China Information Technology, Inc. Announces Second Quarter 2011 Results

The increase in gross profit margin for all of the Company's key segments is due to its recent efforts to be more discerning with new contracts signed, following its previously stated initiative towards improving the quality of earnings. These changes were the result of being more selective with the profitability and accounts receivable turnover of projects.

Administrative Expenses

Administrative expenses consist primarily of compensation and benefits to the general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Administrative expenses increased by $0.75 million, or 28.76%, to $3.38 million for the three months ended June 30, 2011, from $2.62 million in the same period of 2010.  Notable changes that resulted in the increase of administrative expenses were: a) an increase in the impairment of a long-term investment of $0.34 million compared with impairment recognized during the second fiscal quarter of 2010; b) an increase of provisions for accounts receivables and inventories of $0.19 million and $0.11 million, respectively, from the second fiscal quarter of 2010; c) a $0.34 million increase in depreciation and amortization expenses from the second fiscal quarter of 2010; and d) offset by a $0.25 million decrease in salary cost as a result of the reduction in head count, which decreased from 1,490 as at 30 June 2010 to 1,370 as at this period end.

Research and Development Expenses

The Company's research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software and hardware development and enhancement. Research and development expenses increased by $0.59 million, or 105.19%, to $1.15 million for the three months ended June 30, 2011, from $0.56 million in the same period of 2010. As a percentage of revenue, research and development expenses accounted for approximately 4.13% of total revenue for the three months ended June 30, 2011, compared with 1.67% of total revenue for the same period in 2010. Such an increase was primarily due to efforts to improve the profitability of existing products as well as development of new products.

Selling Expenses

Selling expenses consist primarily of compensation and benefits to the sales and marketing staff, sales and after-sales traveling costs, and other sales related costs. Selling expenses increased $0.45 million, or 30.05%, to $1.94 million for the three months ended June 30, 2011, from $1.49 million in the corresponding period of 2010. This increase was due to the Company's increasingly nationwide market expansion, which requires increased travel and telecommunication expenses as well as increased total compensation to sales and marketing staff.

Income from Operations

Income from operations was $5.46 million in the second quarter of 2011, a decrease of 54.98%, or $6.67 million from $12.13 million in the same period in 2010.

Net Income Attributable to the Company

As a result of the factors described above, net income decreased $3.75 million, or 40.10%, to $5.6 million during the three months ended June 30, 2011, from $9.35 million for the same period in 2010.

Net income attributable to the Company on a Non-GAAP basis was $5.63 million in the second quarter of 2011 versus $ 9.87 million in the second quarter of 2010, a decrease of 43.03%.

Cash and Cash Equivalents

As of June 30, 2011, the Company had $21.43 million in cash and cash equivalents as well as restricted cash, as compared to $26.51 million at the end of 2010.  Net cash provided by operating activities for the six months ended June 30, 2011 amounted to $1.90 million, a decrease from $3.45 million in net cash provided by operating activities for the same period of 2010.

Management Update

On August 5, 2011, the Board of Directors of the Company resolved to approve Mr. Zhao Zhi Qiang as the Company's Interim Chief Financial Officer effective as of August 5, 2011.

Zhi Qiang Zhao, 40, has been the Company's Chief Operating Officer since November 2009. Prior to this he served as the Company's Chief Administrative Officer from September 2008 to November 2009. Mr. Zhao has been a member of the Company's Board of Directors since September 1, 2008, and the President of the Company's subsidiary, IST, since January 2010. Mr. Zhao has extensive experience in corporate operations and integration, strategy planning and human resources management. Mr. Zhao has served as Admin and Human Resource Director of iASPEC since April 2005, and as Deputy General Manager of iASPEC since July 2006. Prior to this, Mr. Zhao served, from March 2003 to March 2005, as Supervisor of Human Resources for Foxconn Technology Group. Mr. Zhao holds a Bachelor's degree in Mechanical and Electrical Engineering from Inner Mongolia University.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Technology believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges 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 these non-GAAP measures reflect the essential operating activities of China Information Technology. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Technology believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Information Technology's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Technology's performance using the same methodology and information as that used by China Information Technology'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, China Information Technology's management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table presents the non-GAAP financial measures contained in this press release and the most directly comparable GAAP measures and provides a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

Q2-2011 Reconciliation of Net Income and EPS to Exclude Amortization of Intangible Assets & Contingent Consideration

For Quarter Ended June 30, 2011



3 Mos. Ended

3 Mos. Ended


6 Mos. Ended

6 Mos. Ended



30-Jun-11

30-Jun-10


30-Jun-11

30-Jun-10


Net income Attributable to the Company

5,601,687

9,352,069


13,824,020

15,633,177


Amortization

314,786

427,391


627,737

927,048


Change in fair value of contingent consideration *

(291,072)

94,829



(1,469,446)


(700,268)


Net income (without amortization and contingent consideration)

5,625,401

9,874,289


12,982,311

15,859,957


Weighted Average Number of Shares Outstanding







Basic

52,636,365

51,450,623


52,583,879

51,332,698


Diluted

52,636,365

51,450,623


52,583,879

51,332,698









Earnings per share (without amortization and contingent consideration)







Basic

$0.11

$0.19


$0.25

$0.31


Diluted

$0.11

$0.19


$0.25

$0.31


* Represents a gain from the change of fair value of the contingent consideration for the acquisition of Huipu Electronics (Shenzhen) Co., Ltd. as at 06/30/2011, according to FASB ASC 805- Business Combination




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