Shengkai Innovations, Inc. (Nasdaq:VALV) ("the Company", "Shengkai", "we", or "our"), a leading ceramic valve manufacturer in the People's Republic of China (the "PRC"), today announced results for its fiscal year 2013 ("FY2013") first quarter ended September 30, 2012.

FY2013 First Quarter Highlights

Revenues were approximately $4.7 million compared with approximately $11.0 million in the first quarter of fiscal year 2012 ("FY2012"); Revenues from the electric power segment were approximately $0.8 million compared with approximately $3.5 million in the first quarter of FY2012; Revenues from the petrochemical and chemical segment were approximately $3.4 million compared with approximately $6.7 million in the first quarter of FY2012; and Gross profit was approximately $1.8 million with a gross margin of 37.9%, compared with approximately $4.8 million and 43.7% in the first quarter of FY2012.
FY2013 First Quarter Results

Revenues in the first quarter were approximately $4.7 million as compared to approximately $11.0 million in the first quarter of FY2012. Quarterly ceramic valves output was 952 sets as compared to 1,978 sets a year ago. Facing the general economic slowdown in the PRC, Shengkai continues the transition of target market segment from the electric power industry to domestic and international petrochemical and chemical industry.

During the first quarter of FY2013, revenues from electric power industry, petrochemical and chemical industry, and other industries accounted for 16.4%, 72.9% and 10.7% of the quarterly revenues, respectively, compared with 31.8%, 61.0% and 7.2% in the first quarter of FY2012.

Specifically, revenues from the electric power industry were approximately $0.8 million compared with approximately $3.5 million in the first quarter of FY2012. The decrease was primarily due to the general slowdown in economy as well as the ongoing operational transition into the petrochemical and chemical industry.

During the first quarter, revenues from the petrochemical and chemical industry were approximately $3.4 million compared with approximately $6.7 million in the first quarter of FY2012. The decrease was primarily due to the general slowdown in economy.

Revenues from other industries, including the aluminum and metallurgy industries were approximately $0.5 million compared with approximately $0.8 million in the first quarter of FY2012. Due to its limited market potential, other industries will continue to remain peripheral to the Company's core priorities.

In the first quarter, cost of sales decreased 53.2% year-over-year to approximately $2.9 million from approximately $6.2 million in the first quarter of FY2012. Cost of sales as a percentage of revenues was 62.1% compared with 56.3% in the comparable period a year ago due to decrease in sales volume and decrease in average selling price of the product mix as we sold more lower-priced products in this quarter.

Gross profit in the first quarter was approximately $1.8 million compared with approximately $4.8 million for the first quarter of FY2012. The decrease was primarily attributable to decrease in sales volume and decrease in average selling price of the product mix as we sold more lower priced products in this quarter. Gross margin was 37.9%, compared with 43.7% for the first quarter of FY2012. The decrease in gross margin was primarily due to increase in material prices, which were spread over a smaller revenue base.

Selling expenses in the first quarter decreased by 42.0% year-over-year to approximately $0.6 million from approximately $1.1 million for the comparable period in FY2012. Commissions paid to agents for introducing new sales decreased year-over-year to approximately $0.4 million from approximately $0.9 million in the first quarter of FY2012. Since minor components of selling expenses such as sales staff's salaries, sales offices' administrative expenses and after-sale service expenses are flat-rate and did not diminish proportionally to revenue decrease, selling expenses as a percentage of quarterly sales increased to 13.1% from 9.5% in the first quarter of FY2012.

General and administrative ("G&A") expenses in the first quarter were approximately $1.0 million, down from approximately $3.4 million for the comparable period in FY2012. Excluding the non-cash share-based compensation, G&A expenses in the first quarter were approximately $0.8 million, compared with approximately $1.3 million for the comparable period of FY2012.

Total operating expenses in the first quarter of FY2013 were approximately $1.6 million compared with approximately $4.5 million for the comparable period in FY2012. Operating income in the first quarter of FY2013 was approximately $0.1 million compared with approximately $0.4 million for the comparable period in FY2012.

Excluding the non-cash share-based compensation, non-GAAP operating income was approximately $0.3 million, compared with non-GAAP operating income of approximately $2.5 million for the comparable period in FY2012.

Provision for income taxes in the first quarter was approximately $0.2 million compared with approximately $0.5 million in the first quarter of FY2012. In April 2010, Tianjin Shengkai, the Company's operating entity in Tianjin, PRC, was awarded the status of "High Technology" enterprise by the local government. The tax rate for a "High Technology" enterprise is 15% and Tianjin Shengkai was taxed at that rate from January 1, 2010 through December 31, 2011. The Company expects to renew such treatment in calendar 2012.

GAAP net income was approximately $53,000 compared with approximately $0.9 million in the first quarter of FY2012. Diluted earnings per share were $0.003 compared to $0.052 in the first quarter of FY2012.

