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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

Commission File Number:  001-33669

 

FUSHI COPPERWELD, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 13-3140715
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)  

 

TYG Center Tower B, Suite 2601,

Dong San Huan Bei Lu Bing 2,

Beijing, PRC 100027

 

(Address of principal executive offices) (Zip Code)

 

(+1) 615.377.4183

(Registrant’s telephone number, including area code)

  

 

 

 (Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer (Do not check if a smaller reporting company) ¨    Smaller reporting company   ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of September 30, 2012, the registrant had 38,402,560 shares of common stock outstanding.

 

 
 

 

TABLE OF CONTENTS

  PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Unaudited Condensed Consolidated Balance Sheets 3
     
  Unaudited Condensed Consolidated Statements of Comprehensive Income 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows 5
     
  Notes to the Unaudited Condensed Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
   
Item 4. Controls and Procedures 29
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 30
     
Item 1A. Risk Factors 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 31
     
Signatures 32

 

 

2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2012   2011 
   USD   USD 
ASSETS          
Current assets:          
Cash   217,651,755    200,451,902 
Accounts receivable, net of allowance for doubtful accounts   69,960,402    63,978,861 
Inventories   20,326,083    10,695,123 
Advances to suppliers   6,434,273    6,793,904 
Prepaid expenses and other current assets   2,120,305    1,332,204 
Total current assets   316,492,818    283,251,994 
           
Property, plant and equipment, net   107,924,367    117,405,523 
Intangible assets, net   301,912    431,441 
Land use rights   13,037,820    13,321,796 
Deposits for land use rights   10,105,229    10,090,621 
Goodwill   1,814,691    1,812,068 
Other non-current assets   448,615    491,380 
Total assets   450,125,452    426,804,823 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Short-term bank loan   2,828,320    - 
Current portion of long-term loan   650,000    650,000 
Accounts payable   5,738,739    3,802,155 
Amounts due to a related party   -    2,000,000 
Accrued expenses and other current liabilities   15,344,231    15,880,176 
Total current liabilities   24,561,290    22,332,331 
Long-term loans   7,121,200    7,632,100 
Deferred income tax liabilities   633,954    672,943 
Total liabilities   32,316,444    30,637,374 
           
Shareholders’ equity:          
Common stock, $0.006 par value, 100,000,000 shares authorized; 38,402,560 and 38,240,438 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively   230,417    229,444 
Additional paid-in capital   170,526,773    169,335,522 
Retained earnings   192,455,545    172,507,890 
Accumulated other comprehensive income   54,596,273    54,094,593 
Total shareholders’ equity   417,809,008    396,167,449 
Commitments and contingencies          
Total liabilities and shareholders’ equity   450,125,452    426,804,823 

 

See accompanying notes to unaudited condensed consolidated financial statements

  

3
 

 

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   Three-month
Period Ended September 30,
   Nine-month
Period Ended September 30,
 
   2012   2011   2012   2011 
   USD   USD   USD   USD 
                 
Revenues  72,607,142   74,279,340   212,056,802   219,158,766 
Cost of revenues   53,660,052    54,353,890    156,912,140    161,047,950 
Gross profit   18,947,090    19,925,450    55,144,662    58,110,816 
                     
Operating expense                    
Selling expenses   1,836,636    1,127,259    5,267,629    3,519,065 
General and administrative expenses   5,855,039    5,061,337    19,454,307    15,035,656 
Total operating expenses   7,691,675    6,188,596    24,721,936    18,554,721 
                     
Income from operations   11,255,415    13,736,854    30,422,726    39,556,095 
                     
Other income (expense):                    
Interest income   237,563    222,852    710,972    663,776 
Interest expense   (70,687)   (116,378)   (309,183)   (340,282)
Foreign currency exchange gain (losses), net   62,449    (757,407)   82,116    (1,677,122)
Total other income (expense)   229,325    (650,933)   483,905    (1,353,628)
                     
Income before income taxes   11,484,740    13,085,921    30,906,631    38,202,467 
Income tax expense   3,784,597    4,137,255    10,958,976    11,793,472 
                     
Net income   7,700,143    8,948,666    19,947,655    26,408,995 
                     
Other comprehensive income:                    
Foreign currency translation adjustment, net of nil income taxes   4,237,345    5,322,885    501,680    12,854,266 
Comprehensive income   11,937,488    14,271,551    20,449,335    39,263,261 
                     
Earnings per share:                    
Basic and diluted   0.20    0.23    0.52    0.69 

   

See accompanying notes to unaudited condensed consolidated financial statements

 

4
 

   

FUSHI COPPERWELD, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine-Month Period Ended September 30, 
   2012   2011 
   USD   USD 
Cash flows from operating activities:          
Net cash provided by operating activities   16,289,145    40,676,212 
           
Cash flows from investing activities:          
Purchases of property, plant and equipment   (423,623)   (1,160,718)
Net cash used in investing activities   (423,623)   (1,160,718)
           
Cash flows from financing activities:          
Proceeds from bank loans   15,768,600    - 
Payment for acquisition of Jinchuan   -    (4,819,107)
Repayment of interest-free advance provided by Mr. Li Fu   (2,000,000)   - 
Repayment of bank loans   (13,435,700)   (487,500)
Proceeds from issuance of common stock and warrants   573,210    628,495 
Net cash provided by (used in) financing activities   906,110    (4,678,112)
           
Effect of foreign currency exchange rate changes on cash   428,221    5,786,556 
Net increase in cash   17,199,853    40,623,938 
Cash at beginning of period   200,451,902    123,000,338 
Cash at end of period   217,651,755    163,624,276 
           
Supplemental disclosure of cash flow information:          
Interest paid   309,183    340,282 
Income taxes paid   15,257,995    7,665,233 

  

See accompanying notes to unaudited condensed consolidated financial statements

  

5
 

 

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Basis of presentation and significant concentrations and risks

 

(a) Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as permitted by rules and regulations of the US Securities and Exchange Commission (the ‘‘SEC’’). The condensed consolidated balance sheet as of December 31, 2011 was derived from the audited consolidated financial statements of Fushi Copperweld, Inc. (“Fushi”) and subsidiaries (collectively the ‘‘Company’’). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2011, and the related consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended included in Fushi’s Annual Report on Form 10-K filed with the SEC.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2012, the results of operations for the three-month periods ended September 30, 2012 and 2011, and the results of operations and cash flows for the nine-month periods ended September 30, 2012 and 2011, have been made.

 

The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the fair values of assets acquired and liabilities assumed in business combinations, the recoverability of the carrying amounts of property, plant and equipment, goodwill and intangible assets, the realizability of inventories and deferred income tax assets, the useful lives of property, plant and equipment and intangible assets, the collectibility of accounts receivable, the fair values of share-based compensation awards, and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

 

(b) Significant concentrations and risks

 

The percentage of the Company’s total revenues from customers located in the People’s Republic of China (“PRC”), United States (“US”) and other countries is as follows:

 

   Three-Month Period Ended September 30, 
   2012   2011 
   USD   %   USD   % 
                     
PRC   57,228,308    79%   60,378,513    81%
US   8,995,727    12%   10,195,436    14%
Other countries   6,383,107    9%   3,705,391    5%
Total   72,607,142    100%   74,279,340    100%

 

 

   Nine-Month Period Ended September 30, 
   2012   2011 
   USD   %   USD   % 
                 
PRC   161,458,954    76%   173,356,367    79%
US   32,157,378    15%   32,561,751    15%
Other countries   18,440,470    9%   13,240,648    6%
Total   212,056,802    100%   219,158,766    100%

 

The Company expects revenues from customers located in the PRC and US to continue to represent a substantial portion of its revenues in the future. Any factors adversely affecting the bimetallic wire sector in the PRC and US will have a material adverse effect on the Company’s business, financial position and results of operations.

