SOURCE: RAE Systems

RAE Systems

November 04, 2009 16:10 ET

RAE Systems Reports Third Quarter 2009 Results

Achieves Non-GAAP Profitability; Books an Accrual for Potential FCPA Settlement With DOJ & SEC

SAN JOSE, CA--(Marketwire - November 4, 2009) - RAE Systems Inc. (NYSE Amex: RAE), a leader in delivering innovative sensor solutions to serve industrial, energy, environmental, and government safety markets worldwide, reported financial results and business highlights for the third quarter ended September 30, 2009.

Financial Results

For the third quarter of 2009, RAE Systems reported revenue of $19.9 million, compared with $19.9 million in the second quarter of 2009 and $28.8 million in the third quarter of 2008. The year-over-year decrease is primarily attributable to the global recession, two significant non-recurring orders recorded in third quarter of 2008, and a disruption of sales activity in China due to recent management changes. For the third quarter of 2009, the Americas contributed 46 percent of total revenue, Asia contributed 37 percent and Europe contributed 17 percent of revenue. Gross margin for the third quarter was 52 percent, compared with 50 percent for the second quarter 2009 and 55 percent for the third quarter of 2008. Operating expenses for the third quarter 2009 were $14.2 million, compared with $14.4 million for the third quarter of 2008.

The company is actively engaged in discussions with the Department of Justice and the Securities and Exchange Commission to settle the outstanding joint investigation into the company's alleged violations of the Foreign Corrupt Practices Act (FCPA). Although no assurances can be given as to whether the matter will settle or the amount of any settlement, the company booked an accrual of $3.5 million in the third quarter 2009 relating to this potential settlement.

The third quarter 2009 GAAP net loss was $3.5 million, or $0.06 per share. Excluding the impact of the reserve for the potential FCPA settlement, non-GAAP net income was $11,000 or $0.00 per share. These compare with third quarter 2008 net income of $554,000 or $0.01 per share.

For the nine months ended September 30, 2009, revenue was $58.9 million, compared with $71.4 million for the same period in 2008. For the nine months ended September 30, 2009, the GAAP net loss was $6.7 million or $0.11 per share and the non-GAAP net loss was $3.2 million or $0.05 per share. This compares with a net loss of $2.2 million or $0.04 per share for the same period in 2008.

"During the quarter, to ensure our long-term success, we furthered initiatives to run the company more efficiently, particularly in China," said Robert Chen, president and CEO of RAE Systems. "Globally, we are prioritizing cost management, business controls and cash generation. For the nine months ended September 30, 2009, we increased our cash balance by $1.3 million to $16.2 million. In China, we installed a new management team; instituted mandatory, ongoing, FCPA compliance training; and began consolidating certain operations."

"Due to the continued uncertainty of the worldwide economic outlook for 2009 combined with year-to-date performance, we now expect full year 2009 revenue of between $80.0 million and $82.0 million, and we do not expect to be profitable for the year," Chen concluded.

Third Quarter Business Highlights

In the Oil and Gas/Energy market:

--  Won long-term contracts with companies in the U.S., Europe, the Middle
    East and China for portable instruments, wireless systems and RAE Systems'
    specialty benzene monitors, two of which were "preferred supplier"
    contracts and the longest is for six years.
--  Secured the sale of the new MeshGuard wireless monitoring system for
    deployment in methane coal beds in Australia.
--  Obtained two digital coal mine safety systems orders for large coal
    mines in China's Northern provinces that are expected to be delivered in
    the first half of 2010.
    

In the Hazardous Material Management market:

--  Received orders for AreaRAE wireless systems to equip Urban Search and
    Rescue teams, municipal fire departments, state emergency management
    departments as well as regional mutual-aid initiatives.
--  Delivered MultiRAE Plus Wing Tank Entry kits to both the United States
    Navy and Air Force.
    

In the Industrial Safety market:

--  Won key systems and instruments awards in China, Germany and Taiwan
    for use in steel mills, metal plating facilities and semiconductor
    production and contamination control.
    

