217 9,122,556 5,440,055 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Other income (expenses) 1,154,848 51,789 1,286,240 62,135 Interest and finance costs (179,345) (43,756) (402,937) (45,613) ------------ ------------ ------------ ------------ 975,503 8,033 883,303 16,522 ------------ ------------ ------------ ------------ MINORITY INTEREST 17,807 - 20,608 - ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 5,261,967 2,823,250 10,026,467 5,456,577 (PROVISION FOR) BENEFIT FROM INCOME TAXES - - - - ------------ ------------ ------------ ------------ NET INCOME 5,261,967 2,823,250 10,026,467 5,456,577 OTHER COMPREHENSIVE INCOME (LOSS): FOREIGN CURRENCY TRANSLATION ADJUSTMENT (65,606) - 469,354 - ------------ ------------ ------------ ------------ TOTAL COMPREHENSIVE INCOME $5,196,361 $2,823,250 $10,495,821 $5,456,577 ============ ============ ============ ============ BASIC NET INCOME PER COMMON SHARE $0.36 $0.21 $0.70 $0.40 ============ ============ ============ ============ WEIGHTED AVERAGE BASIC SHARES OUTSTANDING 14,579,828 13,756,377 14,373,202 13,656,918 ============ ============ ============ ============ DILUTED NET INCOME PER COMMON SHARE $0.31 $0.18 $0.61 $0.36 ============ ============ ============ ============ WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 17,113,560 15,409,938 16,860,107 15,310,479 ============ ============ ============ ============ See accompanying notes to the condensed consolidated financial statements. AMERICAN DAIRY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2006 AND DECEMBER 31, 2005 ASSETS June 30, December 31, 2006 2005 (unaudited) ------------ ------------ Current assets: Cash $16,179,321 $12,958,435 Accounts receivable Trade-net of allowance for bad debts of $315,264 and $309,461, respectively 5,684,331 4,132,931 Employees 519,283 488,413 Other 481,888 1,516,105 Inventories 10,828,787 9,622,347 Prepaid expenses 347,080 875,031 Advances to suppliers 1,553,303 1,216,172 Other tax refundable - 500,892 ------------ ------------ Total current assets 35,593,993 31,310,326 ------------ ------------ Property and equipment: Fixed assets, net of accumulated depreciation 36,231,916 34,685,898 Construction in progress 2,161,093 3,373,833 ------------ ------------ 38,393,009 38,059,731 ------------ ------------ Total assets $73,987,002 $69,370,057 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31, 2006 2005 (unaudited) ------------ ------------ Current liabilities: Accounts payable and accrued expenses $11,964,466 $11,855,430 Current portion of long term debt 102,375 102,466 Advances from related parties 964,367 932,942 Advances from employees 709,125 947,596 Deferred income 3,761,371 12,073,781 Short-term notes and loans payable 5,508,853 7,323,801 ------------ ------------ Total current liabilities 23,010,557 33,236,016 ------------ ------------ Long term debt, net of current portion shown above 5,488,907 5,543,517 ------------ ------------ Minority interest 442,916 493,500 ------------ ------------ Stockholders' equity: Common stock, $.001 par value; 50,000,000 shares authorized; 14,793,210 and 14,132,824 issued and outstanding at June 30, 2006 and December 31, 2005, respectively 14,793 14,133 Additional paid-in capital 13,659,955 9,208,837 Retained earnings 30,295,259 20,268,793 Accumulated other comprehensive income 1,074,615 605,261 ------------ ------------ Total stockholders' equity 45,044,622 30,097,024 ------------ ------------ Total liabilities and stockholders' equity $73,987,002 $69,370,057 ============ ============ See accompanying notes to the condensed consolidated financial statements. AMERICAN DAIRY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2006 2005 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $10,026,467 $5,456,577 Adjustments to reconcile net income to operating activities - Depreciation 790,235 238,608 Compensation expense for stock issued 910,930 642,850 Changes in assets and liabilities: (Increase) decrease in - Accounts and notes receivable (1,551,400) (3,362,730) Other receivables 1,034,217 (778,623) Employees receivables (30,870) - Inventories (1,206,440) (469,734) Prepaid expenses 527,951 (301,943) Advances to suppliers (337,131) (657,339) Other tax refundable 500,892 (21,324) Increase (decrease) in - Accounts payable and accrued expenses 304,036 (1,073,211) Other liabilities-fixed asset purchases obligations - 5,300,000 Advances from related parties 31,425 (4,415) Advances from employees (238,471) 550,466 Deferred income (8,312,410) (7,434,065) ------------ ----------- Net cash provided by (used in) operating activities 2,449,429 (1,914,883) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (2,336,161) (7,315,504) Payments received on note receivable - 217,391 Minority interest (50,584) 305,285 Construction in progress 1,212,740 (555,073) ------------ ----------- Net cash used in investing activities (1,174,005) (7,347,901) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term loan 3,875,000 6,993,482 Proceeds from long-term loan 391,630 - Repayment of short-term loans (3,082,614) - Proceeds from long-term debt - 2,520,542 Repayment of long-term loans (53,347) (49,902) Issuance of common stock 345,848 550,000 ------------ ----------- Net cash provided by financing activities 1,476,517 10,014,122 ------------ ----------- Effect of exchange rate change on cash and cash equivalents 468,945 - ------------ ----------- NET DECREASE IN CASH AND EQUIVALENTS 3,220,886 751,338 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,958,435 6,645,197 ------------ ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $16,179,321 $7,396,535 ============ =========== AMERICAN DAIRY INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Page 2 of 2 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid, net of capitalized amounts $156,807 $10,017 ============ =========== Income taxes paid $- $- ============ =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During February, 2006, 49,000 shares of the Company's common stock was issued to various directors and service providers. The shares were valued at $434,000. During April 2006, holders of $3,000,000 in convertible debt elected to convert their notes plus accrued interest thereon into 399,375 shares of the Company's common stock. The conversion price was $8.00 per share. During June, 2006, 39,250 shares of the Company's common stock was issued to various directors and service providers. The shares were valued at $477,000.

Source: Business Wire

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