Excluding the non-cash items of share-based compensation and changes in fair value of instruments, non-GAAP net income was approximately $0.3 million in the first quarter compared with approximately $2.2 million in the first quarter of FY2012. The decrease was primarily due to the decline in revenues resulting from slowdown in PRC economy and operational transition, coupled with higher raw material costs. Non-GAAP earnings were $0.015 per diluted share compared with $0.12 per diluted share in the first quarter of FY2012.

Note: The earnings per share data for the first quarter of FY2012 have been retroactively restated to reflect the 1-for-2 reverse stock split effected on March 9, 2012.

GAAP to Non-GAAP Reconciliation Table (Unaudited) (in U.S. Dollars)       For the Three Months Ended September 30,    2012 2011 GAAP Net Income   $ 52,777 $ 944,338 Add back/(Subtract):     Share-based compensation – employee options and stock awards 194,027 2,146,968 Changes in fair value of instruments  20,536 (926,637) Non-GAAP Net Income   $ 267,340 $ 2,164,669 GAAP Earnings per share (diluted)  $ 0.003 $ 0.052 Non-GAAP Earnings per share (diluted)  $ 0.015 $ 0.120
Financial Condition

As of September 30, 2012, the Company had cash and cash equivalents of approximately $66.7 million and accounts receivable of approximately $8.5 million compared to approximately $64.8 million cash and cash equivalents and approximately $9.4 million of accounts receivable as of June 30, 2012. Total current liabilities as of September 30, 2012 were approximately $2.9 million, compared with approximately $3.5 million as of June 30, 2012. Additionally, the Company has no short-term or long-term debts.

Net cash flow provided by operating activities was approximately $2.2 million for the first quarter of FY2013 compared with approximately $2.0 million in the first quarter of FY2012. The increase was primarily attributable to the reduced working capital requirements in the first quarter of FY2013 despite the decrease in net income.

Business Outlook
In response to the business disruptions and changes in the global ceramic valves industry as well as in PRC's economic conditions, management of the Company has decided to gradually phase out its less profitable domestic market segments including the electric power market and focus on expanding its presence in the more profitable domestic and foreign oil and chemical industries where ceramic valve products typically command higher prices. The Company has increased its product sales price to match industry levels and to reflect its superior product quality. The Company has also been making efforts to streamline operations through headcount reduction and other cost-saving measures to conserve capital and reduce the impact of revenue loss.

Additionally, the Company will continue to leverage its self-developed ceramic material technologies to continue in-house and joint research and development of innovative and superior-performance products for the international oil and chemical markets and commit its resources to expanding the acceptance of its products overseas.

As such, we expect that in the immediately following quarter ended December 31, 2012, total revenues would remain flat, and major contribution to our sales would be from the petrochemical and chemical industry. Such situation may persist until our marketing and sales efforts on some new customers and projects pay off, and the expansion in the international market picks up meaningfully. Successful penetration into international oil and chemical markets would also require the Company to obtain various certifications, including but not limited to different class API certification, such as API 6A which covers higher pressure valve products, and other firm-specific supplier qualifications, which will take time to go through various application procedures, develop new products and invest in additional or different equipment.

Non GAAP Financial Measures

To supplement the Company's consolidated financial statements for the three months ended September 30, 2012 and 2011 presented on a GAAP basis, the Company provided non-GAAP financial information in this release that excludes the impact of non-cash items of i) share-based compensation costs related to the stock options and stock awards granted to independent directors and management staff, and (ii)  changes in the fair value of instruments as a result of adoption on July 1, 2009 of FASB ASC Topic 815, "Derivative and Hedging" ("ASC 815"). The Company's management believes that these non-GAAP measures, namely non-GAAP operating and net income and non-GAAP diluted earnings per share, provide investors with a better understanding of how the results relate to the Company's current and historical performance. The additional non-GAAP information is not meant to be considered in isolation or as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies.

Management believes that these non-GAAP financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes that these non-GAAP measures reflect the essential operating activities of the Company. In addition, the provision of these non-GAAP measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded.

About Shengkai Innovations, Inc.

Shengkai Innovations is primarily engaged in the design, manufacture and sale of ceramic valves, high-tech ceramic materials and the provision of technical consultation and related services. The Company's industrial valve products are used by companies in the electric power, petrochemical and chemical, metallurgy and other industries as high-performance, more durable alternatives to traditional metal valves. The Company was founded in 1994 and is headquartered in Tianjin, PRC.

The Company is one of the few ceramic valve manufacturers in the world with research and development, engineering, and production capacity for structural ceramics and is able to produce large-sized ceramic valves with calibers of 6" (150mm) or more. The Company's product portfolio includes a broad range of valves that are sold throughout the PRC, to Europe, North America, United Arab Emirates, and other countries in the Asia-Pacific region. The Company has over 200 customers, and is the only ceramic valve supplier qualified to supply SINOPEC. The Company joined the supply network of China National Petroleum Corporation ("CNPC") in 2006 and subsequently received a CNPC Certificate of Material Supplier for valve products in 2011.