In the Civil Defense market:

--  Obtained two significant radiation detection orders from the Singapore
    Civil Defense Force and the Los Angeles County Sherriff's Department.
    

In the Environmental market

--  Secured a radiation monitoring system order from the China
    Environmental Protection Bureau to track the movement of radioactive
    sources.
    

About RAE Systems

RAE Systems is a leading global provider of rapidly deployable sensor networks that enable customers to identify safety and security threats in real time. Products include disposable gas-detection tubes, single-gas personal monitors, multi-sensor chemical detection monitors, photoionization (PID) monitors for volatile organic compounds (VOCs), wireless gas detection systems, and radiation monitoring networks for energy production and refining, industrial and environmental safety, and public and government first responder security sectors. RAE Systems' products are used in over 95 countries by many of the world's leading corporations and by many global Governmental agencies. For more information about RAE Systems, please visit www.RAESystems.com.

Use of Non-GAAP Financial Measures

Non-GAAP net income and net loss discussed in this press release excludes the impact of the company's potential FCPA settlement. Management believes that the non-GAAP financial information provides additional insight for analysts and investors in evaluating the Company's financial and operational performance. However, non-GAAP financial information has limitations as an analytical tool, and are not intended to be an alternative to financial information prepared in accordance with GAAP. Pursuant to the requirements of SEC Regulation G, detailed reconciliations between the Company's GAAP and non-GAAP financial results is provided at the end of this press release. Investors are advised to carefully review and consider this information as well as the GAAP financial results that are disclosed in the Company's SEC filings.

Safe Harbor Statement

This presentation may contain "forward-looking" statements, as that term is used in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation: expressions of "belief," "anticipation," or "expectations" of management; statements as to industry trends or future results of operations of RAE Systems and its subsidiaries; and other statements that are not historical fact. These types of statements address matters that are subject to risks and uncertainties, which could cause actual results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, the results of ongoing discussions with the Department of Justice and Securities and Exchange Commission regarding the company's alleged violations of the FCPA, the general economic and industry factors and receptiveness of the market to RAE Systems and its products. In addition, our forward-looking statements should be considered in the context of other risk factors discussed in our filings with the Securities and Exchange Commission, including but not limited to our annual report on Form 10-K and Form 10-Q filings, available online at http://www.sec.gov. All forward-looking statements are based on information available to the company on the date hereof, and the company assumes no obligation to update such statements.




                             RAE Systems Inc.
                  Condensed Consolidated Balance Sheets
              (in thousands, except share and par value data)
                                (unaudited)


                                               September 30,  December 31,
                                                   2009           2008
                                               -------------  ------------
ASSETS
Current assets:
 Cash and cash equivalents                     $      16,157  $     14,845
 Trade notes receivable                                1,762         1,870
 Accounts receivable, net of allowances of
  $5,096 and $3,472, respectively                     18,628        20,961
 Accounts receivable from affiliate                      224           100
 Inventories                                          14,581        17,604
 Prepaid expenses and other current assets             4,235         4,991
 Income taxes receivable                                 102           895
                                               -------------  ------------
      Total current assets                            55,689        61,266
                                               -------------  ------------
Property and equipment, net                           15,600        14,976
Intangible assets, net                                 2,656         3,342
Investments in unconsolidated affiliates                 289           467
Other assets                                             658         1,124
                                               -------------  ------------
 Total assets                                  $      74,892  $     81,175
                                               =============  ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable                              $       7,003  $      6,387
 Accounts payable to affiliate                            83           382
 Payable to Fushun shareholder                             2            64
 Bank lines of credit                                  3,739         2,584
 Accrued liabilities                                  13,598        12,318
 Notes payable to related parties, current               370         1,329
 Income taxes payable                                    267           425
 Deferred revenue, current                               522           631
                                               -------------  ------------
      Total current liabilities                       25,584        24,120
                                               -------------  ------------
Deferred revenue, non-current                            508           685
Deferred tax liabilities, non-current                      1            83
Deferred gain on sale of real estate,
 non-current                                           4,602         5,079
Other long-term liabilities                            1,385         1,292
Notes payable to related parties, non-current            362         1,219
                                               -------------  ------------
      Total liabilities                               32,442        32,478
                                               -------------  ------------

