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China Security & Surveillance Technology Reports First Quarter 2009 Financial Results

Posted on: Thursday, 30 April 2009, 06:00 CDT

SHENZHEN, China, April 30 /PRNewswire-Asia/ -- - 1Q09 Revenue Increases 34.3% YoY to $96.42 Million - - 1Q09 Adjusted Net Income Increases 6.9% YoY to $14.67 Million - - 1Q09 Cash Balance Increases Sequentially by $24.69 million to $72.47 Million - Reaffirms FY09 Revenue, Adjusted Net Income, and Adjusted Diluted EPS Forecast

China Security & Surveillance Technology, Inc. ("China Security" or "CSST" or the "Company") (NYSE: CSR) (Nasdaq Dubai: CSR), a leading provider of digital surveillance technology in the PRC, today reported its financial results for the first quarter ending March 31, 2009.

First quarter 2009

First quarter 2009 revenue increased 34.3% to $96.42 million, from $71.78 million in first quarter of 2008, driven by continued strong demand for CSST's products and services in both the government and private sectors. Organic revenue was approximately $87.10 million, or 90.3% of total revenue, while revenue from acquired companies was approximately $9.32 million, or 9.7% of total revenue. As a result, organic revenue grew by $23.46 million, or 36.9%, from $63.64 million in the same period of 2008.

In the first quarter, gross profits increased $2.77 million, or 12.4%, to $25.03 million, compared to $22.26 million for the same period last year. First quarter gross margin of 26.0% expanded from 25.0% in the fourth quarter of 2008, but declined year-over-year from 31.0% in the prior year's first quarter. While pricing in the government sector improved during the quarter, price levels in the corporate sector remained lower than the prior year's levels. Income from operations of $7.98 million in first quarter 2009 decreased $3.16 million, or 28.4%, from $11.14 million in first quarter of 2008. Accordingly, operating margins decreased to 8.3%, versus 15.5% for the same period in 2008, primarily due to lower gross margin and the increase of general and administrative expenses and non-cash employee compensation.

GAAP net income of $2.00 million decreased $2.47 million, or 55.3%, from $4.47 million for the same period in 2008. As a percentage of revenues, GAAP net income decreased to 2.1%, from 6.2% for the same period in 2008. Consequently, earnings per diluted share was $0.04 in first quarter 2009, as compared to $0.11 in first quarter of 2008. GAAP results include: (1) approximately $5.38 million, or $0.11 per diluted share, of non-cash expense related to the redemption accretion on convertible notes; (2) approximately $3.06 million, or $0.06 per diluted share, of non-cash expense related to depreciation and amortization of long-lived assets due to our acquisition of subsidiaries, and (3) approximately $4.22 million, or $0.09 per diluted share, of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).

Excluding these non-cash expenses (see "About Non-GAAP Financial Measures" toward the end of this release), adjusted net income grew 6.9% to $14.67 million, versus $13.72 million in the first quarter of 2008. Adjusted earnings per diluted share was $0.30, a 6.3% decrease from $0.32 per diluted share in the first quarter of 2008, as diluted share count increased 15.3% to 49.36 million, from 42.80 million in the first quarter of 2008.

The Company's cash position at the end of March 31, 2009 increased sequentially by $24.69 million to $72.47 million, from $47.78 million at the end of 2008. Working capital increased sequentially to $241.90 million, versus $231.94 million, and total debt was $174.59 million, up from $163.12 million at the end of 2008.

Mr. Guo Shen Tu, Chief Executive Officer of China Security, commented, "Though the first quarter has seasonally been a slow quarter for us due to the Chinese New Year holiday, I'm delighted that we solidly grew our revenue and generated significant cash from operations. We successfully managed collection of receivables and significantly improved our cash position and working capital. Our first quarter results clearly demonstrate our focus on execution, and I'm pleased that we continue to grow our Company, our brand, and our market leadership. As demand for our products and services remain strong, I'm confident about our abilities to achieve our current revenue and profit forecast for 2009."

