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| GSI > SEC Filings for GSI > Form 10-K/A on 30-Aug-2012 | All Recent SEC Filings |
30-Aug-2012
Annual Report
Forward-Looking Statements:
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. General Steel Holdings, Inc. is referred to herein as "we" or "our." The words or phrases "would be," "will allow," "expect to", "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under "Liquidity and Capital Resources". Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
OVERVIEW
We were founded on the strategy to aggressively merge, partner with, and acquire State-owned enterprises and selected steel companies with great growth potential within China's highly fragmented steel industry. As of December 31, 2010, we were comprised of four steel producing and processing subsidiaries of which Longmen Joint Venture is the largest, and one raw material trading company subsidiary. Located in Shaanxi province, Longmen Joint Venture contributed approximately 98.1% of our total revenue for the 2010 fiscal year.
Fiscal year 2010 was highlighted by increased sales revenue, formation of a material trading company and compensation for economic losses:
· Sales revenue increased by 12.0% year-over-year to $1.9 billion, up from $1.7 billion in 2009.
· The construction of the two 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine funded by Shaanxi Steel at the business property of Longmen Joint Venture were finalized.
· In connection with the construction of the two new blast furnaces, to
compensate the Company, in the fourth quarter of 2010, Shaanxi Steel
reimbursed Longmen Joint Venture $16.4 million (RMB 108 million) related
to the value of assets dismantled, various site preparation costs
incurred by Longmen Joint Venture and for rent under a 40-year property
sub-lease that was entered into by the parties in June 2009 (the "Longmen
Sub-lease"), and $27.8 million (RMB 183 million) for the reduced
production efficiency caused by the construction. In addition, in 2010
and 2011, Shaanxi Steel reimbursed Longmen Joint Venture $13.5 million
(RMB 89 million) each year for production inefficiencies related to the
two new blast furnaces, two new converters and one new sintering machine
constructed and owned by Shaanxi Steel. The compensations total $57.7
million (RMB 380 million), among which $52.0 million (RMB 343 million) as
of December 31, 2010, was recorded as a deferred sub-lease income from
the land which was sub-leased by Longmen Joint Venture to Shaanxi Steel
on the new furnaces constructed.
· In December 2010, we brought online a new 400,000 metric tons capacity
rebar production line at Maoming Hengda's facility.
· In September 2010, we formed Tianwu JV with TME Group, one of the largest
and most diversified commodity trading groups in China. We hold a 60%
controlling interest in Tianwu JV. Tianwu JV will source raw materials
including iron ore domestically and overseas, and is expected to supply
approximately 20% to 50% of our iron-ore needs amounting to approximately
two to three million metric tons on an annual basis.
· On December 21, 2010, we announced the adoption of a share repurchase
program ("Share Repurchase Program") pursuant to which we may repurchase
up to an aggregate of 1,000,000 shares of our common stock. The
repurchases may be made from time to time in the open market or in
privately negotiated transactions in accordance with applicable federal
securities laws. The Share Repurchase Program does not have an expiration
date. As of December 31, 2010, we have repurchased 316,760 shares of
common stock in open market transactions at an average price of $2.7475
price per share.
The results reflect the strong demand for our construction steel products in our principal markets of Shaanxi and western China. Our subsidiary, Longmen Joint Venture, continues to benefit from a large number of infrastructure projects in the region fueled by the national stimulus plan and the national "Go West" economic development initiative.
RESULTS OF OPERATIONS
Industry Environment
In 2010, China's steel industry experienced positive growth compared to fiscal 2009 due to the recovering and restabilazation of the domestic economy. While the price of steel continued to fluctuate in 2010, the price was still lower, on average, than the price that existed before the 2008 financial crisis. However, the price did reach its highest point of the year in the end of 2010. In addition, according to the Ministry of Industry and Information Technology, the price of rebar had increased approximately 23.1% at the end of the year of 2010 compared to the beginning of the year. As a result of the gradual recovery in the global markets, the demand for raw materials has increased due to increased production of main crude steel producers which has resulted in rapid increases in the international demand for such raw materials which has resulted in increased prices of raw materials in China. Such increased prices in raw materials, coupled with the relatively lower price of steel in China, have led to a decrease in the overall profitability of China's steel industry.
Overview of Company Operations.
