Cogo Announces Results of Annual General Meeting

SHENZHEN, China, May 16, 2012—Cogo Group, Inc. (NASDAQ: COGO) (“Cogo” or the “Company”), one of the leading gateways for global semiconductor companies to access the industrial and technology markets in China, today announced that all four proposals presented to shareholders at the Company’s Annual General Meeting were approved by shareholders. The following is a list of the proposals that were approved:

  1. Election of five directors named in the proxy statement to the board of directors;
  2. Creation of a 10 million share repurchase plan;
  3. Amendment to Article 13(b) of the Company’s articles of association to provide that any future Company repurchases of its outstanding shares do not require shareholder approval; and
  4. Appointment of KPMG as the Company’s independent auditors for the fiscal year ending December 31, 2012;

Additional information about each of the proposals is available in the Company’s proxy statement filed as exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K filed with the SEC on April 23, 2012.

 

About Cogo Group, Inc.:
Cogo Group, Inc. (Nasdaq: COGO) is one of the leading gateways for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. Through its unique business-to-business services platform, Cogo designs customized embedded solutions using technology from suppliers including Intel, Broadcom, Xilinx, SanDisk, Freescale, Atmel and others for a customer base of over 1,800 Chinese OEMs/ODMs. Cogo’s customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as over 1,700 Small and Medium Enterprises (SMEs). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smart phones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television (“HDTV”).

Safe Harbor Statement:
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our proposed discussions related to our business or growth strategy such as growth in digital media, telecommunications and industrial applications businesses, as well as our potential acquisitions which are subject to change. Such information is based upon expectations of our management that were reasonable when made, but may prove to be incorrect. All such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions, which are subject to change. For further descriptions of other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 20-F, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis retrieval system (EDGAR) 
www.sec.gov.

Cogo Reports Highest Ever First Quarter Revenue

•    Q1 Net Revenue: $169.3 million in accordance with Generally Accepted Accounting Principles (“GAAP”) (a year-over-year increase of 62.2%) and Diluted Earnings per share (“EPS”) attributable to Cogo Group, Inc. of $0.03 GAAP and $0.13 Non-GAAP (a year-over-year decrease of 36.7% Non-GAAP)
•    Audit committee reviewing Cogo Chairman and CEO’s proposed purchase of 30% of Cogo’s total assets, liabilities and business operations; Management expects to close the deal during second quarter of 2012

SHENZHEN, China, May 15, 2012—Cogo Group, Inc. (NASDAQ: COGO) (“Cogo” or the “Company”), one of the leading gateways for global semiconductor companies to access the industrial and technology markets in China, today announced unaudited financial results for its first quarter ended March 31, 2012. The Company reported quarterly revenue of $169.3 million, up 62.2% year-over-year compared to $104.4 million reported in the first quarter of 2011.

Jeffrey Kang, CEO and Chairman of Cogo commented, “I am pleased with our continued solid execution in these difficult economic conditions. We achieved strong year-over-year growth in each of our three business end-markets and continued to show good control of operating costs. However, as we have indicated on previous calls, the tight credit environment in China continues to negatively affect our SME business and consequently suppresses our gross margin.  We continue to believe that the tight credit environment in China will not materially improve in 2012.  Therefore, this year will likely remain a transition year for Cogo due to these macro uncertainties.”

Mr. Kang said, “I am pleased with our internal working capital controls. We reduced our cash conversion cycle from 128 days in the third quarter of 2011 to 98 days in the quarter just ended. We generated $4.8 million of operating cash flow in the first quarter of 2012 and we increased our net cash position sequentially from $23.8 million as of December 31, 2011 to $28.5 million as of March 31, 2012. By our own internal calculations, we sequentially increased our tangible book value from approximately $6.33 a share to over $6.45 per share as of March 31, 2012.”

Mr. Kang added, “I am also pleased to report that the audit committee is currently reviewing my personal proposal to purchase certain Cogo assets, liabilities and operating business units. We expect to complete the review of my personal proposal before the end of the second quarter of 2012, subject to the successful negotiation of deal terms, the approval of the audit committee and other contingencies. Target companies of the deal roughly account for 26% of the group’s revenue, with a gross margin of approximately 5% in the first quarter of 2012. I continue to believe that this purchase, which may possibly place an overall value of Cogo at $6-$8 a share, will help to legitimize the value of our financial assets.”