 

6
 

 

The Company purchases raw materials from a limited number of suppliers. In the aggregate, five major suppliers provided approximately 66% and 59% of the Company’s raw materials for the nine-month periods ended September 30, 2012 and 2011, respectively. Management believes that other suppliers could provide similar raw materials on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect the Company’s business, financial position and results of operations.

 

To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits with large financial institutions in the PRC with acceptable credit rating. As of September 30, 2012 and December 31, 2011, the Company placed 92% and 88% of its total cash, respectively, with Industrial and Commercial Bank of China, a large state-owned bank in China. Bank deposits placed in financial institutions in the PRC are uninsured by the government authority.

 

Note–2 - Principles of Consolidation

 

The consolidated financial statements include the financial statements of Fushi, its wholly-owned subsidiaries and consolidated variable interest entity (“VIE”), in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated on consolidation.

 

Fushi has no direct or indirect legal ownership interest in Dalian Fushi Bimetallic Manufacturing Co., Ltd.( “Dalian Fushi” ). The legal registered capital interests of Dalian Fushi are held by four individuals as nominee shareholders. Through a series of contractual agreements, including the Entrusted Management Agreement, the Voting Proxy Agreement, the Share Pledge Agreement and Exclusive Option Agreement (collectively, the “VIE Agreements”) among Fushi International (Dalian) Bimetallic Cable Co., Ltd. (“Fushi International”), Dalian Fushi and its shareholders, Fushi, through Fushi International, has a controlling financial interest in Dalian Fushi. The Company holds an exclusive call option to acquire Dalian Fushi for nil consideration and has provided financing to Dalian Fushi. Dalian Fushi holds the titles to an office building and land use rights in Dalian on behalf of the Company and does not conduct any business operation.

 

In accordance with ASC Sub-topic 810-10, Dalian Fushi is determined to be a VIE because (i) the registered capital interests of Dalian Fushi that are held by nominee shareholders do not allow the nominee shareholders to participate in any profit or loss of Dalian Fushi and (ii) the nominee shareholders do not have the power to direct the activities of Dalian Fushi that most significantly impact its economic performance and do not have the obligation to absorb the expected losses and right to receive the expected residual returns of Dalian Fushi.

 

In accordance with ASC Sub-topic 810-10, the Company is determined to be the primary beneficiary of Dalian Fushi and the financial statements of Dalian Fushi are consolidated in the Company’s consolidated financial statements.

 

The Company is the primary beneficiary of Dalian Fushi because the Company has (i) the power to direct activities of Dalian Fushi that most significantly impact the economic performance of Dalian Fushi; (ii) the obligation to absorb the expected losses and the right to receive expected residual return of Dalian Fushi that could potentially be significant to Dalian Fushi; and (iii) there is no party apart from the Company that holds any variable interest in Dalian Fushi.

 

Under the terms of the VIE Agreements, the Company (i) is irrevocably appointed by the nominee shareholders of Dalian Fushi with the exclusive right to exercise the shareholder’s voting rights of Dalian Fushi, (ii) has the right to independently manage Dalian Fushi’s business, including appointing all directors to its board of directors, and management, (iii) has the right to receive Dalian Fushi’s profits and bear its losses, (iv) has the right to dispose all assets of Dalian Fushi, and (v) the option to acquire 100% of the registered capital interests in Dalian Fushi for nil consideration.

 

The assets and liabilities of Dalian Fushi as of September 30, 2012 and December 31, 2011, and revenues and net loss of Dalian Fushi for the three and nine-month periods ended September 30, 2012 and 2011 are as follows:

 

   September 30, 2012   December 31, 2011 
   USD   USD 
         
Property, plant and equipment, net   43,223,948    45,529,419 
Land use rights   5,194,637    5,282,596 
Other assets   287,415    404,539 
Total assets   48,706,000    51,216,554 
           
Amounts due to Fushi International                       (i)   24,678,547    24,482,686 
Other liabilities   737,691    512,857 
Total liabilities   25,416,238    24,995,543 

 

  (i) This amount is eliminated on consolidation.

 

7
 

 

   Three-Month Period Ended September 30, 
   2012   2011 
   USD   USD 
         
Revenues   -    - 
Net loss   949,485    893,696 

 

   Nine-Month Period Ended September 30, 
   2012   2011 
   USD   USD 
         
Revenues   -    - 
Net loss   2,947,747    2,569,305 

 

 

Risks and uncertainties of the VIE Agreements

 

The Company relies on the VIE Agreements to manage Dalian Fushi. However, these contractual arrangements may not be as effective as direct equity ownership in providing the Company with control over Dalian Fushi. Any failure by Dalian Fushi or its registered capital holders to perform their obligations under the VIE Agreements would have a material adverse effect on the financial position of the Company. All the VIE Agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements. In addition, if the legal structure and the VIE Agreements were found to be in violation of any existing or future PRC laws and regulations, the Company may be subject to fines or other legal or administrative sanctions.

 

In the opinion of management, based on the legal opinion obtained from the Company’s PRC legal counsel, the above contractual arrangements are legally binding and enforceable and do not violate current PRC laws and regulations. However, there are uncertainties regarding the interpretation and application of existing and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the VIE Agreements are found to be in violation of any existing or future PRC laws and regulations, the Company may lose its controlling financial interests in Dalian Fushi and would no longer be able to consolidate the financial position and results of Dalian Fushi in the Company’s consolidated financial statements. In the opinion of management, the likelihood of loss in respect of the Company’s VIE Agreements is remote based on current facts and circumstances.

 

All the equity (net assets) and profits (losses) of Dalian Fushi are attributed to the Company. Therefore, no non-controlling interest in Dalian Fushi is presented in the Company’s consolidated financial statements.

 

Note–3 - Accounts receivable

 

Accounts receivable consist of the following:

 

   September 30,
2012
   December 31,
2011
 
   USD   USD 
         
Trade receivables   70,628,151    64,543,940 
Allowance for doubtful accounts   (667,749)   (565,079)
Accounts receivable, net   69,960,402    63,978,861 

 

Accounts receivable from one customer which exceeded 10% of the Company’s net accounts receivable amounted to USD 6,433,517 and USD 6,645,151 as of September 30, 2012 and December 31, 2011, respectively. 

