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| AP > SEC Filings for AP > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Executive Overview
The Corporation currently operates in two business segments - the Forged and Cast Rolls segment and the Air and Liquid Processing segment.
The Forged and Cast Rolls group has been affected by the weak economy and global recession which has forced customers to cut back their level of steel and aluminum production, temporarily shut down facilities and place new mill projects on hold. Operating results for Davy Roll have been further impacted by the weakening of the British pound sterling in relation to the U.S. dollar. While backlogs (orders on hand) remain strong, many customers are requesting deferral or cancellation of roll shipments. Where possible, the Corporation is working with each of them by agreeing to reschedule deliveries into future periods. The Corporation believes the worldwide shortage of capacity for forged hardened steel rolls, which resulted in the enormous backlog for Union Electric Steel, will continue to be a significant factor influencing demand when steel and aluminum production returns to more normal levels. The outlook for the segment for the remainder of the year, which will depend principally on improvement in the economy and recovery of the global steel and aluminum industries, is for continued profitability. The Corporation is continuing its capital investment program, which is in the second of three years and will enable the operations to maximize capacity and productivity when business returns to more typical volumes.
The Air and Liquid Processing group has not been affected by the weakened economy as significantly as the Forged and Cast Rolls group. Based on current backlog, Buffalo Pumps and Aerofin are expected to be operating at normal capacity for the first part of 2009 with performance for the remainder of the year contingent on the volume of new orders. Buffalo Air Handling, however, is dependent on industrial and institutional construction spending which has slowed significantly. The outlook for the segment for 2009 is for continuing profitability.
Operations for the Three Months Ended March 31, 2009 and 2008
Net Sales. Net sales for the three months ended March 31, 2009 and 2008 were $85,755,000 and $97,830,000, respectively. Backlog approximated $618,935,000 and $756,687,000 at March 31, 2009 and 2008, respectively. A discussion of sales and backlog for the Corporation's two segments is included below.
Costs of Products Sold. Costs of products sold, excluding depreciation, as a percentage of net sales approximated 69.7% and 71.5% for the three months ended March 31, 2009 and 2008, respectively. The decrease is attributable to lower costs for steel scrap and alloys used by the Forged and Cast Rolls group coupled with a higher amount of billable variable-index surcharge revenues.
Selling and Administrative. Selling and administrative expenses increased principally due to the recognition of stock-based compensation costs associated with stock options granted offset by the effects of lower volumes of shipments.
Income from Operations. Income from operations for the three months ended March 31, 2009 and 2008 approximated $13,541,000 and $15,821,000, respectively. A discussion of operating results for the Corporation's two segments is included below.
Forged and Cast Rolls. Sales and operating income for the quarter were less than the comparable prior year period and impacted by the deferral of orders by customers, particularly for the cast roll business in England. Although operating income was negatively affected by the reduced volume of shipments, it benefited from the completion and delivery of production that was in progress at the end of 2008 and lower costs for scrap and alloys. Backlog approximated $566,436,000 at March 31, 2009 against $710,010,000 as of March 31, 2008. The decrease is attributable to adjustments made to variable-indexed surcharges included therein resulting from the decline in scrap and alloy costs late in 2008 and lower order intake as customers had previously placed orders two to three years in advance of their anticipated need. It is difficult to accurately determine the proportion of the backlog that will ship beyond the end of 2009; however, based on customers deferring roll deliveries to better meet their production needs, it is likely to be more than $400,000,000. In addition, the Forged and Cast Rolls group has commitments of roughly $69,000,000 from customers under long-term supply arrangements which will be included in backlog upon receipt of specific purchase orders closer to the requirement dates for delivery.
