saudi ceramics q1 2008 report

SAUDI CERAMIC COMPANY (A Saudi Joint Stock Company)

FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

1


BALANCE SHEET

As of March 31,

Note 2008

SR’000

2007

SR’000

ASSETS

Current assets:

Cash and cash equivalent 69,388 15,698

Accounts receivable, net 110,098 91,709

Inventories, net 273,329 257,783

Prepayments and other assets 16,649 10,878

Total current assets 469,464 376,068 Non-current assets:

Investments and financial assets 33,311 9,483

Projects under construction 315,952 270,802

Property, plant and equipment, net 606,754 433,178

Total non-current assets 957,767 713,463 Total assets 1,427,231 1,089,531

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable 90,416 83,987

Notes payable due within a year 21,447 28,320

Accruals and other liability 33,911 40,073

62,500 -

Short term loans 420,000 240,000

Current portion of long term loans 27,117 12,500

Total current liabilities 655,391 404,880 Non-current liabilities:

Notes payable 13,866 24,670

Long term loans 147,304 66,435

Employees’ end of service benefits 23,015 22,000

Total non-current liabilities 184,185 113,105

Total liabilities 839,576 517,985

Shareholders’ equity:

Share capital 250,000 250,000

Statutory reserve 90,087 77,336

Retained earnings 244,193 244,210

Unrealized gain from available-for-sale securities 3,375 -

Total Shareholders’ equity 587,655 571,546 Total liabilities and shareholders’ equity 1,427,231 1,089,531

The accompanying notes 1 through 13 form an integral part of these financial statements

2


STATEMENT OF INCOME

For the Three Months Ended

March 31,

Note

2008

SR’000

2007

SR’000

Net sales 199,709 135,122

Cost of sales (129,883) (83,997)

Gross Income 69,826 51,125

Selling and marketing expenses (24,275) (19,374)

General and administrative expenses (8,171) (5,911)

Operating income 37,380 25,840

Financing cost (341) (375)

Other revenues and expenses, net 2,362 816

Net income for the year before Zakat 39,401 26,281

Zakat provision (1,038) (825)

Net income for the year 38,363 25,456

Earning per share – Operating Income (in Saudi

Riyal)

1.49 1.03

Earning per share – Net Income (in Saudi Riyal) 1.53 1.02


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STATEMENT OF CASH FLOWS

For the Three Months

Ended March 31,

2008

SR’000

2007

SR’000

Cash flows from operating activities:

Net income before Zakat 39,401 26,281

Adjustments to reconcile net income before zakat

to net cash provided by operating activities:

Depreciation 16,329 13,256

Gain from sale of property, plant and equipment (54) -

Employees’ end of service benefit provision 893 827 Changes in operating assets and liabilities

Increase in accounts receivable (6,611) (5,216)

Decrease (Increase) in inventory 9,717 (37,860)

Decrease in prepayments and other assets 889 1,980

Decrease (Increase) in accounts payables (222) 7,582

Increase (Decrease) in notes payable 4,138 (1,924)

Decrease (Increase) in accruals and other liabilities (13,645) 1,020

Cash from operations 50,080 5,946

End of service benefit paid (755) (639)

Net cash flows provided by operating activities 50,080 5,307

Cash flows from investing activities:

Additions to investments and financial assets (9,000) -

Dividends from financial investments 238 -

Additions to property, plant, equipment and projects (104,535) (33,369)

Proceeds from sale of property, plant and equipment 54 -

Net cash used in investing activities (113,243) (33,369)

Cash flows from financing activities:

Net proceeds (settlements) of short-term loans 115,000 30,000

Dividends paid (1,560) -

Loan For Affiliate Company (1,750) -

Net cash provided by financing activities 111,690 30,000 Net increase in cash and cash equivalents 48,527 1,938

Cash and cash equivalents at beginning of the year 20,861 13,760

Cash and cash equivalents at the end of the year 69,388 15,698

Non-cash transactions

Unrealized gain from revaluation of securities 254 -

Transfer of Dividends from Retained Earnings to current

Liabilities 62,500 -


4


NOTES TO THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

1. ORGANIZATION AND ACTIVITY

Saudi Ceramic Company, (the Company) is a Saudi Joint Stock Company established by the

Royal Decree No. (M/16) on 25/4/1397H (corresponding to 14/4/1977G), registered in the Kingdom of Saudi Arabia under Commercial Registration No. 1010014590 issued in Riyadh on 15/2/1398H (corresponding to 24/1/1978G).