Financial Outlook

For the full year 2009, the Company reaffirms its revenue projection of $600 to $630 million. The Company also reaffirms adjusted net income of $108-$113 million and adjusted diluted earnings per share of $2.16-$2.26. The company estimates that non-cash redemption accretion on convertible notes, non-cash employee compensation expense, and depreciation and amortization will be approximately $22.7 million, $18.5 million, and $12.0 million, respectively. The adjusted net income and adjusted earnings per share projections provided above are non-GAAP financial measures and can be reconciled to similar GAAP projections by adding back the estimated non-cash redemption accretion, non-cash employee compensation expense, and depreciation and amortization (see "About Non-GAAP Financial Measures" toward the end of this release).

Mr. Tu concluded, "For the remainder of 2009, we intend to sustain our current momentum and aim to achieve greater synergies across our portfolio of technologies, products, and subsidiaries by focusing on greater cross-selling and cross-development throughout our organization. Even in the context of a slower global economy, we continue to see a growing pipeline of large projects from our core corporate and government customers. Our optimism is supported by our unparalleled product and services offering, our unmatched nationwide distribution, and our leading brand. We believe that our integrated strengths will allow us to expand our market share and help us to capture new markets."

Explanation of Redemption Accretion

The Company raised $60.00 million and $50.00 million through two guaranteed senior unsecured convertible note financings with Citadel Equity Fund Ltd. in February 2007 and April 2007, respectively. These notes bear interest at a rate of 1% per annum and are due in 2012. Under the indentures, if the notes are not converted before their respective maturities, the notes are to be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the notes then outstanding plus an additional amount of 15% per annum, calculated on a quarterly compounded basis, plus any accrued and unpaid interest.

As of March 31, 2009, the Company accrued $38.72 million as a redemption amount payable under the notes, $5.38 million of which was included in interest expense in the first quarter of 2009. Unlike the annual interest rate of 1% that the Company is actually paying out to the note holders under the notes on a semi-annual basis, the Company would only pay the accrued redemption amount under the notes if the notes are not converted into the Company's common stock before their respective maturity dates and are redeemed in accordance with their terms. Nevertheless, the Company believes that it must accrue the entire redemption amount under U.S. generally accepted accounting principles.

Conference Call

The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET on April 30, 2009. The Company invites you to join the call by dialing 1-913-312-4373. A live webcast of the conference call will be available at http://www.csst.com . A replay of the call will be available from April 30, 2009 to May 07, 2009. Listeners may access the replay by dialing 1-719-457-0820, passcode: 6635430.

About China Security & Surveillance Technology, Inc.

Based in Shenzhen, China, China Security manufactures, distributes, installs and services surveillance and safety products and systems as well as develops surveillance and safety related software in China. Its customers are mainly comprised of commercial and government entities and non-profit organizations. China Security has built a diversified customer base through its extensive sales and service network that includes over 150 branch offices and distribution points throughout China. To learn more about the Company visit http://www.csst.com .

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the accrual for the redemption amount payable under certain outstanding convertible notes issued by the Company and certain other non-cash charges. China Security believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that China Security's management excludes when it internally evaluates the performance of China Security's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Security. Accordingly, management excludes the expense arising from the accrual of redemption amounts payable under its outstanding convertible notes and certain other non-cash charges when making operational decisions. China Security believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Security's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Security's performance using the same methodology and information as that used by China Security's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non- GAAP financial measure. However, China Security's management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