  

8
 

 

Note–4 – Inventories

 

Inventories consist of the following:

 

   September 30,
2012
   December 31,
2011
 
   USD   USD 
         
Raw materials   6,944,941    3,957,385 
Work in progress   4,272,349    2,541,754 
Finished goods   9,108,793    4,195,984 
Total inventories   20,326,083    10,695,123 

 

Note–5 – Property, plant and equipment

 

Property, plant and equipment consist of the following:

 

   September 30,
2012
   December 31,
2011
 
   USD   USD 
         
Plant and buildings   67,114,311    66,993,046 
Machinery and equipment   95,859,202    94,777,398 
Office equipment and furniture   1,636,292    1,615,393 
Motor vehicles   4,784,580    4,777,698 
Construction in progress   2,022,034    2,526,016 
Total property, plant and equipment   171,416,419    170,689,551 
Less: accumulated depreciation   (63,492,052)   (53,284,028)
Property, plant and equipment, net   107,924,367    117,405,523 

 

Depreciation expense was USD 3,316,174 and USD 3,273,909 for the three-month periods ended September 30, 2012 and 2011, respectively, and USD 10,029,560 and USD 9,842,417 for the nine-month periods ended September 30, 2012 and 2011, respectively.

 

Note 6 - Deposits for land use rights

 

In October 2010, the Company paid RMB 63,442,960 to the Managing Committee of China Yixing Industrial Park for Environmental Science & Technology, a government organization, in advance to acquire the land use right on a piece of land of approximately 151,040 square meters in Yixing, Jiangsu province of the PRC. The Company plans to establish an operating facility in the area for the manufacture and sale of bilmetallic wire products in Southeast China. As of September 30, 2012, the Company has not obtained the title to the land use right because the administrative procedures, including obtaining governmental approvals, have not been completed. The prepayment was recorded in deposits for land use right in the consolidated balance sheets as of September 30, 2012 and December 31, 2011 and will be reclassified to land use rights once the Company obtains the title to the land use right. The Company believes that the deposits will be refunded or used as payment for another equivalent piece of land if the title to the land use right cannot be obtained.  

 

Note 7 - Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consist of the following:

   Note   September 30,
2012
   December 31,
2011
 
       USD   USD 
             
Accrued payroll        2,845,311    2,459,681 
Income tax payable        3,687,379    7,966,202 
Value-added tax payable        1,378,612    1,577,727 
Others   (a)    7,432,929    3,876,566 
Total accrued expenses and other current liabilities        15,344,231    15,880,176 

 

  (a) Others mainly represent construction payable, accrued professional service fee in connection with the Company’s going private transaction and accrued shipping costs.

 

9
 

 

Note 8 - Loans and revolving line of credit

 

Loans consist of the following:

 

Name of lender  September 30,
2012
   December 31,
2011
 
   USD   USD 
         
BNP Paribas Fortis Bank short-term loan   2,828,320    - 
           
Regions bank term loan – current portion   650,000    650,000 
           
Regions bank term loan – noncurrent portion   4,550,000    5,037,500 
Walloon Region loan   2,571,200    2,594,600 
Long-term loans   7,121,200    7,632,100 

 

Repayment of principal of long-term loans for each of the five years following September 30, 2012 is as follows:

 

   Amount 
    USD 
      
Period from October 1, 2012 to December 31, 2012   162,500 
Years ending December 31,     
2013   650,000 
2014   6,958,700 
2015   - 
2016   - 
2017   - 
Total   7,771,200 

 

As of September 30, 2012 and December 31, 2011, the Company had no balance under the revolving credit facility of USD 4.5 million with Regions Bank.

 

In 2011, Copperweld Bimetallics Europe SPRL and Copperweld Tubing Europe SPRL entered into a credit facility agreement with BNP Paribas Fortis Bank, pursuant to which the bank has provided (i) a credit facility up to €2,000,000 for Copperweld Bimetallics Europe SPRL and (ii) a credit facility up to €8,000,000 for Copperweld Tubing Europe SPRL. The credit facilities expire on October 31, 2012. This type of credit facility is typically offered on an annually renewable basis. Pursuant to the credit facility agreement, there is a commitment fee of 0.2% per quarter on the unused amount of the facility. On October 23, 2012, the Company renewed the credit facilities to extend the maturity date to October 31, 2013. The amount that can be drawn from each credit facility is based on the respective amount of eligible inventories and receivables of Copperweld Bimetallics Europe SPRL and Copperweld Tubing Europe SPRL. The credit facilities are secured by the business of Copperweld Bimetallics Europe SPRL and Copperweld Tubing Europe SPRL and guaranteed by Fushi.

 

In the first three quarters of 2012, Copperweld Bimetallics Europe SPRL withdrew €1,900,000 ($2,435,800) under credit facility agreement and repaid €1,400,000 ($1,794,800). Also, in the first three quarters of 2012, Copperweld Tubing Europe SPRL withdrew a total of €10,400,000 ($13,332,800) under its credit facility agreement and repaid €8,700,000 ($11,153,400). Both short-term borrowings mature and expire at various times within one year.

 

As of September 30, 2012, Copperweld Bimetallics Europe SPRL has unused credit facility of €1,500,000 ($1,928,400) and Copperweld Tubing Europe SPRL has unused credit facility of €6,300,000 ($8,099,280).

  

10
 

  

Note 9 - Earnings per share

 

Basic and diluted earnings per share are calculated as follows:

 

   Three-month
Period Ended September 30,
   Nine-month
Period Ended September 30,
 
   2012   2011   2012   2011 
   USD   USD   USD   USD 
Numerator:                    
Net income   7,700,143    8,948,666    19,947,655    26,408,995 
 Net income attributable to participating securities - nonvested shares   (15,209)   (21,964)   (39,399)   (64,819)
 Net income for basic and diluted earnings per share   7,684,934    8,926,702    19,908,256    26,344,176 
Denominator:                    
Denominator for basic earnings per share:                    
Weighted average number of common stock outstanding
Plus:
   38,361,910    38,204,078    38,300,246    38,186,708 
   Warrants   -    -    -    3,586 
   Stock options   61,878    50,670    25,576    74,828 
 Denominator for diluted earnings per share   38,423,788    38,254,748    38,325,822    38,265,122 
Earnings per share                    
Basic and diluted   0.20    0.23    0.52    0.69 

 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month and nine-month periods ended September 30, 2012 and 2011, respectively, because their effects are anti-dilutive:

 

   Three-month
Period Ended September 30,
   Nine-month
Period Ended September 30,
 
   2012   2011   2012   2011 
                 
Shares issuable upon exercise of stock options   241,750    921,455    241,750    921,455 
Shares issuable upon exercise of warrants   -    100,000    -    100,000 

 

  Note 10 – Income tax

 

The effective income tax rates for the three-month periods ended September 30, 2012 and 2011 were 33.0% and 31.6%, respectively. The effective income tax rates for the nine-month periods ended September 30, 2012 and 2011 were 35.5% and 30.9%, respectively. The effective income tax rates for the three-month and nine-month periods ended September 30, 2012 differ from the PRC statutory income tax rate of 25% primarily due to the recognition of valuation allowances for deferred income tax assets relating to the entities which were in cumulative loss positions.

 

As of September 30, 2012 and December 31, 2011, full valuation allowances of USD 11,332,490 and USD 8,763,199 were provided against the deferred income tax assets arising from tax loss carryforwards and deductible temporary differences of entities which were in cumulative loss positions.

