China Architectural Engineering Inc. (CAEI) reported net loss of $3.5 million or loss per share of 6 cents for its fiscal first quarter ended March 31. Results were disappointing, considering the net income of $943,611 million or 2 cents per share in the year-ago quarter. Decreases in contract revenue, higher raw material costs and administrative costs led to the loss in the quarter.
Revenue dipped 68% to $11.5 million from the year-ago period. The decline in revenue resulted as most of China Architectural’s major international projects were completed in 2009. Further aggravating the decline was the fact that the company abstained from commencing other international projects in the quarter, given its plans to concentrate more in the domestic market.
Gross margin plunged 220 basis points to 20.3% from the year-earlier period. Increases in raw material, labor and administrative costs in the domestic market of China hurt gross margin in the quarter.
On the expense side, selling, general and administrative expenses (SG&A) declined 30% to $4.2 million in first-quarter 2010 due to the fall in revenue. As a percentage of revenue, SG&A expense was 37% versus 17% in the year-earlier period. Payroll and related costs of China Architectural accounted for approximately 71.8% of total operating expenses, including a $2 million charge related to stock grants made in the quarter.
Interest expenses and finance expenses increased 23% year over year to $1.6 million, reflecting the use of short-term bank loans.
Income tax benefit was $9.6 million (the effective tax rate was negative 0.3%), compared with nil taxes in the prior-year period. This was caused by the losses incurred by the operations of the company as a result of the recent international financial crises.
Financial Position
China Architectural had cash and cash equivalents of $497,348 million as of March 31, 2010, a decline from $740,125 million as of December 31, 2009.
The company generated $6.9 million net cash from operating activities in the first quarter compared to $4.3 million in the year-ago period.
Total debt decreased to $33.4 million as of March 31, 2010, from $34.2 million as of December 31, 2009. Debt-to-capitalization ratio at the end of the quarter was 44% compared with 43% as of December 31, 2009.
Total shareholders’ equity was $43.1 million compared with $44.6 million as of December 31, 2009.
Acquisition
In the first-quarter 2010, China Architectural said that its shareholders have approved the acquisition of the majority interest of Shanghai ConnGame Network.
China Architectural had signed a letter of intent in the fourth quarter of fiscal 2009, to acquire 60% ownership in Shanghai ConnGame, a game developer and operator in exchange for 25 million shares of the company’s common stock. Completion of the transaction is subject to negotiation of a definitive equity transfer agreement, pending regulatory approvals.
China Architectural and ConnGame may appear to share a few common grounds, but the former expects to leverage ConnGame’s robust design engines and virtual applications to broaden the company’s service capabilities and scope of architectural collaborations.
Based in Zhuhai, China, China Architectural Engineering Inc. specializes in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products for public works and commercial real estate projects.
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