The Company is engaged in the production and sale of ceramic products, water heaters and their components. The Company is also involved in the import of related machineries, equipments and other accessories.

The authorized and fully paid-up capital of the Company is SR 250 million, divided into 25 million shares of SR 10 each.

The financial year of the Company commences on January 1, and ends on December 31 of each calendar year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared under the historical cost convention

(except for investments in available for-sale financial instruments which are measured at fair value) on the accrual basis of accounting, in accordance with generally accepted accounting principles applicable in Saudi Arabia. Significant accounting policies adopted in the preparation of these financial statements are summarized below:

Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and judgments which might effect the valuation of recorded assets, liabilities and the disclosure of contingencies at the balance sheet date. Although these estimates are based on the best information available to management at the date of issuing these financial statements, the actual end results might immaterially differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, balances and deposits with banks, and other highly liquid investments with maturities of 90 days or less from its purchase date.

Accounts Receivable

Accounts receivable is stated net of provision. Provision is made for accounts receivable where recovery is considered doubtful based on the Company’s approved policy.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined, on a weighted average cost basis. Cost of finished goods and work in process includes cost of materials, labor and an appropriate proportion of indirect overheads. Provisions for slow-moving and obsolete inventory are estimated based on the Company’s approved policy. As a result of the large expansions in the Company’s plants during this year, which were accompanied with the supply of related major spare parts, management decided to change the accounting policy related to recognition of spare parts which are considered major parts of the plants’ machinery and equipment, such as strategic and stand-by parts, to be recorded as plant and equipment instead of inventory. The total value of those parts as of December 31, 2007, amounted to about SR. 9.8 million. This change in policy was not applied retroactively, as management believe the affect is immaterial on the Company’s financial statement as a whole.

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Investments in Associates

Investments in associates where the Company has significant influence over the investee’s

financial and operation policies, or where the Company has a long-term investment between 20%

and 50% of the equity, is accounted for using the equity method. Under the equity method, the

investment is stated initially at cost and adjusted thereafter for the post acquisition changes in the

net assets of the associates. The Company’s share of profit in the associate company is recognized

in the income statement.

Investments in Financial Instruments

Investments in (available for sale) securities, which are neither held to maturity or for trading, are

valued at fair value and are classified as non-current assets, unless the intention is to sell it in the

following year. Changes in fair value of available for sale securities are taken to equity as a

separate item. Permanent impairment, if any, of such investment is recognized directly in the

income statement. Revenues from such investments are recognized when declared. Fair value is determined by reference to the market value when an active trading market is

available; else, if no active market is available, cost is considered the best substitute to fair value.

If part of the investment is sold, cost is determined on weighted average basis.

Capitalization of Financing Costs

The net financing cost of the Company’s borrowings, is capitalized on qualified projects which

require a substantial period of time to construct.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Expenditure on maintenance and repairs is expensed, while expenditure for betterment is capitalized. Depreciation is provided over the estimated useful lives of the applicable assets using the straight line method. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining term of the lease. Property and equipment sold or otherwise disposed off and their related accumulated depreciation are removed from the accounts at the time of disposal and the related gain or loss is recognized in the income statement. The estimated operational useful lives are as follows:

Years

Buildings 10 - 33.33 Machinery, equipment and spare parts 10 - 25 Vehicles and transportation equipments 4 - 6.66 Furniture, fixture and office equipment 6.66 - 10 Leasehold improvements 4

Employees’ End of Service Benefits

Employees’ end of service benefits are provided for based on Saudi Arabian Labour Law and

according to the employees' service duration.

Zakat Zakat is accrued in accordance with the regulations of the Department of Zakat and Income Tax in

KSA. Adjustments arising from final Zakat assessments, if any, are recorded in the year in which such

assessments are made.

