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China Medical Technologies Reports FY2009 First Fiscal Quarter Unaudited Financial Results

Thursday, September 17, 2009 General News J E 4
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BEIJING, Sept. 1 China Medical Technologies,Inc. (the "Company") (Nasdaq: CMED), a leading China-based medical devicecompany that develops, manufactures and markets advancedin-vitro diagnostic products, today announced its unaudited financial resultsfor the first fiscal quarter ended June 30, 2009 ("1Q FY2009"). The Company's2009 fiscal year ends on March 31, 2010 ("FY2009").

See "Non-GAAP Measure Disclosures" below, where the impact of certainitems on reported results is discussed.

"While we remain confident in the fundamentals of the Company and itsprospects in the longer term, we were recently affected on several fronts,"commented Mr. Xiaodong Wu, Chairman and Chief Executive Officer of the Company."Our ECLIA customers, mainly distributors, have reduced their inventory levelduring the past months in anticipation of a price reduction on our ECLIAreagent kits due to increasing market competition. We have reduced theselling price on our ECLIA reagent kits from September 2009 to maintain ourcompetitiveness. Besides, we launched our SPR-based analysis system to ourexisting FISH hospital customers in April 2009 but the progress of theplacement of our analysis system with hospitals was significantly affectedbecause the attention of our senior management was significantly diverted tothe internal investigation since April 2009. Nevertheless, we expect todeliver our analysis system to some hospitals in October 2009 and willcommence the training for hospital personnel on the use of our analysis systemfor HPV testing. We expect to generate revenue from the sale of our HPV chipsused with our analysis system in January 2010."

1Q FY2009 Unaudited Financial Results

The Company reported revenues from continuing operations of RMB209.0million (US$30.6 million) for 1Q FY2009, representing a 28.9% increase fromthe corresponding period of FY2008.

The Company's revenues from continuing operations are currently generatedfrom two product lines, ECLIA diagnostic systems and FISH diagnostic systems.

ECLIA system sales for 1Q FY2009 were RMB110.5 million (US$16.2 million),representing a 1.1% decrease from the corresponding period of FY2008. Theyear-over-year decrease in the ECLIA system sales was primarily due to theattention of the Company's senior management and certain sales personnelsignificantly diverted to the independent internal investigation and thedecrease in inventory level of customers in anticipation of a price reductionon the ECLIA reagent kits.

FISH system sales for 1Q FY2009 were RMB98.5 million (US$14.4 million),representing a 95.6% increase from the corresponding period of FY2008. Thestrong year-over-year growth in the FISH system sales was primarily due tosignificant increase in sales of FISH probes to hospitals as a result ofincrease in new hospital customers and the increased usage of the Company'sFISH probes by existing hospital customers.

Gross margin increased to 74.7% for 1Q FY2009 as compared to 68.4% for thecorresponding period of FY2008. The increase in gross margin was primarilydue to the change in revenue mix where almost all revenues were from recurringsales of higher margin ECLIA reagent kits and FISH probes in 1Q FY2009.

Research and development expenses were RMB11.7 million (US$1.7 million)for 1Q FY2009, representing a 90.7% year-over-year increase. The increase wasprimarily due to the development of new ECLIA reagent kits, FISH probes andSPR-based chips.

Sales and marketing expenses were RMB13.4 million (US$2.0 million) for 1QFY2009, representing an 18.8% year-over-year increase. The increase wasprimarily due to the continued expansion of the direct sales force for FISHsystem sales and increased product promotional activities.

General and administrative expenses were RMB74.4 million (US$10.9 million)for 1Q FY2009, representing a significant year-over-year increase. Theincrease was primarily due to the costs of the independent internalinvestigation and amortization of acquired intangible assets in connectionwith the acquisition of the SPR technology in December 2008.