Income Statement for the year ended December 31, 2010, 2009 and 2008:
Percentage Change
2010 2009 2008 2010 VS 2009 2009 VS 2008
Unit-thousands except share data As restated As restated As restated As restated
Sales $ 1,882,140 $ 1,679,770 $ 1,351,203 12.0 % 24.3 %
Cost of Goods Sold 1,850,725 1,590,958 1,343,275 16.3 % 18.4 %
Gross Profit 31,415 88,812 7,928 (64.6 )% 1020.2 %
Gross Profit Margin % 1.7 % 5.3 % 0.6 % (67.9 )% 783.3 %
Selling, General and Administrative Expenses 52,577 41,059 36,942 28.1 % 11.1 %
Income (Loss) from Operations (21,162 ) 47,753 (29,014 ) (144.3 )% (264.6 )%
Total Other Income (expense), net (33,891 ) (54,857 ) 3,738 (38.2 )% (1567.5 )%
Income (Loss) Before Provision for Income Tax
and Noncontrolling Interest (55,053 ) (7,104 ) (25,276 ) 675.0 % (71.9 )%
Total (Benefit) Provision for Income Taxes (8,782 ) 4,449 (5,411 ) (297.4 )% (182.2 )%
Loss before Noncontrolling Interest (46,271 ) (11,553 ) (19,865 ) 300.5 % (41.8 )%
Less: Net Income (loss) Attributable to
Noncontrolling Interest (16,265 ) 19,067 (8,542 ) (185.3 )% (323.2 )%
Net Loss Attributable to Controlling Interest $ (30,006 ) $ (30,620 ) $ (11,323 ) (2.0 )% 170.4 %
Loss Per Share
Basic $ (0.56 ) $ (0.73 ) $ (0.32 ) (23.3 )% 128.1 %
Diluted $ (0.56 ) $ (0.73 ) $ (0.32 ) (23.3 )% 128.1 %
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Revenue
Fiscal year ended December 31, 2010 compared to fiscal year ended December 31,
2009 and 2008
Revenue by Subsidiary and Product Percentage Change
2010 VS 2009 VS
USD in thousands 2010 2009 2008 2009 2008
As restated As restated As restated As restated
Subsidiary Product
Longmen Joint Venture Rebar $ 1,845,577 $ 1,540,367 $ 1,182,433 19.8 % 30.3 %
Others $ 36,563 139,403 168,770 (73.8 )% (17.4 )%
Total Revenue $ 1,882,140 $ 1,679,770 $ 1,351,203 12.0 % 24.3 %
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Percentage Change
2010 VS 2009 VS
In thousands metric tons 2010 2009 2008 2009 2008
As restated As restated As restated As restated
Subsidiary Product
Longmen Joint Venture Rebar 3,510 3,420 2,030 2.6 % 68.5 %
Others 415 439 278 (5.5 )% 57.9 %
Total Production 3,925 3,859 2,308 1.7 % 67.2 %
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Total Sales Revenue for the fiscal year 2010 increased 12.0% to $1.9 billion from $1.7 billion in last year. The increase in sales revenue compared to last year is predominantly due to the sales volume increase of 1.7% and a 16.1% increase in the average selling price of rebar at Longmen Joint Venture to approximately $524.6 (RMB3,546) in 2010 from approximately $452.0 (RMB3,083) in 2009.
Longmen Joint Venture comprised 98.1% of total sales for 2010. We operated at about 89% of our total capacity in 2010 due to a stable market demand for our construction steel products.
Maoming Hengda comprised $10.0 million, or less than 1% of our total sales in 2010. The decrease in sales revenue compared to last year is primarily due to a greater number of processing contracts versus production contracts. In 2010, Maoming Hengda only executed processing contracts which generated less sale revenue whereas both processing and production contracts were performed in 2009.
Income Statement for the three months ended December 31, 2010 and 2009:
Percentage
Income Statement Change
2010 Q4 2009 Q4 2010 Q4 VS 2009
Unit-thousands except share data As restated As restated Q4
(Unaudited) As restated
Sales $ 467,161 $ 463,277 0.8 %
Cost of Goods Sold 462,445 449,623 2.9 %
Gross Profit 4,716 13,654 (65.5 )%
Gross Profit Margin % 1.0 % 2.9 % (65.5 )%
Selling, General and Administrative
Expenses 17,204 11,855 45.1 %
Income (loss) from Operations (12,488 ) 1,799 (794.2 )%
Total Other expense, net (18,405 ) (18,985 ) (3.1 )%
Income (Loss) Before Provision for Income
Tax and Noncontrolling Interest (30,893 ) (17,186 ) 79.8 %
Total Expense (Benefit) for Income Taxes (3,698 ) (1,416 ) 161.2 %
Income (Loss) before Noncontrolling
Interest (27,195 ) (15,770 ) 72.4 %
Less: Net Income Attributable to
Noncontrolling Interest (8,589 ) (1,118 ) 668.2 %
Net Income (Loss) Attributable to
Controlling Interest $ (18,606 ) $ (14,652 ) 27.0 %
Earnings(Loss) Per Share
Basic $ (0.34 ) $ (0.35 ) (2.9 )%
Diluted $ (0.34 ) $ (0.35 ) (2.9 )%
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Three months ended December 31, 2010 compared to three months ended December 31, 2009
Revenue by Subsidiary and Product
USD in thousands Percentage Change
2010 Q4 VS
2010 Q4 2009 Q4 2009 Q4
Subsidiary Product As restated As restated As restated
(Unaudited)
Longmen Joint Venture Rebar 456,339 433,489 5.3 %
Other 10,822 29,788 (63.7 )%
Total Sales 467,161 463,277 0.8 %
Production by Subsidiary and Product
(in thousand metric tons) Percentage Change
2010 Q4 2009 Q4 2010 Q4 VS2009 Q4
Subsidiary Product As restated As restated As restated
(Unaudited)
Longmen Joint Venture Rebar 805 969 (16.9 )%
Other 134 180 (25.6 )%
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Total Sales Revenue for the three months ended December 31, 2010 only increased 0.8% to $467.2 million from $463.3 million for the same period last year. The slight increase is predominantly a result of a 25.3% rise in the average selling price of rebar from approximately $447.2 (RMB3,048) in the fourth quarter of 2009 to approximately $560.2 (RMB3,787) in fourth quarter of 2010 and a 18.3% drop of production decrease from 1,149 metric tons in the fourth quarter of 2009 to 939 metric tons in the fourth quarter of 2010 due to the production inefficiency caused by the construction of Shaanxi Steel's blast furnaces.