Financial Results
Net income attributable to Cogo Group, Inc. for the first quarter of 2012 was $1.3 million, down 69.5% from $4.1 million reported in the same period in 2011, with Non-GAAP net income attributable to Cogo Group, Inc. of $4.5 million down 41.8% over $7.8 million reported for the same period in 2011. Diluted EPS attributable to Cogo Group, Inc. on a U.S. GAAP basis was $0.03, and Non-GAAP Diluted EPS attributable to Cogo Group, Inc. was $0.13, down 36.7% from the first quarter of 2011.

 

Q1 2012(1)
(unaudited)

Q1 2012(1)
(unaudited)

Percentage Change

Net Revenue

$169,344

$104,418

62.2%

 
Cost of Sales

$157,857

$89,584

76.2%

 
Gross Profit

$11,487

$14,834

-22.6%

 
Operating Expenses

$9,202

$9,787

-6.0%

 
Net Income attributable to Cogo Group, Inc.

$1,260(2)

$4,132

-69.5%

 
EPS Diluted attributable to Cogo Group, Inc.

$0.03

$0.11

-66.8%

 
Non-GAAP EPS Diluted attributable to Cogo Group, Inc.

$0.13

$0.20

-36.7%

 

(1)    The US dollar (“USD”) amounts are calculated based on the conversion rate of $1 to RMB6.2975 as of March 31, 2012 and $1 to RMB6.5483 as of March 31, 2011.

(2)    Included in the Q1 2012 net income attributable to Cogo Group, Inc. was $2.5 million of share-based compensation expenses recognized in accordance with Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation and $0.8 million of amortization of intangible assets and related deferred taxation. Non-GAAP net income attributable to Cogo Group, Inc. was $4.5 million
Financial Review
Revenue for the first quarter was $169.3 million, an increase of 62.2% compared to $104.4 million reported for the same period in 2011. The revenue breakdown includes: $63.8 million, or 37.6% of total sales for digital media (including the mobile handset business), representing a 11.4% increase year-over-year; $77.6 million, or 45.8% of total sales for telecommunications equipment, representing a 232.4% increase year-over-year; and $28.0 million, or 16.6% of total sales relating to industrial business, representing a 17.5% increase year-over-year. The Company did not record any revenue from the service business in the first quarter of 2012 and 2011. The Company is currently participating in what management believes to be some of the fastest growing end-markets in China, including the smart grid, wind power, smart meter, automotive, high-speed railway and medical equipment sectors. Over time, the Company expects to expand into other verticals in the industrial business end-market, such as electronic security.

Customers Update
In the first quarter of 2012, blue-chip customers accounted for approximately 73% of the Company’s total revenue, up from approximately 66% for the same period in 2011. Small and medium enterprise (“SME”) customers accounted for the remaining approximately 27% of total revenue in the quarter. Management’s goal is to achieve 50% of total sales from SME customers in the longer term.

Cost of sales, which includes the aggregate purchase of components from suppliers and the direct cost of services, was $157.9 million compared to $89.6 million in the first quarter of 2011, representing an increase of 76.2% year-over-year. Gross profit for the first quarter was $11.5 million, down 22.6%, compared to $14.8 million during the first quarter of last year. Gross margin for the first quarter of 2012 was 6.8%, compared to 14.2% reported for the first quarter of 2011.

Operating expenses, including selling, general and administrative, and research and development expenses, totaled $9.2 million, down 6.0%, compared to $9.8 million reported for the first quarter of 2011.

Income from operations was $2.3 million, a decrease of 54.7% from $5.0 million reported in the same period of 2011. Operating margin for the first quarter of 2012 was 1.3% compared to 4.8% for the first quarter of 2011. Excluding the effects of share-based compensation expenses and amortization of intangible assets and related deferred taxation, operating margin would have been 3.4% for the first quarter of 2012, compared to 8.5% for the same period in 2011. The effective tax rate for the first quarter of 2012 was 13.8%, compared to 10.8% for the same period in 2011. Included in the income tax expense for the quarter ended March 31, 2012 was a deferred income tax benefit of $0.2 million as a result of the amortization of intangible assets of $1.0 million. Non-controlling interests’ share of income was $0.5 for the first quarter of 2012 as compared with  $0.4 million for the first quarter of 2011.

Net income attributable to Cogo Group, Inc. for the first quarter of 2012 was $1.3 million or Diluted EPS attributable to Cogo Group, Inc. of $0.03 on a U.S. GAAP basis, compared to net income of $4.1 million, or Diluted EPS attributable to Cogo Group, Inc. of $0.11, in the first quarter of 2011. Included in the first quarter of 2012 was $2.5 million attributable to share-based compensation expenses and $0.8 million attributable to amortization of intangible assets and related deferred taxation. Excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation, the Non-GAAP net income would have been $4.5 million, or $0.13 Non-GAAP Diluted EPS attributable to Cogo Group, Inc. for the first quarter of 2012. The weighted average number of shares used in the calculation of diluted EPS was 36.0 million compared to 39.2 million in the first quarter of 2011.