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Revenue recognition Revenues from sales are recorded when goods are delivered and invoiced.

Expenses

Sales and marketing expenses represent salaries and wages of the sales and distribution employees, marketing campaigns, sales costs and similar expenses. All other expenses not related to production or sales are classified as general and administrative expenses. Shared expenses are allocated between selling and general expenses using consistent basis.

Statutory Reserve

In accordance with Regulations for Companies in Saudi Arabia and the companys’ articles of

association, the company has established a statutory reserve by the appropriation of 10% of annual

net income, this appropriation continues until the reserve equals 50% of the share capital, then it

can be stopped. This reserve can not be distributed as dividends.

Foreign Currency Translation

The Company are maintained its accounts in Saudi Riyals, foreign currency transactions are

translated into Saudi Riyals at the rates of exchange prevailing at the time of the transactions.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are

translated at the exchange rates prevailing at that date. Gains and losses from settlement and

translation of foreign currency transactions are included in the statement of income.

Earnings per Share

Earning per share is calculated using the weighted average of the shares outstanding during the

period.

3. THE RESULTS FOR THE PRIMARY PERIOD

The management prepared all adjustments which were important to present fairly, the financial

position of the Company as of March 31, 2008 and the results of its operations, for the three months

then ended. Those primary financial results for that period might not represent an accurate indicator

for the whole year results.

March 31,

4. INVENTORIES, NET

2008 SR’000

2007 SR’000

Finished goods and Work in process 93,700 82,644

Raw materials, Spare parts, and Goods in transit 164,749 160,501

Purchased goods for resale 14,880 14,638

273,329 257,783

The Company uses the standard cost method for valuation of its cost of goods sold, finished

production and work in process. Standard cost is adjusted when there are material variances between

standard and

7



INVENTORIES (continued)

actual costs inventory. Management believes that using this approach is appropriate for the

Company’s circumstances due to the nature of its products and method of production. The

variance between standard and actual at the end of March 2008 is immaterial.

5. INVESTMENTS AND FINANCIAL ASSETS

Investment in Associates

Natural Gas Distribution Company (5a) 6,006 4,553

Ceramic Pipes Company (5b) 10,000 -

16,006 4,553

Available for Sale Securities

Gulf Real Estate Company 4,200 4,200

Yanbu National Petrochemical (YANSAP) 4,105 730

Portfolio for Land Parcel (5c) 9,000 -

17,305 4,930

33,311 9,483

Investment in Associates 5 - a The Company held 15.87% of the share capital of Natural Gas Distribution Company “a

Limited Liability Company” amounting to SR 15 million. The main activity of the associate is to

purchase and distribute gas to the factories in the Second Industrial City in Riyadh. The investment is

accounted for using the equity method because the Company has significant influence over the

investee by major representation in the board of directors.

To date, the audited financial statements for the associate for the year 2007 was not yet issued, and

the share of the Company in the associate profits was estimated at SR. 1,929K.

5 – b During 2007, the Company participated in establishing the Ceramic Pipes Company “a

closed joint stock Company” holding a 50% share of its SR 100 million issued and fully

subscribed share capital. The paid-up capital is SR 50 million. The Company has paid SR 10

million in cash for its share and the remaining amount of SR 15 million was paid in-kind and the

legal procedures to transfer it in the name of Ceramic Pipes Company is under process.

5 – c The Company subscribed during the first quarter of 2008 in 900,000 unit of Kasab

Taiba Real Estate fund for 10 SAR each.

6. LOAN FOR AN AFFILIATE COMPANY

The company agreed with Natural Gas Distribution Company to lend it the amount of SAR 1.75

million, this loan is a contribution in the cost of natural gas supply project to supply the gas to the

Companies factories on AlKharj Road. This loan will be repaid when the consumption reaches 505 of

the allocated quantities.

8



7. SHORT TERM LOANS

Short term loans represent the Islamic Murabaha loans offered to the Company by local commercial

banks in accordance with agreed rates guaranteed by promissory notes in favour of the banks for the

loan values.