Longmen Joint Venture comprised 97.7% of total sales for the fourth quarter of 2010. Compared to the same period in 2009, the production decreased 16.9% to 805,000 metric tons from 969,000 metric tons. The decrease is due to the negative impact of blast furnace construction by Shaanxi Steel, as is more fully described in the gross profit analysis section. Total Sales Revenue of Longmen Joint Venture for the three months ended December 31, 2010 increased 5.3% to $456.3 million from $433.5 million in the same period last year. The increase is predominantly a result of a 25.3% rise in the average selling price of rebar to approximately $560.2 (RMB3,787) in fourth quarter of 2010 from approximately $447.2 (RMB3,048) in the fourth quarter of 2009.
Compared to the same period last year, the sales revenue of other subsidiaries decreased 63.7% to $10.8 million from $29.8 million in the fourth quarter in 2009. The decrease is mainly because we changed the operating model at General Steel (China) and only executed processing contracts at Maoming Hengda which generated less sale revenue in 2010.
Cost of Goods Sold
Fiscal year ended December 31, 2010 compared with fiscal years ended December
31, 2009 and 2008
Cost of Goods Sold Percentage Change
2010 VS 2009 VS
2010 2009 2008 2009 2008
USD in thousands As restated As restated As restated As restated
Cost of Goods Sold $ 1,369,523 $ 1,141,471 $ 999,318 20.0 % 14.2 %
Cost of Goods Sold - Related
Parties $ 481,202 $ 449,487 $ 343,957 7.1 % 30.7 %
Total Cost of Goods Sold $ 1,850,725 $ 1,590,958 $ 1,343,275 16.3 % 18.4 %
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Three months ended December 31, 2010 compared to three months ended December 31, 2009
Percentage Change
2010 Q4 2009 Q4 2010 Q4 VS 2009 Q4
(USD in thousands) As restated As restated As restated
Cost of Goods Sold $ 347,671 $ 319,082 9.0 %
Cost of Goods Sold - Related Parties $ 114,774 $ 130,541 (12.1 )%
Total Cost of Goods Sold $ 462,445 $ 449,623 2.9 %
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Our primary cost of goods sold is the cost of raw materials such as iron ore, coke, alloy and scrap steel. The costs of iron ore and coke account for approximately 80% of our total cost of sales. As a result, the cost of goods sold increased by 16.3% to $1.9 billion in 2010 from $1.6 billion in the year ago period. The increase is mainly due to the ascending of sales volume and the rise of iron ore and coke price. The cost of goods sold increased 2.9% slightly to $462.4 million in the fourth quarter of 2010 from $449.6 million in the same period of 2009 due to the negative impact of Shaanxi Steel's construction and production inefficiencies in the fourth quarter of 2010 and which is discussed in detail in the following section.
Gross Profit
Fiscal year ended December 31, 2010 compared to fiscal year ended December 31,
2009 and 2008
Percentage Change
2010 VS 2009 VS
2010 2009 2008 2009 2008
USD in thousands As restated As restated As restated As restated
Gross Profit $ 31,415 $ 88,812 $ 7,928 (64.6 )% 1,020.2 %
Gross Profit Margin 1.7 % 5.3 % 0.6 %
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Gross profit for 2010 decreased 64.6% to $31.4 million from $88.8 million in 2009. The decrease is primarily attributable to a drop in gross profit at Longmen Joint Venture because the costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated are recorded as deferred lease income. The purchase price of our primary raw materials including iron ore and coke increased in 2010, which had a negatively impact on gross profit margin.