 

As of and for the nine-month period ended September 30, 2012, the Company did not have any unrecognized tax benefits, and thus no interest and penalties related to unrecognized tax benefits were recorded. In addition, the Company does not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.

 

Note 11 – Commitments and contingencies

 

(1)On November 3, 2010, the Company’s Board of Directors received a proposal from its Chairman and Chief Executive Officer, Mr. Li Fu ("Mr. Fu") and Abax Global Capital (Hong Kong) Limited on behalf of funds managed by it and its affiliates ("Abax") for Mr. Fu and Abax to acquire all of the outstanding shares of common stock of Fushi not currently owned by Mr. Fu, Abax and their respective affiliates in a going private transaction for $11.50 per share in cash, subject to certain conditions (the “Initial Fu Proposal”). According to the proposal letter, Mr. Fu and Abax will form an acquisition vehicle for the purpose of completing the acquisition and plan to finance the acquisition with a combination of debt and equity capital. The proposal letter states that the equity portion of the financing would be provided by Mr. Fu, Abax and related sources. A Special Committee of the Company’s Board of Directors, comprised solely of independent directors (the “Special Committee”), has retained BofA Merrill Lynch as its financial advisor and Gibson, Dunn & Crutcher LLP as its legal advisor to assist the Special Committee in its consideration of the Fu Proposal. On November 17, 2011, the Special Committee received a revised proposal from Mr. Fu and Abax for $9.25 per share in cash, subject to certain conditions, which was further revised by a proposal on December 28, 2011 from Mr. Fu, Abax and TPG Growth Asia, Inc. (an affiliate of TPG Capital, L.P.) ("TPG"), for $9.50 per share, subject to certain conditions (the “Current Fu Proposal”). On May 25, 2012, TPG delivered a letter to the Special Committee indicating that it was no longer interested in participating in an acquisition of the Company. According to the Current Fu Proposal, Mr. Fu and Abax plan to finance the acquisition with a senior term loan from China Development Bank Corporation and the proceeds from an equity investment from Abax and an equity investment from Mr. Fu and his affiliates. On June 26, 2012, the Special Committee and the Company’s Board of Directors approved an Agreement and Plan of Merger (the “Merger Agreement”), which was subsequently executed on June 28, 2012. See Note 14.

 

11
 

 

Shareholder class action complaints have been filed in Nevada against Fushi and certain officers and directors in connection with the Initial Fu Proposal in November 2010. In the complaints, the plaintiffs alleged that the consideration in the proposal was grossly inadequate. The complaint sought, among other relief, to enjoin defendants from consummating the Initial Fu Proposal and to direct defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of the shareholders. There are no definite claims for damages, though the plaintiffs claim that the proposed offer price in the Initial Fu Proposal is unfair. The Company believes the allegation is without merit and the Company has viable defenses to the allegations. Nevertheless, there is a possibility that a loss may have been incurred. In accordance with ASC Topic 450, no loss contingency was accrued as of September 30, 2012 since the possible loss or range of loss cannot be reasonable estimated.

 

(2)Shareholder class action complaints have been filed against Fushi and certain of its present and former officers and directors in connection with the Company's restatement of its consolidated financial statements for the years ended December 31, 2007, 2008 and 2009, and the unaudited condensed consolidated financial statements for the quarters ended March 31, 2010, September 30, 2010 and September 30, 2010. In the complaint, the plaintiff seeks damages in an unspecified amount on behalf of a putative class of persons and entities who purchased the Company's common stock between August 14, 2007 and March 29, 2011. The plaintiff alleges that the Company's financial statements for the aforementioned periods contain material misstatements and omissions, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company believes the allegation is without merit and the Company has viable defenses to the allegations. Nevertheless, there is a possibility that a loss may have been incurred. In accordance with ASC Topic 450, no loss contingency was accrued as of September 30, 2012 since the possible loss or range of loss cannot be reasonable estimated.

 

(3)Pursuant to the agreement between the Company and Nexans Deutschland Industries GmbH & Co. KG (“Nexans”), certain sales of the Company’s CCA products are subject to royalty payments to Nexans, which are expensed as incurred. Royalty expenses are insignificant for all the periods presented.

 

(4)On September 29, 2011, the Company obtained the approval from the Commercial Court of Liege in Belgium for a lease agreement (“Belgium Lease Agreement”), pursuant to which the Company leased land, buildings and equipments from the court appointed receivers of Leaf Business Holdings, an entity in bankruptcy in Leige, Belgium. Leaf Business Holdings was engaged in casting, cold folding, cold rolling and drawing non-ferrous metals, primarily copper, before its liquidation. The lease agreement is effective from October 1, 2011 to December 31, 2014. The monthly rental fee is €8,333 ($10,810) from October 1, 2011 to December 31, 2011 and €16,200 ($20,827) thereafter through December 31, 2014. Future minimum lease payment under this agreement is €48,600 ($62,480) for the three-month period ending December 31, 2012 and €194,400 ($249,921) for each of the two-year ending December 31, 2013 and 2014.

 

The Company has an option to purchase the leased assets for a total consideration of €5,750,000 ($7,392,200) (the “Option Exercise Price”). If the option to purchase is exercised before December 31, 2012, the Option Exercise Price will be reduced by an amount equal to half of the accumulated rental fees from October 1, 2011 to the exercise date of the option. If the option to purchase is exercised between January 1, 2013 and December 31, 2014, the Option Exercise Price will be reduced by an amount equal to a quarter of the accumulated rental fees from October 1, 2011 to the exercise date of the option.

 

Note 12 - Segment Information

 

The segment information is as follows:

   Three–Month Period Ended September 30, 2012 
   PRC   US   Total 
   USD   USD   USD 
             
Revenues from external customers   56,219,941    16,387,201    72,607,142 
Intersegment revenues   528,213    1,142    529,355 
Depreciation and amortization   2,985,517    473,114    3,458,631 
Segment operating income   13,797,354    154,411    13,951,765 

 

12
 

 

   Three–Month Period Ended September 30, 2011 
   PRC   US   Total 
   USD   USD   USD 
             
Revenues from external customers   61,259,761    13,019,579    74,279,340 
Intersegment revenues   1,810,078    -    1,810,078 
Depreciation and amortization   2,953,628    461,680    3,415,308 
Segment operating income   16,043,774    (153,853)   15,889,921 

 

   Nine–Month Period Ended September 30, 2012 
   PRC   US   Total 
   USD   USD   USD 
             
Revenues from external customers   161,237,967    50,818,835    212,056,802 
Intersegment revenues   1,340,572    1,142    1,341,714 
Depreciation and amortization   9,057,380    1,402,462    10,459,842 
Segment operating income   39,392,574    293,964    39,686,538 

 

   Nine–Month Period Ended September 30, 2011 
   PRC   US   Total 
   USD   USD   USD 
             
Revenues from external customers   176,380,484    42,778,282    219,158,766 
Intersegment revenues   3,237,189    -    3,237,189 
Depreciation and amortization   8,811,168    1,429,889    10,241,057 
Segment operating income   44,880,914    1,046,254    45,927,168 

 

Reconciliation of segment operating income to consolidated income before income taxes is as follows:

  

   Three-Month Period Ended September 30, 
   2012   2011 
   USD   USD 
         
Total segment operating income   13,951,765    15,889,921 
Corporate operating expenses *   (2,696,350)   (2,153,067)
Interest income   237,563    222,852 
Interest expense   (70,687)   (116,378)
Other expense, net   62,449    (757,407)
Consolidated income before income taxes   11,484,740    13,085,921 

   

 

   Nine-Month Period Ended September 30, 
   2012   2011 
   USD   USD 
         
Total segment operating income   39,686,538    45,927,168 
Corporate operating expenses *   (9,263,812)   (6,371,073)
Interest income   710,972    663,776 
Interest expense   (309,183)   (340,282)
Other expense, net   82,116    (1,677,122)
Consolidated income before income taxes   30,906,631    38,202,467 

  

* Corporate operating expenses are expenses shared between the PRC segment and the US segment, including business administration and management, corporate marketing, and corporate accounting and human resources expenses.  

