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| AP > SEC Filings for AP > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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 Corporation's capital investment program 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. However, operating results for the remainder of the year are contingent on the volume of new orders.
Operations for the Six and Three Months Ended June 30, 2009 and 2008
Net Sales. Net sales for the six months ended June 30, 2009 and 2008 were $160,734,000 and $200,519,000, respectively, and $74,979,000 and $102,689,000, respectively, for the three months then ended. Backlog approximated $567,304,000 and $841,863,000 at June 30, 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 68.4% and 71.0% for the six months ended June 30, 2009 and 2008, respectively, and 67.0% and 70.6% of net sales for the three months ended June 30, 2009 and 2008, respectively. The decrease is attributable to lower material costs and, for the Forged and Cast Rolls group, a higher amount of billable variable-index surcharge revenues.
Selling and Administrative. Selling and administrative expenses decreased principally due to the effects of lower volumes of shipments offset by the recognition of stock-based compensation costs related to stock options granted of $1,045,000 and $380,000 for the six and three months ended June 30, 2009. No stock-based compensation expense existed for the same periods of the prior year since the grants occurred in September 2008 and February 2009.
Income from Operations. Income from operations for the six months ended June 30, 2009 and 2008 approximated $26,296,000 and $33,572,000, respectively, and $12,755,000 and $17,751,000 for the three months ended June 30, 2009 and 2008, 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 six and three months ended June 30, 2009 were less than the comparable prior year periods 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, higher variable-indexed surcharges and lower costs for scrap and alloys.
Backlog approximated $524,162,000 at June 30, 2009 against $793,997,000 as of June 30, 2008. The decrease is due to lower order intake as a result of reductions in customer production levels coupled with existing orders extending two to three years in advance of their anticipated need. The value of backlog has been further impacted by the decline in amount of variable-indexed surcharge included therein (due to a decline in the cost of scrap and alloys) and by a reduction in the exchange rate used to convert the backlog of Davy Roll. 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 $70,000,000 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 six and three months ended June 30, 2009 were comparable to sales for the six and three months ended June 30, 2008. Operating income for the same periods improved against the respective prior year periods due to a more profitable product mix and lower material costs. Backlog equaled $43,142,000 and $47,866,000 as of June 30, 2009 and 2008, respectively, with the decrease being attributable to slowing order intake during the second quarter of 2009 as a result of trailing effects from the downturn in economic activity. The majority of the month-end backlog is expected to ship in 2009.
Other Income (Expense). Investment-related income decreased as a result of the deferral of the 2009 dividend from the Corporation's Chinese cast-roll joint venture (which approximated $800,000 in 2008) and lower investment returns. Interest expense decreased due to a decline in average interest rates incurred on the outstanding Industrial Revenue Bonds. The increase in other expense for the six months ended June 30, 2009 from the comparable prior year period is primarily attributable to higher foreign exchange losses and an additional provision for environmental costs estimated to be incurred relating to the remediation of real estate previously owned. Foreign exchange losses for the three months ended June 30, 2009 were less than that incurred during the three months ended June 30, 2008.
Income Taxes. The increase in the effective rate between the two years is primarily attributable to a change in the composition of projected net income before income taxes. For 2009, 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 six months ended June 30, 2009 and 2008 equaled $15,112,000 or $1.48 per common share and $21,752,000 or $2.14 per common share, respectively, and $7,793,000 or $0.77 per common share and $11,609,000 or $1.14 per common share for the three months ended June 30, 2009 and 2008, respectively.
Liquidity and Capital Resources
Net cash flows provided by operating activities increased for the six months ended June 30, 2009 when compared to the six months ended June 30, 2008. The increase is principally due to improvements in working capital offset by a reduction in earnings. While business activity declined in 2009 as a result of the economic slowdown, the first half of 2008 was experiencing significant 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 each of the years, Union Electric Steel made contributions toward its 49% interest in the Chinese joint venture. The remaining amount due of $4,410,000 is expected to be contributed by the end of 2009. Also, in 2009, approximately $4,326,000 (£3,000,000) was deposited in escrow and is being held as collateral for the outstanding foreign currency sale contracts of Davy Roll. As of June 30, 2009, future capital expenditures totaling approximately $43,153,000, to be spent over the next two years, have been approved.
Net cash flows used in financing activities represent primarily the payment of dividends which are paid one quarter in arrears. The increase in dividends paid is due to an increase in the dividend rate and the number of common shares outstanding.
The effect of exchange rate changes on cash and cash equivalents for the six months ended June 30, 2009 is related to the strengthening of the U.K. pound sterling against the U.S. dollar.
As a result of the above, cash and cash equivalents decreased $2,526,000 in 2009 and ended the period at $79,081,000 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 June 30, 2009 was approximately $9,500,000 (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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