Three months ended December 31, 2010 compared to three months ended December 31, 2009
(USD in thousands) Percentage Change
2010 Q4 2009 Q4 2010 Q4 VS 2009 V4
As restated As restated As restated
(Unaudited)
Gross Profit $ 4,716 $ 13,654 (65.5 )%
Gross Profit Margin 1.0 % 2.9 %
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The gross margin decreased in the fourth quarter 2010 to 1.0% compared to 2.9% in the same period last year. The decrease is predominantly due to certain fees and costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated but recorded as deferred lease income. The deferred lease income will be amortized over the 40 year sub-lease term at Longmen Joint Venture during the construction of blast furnaces by Shaanxi Steel.
Selling, General and Administrative Expenses
Fiscal year ended December 31, 2010 compared with fiscal year ended December 31,
2009 and 2008
Selling, General and Administrative Expenses Percentage Change
2010 2009 2008 2010 VS 2009 2009 VS 2008
USD in thousands As restated As restated As restated As restated
Selling, General and
Administrative expenses $ 52,577 $ 41,059 $ 36,942 28.1 % 11.1 %
Selling, General and
Administrative expenses as
percentage of sales 2.8 % 2.4 % 2.7 %
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SG&A Expenses increased 28.1% to $52.6 million in 2010 compared to $41.1 million in 2009. The increase is mainly due to the climbing transportation and sales agent charges at Longmen Joint Venture related to the increase of shipping volume and long distance sales deliveries to markets in Henan, Hubei and Chongqing. SG&A expenses as a percentage of revenue increased slightly to 2.8% for 2010 from 2.4% in 2009 and 2.7% in 2008.
Three months ended December 31, 2010 compared with three months ended December 31, 2009
Percentage Change
2010 Q4 2009 Q4 2010 Q4 VS 2009 Q4
(USD in thousands) As restated As restated As restated
(Unaudited)
Selling, General and Administrative expenses $ 17,204 $ 11,855 45.1 %
SG&A/Revenue % 3.7 % 2.6 %
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Selling, general and administrative expenses, including transportation charges, executive compensation, office expenses, legal and accounting charges, travel charges, equipment maintenance and various taxes increased 45.1% to $17.2 million for the three months ended December 31, 2010 compared to $11.9 million in the same period of 2009. The increase is mainly due to the rising transportation and sales agent charges on long distance deliveries outside of Shaanxi province.
Selling, general and administrative expenses as a percentage of revenue increased to 3.7% for the fourth quarter of 2010 from 2.6% in the same period of 2009. The increase is mainly due to the rising transportation and sales agent charges on long distance deliveries outside of Shaanxi province.
Income (Loss) from Operations
Fiscal year ended December 31, 2010 compared to fiscal year ended December 31,
2009 and 2008
Percentage Change
2010 2009 2008 2010 VS 2009 2009 VS 2008
USD in thousands As restated As restated As restated As restated
Income (Loss) from Operations $ (21,162 ) $ 47,753 $ (29,014 ) (144.3 )% (264.6 )%
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The loss from operations in 2010 amounted to $21.2 million, as compared to income of $47.8 million income for the same period last year. The decrease is predominantly due to the drop in gross profit caused by higher purchase price of iron ore and coke in 2010 and costs for production inefficiencies from construction of furnaces that Shaanxi Steel compensated but recorded as deferred lease income.
Three months ended December 31, 2010 compared with three months ended December 31, 2009
(USD in thousands) Percentage Change
2010 Q4 2009 Q4 2010 Q4 VS 2009 Q4
As restated As restated As restated
(Unaudited)
Income (Loss) from Operations $ (12,488 ) $ 1,799 (794.2 )%
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Loss from operations for the three months ended December 31, 2010 decreased to $12.5 million from $1.8 million income for the same period last year. The decrease is primarily due to the revenue loss and cost increase from the production inefficiency caused by the construction of blast furnaces of Shaanxi Steel. Also costs for production inefficiencies from construction of the furnaces that Shaanxi Steel compensated but recorded as deferred lease income, has resulted in an extra decrease.
Total Other Income (Expense), Net
Fiscal year ended December 31, 2010 compared with fiscal years ended December
31, 2009 and 2008
Total Other Income (Expense), Net Percentage Change
2010 2009 2008 2010 VS 2009 2009 VS 2008
USD in thousands As restated As restated As restated As restated
Interest Income $ 6,154 3,334 $ 4,251 84.6 % $ (21.6 )%
Finance/interest expense (51,283 ) (27,843 ) (23,166 ) 84.2 % 20.2 %
Change in Fair Value of
Derivative Liabilities 15,055 (33,159 ) 12,821 (145.4 )% (358.6 )%
Gain from Debt Extinguishment - 7,331 7,169 - 2.3 %
. . .
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