 

13
 

 

Note 13 - Related Party Transactions

 

In December 2011, Mr. Li Fu advanced $2,000,000 to Fushi to facilitate timely payment of certain expenses of Fushi. The advance is non-interest bearing and was due on demand. In January 2012, $1,800,000 was repaid to Mr. Fu by Fushi in cash. In March 2012, the remaining balance of $200,000 was repaid to Mr. Fu by Fushi International in RMB cash by using the prevailing foreign exchange rate of USD against RMB on the repayment date. The average balance of amount due to Mr. Lu was approximately $0.26 million for the 9-month period ended September 30, 2012. The imputed interest of the advance was insignificant.

 

For the nine-month periods ended September 30, 2012 and 2011, the Company rented an office of approximately 800 square meters in Beijing from Mr. Fu free of charge. The quarterly amount of rental fee based on quoted price for similar facilities was $ 68,273. The Company recognized an expense of $204,819 and a corresponding amount to additional paid in capital for the nine-month periods ended September 30, 2012 and 2011, respectively.

 

Note 14- Proposed Merger

 

On June 28, 2012, the Company entered into the Merger Agreement with Green Dynasty Holdings Limited, a Cayman Islands exempted company (“Holdco”), Green Dynasty Limited, a Cayman Islands exempted company wholly owned by Holdco (“Parent”) and Green Dynasty Acquisition, Inc., a Nevada corporation wholly owned by Parent (“Merger Sub”). Holdco is an entity controlled by Mr. Fu, Chairman and Co-CEO of the Company.

 

Pursuant to the Merger Agreement, at the effective time of the merger, Merger Sub will be merged with and into the Company, and as a result, the Company will continue as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the merger (the “Shares”) will be converted into the right to receive $9.50 in cash without interest. Shares held in the treasury of the Company or owned, directly or indirectly, by Parent, Merger Sub, or any wholly owned subsidiary of the Company immediately prior to the effective time of the merger will be cancelled without consideration. Shares of the Company’s common stock beneficially owned by Mr. Fu and his affiliates and affiliates of Abax, will be cancelled for no consideration, because these parties are contributing their shares to Parent in exchange for ownership interests in Holdco. Each then-outstanding option to purchase shares of the Company’s common stock granted under any equity plan of the Company, whether or not vested or exercisable, will become fully vested and exercisable, contingent upon the occurrence of the merger, and will be converted into the right to receive an amount in cash equal to the product of (i) the excess, if any, of the merger consideration of $9.50 per share over the applicable exercise price per share of such stock option and (ii) the number of shares of the Company’s common stock such holder could have purchased had such holder exercised such stock option in full immediately prior to the effective time of the merger. Each then-outstanding nonvested share of the Company’s common stock granted under any equity plan of the Company, will vest in full, contingent upon the occurrence of the merger (and all restrictions thereon will immediately lapse), and be converted at the effective time into the right to receive an amount in cash equal to $9.50.

 

The Company’s Board of Directors, acting upon the unanimous recommendation of the Special Committee approved the Merger Agreement and has recommended that the Company’s stockholders vote to approve the Merger Agreement.  The Merger is scheduled to be subject to the stockholders’ vote on December 11, 2012.

 

The Merger Agreement must be approved by the holders of (i) at least a majority of the combined voting power of the outstanding shares of the Company’s common stock, and (ii) at least 60% of the combined voting power of the outstanding shares of the Company’s common stock not beneficially owned by the buyer group, which is comprised of Parent, Merger Sub, Holdco, Mr. Fu and his affiliates, and Abax and its affiliates, and any affiliate of any buyer group member.

 

The financing for the Merger will be obtained through (i) a facility agreement, dated June 27, 2012, by and between Parent and China Development Bank Corporation Hong Kong Branch (“CDB”) pursuant to which CDB will provide a term loan facility of up to $185 million to Parent; (ii) an equity commitment letter, dated as of June 28, 2012, by and among Abax Lotus Ltd. and AGC Asia 6 Ltd. and Holdco pursuant to which Abax Lotus Ltd. and AGC Asia 6 Ltd. will provide equity financing of $30 million to Holdco; and (iii) an equity commitment letter, dated as of June 28, 2012, by and between Mr. Fu and Holdco pursuant to which Mr. Fu will provide equity financing of $45 million to Holdco.

 

As of September 30, 2012, the Company recorded a total merger cost of $5.1 million consisting of investment banking, legal and other costs associated with the proposed Merger. The merger cost is recorded in general and administration expenses when incurred.

  

14
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q.

 

Certain statements in this Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” in our 2011 Annual Report on Form 10-K and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

Except as otherwise indicated or as the context otherwise requires, “Fushi,” “the Company,” “we,” “our” and “us” refer to Fushi Copperweld, Inc. (formerly Fushi International, Inc.), a Nevada corporation and its subsidiaries, (i) Fushi Holdings, Inc. (formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (ii) Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iii) Dalian Fushi Bimetallic Manufacturing, Co., Ltd. (“Dalian Fushi”), (iv) Copperweld Bimetallics, LLC (“Copperweld”), (v) Copperweld Bimetallics UK, LLC (“Copperweld UK”), (vi) Dalian Jinchuan Power Cable Co. (“Jinchuan”), (vii) Fushi International (JiangSu) Bimetallic Cable Co., Ltd. (“Fushi International (JiangSu)”), (viii) Fushi Copperweld Europe SARL (“Fushi Europe”), (ix) Copperweld Tubing Europe SPRL (“Copperweld Tubing”), and (x) Copperweld Bimetallic Europe SPRL (“Copperweld Europe”). In this Quarterly Report, all references to the “PRC” refer to the People’s Republic of China. In accordance with industry practice, “MT” refers to a metric ton, a unit of weight equivalent to 1,000 kilograms. “Copperweld” is a registered trademark that we own, and “Fushi” is an additional trademark we use in our business.