COMMITMENTS AND CONTINGENCIES (NOTE 5)

SHAREHOLDERS' EQUITY:
 Common stock, $0.001 par value, 200,000,000
  shares authorized; 59,438,328 and 59,443,914
  shares issued and outstanding, respectively             59            59
 Additional paid-in capital                           63,465        62,549
 Accumulated other comprehensive income                6,892         6,555
 Accumulated deficit                                 (32,674)      (25,947)
                                               -------------  ------------
      Total RAE Systems Inc. shareholders'
       equity                                         37,742        43,216
   Noncontrolling interest                             4,708         5,481
                                               -------------  ------------
      Total shareholders' equity                      42,450        48,697
                                               -------------  ------------
      Total liabilities and shareholders'
       equity                                  $      74,892  $     81,175
                                               =============  ============



                             RAE Systems Inc.
              Condensed Consolidated Statements of Operations
                    (in thousands, except share data)
                                (unaudited)


                                    Three Months Ended  Nine Months Ended
                                      September 30,       September 30,
                                    ------------------  ------------------
                                      2009      2008      2009      2008
                                    --------  --------  --------  --------
Net sales                           $ 19,909  $ 28,845  $ 58,929  $ 71,361
Cost of sales                          9,636    13,070    29,458    33,640
                                    --------  --------  --------  --------
Gross profit                          10,273    15,775    29,471    37,721
                                    --------  --------  --------  --------
Operating expenses:
 Sales and marketing                   4,282     5,197    13,513    15,998
 Research and development              1,787     1,541     4,766     4,822
 General and administrative            8,118     7,658    18,223    17,581
                                    --------  --------  --------  --------
       Total operating expenses       14,187    14,396    36,502    38,401
                                    --------  --------  --------  --------
Operating (loss) income from
 continuing operations                (3,914)    1,379    (7,031)     (680)
Other income (expense):
 Interest income                          13        36        30       122
 Interest expense                        (79)      (91)     (314)     (292)
 Other, net                              148      (192)      140      (110)
 Equity in loss of unconsolidated
  affiliate                              (47)       10      (180)      (26)
                                    --------  --------  --------  --------
(Loss) income from continuing
 operations before income taxes       (3,879)    1,142    (7,355)     (986)
Income tax expense                       215      (494)     (145)   (1,159)
                                    --------  --------  --------  --------
Loss from continuing operations       (3,664)      648    (7,500)   (2,145)
Gain from discontinued operations,
 net of tax                                -        (4)        -        11
                                    --------  --------  --------  --------
Net loss                              (3,664)      644    (7,500)   (2,134)
 Net loss (income) attributable to
  the noncontrolling interest            175       (90)      773      (115)
                                    --------  --------  --------  --------
Net loss attributable to RAE
 Systems Inc.                       $ (3,489) $    554  $ (6,727) $ (2,249)
                                    ========  ========  ========  ========


Basic net income (loss) per share
 Continuing operations              $  (0.06) $   0.01  $  (0.11) $  (0.04)
 Discontinued operations                   -         -         -         -
                                    --------  --------  --------  --------
Basic net income (loss) per share   $  (0.06) $   0.01  $  (0.11) $  (0.04)
                                    ========  ========  ========  ========
Diluted net income (loss) per share
 Continuing operations              $  (0.06) $   0.01  $  (0.11) $  (0.04)
 Discontinued operations                   -         -         -         -
                                    --------  --------  --------  --------
Diluted net income (loss) per share $  (0.06) $   0.01  $  (0.11) $  (0.04)
                                    ========  ========  ========  ========