Air and Liquid Processing. Sales for the segment for the three months ended March 31, 2009 were comparable to the prior year period; however, operating income was less. Although Buffalo Pumps benefited from higher volumes of lube oil pumps and Navy pumps, Buffalo Air Handling was negatively impacted by lack of construction activity and Aerofin's results were adversely affected by a change in its product mix. Backlog equaled $52,499,000 and $46,677,000 as of March 31, 2009 and 2008, respectively. Backlog for both the pumps and coil businesses improved; however, backlog declined for the air handling business because of the weak economy and fewer available construction projects. The majority of the backlog as of March 31, 2009 will ship during the remainder of 2009.
Other Income(Expense). The fluctuation in other income (expense) is primarily attributable to higher foreign exchange losses in the current period.
Income Taxes. The increase in the effective rate to 37.9% from 34.2% is primarily attributable to a change in the composition of projected net income before income taxes between the two years. A higher proportion of net income before income taxes is anticipated to be generated by the U.S. operations which are taxed at a statutory federal rate of 35% versus 28% in the U.K.
Net Income and Earnings per Common Share. As a result of the above, the Corporation's net income for the three months ended March 31, 2009 equaled $7,319,000 or $0.72 per basic common share in comparison to $10,143,000 or $1.00 per basic common share for the three months ended March 31, 2008.
Liquidity and Capital Resources
Net cash flows provided by operating activities increased for the three months ended March 31, 2009 when compared to the three months ended March 31, 2008. The increase is principally due to improvements in working capital. Accounts receivable decreased due to lower sales in the first quarter of 2009 when compared to the first quarter of 2008 and stronger collections. Inventories values declined as a result of the economic slowdown. By comparison, the first quarter of 2008 was experiencing robust growth and record-level demand from steel and aluminum producers throughout the world.
The decrease in net cash flows used in investing activities is primarily attributable to maintaining available funds in cash and cash equivalents versus investing in short-term marketable securities. During the first quarter of 2009, Union Electric Steel made an additional contribution of $4,410,000 toward
its 49% interest in the Chinese joint venture. The remaining $4,410,000 is expected to be contributed by the end of 2009. Additionally, in 2009, approximately $4,326,000 (£3,000,000) was deposited in escrow and is being held as collateral for the outstanding foreign currency exchange contracts of Davy Roll. As of March 31, 2009, future capital expenditures totaling approximately $37,965,000, to be spent over the next two to three years, have been approved.
Net cash flows used in financing activities represent the payment of dividends which are paid one quarter in arrears. The increase is due to a 20% increase in the dividend rate between the fourth quarter of 2008 and the fourth quarter of 2007.
The effect of exchange rate changes on cash and cash equivalents for the three months ended March 31, 2009 is primarily related to the weakening of the U.K. pound sterling against the U.S. dollar.
As a result of the above, cash and cash equivalents decreased $3,124,000 in 2009 and ended the period at $78,483,000 in comparison to $81,607,000 at December 31, 2008.
Funds on hand and funds generated from future operations are expected to be sufficient to finance the operational and capital expenditure requirements of the Corporation. The Corporation also maintains short-term lines of credit and an overdraft facility in excess of the cash needs of its businesses. The total available at March 31, 2009 was approximately $9,000,000 (including £3,000,000 in the U.K. and €400,000 in Belgium).
Litigation and Environmental Matters
See Notes 12 and 13 to the condensed consolidated financial statements.
Critical Accounting Pronouncements
The Corporation's critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2008, remain unchanged.
Recently Issued Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-Q contain forward-looking statements that reflect the Corporation's current views with respect to future events and financial performance.
Forward-looking statements are identified by the use of the words "believes," "expects," "anticipates," "estimates," "projects," "forecasts" and other expressions that indicate future events and trends. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations and involve risks and uncertainties. For the Corporation, these risks and uncertainties include, but are not limited to, those described under Item 1A, Risk Factors, of Part II of this Form 10-Q. In addition, there may be events in the future that the Corporation is not able to accurately predict or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. The Corporation undertakes no obligation to update any forward-looking statement whether as a result of new information, events or otherwise.
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