American Dairy Inc. (ADY) reported third quarter results before the opening bell today. The company’s net income from continuing operations stood at $11.1 million, or 52 cents per share, from a loss of $22.1 million, or $1.19 per share in the year-ago quarter. Quarterly earnings also surpassed the Zacks Consensus Estimate for a profit of 31 cents per share.
 
American Dairy is a leading producer and distributor of premium infant formula, milk powder, and soybean, rice and walnut products in China. The company, which operates through its wholly owned subsidiary Feihe Dairy and other subsidiaries, has 200 milk collection stations, 2 dairy farms and 6 production facilities. The company has capacity to produce approximately 1,220 tons of milk powder per day and a distribution network of over 90,000 retail outlets across China.
 
The Beijing-based company recorded an impressive 94.1% year-over-year growth in quarterly sales to $72.1 million. The expansion was primarily driven by strong demand for American Dairy’s milk powder products (mainly infant formula products), which recorded a 151.7% growth in volumes to 6,561 tons and contributed 77.5% to total sales. Moreover, the robust revenue performance was also helped by company’s augmented distribution network and efforts to expand into new geographic areas in China.
 
American Dairy’s gross profit nearly tripled year over year to $37 million, while gross margin expanded by 1770 basis points (bps) to 51.3%. The strong expansion was mainly the result of increased sales of high-margin infant formula products coupled with a decrease in low-margin raw milk powder sales.
 
Operating expenses grew 58.3% year over year to $33.1 million due to increased expenses related to expansion of distribution network and brand awareness as well as the issuance of stock options. Nevertheless, strong revenue growth and impressive gross margin helped the company to post an operating income from continuing operations of $3.9 million during the quarter, compared to an operating loss of $8.5 million in the year-ago period.
 
Cash and equivalents at the end of the quarter was $43.5 million, compared to $8.2 million in the same period last year. During the first 9 months of this year, the company recorded a cash inflow of $39.0 million related to the divestment of subsidiary, Heilongjiang Moveup Co. Ltd. American Dairy formed Moveup in October 2007 to acquire Ausnutria Dairy (Hunan) Co. Ltd., a deal, which fell through on account of regulatory issues. The company also raised long and short-term debt with a combined worth of $49.6 million and received $63 million through a private placement of 2.1 million shares of common stock to Sequoia Capital. American Dairy primarily deployed the cash generated towards capital expenditure, including biological assets ($59.9 million) and repayment of short-term debt ($76.3 million.)
 
Moving forward, the company reduced its full-year sales guidance to a range between $270 million and $290 million after indicating that fourth-quarter performance may fall short of expectations. American Dairy previously predicted full-year sales of $330 million to $360 million.
 
Meanwhile, the Zacks Consensus Estimate on the company’s full-year earnings has reduced by 24 cents over the past 2 months and currently stands at $2.70 per share. However, it still represents a 350% growth over the company’s year-ago result of 60 cents per share.
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