Interest expense of convertible notes was RMB35.4 million (US$5.2 million)for 1Q FY2009, representing a significant year-over-year increase. Theincrease was primarily due to the issuance of US$276.0 million convertiblenotes in August 2008. The Company's outstanding convertible notes of US$150.0million and US$276.0 million bear interest at 3.5% and 4.0% per annum,respectively and will mature in November 2011 and August 2013, respectively.Due to the adoption of the FASB Staff Position No APB14-1, "Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement)" ("FSP APB14-1") on April 1, 2009, theCompany recorded additional non-cash interest expense of RMB7.6 million(US$1.1 million) for the US$150.0 million convertible notes in 1Q FY2009. TheCompany also made an adjustment related to these convertible notes for thecorresponding period of FY2008 by increasing non-cash interest expense byRMB7.2 million to adopt FSP APB14-1 retrospectively in accordance with GAAP.This new guidance does not apply to the US$276.0 million convertible notes.

Interest expense of amortization of convertible notes issuance costs ofRMB4.4 million (US$0.6 million) for 1Q FY2009, representing a significantyear-over-year increase. The increase was primarily due to the issuance ofUS$276.0 million convertible notes in August 2008.

Income tax expense was RMB16.9 million (US$2.5 million) for 1Q FY2009.The high effective tax rate was primarily due to certain expenses of theCompany such as amortization of acquired intangible assets, stock compensationexpense and interest expense of convertible notes were not deductible forincome tax computation in the PRC and the accrual for withholding income taxon distributable earnings generated during the quarter in the PRC.

Income from continuing operations was RMB2.9 million (US$0.4 million) for1Q FY2009, representing a 92.8% decrease from the corresponding period ofFY2008.

Net income was RMB2.9 million (US$0.4 million) for 1Q FY2009, representinga 96.0% year-over-year decrease.

Non-GAAP income from continuing operations excluding stock compensationexpense, amortization of acquired intangible assets and non-cash interestexpense of convertible notes arising from the adoption of FSP APB14-1 wasRMB72.5 million (US$10.6 million) for 1Q FY2009, representing a 7.7% decreasefrom the corresponding period of FY2008.

Stock compensation expense for 1Q FY2009 was RMB12.2 million (US$1.8million), of which RMB2.1 million was allocated to research and developmentexpenses and RMB10.1 million to general and administrative expenses.

Amortization of acquired intangible assets for 1Q FY2009 was RMB49.8million (US$7.3 million), of which RMB22.4 million was allocated to cost ofrevenues and RMB27.4 million to general and administrative expenses.

As of June 30, 2009, the Company's cash balance was RMB1,547.5 million(US$226.6 million). Net operating cash flow for 1Q FY2009 was RMB94.3 million(US$13.8 million).

As of June 30, 2009, the Company's net accounts receivable was RMB346.9million (US$50.8 million), representing an increase of 1.1% from the balanceat March 31, 2009.

For the convenience of readers, certain RMB amounts have been translatedinto U.S. dollars at the rate of RMB6.8302 to US$1.00, the noon buying rate inNew York City for cable transfers of RMB per U.S. dollar as set forth in theH.10 weekly statistical release of the Federal Reserve Board, as of Tuesday,June 30, 2009.

Outlook for 2Q FY2009

Due to the uncertainties relating to various aspects of the Company'sbusinesses, the Company is only able to provide the target revenues fromcontinuing operations for the second fiscal quarter ending September 30, 2009("2Q FY2009"). The target revenues from continuing operations for 2Q FY2009range from RMB165.0 million (US$24.2 million) to RMB180.0 million (US$26.4million).

The above targets are based on the Company's current views on theoperating and marketing conditions, which are subject to change.

New Management Appointment

The nomination committee and the board of directors of the Company haveapproved the promotion of Mr. Charles Zhu to the position of Senior VicePresident - Operations effective October 1, 2009. Mr. Zhu has been working asVice President - Business Development of the Company since January 2005 andsuccessfully helped the Company identify and acquire the FISH technology inearly 2007. Mr. Zhu and our management team have built up the FISH businessover the past two years, which has become a major growth driver of the Companyand led the Company to enter the fast growing molecular diagnostic sector inthe PRC.