 

Overview

 

We believe we are one of the world’s largest producers, based on manufacturing capacity, and a leading innovator of bimetallic wire products, principally copper-clad aluminum, or CCA, and copper-clad steel, or CCS, products. CCA and CCS conductors are generally used as a substitute for solid copper conductors in applications for which either cost savings or specific electrical or physical attributes are necessary. Relative to solid copper wire, our customized, engineered bimetallic wire products significantly reduce the amount of copper metal required to manufacture a conductor, and because copper is expensive relative to aluminum and steel, our products significantly reduce conductor cost per unit length. In the third quarter of 2012, our products were sold to 217 customers in 43 countries. We market our products under the trademarked names of “Copperweld®” and “Fushi TM ,” and sell primarily to cable manufacturers and, to a lesser extent, through distributors or sales agents to cable manufacturers.

 

Although we are engaged in one line of business, as a result of different markets primarily served by each of our manufacturing facilities and significant differences in the operating results among each of our facilities, we manage our worldwide operations based on two geographic segments: 1) “PRC” which consists of our facilities located in the People’s Republic of China (PRC) and 2) “US” which consists of our Fayetteville, Tennessee (US), Telford, England (UK) and Liege, Belgium (EU) facilities. We have combined our US, UK and EU operations as one segment since the UK and EU operating results are consolidated into the US operating company for our chief decision maker to review. Furthermore, the nature of our products, services and production processes at our US, UK and EU facilities, along with the customer base, methods to distribute products and services are nearly identical.

 

We believe we have a strong market position in all markets in which we compete due to the quality of our products, geographic and customer diversity and our ability to deliver superior products while operating as a low cost provider. As a result, we believe we are now one of the leading producers of bimetallic wire products in the world and are one of the market leaders in North America, Europe, North Africa, the Middle East and the PRC. We continue to expand within current and developing markets and create shareholder value by:

 

  · Investing in organic growth in both infrastructure-based and fast-growing markets;

 

  · Focusing on margin enhancement through investment in new machinery and research and development that will improve the performance and capabilities of our bimetallic products and allow us to enter new markets;

 

15
 

 

  · Optimizing capacity and utilization rates throughout the Company by focusing on key performance indicators and operational excellence;

 

  · Protecting and enhancing the Fushi Copperweld brand;

 

  · Strategically hiring and developing talent, to improve the effectiveness of our performance management process, and

 

  · Pursuing acquisitions that expand our strategic capabilities, our access to customers and our product lines as well as downstream in our value chain. 

 

To accomplish these goals, we are focused on continuously improving operational efficiency in areas we view to be vital: quality, delivery, cost and innovation. We also take an opportunistic approach to achieving our goals, and thus, we seek acquisitions of businesses which facilitate overall growth and cash flows of the Company.

 

We manufacture, market and distribute bimetallic conductors (two-metal conductors). These bimetallic conductors are primarily CCA and CCS. These conductors have either aluminum or steel cores, surrounded by an outer layer of pure copper, resulting in a composite bimetallic conductor. The copper sheath, through our processing methods, is metallurgically “bonded” to the core metal. The amount of copper-metal used in cladding the core-metal varies widely, and is based on customers’ needs. However, bimetallic conductors can reduce the amount of copper used by as much as 90% by volume, or 73% by weight which is a considerable cost savings to the company and our customers. For many applications, bimetallic conductors offer significant advantages over copper wire. End-user manufacturers in the wire and cable industry have increasingly pursued and considered alternative technologies such as bimetallics due to performance and economic considerations. Relative to traditional copper conductors, bimetallic conductors offer greater value to a variety of customers. Because of the benefits of bimetallic conductors, we believe there are substantial opportunities to capture increased market share in applications that have historically been dominated by solid copper wire.

 

We believe our engineered bimetallic conductor products offer end-users greater value-performance than “solid” copper conductors. Our bimetallic conductors combine the efficiency of copper with the lightweight qualities of aluminum (CCA), or the ruggedness and strength of steel (CCS). Bimetallic conductors offer favorable cost characteristics, weight savings (CCA), increased flexibility and end-product ease-of-handling (CCA), increased tensile strength (CCS), improved corrosion characteristics and decreased theft risk. Conductivity can be customized, by changing the percentage of copper, to fit many applications. The physical and electrical attributes of our bimetallic products provide our customers cost savings beyond their intrinsic pricing advantages.

 

We believe our proprietary manufacturing technology allows us to produce superior products compared to other manufacturers and creates a significant barrier to entry. Manufacturing copper-clad products involves bonding copper tape to an aluminum or steel core rod, drawing the clad product to a finished diameter and heat treating (annealing) as necessary depending on customer specifications. Our proprietary cladding process differentiates us in terms of manufacturing capabilities, offering superior product quality. Our developmental capabilities support the ongoing evolution of our current products. We are continuously working toward new technologies and products that we expect to improve the performance and capabilities of our bimetallic products thereby allowing us to enter new markets. 

 

While the pricing volatility of our raw materials, especially copper, is a primary cause of cost variations in our products, changes in raw material costs do not materially affect our dollar earnings on a per pound basis. Although an increase in the price of raw materials may reduce our gross margins as a percentage of revenues, likewise, a decline in raw material prices may increase our gross margin as a percentage of revenues. We generally pass the cost of price changes in our raw materials to our customers. We establish prices for our products based on market factors and our cost to produce our products. Typically, we set a base price for our products for our customers with an understanding that as prices of raw materials change, primarily for copper but also for aluminum and steel, we will pass the change to our customers. Therefore, when prices of raw material increase, our prices to our customers increase and the amount of our total revenues increases while the dollar amount of our gross margin on a per pound basis remains relatively stable. As a result, the impact on earnings per share from volatile raw material prices is minimal, although there are timing delays of varying lengths depending upon volatility of metals prices, the type of product, competitive conditions and particular customer arrangements.

 

Factors driving and affecting operating results include raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, variations in the mix of products, production capacity and utilization, working capital sufficiency, availability of credit and general market liquidity, patent and intellectual property issues, litigation results and legal and regulatory developments, and our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage volatile raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems.

 

16
 

 

On June 28, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Green Dynasty Holdings Limited, a Cayman Islands exempted company (“Holdco”), Green Dynasty Limited, a Cayman Islands exempted company wholly owned by Holdco (“Parent”) and Green Dynasty Acquisition, Inc., a Nevada corporation wholly owned by Parent (“Merger Sub”). Holdco is an entity controlled by Mr. Fu, Chairman and Co-CEO of the Company.

 

Pursuant to the Merger Agreement, at the effective time of the merger, Merger Sub will be merged with and into the Company, and as a result, the Company will continue as the surviving corporation and a wholly owned subsidiary of Parent (the “merger”). Each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the merger (the “Shares”) will be converted into the right to receive $9.50 in cash without interest. Shares held in the treasury of the Company or owned, directly or indirectly, by Parent, Merger Sub, or any wholly owned subsidiary of the Company immediately prior to the effective time of the merger will be cancelled without consideration. Shares of our common stock beneficially owned by Mr. Fu and his affiliates and affiliates of Abax Capital Partners (Hong Kong) Limited ("Abax"), will be cancelled for no consideration, because these parties are contributing their shares to Parent in exchange for ownership interests in Holdco. Each then-outstanding option to purchase shares of the Company’s common stock granted under any equity plan of the Company, whether or not vested or exercisable, will become fully vested and exercisable, contingent upon the occurrence of the merger, and will be converted into the right to receive an amount in cash equal to the product of (i) the excess, if any, of the merger consideration of $9.50 per share over the applicable exercise price per share of such stock option and (ii) the number of shares of the Company’s common stock such holder could have purchased had such holder exercised such stock option in full immediately prior to the effective time of the merger. Each then-outstanding nonvested share of the Company’s common stock granted under any equity plan of the Company, will vest in full, contingent upon the occurrence of the merger (and all restrictions thereon will immediately lapse), and be converted at the effective time into the right to receive an amount in cash equal to $9.50.

