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FUQI International gross profit up in Q2

13
Aug '08
FUQI International Inc announced financial results for the second quarter ended June 30, 2008.

Revenues for the second quarter of 2008 increased 154% to $66.9 million from $26.3 million in the second quarter of 2007, due to increases in sales volumes and selling prices.

A higher inventory level going into the quarter provided existing and potential customers with sufficient comfort to begin increasing the size of orders overall.

Gross profit in the second quarter of 2008 increased 129% to $7.1 million compared to $3.1 million for the same period in the prior year.

This increase in gross profit was primarily attributable to higher selling prices for new jewelry designs, which resulted in increased processing fees on jewelry items delivered during the second quarter.

Gross profit margin for the second quarter was 10.6% in the second quarter of 2008, within the Company's previous 2008 second quarter guidance estimate of 10.5%, and down from 11.6% in the same period of the prior year.

This decrease was primarily due to higher raw materials prices, which more than offset the increase in sales. It is important to note that management prepared for fluctuating raw materials prices by entering into futures contracts, which resulted in a below-the-line gain of $721,000 during the quarter.

Operating expenses in the second quarter of 2008 increased to $1.1 million compared to $927,000 in the same period of the prior year. This increase was a result of higher administrative expenses required to support a growing revenue base, higher advertising costs, business taxes, options granted and increased salaries to certain executives, as well as expenses incurred as a result of being a publicly traded company.

These expenses were offset by a year-over-year decrease in bad debt expense, as well as the absence of a one-time discretionary bonus of $88,000 that was issued to the Company's CFO in the prior year's period. Operating income for the second quarter increased to $6.0 million from $2.1 million in the second quarter of 2007.

Net Income for the second quarter of 2008 increased 253% to $5.3 million, or $0.25 per diluted share, compared to $1.5 million, or $0.10 per diluted share, in the same period of the prior year. Net margin was 7.9% compared to 5.7% in the prior year period.

The increase in net margin was primarily a result of our strong growth in revenue in excess of the increase in our operating expenses. Non-cash items in the second quarter of 2008 included a $149 thousand expense for equity based compensation and a $167 thousand retail barter revenue gain.

Second quarter 2008 net income also benefited from a $721 thousand non-operating income derivative gain associated with gold futures the Company purchased to hedge against its inventory position during the quarter.

At the end of the second quarter, the Company had cash of $76.9 million, versus $28.9 million of cash at the end of the first quarter 2008.

The primary reasons for the increase in cash were 1) an increase in the operating profits resulting in strong sales during the quarter and 2) the use of existing inventory, which had been built up going into the second quarter in anticipation of strong demand.

Total inventory at the end of the second quarter was $35.1 million, down from $64.2 million at the end of the first quarter.

Management expects inventory and cash positions to fluctuate from time to time as the Company anticipates periods of high demand and increases of inventory to meet that expected demand.


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