Adjusted Net Income (Unaudited) All amounts, other than for share and per share amounts, in millions of U.S. dollars For the Three Months Ended March 31 2009 2008 GAAP Net Income attribute to the Company $2.01 $4.50 Addition: Depreciation and amortization 3.06 1.90 Non-cash employee compensation 4.22 2.96 Redemption accretion on convertible notes 5.38 4.36 Non-GAAP Net Income $14.67 $13.72 GAAP DILUTED EPS 0.04 0.11 Addition: Depreciation and amortization 0.06 0.04 Non-cash employee compensation 0.09 0.07 Redemption accretion on convertible notes 0.11 0.10 Adjusted EPS 0.30 0.32 Share used in computing net income per share (diluted) 49.36 million 42.80 million Reconciliation of GAAP to Non-GAAP Measures (Unaudited) All amounts, other than for share and per share amounts, in millions of U.S. dollars For the Three Months Ended March 31, 2009 2008 GAAP Net Income attribute to the Company $2.01 $4.50 Addition: Depreciation and amortization 3.06 1.90 Non-cash employee compensation 4.22 2.96 Redemption accretion on convertible notes 5.38 4.36 Non-GAAP Net Income $14.67 $13.72 GAAP BASIC EPS 0.04 0.11 Addition: Depreciation and amortization 0.07 0.04 Non-cash employee compensation 0.09 0.07 Redemption accretion on convertible notes 0.12 0.10 Adjusted EPS 0.32 0.32 Share used in computing net income per share (Basic) 45.04 million 42.74 million

Safe Harbor Statement

This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, our future operating results, our expectations regarding the market for surveillance and safety products, our expectations regarding the continued growth of the surveillance and safety market, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause our actual results to differ materially from those anticipated, expressed or implied in the forward-looking statements. These risks and uncertainties include, but not limited to, the factors mentioned in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008, and other risks mentioned in our other reports filed with the Securities Exchange Commission, or SEC. Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov. The words "believe," "expect," "anticipate," "project," "targets," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The Company assumes no obligation and does not intend to update any forward- looking statements, except as required by law.