Saudi Industrial Development Fund (SIDF) Loans

The Company obtained loans from SIDF to finance its tiles and sanitary ware plants against

pledging all those plants fixed assets. The agreement with SIDF includes terms related to

financial ratios.

The total SIDF available and not utilized facility as at March 31, 2008 amount to SR 88.88

million (2007: SR 47.12 million). The due date for utilizing the remaining amounts of the facility

is 29/12/1429H corresponding to 27/12/2008G.

Local Bank Loan The Company obtained a long term Islamic Murabaha loan facility during 2007 from a local

commercial bank for a total amount of SR 80 million for the expansion of its plants. The bank

loan is guaranteed with promissory notes in favour of the bank.

9- RETAINED EARNINGS

March 31,

8. LONG TERM LOANS

2008 SR’000

2007 SR’000

Loan from Saudi Industrial Development Fund 94,421 78,935

Loan from local bank 80,000 -

Total loan 174,421 78,935

Less: Current Portion

Loan from Saudi Industrial Development Fund (14,200) (12,500)

Loan from local bank (12,917) -

Total Current Portion (27,117) (12,500) Total non-current Portion 147,304 66,435

March 31,

8. RETAINED EARNINGS

2008 SR’000

2007 SR’000

Opening Balance 269,730 218,754

Dividends Declared during the period (63,900) -

Net Profit for the period 38,363 25,456

Ending Balance 244,193 244,210

9



Retained earnings (continued)

The general assembly of the shareholders held on 17/3/2008 agreed to distribute cash dividends for

the shareholders for the year 2007 for the amount of SAR 62.5 million (being SAR 2.5 per share),

and to award the board members for the amount of SAR 1.4 million, accordingly the amounts were

transferred from the retained earnings account to current liabilities since the actual distribution of

the dividends started on 7/4/2008.

(For 2007 the dividends of year 2006 were agreed by the general assembly during the second quarter

of 2007 for the amount of SAR 62.5 million).

10- Earnings Per Share from sub activities

The continuous sub activities of the Company include the financing costs,

other revenues and other expenses. The EPS from those activities for the three

months ended 31/3/2008 and 2007 was SAR 0.08 and SAR 0.02 respectively.

The Zakat per share for the same periods was SAR 0.04 and SAR 0.03

respectively.

11. CONTINGENT LIABILITIES AND COMMITMENTS

The Company has obtained bank facilities in the form of letters of credit and guarantees from local banks amounting to SR 116 million (2007: to SR 131 million). Additionally, the Company provided SR 1.87 million (2007: 2.78 million) as a partial guarantee for SIDF loan to one of its associate Companies. The guarantee provided is proportionality equivalent to the Company’s share in the associate Company capital. The Company’s capital commitments relating to its plant expansion and machineries as at March 31, 2008 amounted to approximately SR 118 million.

12. SEGMENT INFORMATION

A segment is a major component of a business that sells/provides certain services (business segment) or sells/provides services in a particular economic environment (Geographical Segment) and its profits and losses are different from those of other business segments. The Company follows the business segment as a base for reporting its segment information which is consistent with its internal reporting purposes. The Company is developing a system which will provide detailed segment activity information.

The main segments of the Company are ceramic tiles and sanitary ware, and water heaters. Information related to each segment is as follows:

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SEGMENT INFORMATION - Continued

Ceramic Tiles And

Sanitary Ware

SR’000

Water

Heaters

SR’000

Total

SR’000

For the year ended March 31, 2008:

Total assets 1,309,770 117,461 1,427,231 Total liabilities 809,574 30,002 839,576 Sales 155,607 44,102 199,709 Gross income 59,866 9,960 69,826 Net income 33,811 4,552 38,363 For the year ended March 31, 2007:

Total assets 971,480 118,051 1,089,531 Total liabilities 492,875 25,110 517,985 Sales 102,534 32,588 135,122 Gross income 41,213 9,912 51,125 Net income 20,572 4,884 25,456

13. COMPARATIVE FIGURES

Certain reclassifications have been made to the comparative figures to conform with the current

period presentation.

saudi ceramics q1 2008 report

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