 

The Company’s Board of Directors, acting upon the unanimous recommendation of the Special Committee approved the Merger Agreement and has recommended that the Company’s stockholders vote to approve the Merger Agreement.  The Merger is scheduled to be subject to the stockholders’ vote on December 11, 2012.

 

The Merger Agreement must be approved by the holders of (i) at least a majority of the combined voting power of the outstanding shares of our common stock, and (ii) at least 60% of the combined voting power of the outstanding shares of the Company’s common stock not beneficially owned by the buyer group, which is comprised of Parent, Merger Sub, Holdco, Mr. Fu and his affiliates, and Abax and its affiliates, and any affiliate of any buyer group member.

 

Highlights for the three months ended September 30, 2012 include:

 

  · Product shipped was 10,167 MT compared to 9,300 MT in the third quarter of 2011;
  · Revenues were $72.6 million compared to $74.3 million in the third quarter of 2011;
  · Gross profit was $18.9 million, or 26.1% of revenues, compared to $19.9 million, or 26.8% of revenues, in the third quarter of 2011;
  · Income from operations was $11.3 million, or 15.5% of revenues, compared to $13.7 million, or 18.5% of revenues, in the third quarter of 2011;
  · Net income was $7.7 million, or $0.20 per diluted share, compared to net income of $8.9 million, or $0.23 per diluted share, in the third quarter of 2011;
  · Cash position of $217.7 million at September 30, 2012, compared to $200.5 million at December 31, 2011.

 

Current Business Environment and Outlook for the remainder of 2012

 

The bimetallic conductor industry is a subset of the broader wire and cable industry, which consumed approximately 14,767,000 MT of metallic center conductor in 2010 according to estimates by CRU International Limited, a leading publisher of industry market research. The global bimetallic wire industry, as well as the wire and cable industry, is fast-growing and increasingly competitive. This is especially true in the PRC where there is considerable fragmentation of manufacturers. We continue to see strong demand for our products and believe significant growth opportunities exist to capture a larger proportion of the metallic center conductor market relative to solid copper wire.

 

Furthermore, we think the following macro-level trends will positively impact our business and offer us opportunities to capture new business and preserve profitability despite global economic conditions:

 

  · Continued investment in telecommunication projects in emerging economies;

 

  · Government initiatives focused on infrastructure: high-speed railways, transmission and distribution and power grid build out;

 

  · Continued strength of grounding wire market;

 

  · Worldwide underlying long-term growth trends in electric utility and infrastructure markets; and

 

  · Continuing demand for cost effective, energy saving alternatives.

 

17
 

  

In addition to these macro-level trends, the Company is presented with opportunities brought by the addition of CCS cladding capacity at our Dalian facility. We believe this equipment is the first large-scale, high quality CCS cladding capacity in Asia. We continue to educate the PRC and other Asian markets on the benefits of CCS for the telecommunication, utilities, and transportation markets in anticipation of expected large-scale production of 8,200 MT of annual CCS capacity at our Dalian facility in fiscal year 2012. Initially, we intend to focus our CCS efforts on capturing market share in the CATV drop cable market. According to the 12th Five-year Program Outline by the Optical and Electrical Cable Association of China, approximately 8,000,000 kilometers of CATV drop cable was manufactured in the PRC in 2009. This amount of CATV cable represents the equivalent of approximately 50,000 MT of CCS center conductor, and to-date has been primarily supplied by local Copper-plated Steel (CPS) manufacturers. We believe CPS to be an inferior product compared to CCS, and the absence of local, affordably priced CCS manufacturers in the PRC results in CATV manufacturers choosing CPS in their production process. As we introduce CCS production, we expect those market dynamics to shift to be more in-line with those of developed markets, where CCS is the preferred center conductor of choice for CATV drop cable.

 

In addition, we are seeking to continue to develop the high potential utility and transportation markets, to enhance productivity and to expand our sales of higher margin products.  We view the market for CCA and CCS wires and cables within the utilities market to be worldwide. In order to capture the growth opportunities, we will focus on driving profitability by streamlining our organizational structure and business procedures, increasing operational efficiency and optimizing operating processes, while managing production costs and operating expenses.

 

Meanwhile, we are also working to strengthen our business development, sales, marketing and customer relations.  We will seek approval for our products from product safety testing and certification organizations and inclusion in national and industry product standards throughout the world. We view efforts in certification and standardization as vital aspects of our efforts to realize large-scale conversion to bimetallic wire from solid copper wire.  In addition, as part of our ongoing efforts to reduce total operating costs, we continuously improve our ability to efficiently utilize existing and new manufacturing capacity to manage expansion and growth.  We believe that effectively utilized manufacturing assets and generating economies of scale will help offset high raw material prices and dilute overhead over time, thus improving profitability.

 

We actively seek to identify and promptly respond to key economic and industry trends in order to capitalize on expanding niche markets for our products, and possibly entering into new markets both down and up stream, in order to achieve better returns.  We believe we have the resources, technology, working capital and capacity to meet growing market demands.  Over the long-term, we believe that we are well positioned to benefit from the growth opportunities presented by infrastructure projects throughout the world.

 

Results of Operations

 

The following table sets forth, for the periods indicated, statement of operations data in millions of US dollars:

 

   Three Months Ended       Nine Months Ended     
   September 30,   September 30,   Change   September 30,   September 30,   Change 
   2012   2011   %   2012   2011   % 
Revenues  $72.6   $74.3    -2.3%  $212.1   $219.2    -3.2%
Gross profit   18.9    19.9    -5.0%   55.1    58.1    -5.2%
Selling, general and administrative expenses   7.7    6.2    24.2%   24.7    18.5    33.5%
Income from operations   11.2    13.7    -18.2%   30.4    39.6    -23.2%
Income before income taxes   11.5    13.1    -12.2%   30.9    38.2    -19.1%
Income tax expense   3.8    4.2    -9.5%   11.0    11.8    -6.8%
Net income  $7.7   $8.9    -13.5%  $19.9   $26.4    -24.6%

 

18
 

 

Three Months Ended September 30, 2012 compared to three months ended September 30, 2011:

 

Revenues from external customers by segment

 

The following tables set forth revenues from external customers in millions of US dollars and metric tons (MT) of copper-clad products sold by segment:

 

(in millions, except  Revenues         
percentage)  Three Months Ended September 30,         
   2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
PRC  $56.2    77.4%  $61.3    82.5%  $(5.1)   -8.3%
US   16.4    22.6%   13.0    17.5%   3.4    26.2%
Total revenues  $72.6    100.0%  $74.3    100.0%  $(1.7)   -2.3%

 

(in MTs, except  Metric Tons Sold         
percentage  Three Months Ended September 30,         
   2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
PRC *   7,710    75.8    7,227    77.7%   483    6.7%
US   2,457    24.2    2,073    22.3%   384    18.5%
Total sales volume   10,167    100.0    9,300    100.0%   867    9.3%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

Revenues for the third quarter of 2012 were $72.6 million, a decrease of 2.3% from $74.3 million in same quarter of the prior year. The decrease was primarily due to lower unit selling prices as a result of decrease of raw material price in the third quarter of 2012 compared to that of 2011.

