China Fire & Security Group, Inc. (CFSG) reported results for the fourth quarter and fiscal year ended Dec 31, 2009. 

Earnings 

During the quarter, China Fire reported a net income of $2.9 million, down from $6.8 million in the same period of 2008. EPS for the quarter was 10 cents versus 24 cents in the fourth quarter of 2008. EPS was also below the Zacks Consensus Estimate of 17 cents. 

Revenues decreased as a result of the delay in signing the $92 million contract with Wuhan Iron and Steel (Group) Corporation. Decrease in gross margin also pushed earnings down in the fourth quarter of last year.
 
In 2009, net income was $24.4 million, almost flat in comparison to $24.7 million in 2008. Reported EPS was 86 cents, down from 88 cents in 2008. EPS was only a penny below the Zacks Consensus Estimate. 

Revenue & Gross margin 

During the fourth quarter, revenue decreased 19.4% and reached $16.9 million from $21.0 million in the year-ago quarter. Gross margin decreased to 48.8% from 54.3% based on only 53% of revenue generated from the iron and steel vertical, the most profitable section compared to 74% in the same quarter of previous year.
 
During the full year, the company reported revenues of $81.2 million, 17.5% up from $69.1 million in the previous year. The increase was attributable to higher solution and product sales. 

During the entire year, the iron and steel vertical contributed 75% of total revenues. Consequently, gross margin increased to 58.0% from 57.2% in 2008.
 
Operating Income 

Based on the decrease in revenues and gross margin during the fourth quarter, operating income also fell to $3.3 million, from $6.2 million in the fourth quarter of 2008. However, the full year operating income increased to $27.6 million, from $23.6 million in 2008 based on the increase in both revenue and gross margin in 2009.
 
Liquidity 

The company has a strong financial position with no debt. As on Dec 31, 2009, China Fire had net cash of $35.0 million down from $26.7 million at the end of 2008. 

Outlook 

Management reiterated its revenue guidance for fiscal year 2010. It expects revenues to grow 66% to 78% year over year and in the range of $135 million to $145 million. Net income is estimated to grow at a rate of 89% to 105%. Thus, net income for fiscal year 2010 is expected in the range of $47 million to $49 million and EPS in the range of $1.65 to $1.70. 

China Fire & Security Group is a leading provider of industrial fire protection systems in China. The company’s strong position in the industry has enabled it to win a high percentage of its bids, which is around 60%−70% of bids in the iron and steel industry. 

Though the company has been primarily serving the iron and steel industry, it is now looking at expanding into other industrial sectors such as transportation, marines, nuclear energy, and petrochemical. The company’s inability to successfully expand the market for its products and services into other industries will limit its growth potential. Thus, we reiterate our Neutral recommendation on the stock.
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