Non-GAAP Measure Disclosures

To supplement its consolidated financial statements presented inaccordance with United States Generally Accepted Accounting Principles("GAAP"), the Company uses non-GAAP measures of income from continuingoperations and earnings from continuing operations per ADS, which are adjustedfrom the results based on GAAP to exclude the impact of stock compensationexpense, amortization of acquired intangible assets and non-cash interestexpense of convertible notes arising from the adoption of FSP APB14-1.Non-GAAP financial measures are used by the Company in their financial andoperating decision-making because management believes they reflect theCompany's ongoing business in a manner that allows meaningful period-to-periodcomparison. The Company's management believes that these non-GAAP financialmeasures provide useful information to investors and others in understandingand evaluating the Company's current operating performance and futureprospects in the same manner as management does, if they so choose. TheCompany's management also believes the non-GAAP financial measures are usefulfor itself and investors because it makes more meaningful comparisons of theCompany's current results of operations to those of prior periods.

The presentation of this additional financial information is not intendedto be considered in isolation or as a substitute for the financial informationprepared and presented in accordance with GAAP. For a reconciliation of thenon-GAAP financial measures to the most directly comparable GAAP financialmeasure, please see the financial statements included with this earningsannouncement.

Conference Call

The Company's management team will host a conference call at 8:00a.m. U.S.Eastern Time on September 1, 2009 (or 8:00p.m. Beijing/Hong Kong time on thesame date) to discuss the results following this earnings announcement.

A live webcast of the conference call will be available onhttp://ir.chinameditech.com .

A replay of this webcast will be available for one month on this website.

A telephone replay of the call will be available after the conclusion ofthe conference call through 10:00a.m. U.S. Eastern Time on September 2, 2009.

About China Medical Technologies, Inc.

China Medical Technologies is a leading China-based medical device companythat develops, manufactures and markets advanced in-vitro diagnostic productsusing Enhanced Chemiluminescence (ECLIA) technology, Fluorescent in situHybridization (FISH) technology and Surface Plasmon Resonance (SPR) technologyto detect and monitor various diseases and disorders. For more information,please visit http://www.chinameditech.com .

Safe Harbor Statement

This press release contains forward-looking statements. These statementsconstitute "forward-looking" statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, and as defined in the U.S.Private Securities Litigation Reform Act of 1995. These forward-lookingstatements can be identified by terminology such as "will," "expects,""anticipates," "future," "intends," "plans," "believes," "estimates" andsimilar statements. Among other things, the quotations from management inthis press release, the Company's strategic operational plans, as well as ouroutlook for 2Q FY2009, contain forward-looking statements. Such statementsinvolve certain risks and uncertainties that could cause actual results todiffer materially from those in the forward-looking statements. Furtherinformation regarding these and other risks is included in the Company'sfilings with the U.S. Securities and Exchange Commission, including its annualreport on Form 20-F. The Company does not undertake any obligation to updateany forward-looking statement as a result of new information, future events orotherwise, except as required under applicable law.1Q FY2009 Highlights -- Revenues from continuing operations increased by 28.9% year-over-year to RMB209.0 million (US$30.6 million). -- Income from continuing operations decreased by 92.8% year-over-year to RMB2.9 million (US$0.4 million). -- Net income decreased by 96.0% year-over-year to RMB2.9 million (US$0.4 million). -- Non-GAAP income from continuing operations, as defined below, decreased by 7.7% year-over-year to RMB72.5 million (US$10.6 million). -- Diluted earnings from continuing operations per ADS* was RMB0.11 (US$0.02). -- Non-GAAP diluted earnings from continuing operations per ADS*, as defined below, decreased by 7.7% year-over-year to RMB2.74 (US$0.40). *One American Depositary Share ("ADS") = 10 ordinary shares

SOURCE China Medical Technologies, Inc.
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