Jinpan International Ltd. (Nasdaq: JST) announced preliminary financial results for the second quarter ended June 30, 2012.

Here are the numbers compared to a year ago same quarter:

Also, per the news release management has amended the 2012 outlook per the following:

1. Net sales for 2012 to be US$ 219 to US$ 230 million or 0% to 5% growth over net sales in 2011 of US$ 219 million.
2. Gross profit margin for 2012 is expected to be  approximately 33% of net sales, compared to gross profit margin in 2011 of 36.7% of net sales.
3. Net income for 2012 is expected to experience a decrease of 15% to 20%, compared to US$ 23.8 million in 2011.

A Look at Management’s Statements.

The sales number reports from two segments, domestic (China) and international. Domestic sales grew to 50.8M from 46.1M the same quarter last year. International sales took a big hit, 4.8M compared to 12.2M from last year’s second quarter. This was attributed to “…a change in the design by our primary OEM customer of their wind power product(s), which resulted in a decrease in our international sales in the second quarter.”

“Currently, we are waiting for our customer to provide new specifications, so we can make corresponding design changes to our cast resin transformer products and integrate our transformers into their newly designed wind power product(s).”  International OEM sales have been down for a three month period and Jinpan is still waiting for specifications from this customer. This may be a flag signaling strained customer relations.

Once these specifications are received, Jinpan will have to modify/redesign their product and have it re-qualified. I would expect this to take some time and possibly affect International sales for the remainder of this year. Management expects this also, “Even though we experienced slower sales to our primary OEM customer, we do expect a pick-up in orders from other OEM customers in the second half of 2012.” This has also exposed a weakness of dependence on one major OEM customer (a 60% decrease in this sales segment due to one customer). I would like to see management move to fix this weakness.

I sensed some hesitation by management about Domestic sales for the remainder of the year also, “We also experienced some weakness in domestic order flows in the second quarter due to a softer economic environment in China.” Domestic sales were actually up by 9.25% this quarter compared to last year, why the warning?

“We have backlog of approximately $113 million at the end of June 2012 and believe that approximately 80% to 90% of the backlog will be shipped in 2012”. I assume that 113M figure is a net sales number. 80% of that would be about 90.5M for the last half of the year in addition to incoming orders. Last year Jinpan had 130.75M revenue over the last half of the year.

The revised numbers for Net Sales predict 0-5% growth this year. Using the worst case scenario of 219M would require Jinpan to achieve Net Sales of 120.6M over the last two quarters. Again, Jinpan had about 130M over the last two quarters for 2011 so it is possible, even more so if the backlog is delivered as promised.

The Gross Margin reduction is not too much of a concern for me. Jinpan has averaged a 38% margin over the last ten years and been in the 33% range three of the same last ten. Also, the net income number if reduced by 20% would be 19M. This is still well above the ten year average of 12.6M and better than seven of the last ten.

Conclusion

“We believe the second half of 2012 will be stronger for our business than the first half.”

Jinpan has some work to do if it wants to be a ‘zero growth company’ this year. There have been some weaknesses exposed regarding reliance on a single customer and possibly customer relations/communications. Jinpan plans to release its second quarter earnings results and conduct an earnings conference call in mid-August. I look forward to seeing how management addresses these issues and handles the remainder of the year, it could reveal a lot about the quality of management.