China Precision Steel, Inc. (CPSL), a niche precision steel processing company principally engaged in producing and selling high precision, cold-rolled steel products, announced its financial results for the fourth quarter and fiscal 2012 year ended 30 June 2012.

"Business confidence and manufacturing activities continue to be strained as concerns linger regarding the prolonged uncertainty from the euro debt crisis and sharper than expected slowdown in China. The fallout of this challenging economic environment has been a softening in global steel demand along with a sharp decline in steel prices. As a result, we experienced negative gross margins for the fourth quarter and full year ended 30 June 2012 as we were unable to recover the full cost of our raw materials which was purchased in advance of the decline in steel prices," commented Mr. Hai Sheng Chen, CEO of China Precision Steel. "Facing the challenging economic environment, we recognize the need to increase focus on our more competitive specialty high-carbon steel products and lower our production costs. As such, we have begun to implement a series of measures to cut costs and increase profitability in order to strengthen our financial position."

Revenue for the fourth quarter of fiscal year 2012 was $37.6 million, down 18.2% from $46.0 million in the fourth quarter of fiscal year 2011. Sales volume in the fourth quarter of fiscal year 2012 decreased 3.9% to 47,212 tons from 49,104 tons, period-on-period, while average selling price per ton declined 15.0% from $938 to $797, period-on-period. The decrease in revenue and sales volume period-on-period is primarily due to softening demand for the Company’s high carbon, cold-rolled steel used in the production of automobile components, due to a slowdown of the Chinese automobile industry during the year, combined with the decrease in average selling price. Sequentially, revenue increased 27.6% from $29.5 million in the third quarter of fiscal year 2012 and sales volume increased 21.4% from 38,898 tons, as demand for high-carbon steel products slightly rebounded from the low in the third quarter. High carbon and low carbon products accounted for 23.2% and 75.6% of sales, respectively, compared to 28.3% and 64.9%, respectively, from the same period of the prior year.

Gross loss in the fourth quarter was $3.0 million, compared to gross profit of $1.7 million in the fourth quarter of fiscal year 2011. Gross margin was (7.8%), compared to a gross profit margin of 3.7% in the same period a year ago. The decline is gross margin is mainly due to the decline in average selling price per ton of 15.0%, while the average cost per ton declined only 4.1%, period-on-period, resulting in compression of gross margin and a gross loss. The high average cost per ton is a result of the locked-in raw material cost purchased during the past twelve months. The Company has been renegotiating with some of its major suppliers to get a partial refund of its advances to suppliers in an effort to mitigate the locked-in raw materials cost.

Operating loss for the fourth quarter was $8.2 million, compared to operating income of $1.2 million in the same period a year ago.

Net loss for the fourth quarter of fiscal year 2012 was $9.0 million, compared to a net income of $0.3 million in the same period of the prior year. Fully diluted loss per share were $2.32, compared to $0.07 in the fourth quarter of fiscal year 2011, after adjusting for the 1:12 reverse stock split which effected on 27 August 2012.

Fiscal Year 2012 Results
Revenue for fiscal year 2012 was $143.0 million, down 5.4% from revenue of $151.2 million in fiscal year 2011. High carbon and low carbon products accounted for 18.3% and 79.3% of sales, respectively, compared to 23.3% and 69.5%, respectively, in the prior year. In fiscal year 2012, sales of low carbon, cold-rolled steel increased to $105.9 million, or 74% of total sales, from $100.6 million, or 66% of total sales, year-on-year. International sales represented 5% of total sales, up from 3% in fiscal year 2011. Gross loss was $5.8 million compared to a gross profit of $6.0 million in fiscal year 2011. Gross margin was (4.1%), compared to gross margin of 3.9% a year ago. Operating loss was $13.9 million, compared to operating income of $3.4 million in fiscal year 2011. Net loss was $16.9 million, compared to a net income of $0.3 million a year ago. Fully diluted loss per share was $4.37, compared to fully diluted earnings per share of $0.07 for fiscal year 2011.

Financial Condition
As of June 30, 2012, China Precision Steel had $1.6 million in cash and cash equivalents, total liabilities of $66.7 million and working capital of $48.9 million. Stockholders’ equity was $118.9 million, compared to $133.5 million as of June 30, 2011. Net cash provided by operating activities was $1.8 million for the year end fiscal 2012.

Recent Events
On 27 August 2012, China Precision Steel completed a reverse stock split of its common stock at a ratio of 1 share of common stock for every 12 shares, to regain compliance with the NASDAQ minimum bid price requirements. Since the reverse stock split, the bid price for the Company’s common stock has been above $1.00 per share.

Business Outlook
China Precision Steel is taking measured steps to adjust to the current market conditions by re-focusing on its more competitive products and niche capabilities, including producing more ultra-thin low-carbon and high-strength high-carbon products, streamlining production by reducing the number of workers, and improving working capital efficiency by increasing turnover of advances to suppliers and accounts receivables. Total Company backlog as of 30 June 2012 was $6,629,115.

"The global economic environment remains challenging, especially for steel manufacturers as we believe uncertainty and volatility has become the norm for the industry in the past year. We are working to adjust to the market conditions by manufacturing only products that will help enhance our gross margin, as well as taking steps to improve our cost position and bottom line," continued Mr. Chen. "As the world’s largest steel producer and consumer, China, has responded to the slowdown by launching a series of pro-growth policies and fast-tracking infrastructure projects with the intention of reinvigorating the economy and bolstering the steel industry. As these projects are expected to be implemented in 2013, we remain focused on controlling the factors that we can and carefully executing our business strategy to make China Precision Steel more sustainable and endure through this period of uncertainty and difficulty."