Balance Sheets and Cash Flows
Total cash, including pledged bank deposits, was $146.3 million at the end of the first quarter of 2012, down from $159.5 million as of December 31, 2011. Bank borrowings decreased from $135.7 million as of December 31, 2011 to $117.8 million as of March 31, 2012. The Company has a current ratio of 2.5 to 1 and generated operating cash flow of $4.8 million during the first quarter of 2012.

Inventories decreased from $52.0 million as of December 31, 2011 to $50.8 million as of March 31, 2012 as the Company continued to exercise effective inventory control measures. Consequently, inventory turnover days was 30 days in the first quarter of 2012 compared to 31 days in the prior quarter. Accounts receivable decreased from $149.6 million as of December 31, 2011 to $147.7 million as of March 31, 2012 and the Days Sales Outstanding kept at 80 days. Accounts payable increased from $19.3 million at the end of 2011 to $20.4 million as of March 31, 2012 and Days Payable Outstanding increased slightly from 11 to 12 days sequentially. Cogo’s cash conversion cycle decreased from 100 days in the fourth quarter of 2011 to 98 days in the first quarter of 2012.

Cogo Group, Inc. equity was $245.7 million as of March 31, 2012, an increase of 1.7% from $241.5 million as of December 31, 2011. During the first quarter of 2012, the Company did not repurchase any shares due to insider trading and blackout restrictions. The Company continues to view share buybacks as a strategic use of cash.

About Cogo Group, Inc.:
Cogo Group, Inc. (Nasdaq: COGO) is one of the leading gateways for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. Through its unique business-to-business services platform, Cogo designs customized embedded solutions using technology from suppliers including Intel, Broadcom, Xilinx, SanDisk, Freescale, Atmel and others for a customer base of over 1,800 Chinese OEMs/ODMs. Cogo’s customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as over 1,700 Small and Medium Enterprises (SMEs). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smart phones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television (“HDTV”).

Safe Harbor Statement:
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our proposed discussions related to our business or growth strategy such as growth in digital media, telecommunications and industrial applications businesses, as well as our potential acquisitions which are subject to change. Such information is based upon expectations of our management that were reasonable when made, but may prove to be incorrect. All such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions, which are subject to change. For further descriptions of other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 20-F, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis retrieval system (EDGAR) 
www.sec.gov.

About Non-GAAP Financial Measures:
To supplement Cogo’s unaudited consolidated financial results presented in accordance with GAAP, Cogo uses the following measures defined as Non-GAAP financial measures by the SEC: 1) Non-GAAP net income attributable to Cogo Group, Inc. which is net income attributable to Cogo Group, Inc. excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation, and 2) Non-GAAP diluted EPS attributable to Cogo Group, Inc., which is diluted EPS excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation. The presentation of these Non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these Non-GAAP financial measures, please see the table captioned “Unaudited Reconciliation of Non-GAAP measures to the most comparable GAAP measures” set forth at the end of this release.

Cogo believes that these Non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation that may not be indicative of its operating performance from a cash perspective. Cogo believes that both management and investors benefit from referring to these Non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These Non-GAAP financial measures also facilitate management’s internal comparisons to Cogo’s historical performance and liquidity. Cogo computes its Non-GAAP financial measures using the same consistent method from quarter to quarter.

Cogo believes these Non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using Non-GAAP net income attributable to Cogo Group, Inc., Non-GAAP diluted EPS attributable to Cogo Group, Inc., Non-GAAP income from operation and Non-GAAP operating margin is that these Non-GAAP measures exclude share-based compensation expenses and amortization of intangible assets and related deferred taxation that have been and will continue to be for the foreseeable future a recurring expense in our business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each Non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are most directly comparable to Non-GAAP financial  measures.

Tables Attached

COGO GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2012

December 31,
2011

USD’000

RMB’000

RMB’000

 
Assets  
Current assets:  
Cash

77,714

489,406

572,364

 
Pledged bank deposits

68,589

431,941

431,695

 
Accounts receivable, net

147,734

930,355

941,798

 
Bills receivable

9,050

56,993

39,889

 
Inventories

50,826

320,079

327,482

 
Income taxes receivable

282

1,776

1,932

 
Prepaid expenses and other receivables

9,142

57,565

51,507

 
Total current assets

363,337

2,288,115

2,366,667

 
Property and equipment, net

2,508

15,796

17,891

 
Land use rights, net

3,061

19,275

 
Intangible assets, less accumulated amortization, RMB157,593 thousand (USD25,025 thousand) in 2012 and RMB151,268 thousand in 2011