Weighted-average common shares
 outstanding-Basic                    59,375    59,304    59,359    59,162
Stock options and warrants                 -       456         -         -
                                    --------  --------  --------  --------
Weighted-average common shares
 outstanding-Diluted                  59,375    59,760    59,359    59,162
                                    ========  ========  ========  ========



                             RAE Systems Inc.
   Non-GAAP Information and Reconciliation to Comparable GAAP Financial
                                 Measures
                    (in thousands, except share data)
                                (unaudited)


                                              Three Months Ended
                                    --------------------------------------
                                    September 30, 2009  September 30, 2008
                                    ------------------  -------------------
                                      Net                 Net
                                     income     Basic    income     Basic
                                     (loss)     EPS      (loss)     EPS
                                    --------  --------  --------- ---------
GAAP measures                       $ (3,489) $  (0.06) $     554 $    0.01
 Item reconciling GAAP net income
  and EPS to Non-GAAP net income
  and EPS:

 Related to operating expenses:
  General and administrative:
   Non-recurring charge for
    proposed FCPA settlement           3,500      0.06          -         -
                                    --------  --------  --------- ---------
Non-GAAP measures                   $     11  $      -  $     554 $    0.01
                                    --------  --------  --------- ---------



                                              Nine Months Ended
                                    --------------------------------------
                                    September 30, 2009  September 30, 2008
                                    ------------------  ------------------
                                      Net                 Net
                                     income     Basic    income     Basic
                                     (loss)     EPS      (loss)     EPS
                                    --------  --------  --------  --------
GAAP measures                       $ (6,727) $  (0.11) $ (2,249) $  (0.04)
 Item reconciling GAAP net income
  and EPS to Non-GAAP net income
  and EPS:

 Related to operating expenses:
  General and administrative:
   Non-recurring charge for
    proposed FCPA settlement           3,500      0.06         -         -
                                    --------  --------  --------- ---------
Non-GAAP measures                   $ (3,227) $  (0.05) $ (2,249) $  (0.04)
                                    --------  --------  --------  --------






The following table sets forth the components of our Condensed Consolidated
Statements of Operations as a percentage of net sales:


                                          Three Months      Nine Months
                                             Ended            Ended
                                          September 30,    September 30,
                                        ----------------  ----------------
                                          2009     2008     2009     2008
                                        -------  -------  -------  -------
Net sales                                   100%     100%     100%     100%
Cost of sales                                48%      45%      50%      47%
                                        -------  -------  -------  -------
Gross profit                                 52%      55%      50%      53%
                                        -------  -------  -------  -------
Operating expenses:
 Sales and marketing                         22%      18%      23%      23%
 Research and development                     9%       5%       7%       7%
 General and administrative                  41%      27%      31%      25%
 Adjustment to lease abandonment
  accrual                                     0%       0%       0%       0%
                                        -------  -------  -------  -------
       Total operating expenses              71%      50%      62%      55%
                                        -------  -------  -------  -------
Operating (loss) income from continuing
 operations                                 -20%       5%     -12%      -1%
Other income (expense):
 Interest income                              0%       0%       0%       0%
 Interest expense                            -1%       0%      -1%       0%
 Other, net                                   1%      -1%       0%       0%
 Equity in loss of unconsolidated
  affiliate                                   0%       0%       0%       0%
                                        -------  -------  -------  -------
(Loss) income from continuing
 operations before income taxes             -19%       4%     -12%      -1%
Income tax expense                            1%      -2%       0%      -2%
                                        -------  -------  -------  -------
Loss from continuing operations             -18%       2%     -13%      -3%
Gain from discontinued operations, net
 of tax                                       0%       0%       0%       0%
                                        -------  -------  -------  -------
Net loss                                    -18%       2%     -13%      -3%
 Net loss (income) attributable to the
  noncontrolling interest                     1%       0%       1%       0%
                                        -------  -------  -------  -------
Net loss attributable to RAE Systems
 Inc.                                       -18%       2%     -11%      -3%
                                        =======  =======  =======  =======

Contact Information