Jinpan International released their 3Q results on 11 Nov 2011. It was another good quarter for JST, but the market does not seem to believe the JST story as the shares continue to trade below $9.Net sales for the third quarter were $66.6 million, a 49.3% increase from $44.6 million in the same period last year. The increase in third quarter sales was the result of higher volume transformer sales in China and strong international wind transformers sales compared to the prior year period. Sales for Q2 were $58.3 million. Net sales for Q1 were $29.9 million.In the third quarter, domestic sales accounted for $59.1 million, or 88.7% of net sales, compared to $42.2 million, or 94.6% of net sales in the same period last year. In the second quarter, domestic sales accounted for $46.1 million, or 79.1% of net sales. In Q1, domestic sales accounted for $27.8 million, or 93.0% of net sales. Net sales outside of China were $7.5 million, or 11.3% of net sales, compared to $2.4 million, or 5.4 % of net sales in the same period last year. In Q2, net sales outside of China were $12.2 million, or 20.9% of net sales. In Q1 net sales outside of China were $2.1 million, or 7.0% of net sales. So, while the domestic sales percent of net sales increased in Q3, the trend of overall sales outside of China continues to be headed up, which I think is good for diversification and future growth.Cast resin transformers (excluding those for wind power applications), switch gears and unit substations represented $56.8 million, or 85.3% of net sales in the third quarter, while wind energy products represented $9.8 million, or 14.7% of net sales in the third quarter. In Q2, cast resin transformers (excluding those for wind power applications), switch gears and unit substations represented $44.3 million, or 76% of net sales in the second quarter, while wind energy products represented $14 million, or 24% of net sales in the second quarter. In Q1, Cast resin transformers (excluding those for wind power applications), switch gears and unit substations represented $25.0 million, or 83.6% of net sales in the first quarter, while wind energy products represented $4.9 million, or 16.4% of net sales in the first quarter. While the percentage of wind energy product sales is decreasing (not a good sign to me), the overall dollar amount is increasing (in 2010 Q3, wind energy products sales were $4.7M). This increase continues to support that their OEM agreement is working as their only fully active OEM agreement is with a wind energy specialist. Gross profit in the 2011 third quarter increased 55.6% to $24.9 million from $16.0 million in the same period last year. Third quarter 2011 gross profit margin was 37.5% compared to 35.9% in the prior year period. Q2 gross profit margin was 38.1% compared. Q1gross profit margin of 36.7%. The Company reaffirms its guidance of full year gross margin ranging from 36%-38%.Selling and administrative expenses in the third quarter were $16.5 million, or 24.8% of net sales, compared to $11.6 million, or 26.0% of net sales in the same period last year. This percentage decrease was primarily due to the strong increase in net sales. In Q2 selling and administrative expenses were $13.8 million or 23.7% of net sales. For Q1, sales, general and administrative expenses were $7.8 million, or 26.1% of net sales, Operating income increased 90.9% to $8.4 million, or 12.7% of net sales, from $4.4 million, or 9.9% of net sales in the same period last year. In Q2 operating income was $8.4 million. In Q1 operating income was $3.2 million.Net income for the third quarter increased to $8.4 million, or $0.51 per diluted share, from $4.4 million, or $0.27 per diluted share, in the same period last year. Q2 net income was $7.3 million, or $0.44 per diluted share (In the 2010 second quarter, Jinpan incurred a $2.5 million dividend tax). Q1 net income was $2.7 million, or $0.17 per diluted share.Balance SheetAs of September 30, 2011, the Company had $13.8 million in cash, cash equivalents and restricted cash compared to $28.6 million at December 31, 2010. Cash, cash equivalents at the end of Q2 was $8.3 million, and at the end of Q1 cash, cash equivalents, and restricted cash was $25.2 million. Inventory increased to $44.8 million as of September 30, 2011, from $29.5 million on December 31, 2010, due to anticipated order demand. Inventory at the end of Q2 was $41.0 million. Inventory at the end of Q1 stood at $38.6 million. Inventory continues to increase, which although they explained it away with “anticipated order demand”, I am beginning to become nervous. If the global or Chinese economy takes big downturn, this will be a problem. It has happened to JST in the past. However, sales are increasing which is good, so I will continue to watch for now.Accounts receivable on September 30, 2011 totaled $110.3 million, compared to $75.7 million on December 31, 2010. Accounts receivable at the end of Q2 totaled $96.3 million. Accounts receivable at the end of Q1 totaled $77.5 million. Total bank loans outstanding at September 30, 2011 increase to $28.5 million as compared to $13.7 million at December 31, 2010. Total bank loans outstanding at June 30, 2011 were $31.0 million. Total bank loans outstanding at March 31, 2011 were $15.7 million. Slight improvement here.Financial Outlook As of September 30th, 2011, the Company had a backlog of approximately $100 million, compared to $91 million as of June 30th, 2011, $79 million as of April 30, 2011 and $60 million as of December 31, 2010. As a result of JST’s third quarter performance coupled with current favorable domestic and international order trends, the Company is raising its financial forecast for the year. For full year 2011, the company anticipates net sales growth of 48%-50% to $213 million-$216 million and net income growth to approximately 75%-80% to $23.4-$24.1 million. The Company maintains its gross profit margin estimate of 36-38% and believes that international sales will account for approximately 12%-14% of full year sales.TakeawaySo overall, I think it was a very good quarter. Some highlights for me:1. Customized transformer sales are up (these are higher margin products)2. International orders are still strong despite a pull back this quarter. If the international order dollar amount declines in Q3 (which is possible considering the European situation), I will become concerned. 3. Increase in cashSome lowlights:1. Increase in inventory. I realize it is based on expected demand, which does mitigate my fears to a some extent, but still, there is always a nagging fear in my mind when we see inventory climb.2. Increase in accounts receivable. On Q1’s conference call, this was said to be due to extending better credit terms to larger companies and the central government.Again, I did not hear on the status of their gas switchgears (high end switchgears) because I was on vacation. This is one area that JST sees lots of promise, but since I missed the call and didn’t see anything in the press release, it is unclear as to the progress. JST was NOT including very much revenue for the gas switchgears in the 2011 estimates, so the surprise should only be positive.
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