23,467

147,781

154,105

 
Other assets

292

1,839

21,325

 
Total Assets

392,665

2,472,806

2,559,988

 
Liabilities and equity  
Current liabilities:  
Accounts payable

20,446

128,758

121,538

 
Bank borrowings

117,755

741,560

854,234

 
Income taxes payable

2,927

18,431

16,046

 
Accrued expenses and other liabilities

1,991

12,544

22,593

 
Total current liabilities

143,119

901,293

1,014,411

 
Deferred tax liabilities

3,872

24,384

25,427

 
Total liabilities

146,991

925,677

1,039,838

 
Equity  
Common stock:

Par value: USD0.01

Authorized: 200,000,000 Shares

Issued: 42,618,285 shares in 2012, 42,309,285 shares in 2011

Outstanding: 33,869,467 shares in 2012, 33,560,467 shares in 2011

533

3,359

3,340

 
Additional paid in capital

221,983

1,397,935

1,382,521

 
Retained earnings

90,222

568,170

560,234

 
Accumulated other comprehensive loss

(20,436)

(128,696)

(128,254)

 

292,302

1,840,768

1,817,841

 
Less cost of common stock in treasury, 8,748,818 shares in 2012 and 2011

(50,818)

(320,025)

(320,025)

 
Total Cogo Group, Inc. equity

241,484

1,520,743

1,497,816

 
Noncontrolling interests

4,190

26,386

22,334

 
Total equity

245,674

1,547,129

1,520,150

 
Total liabilities and equity

392,665

2,472,806

2,559,988

 

COGO GROUP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

Three Months ended March 31,

2012

2012

2011

USD’000

RMB’000

RMB’000

Net Revenue
Product sales

169,344

1,066,441

683,762

Service revenue

169,344

1,066,441

683,762

Cost of sales
Cost of goods sold

(157,857)

(994,103)

(586,624)

Cost of service

(157,857)

(994,103)

(586,624)

Gross profit

11,487

72,338

97,138

Selling, general and administrative expenses

(5,685)

(35,800)

(42,331)

Research and development expenses

(3,793)

(23,889)

(21,745)

Other operating income (expense)

276

1,741

(10)

Income from operations

2,285

14,390

33,052

Interest expense

(853)

(5,369)

(3,103)

Interest income

638

4,019

3,130

Earnings before income taxes

2,070

13,040

33,079

Income tax expense

(285)

(1,796)

(3,573)

Net income

1,785

11,244

29,506

Less net income attributable to noncontrolling interests

(525)

(3,308)

(2,450)

Net income attributable to Cogo Group, Inc.

1,260

7,936

27,056

Earnings per share attributable to Cogo Group, Inc.
Basic

0.03

0.22

0.71

Diluted

0.03

0.22

0.69

Weighted average number of common shares outstanding
Basic

36,023,931

37,994,774

Diluted

36,023,931

39,174,483

Comprehensive income:
Net income

1,785

11,244

29,506

Other comprehensive income
Foreign currency translation adjustments

48

302

(1,078)

Comprehensive income
Less: comprehensive income attributable to noncontrolling interests

(643)

(4,052)

(2,394)

Comprehensive income attributable to Cogo Group, Inc.

1,190

7,494

26,034

COGO GROUP, INC. and SUBSIDIARIES

UNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO THE MOST COMPARABLE GAAP MEASURES

     

Three Months ended March 31,

     

2012

 

2011

     

$’000

 

$’000

Net Income  

  GAAP net income attributable to Cogo Group, Inc.  

1,260

 

4,132

  Share-based compensation expenses  

2,451

2,889

  Amortization of intangible assets and related deferred taxation  

  838

  800

  Non-GAAP net income attributable to Cogo Group, Inc.  

4,549

 

7,821

   

Income from operation  

  GAAP income from operations  

2,285

 

5,047

  Share-based compensation expenses  

2,451

2,889

  Amortization of intangible assets  

1,004

  958

  Non-GAAP income from operation  

5,740

 

8,894

     

Operating Margin  

  GAAP operating margin  

1.3%

4.8%

  Non-GAAP operating margin  

3.4%

8.5%

     

Earnings per share  

$

 

$

  GAAP net income attributable to Cogo Group, Inc. per common share-Diluted  

0.03

0.11

  Non-GAAP net income attributable to Cogo Group, Inc. per common share-Diluted  

0.13

0.20

     

     

Weighted average number of common shares outstanding  

  Basic   36,023,931

37,994,774
  Diluted   36,023,931

39,174,483