For more information, please contact: Company Contact: Terence Yap Tel: +86-755-8351-6102 Email: terence.yap@csst.com Kewa Luo Tel: +1-412-512-6655 Email: kewa@csst.com Investor Contact: ICR: Michael Tieu Tel: +86-10-6599-7960 Email: michael.tieu@icrinc.com Bill Zima Tel: +1-203-682-8200 Email: bill.zima@icrinc.com Media Contact: Patrick Yu Fleishman-Hillard Hong Kong Tel: +852-2530-2577 Email: patrick.yu@fleishman.com CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2009 and 2008 Expressed in thousands of U.S. dollars (Except for share and per share amounts) ` Three Months Ended March 31 2009 2008 (Unaudited) (Unaudited) Revenues $96,416 $71,777 Cost of goods sold (including depreciation and amortization for the three months ended March 31, 2009 and 2008 of $241 and $83, respectively) 71,390 49,521 Gross profit 25,026 22,256 Selling and marketing 2,714 2,142 General and administrative (including non 11,507 7,162 cash employee compensation for the three months ended March 31, 2009 and 2008 of $4,218 and $2,958, respectively) Depreciation and amortization 2,822 1,817 Income from operations 7,983 11,135 Interest income 29 55 Interest expense (6,037) (4,863) Other income, net 229 320 Income before income taxes 2,204 6,647 Income taxes (202) (2,176) Net income 2,002 4,471 Less: Net loss attributable to the noncontrolling interest 11 25 Net income attributable to the Company 2,013 4,496 Foreign currency translation gain 54 8,504 Comprehensive Income Attributable To The Company 2,067 13,000 Comprehensive Loss Attributable To The (11) (25) Noncontrolling Interest Comprehensive Income $2,056 $12,975 NET INCOME PER SHARE ATTRIBUTABLE TO THE COMPANY'S COMMON SHAREHOLDERS BASIC $0.04 $0.11 DILUTED $0.04 $0.11 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING BASIC 45,040,994 42,738,195 DILUTED 49,362,254 42,796,797 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 2008 Expressed in thousands of U.S. dollars (Except for share and per share amounts) March 31, December 31, 2009 2008 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $72,471 $47,779 Accounts receivable, net 132,799 148,205 Inventories, net 127,110 117,042 Prepayments and deposits 7,052 7,280 Advances to suppliers 38,461 17,120 Other receivables 12,614 14,065 Deferred tax assets - current portion 8 32 Total current assets 390,515 351,523 Deposits for acquisition of subsidiaries, intangible assets and properties 5,985 7,855 Plant and equipment, net 74,679 74,523 Land use rights, net 7,632 7,675 Intangible assets 59,144 56,913 Contingently returnable acquisition consideration 1,176 1,176 Goodwill 75,529 73,216 Deferred financing cost 1,124 1,082 Deferred tax assets - non-current portion 246 253 TOTAL ASSETS $616,030 $574,216 LIABILITIES AND EQUITY CURRENT LIABILITIES Notes payable - short term $17,555 $10,242 Obligation under product financing arrangements - short term 2,682 2,469 Accounts payable 47,613 50,756 Accrued expenses 12,605 10,263 Advances from customers 51,822 28,621 Taxes payable 1,955 4,115 Payables for acquisition of businesses, properties and land use rights 13,360 11,915 Deferred income 1,022 1,207 Total current liabilities 148,614 119,588 LONG-TERM LIABILITIES Notes payable - long term 1,389 2,853 Obligation under product financing arrangements - long term 4,242 4,214 Convertible notes payable 148,717 143,342 Total liabilities 302,962 269,997 EQUITY Shareholders' equity of the Company: Preferred stock, $0.0001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding Common stock, $0.0001 par value; 290,000,000 shares authorized, 50,043,211 (March 31, 2009) and 49,142,592 (December 31, 2008) shares issued and outstanding 5 5 Additional paid-in capital 171,599 164,806 Retained earnings 111,418 109,405 Statutory reserves 804 804 Accumulated other comprehensive income 29,221 29,167 Total shareholders' equity of the Company 313,047 304,187 Noncontrolling interest 21 32 Total equity 313,068 304,219 TOTAL LIABILITIES AND EQUITY $616,030 $574,216 CHINA SECURITY & SURVEILLANCE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2009 and 2008 Expressed in thousands of U.S. dollars (Except for share and per share amounts) Three Months Ended March 31 2009 2008 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,002 $4,471 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for doubtful debts 1,396 -- Depreciation and amortization 3,063 1,900 Amortization of consultancy services 11 33 Amortization of deferred financing cost 109 9 Non-cash employee compensation 4,218 2,958 Redemption accretion on convertible notes 5,375 4,363 Deferred taxes 31 1 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 15,342 (12,396) Related party receivables -- 261 Other receivables 1,739 (3,077) Inventories (9,441) 4,239 Prepayments and deposits 466 673 Advances to suppliers (21,315) (1,133) (Decrease) increase in: Accounts payable and accrued expenses (2,222) (1,277) Advances from customers 23,195 (1,393) Taxes payable (2,350) (2,194) Deferred income (184) 53 Net cash provided by (used in) operating activities 21,435 (2,509) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to plant and equipment (393) (830) Additions to intangible assets (804) (543) Deposits paid for acquisition of subsidiaries -- (12,944) Payments for business acquisitions (1,881) -- Cash acquired in business combinations 273 -- Proceeds from disposal of land use rights and properties -- 3,379 Net cash used in investing activities (2,805) (10,938) CASH FLOWS FROM FINANCING ACTIVITIES: Warrants exercised -- 277 New borrowings, net of issuing cost 13,166 4,274 Repayment of borrowings (7,314) (5,827) New borrowings from obligation under product financing arrangements 891 -- Repayment of obligation under product financing arrangements (798) -- Net cash provided by (used in) financing activities 5,945 (1,276) NET INCREASE (DECREASE) IN CASH AND CASH 24,575 (14,723) EQUIVALENTS Effect of exchange rate changes on cash 117 2,764 Cash and cash equivalents, beginning of period 47,779 89,071 CASH AND CASH EQUIVALENTS, END OF PERIOD $72,471 $77,112

SOURCE China Security & Surveillance Technology, Inc.

Source: PR Newswire

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