 

The PRC segment experienced a decrease of 8.3% in revenues in the third quarter of 2012, which is primarily due to lower unit selling prices as a result of decrease of unit price of raw materials, particularly copper. The volume sold in terms of MT in our PRC segment increased 483 MT, or 6.7% in the third quarter of 2012 compared to the same quarter of 2011. The higher volume shipped in the PRC segment in the third quarter of 2012 was mainly the result of stronger sales to our utility customers. The appreciation of the average exchange rate of RMB against USD in the third quarter of 2012 compared with the same period of 2011 has also attributed to a 1.0% or $0.6 million increase in revenue as a result of translating PRC entities’ revenue denominated in RMB to USD.

 

The US segment experienced an increase of 26.2% in revenues in the third quarter of 2012 compared to the same period of 2011. The increase is primarily due to an 18.5% increase in quantities sold which is partially contributed by operations in Liege, Belgium.

 

Revenues by industry

 

The following table presents the breakdown of revenues in millions of US dollars by industry:

 

   Revenues         
(in millions, except  Three Months Ended September 30,         
percentage)  2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
Telecommunication  $20.8    28.7%  $24.1    32.4%  $(3.3)   -13.7%
Utility   45.8    63.1%   47.1    63.4%   (1.3)   -2.8%
Transportation   1.0    1.4%   1.2    1.7%   (0.2)   -16.7%
Other   5.0    6.8%   1.9    2.5%   3.1    163.2%
Total revenues  $72.6    100.0%  $74.3    100.0%  $(1.7)   -2.3%

  

19
 

 

The following table presents the breakdown of metric tons (MT) of copper-clad products sold to customers by industry:

 

(in MTs, except  Metric Tons Sold
Three Months Ended September 30,
         
percentage)  2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
Telecommunication   3,586    35.3    3,707    39.9%   (121)   -3.3%
Utility *   5,636    55.4    4,948    53.2%   688    13.9%
Transportation   136    1.3    152    1.6%   (16)   -10.5%
Other   809    8.0    493    5.3%   316    64.1%
Total sales volume   10,167    100.0    9,300    100.0%   867    9.3%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

In the third quarter of 2012, our sales to the telecommunication markets decreased by 121 metric tons, or 3.3%, compared to the same period of 2011, which was primarily the result of the continued slowdown in telecommunication infrastructure build out in the PRC and US.

 

Our sales to utility markets increased by 688 metric tons, or 13.9%, in the third quarter of 2012 compared to the third quarter of 2011 as we continued to shift our sales to utility customers. In our PRC segment, sales to utility market increased by 374 MT, or 11.8%, We expect modest growth in utilities-related sales in 2012 as a result of our business development efforts as well as ongoing adoption trends elsewhere in Europe and Asia.

 

Capacity and Output

 

The following table summarizes installed cladding capacities per annum and metric ton sold by products in the third quarter of 2012:

 

 

    Three Months Ended September 30, 2012  
    PRC     US  
    Capacity
(MT)
    Total
Volume
(MT)
    Capacity
(MT)
    Total
Volume
(MT)
 
CCA     40,000       7,536       12,400       540  
CCS     8,200       24       16,300       1,621  
Total     48,200       7,560       28,700       2,161  

 

Product Mix

 

The following table summarizes the breakdown of metric tons (MT) of copper-clad products sold to customers by product mix:

 

(in MTs, except  Metric Tons Sold         
percentage)  Three Months Ended September 30,         
   2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
CCA   8,076    79.4%   7,711    82.9%   365    4.7%
CCS   1,645    16.2%   1,440    15.5%   205    14.2%
Others   446    4.4%   149    1.6%   297    199.3%
Total sales volume *   10,167    100.0%   9,300    100.0%   867    9.3%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

Sales volume of CCA in our PRC segment increased by 6.5%, or 463 metric tons in the third quarter of 2012 compared to the same period of 2011 due to stronger sales in utility market partially offset by weaker sales to telecommunication market as a result of slowdown of the PRC’s 3G build out. Sales volume of CCA in our US segment decreased by 15.4%, or 98 metric tons in the third quarter of 2012 compared to the same period of 2011.

 

Sales volume of CCS in our US segment increased by 16.5%, or 230 metric tons in the third quarter of 2012 compared to the same period of 2011 primarily due to incremental sales from our Liege facility, which started sales in the first quarter of 2012.

 

20
 

 

Gross Profit and Gross Margin

 

   Three Months Ended September
30,
   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Gross Profit  $18.9   $19.9   $(1.0)   -5.0%
Gross Margin   26.1%   26.8%        -0.7%

 

Gross profit decreased 5.0% to $18.9 million from $19.9 million in the third quarter of 2011. As a percentage of revenues, gross margin decreased to 26.1% in the third quarter of 2012 from 26.8% in the same period in 2011. The decrease of gross margin was mainly due to lower average gross margin of our Liege tubing facility, which started sales in the first quarter of 2012.

 

Selling Expenses

 

   Three Months Ended September
30,
   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Selling Expenses  $1.8   $1.1   $0.7    63.6%
as a percentage of revenues   2.5%   1.5%        1.0%

 

Selling expenses were $1.8 million in the quarter ended September 30, 2011, an increase of 63.6%, or $0.7 million compared to the same period in 2011. As a percentage of revenues, selling expenses increased from 1.5% in the third quarter of 2011 to 2.5% in the third quarter of 2012. The increase in selling expenses was primarily related to expenses incurred at our Liege facility and our ongoing efforts in business development activities.

 

General and Administrative Expenses

 

   Three Months Ended September
30,
   Change 
(in millions, except percentage)  2012   2011   Amount   % 
General and Administrative Expenses  $5.9   $5.1   $0.8    15.7%
as a percentage of revenues   8.1%   6.9%        1.2%

 

General and administrative (G&A) expenses were $5.9 million in the third quarter of 2012 compared to $5.1 million in the same period in 2011, representing an increase of 15.7%, or $0.8 million. As a percentage of revenues, G&A expenses increased from 6.9% in the third quarter of 2011 to 8.1% in the third quarter of 2012. The increase in G&A expenses was mainly due to expenses incurred at our Liege facility.

 

 

Income from operations

 

The following table sets forth income from operations by segment, in millions of US dollars:

 

(in millions, except percentage)  Three Months Ended September 30,         
   2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
PRC  $13.8    122.1%  $16.0    116.8%  $(2.2)   -13.8%
US  $0.2    2.7%  $(0.2)   -1.5%  $0.4    -200.0%
Segment income from operations  $14.0    124.8%  $15.8    115.3%  $(1.8)   -11.4%
Corporate  expenses  $(2.8)   -24.8%  $(2.1)   -15.3%  $(0.7)   33.3%
Total income from operations  $11.2    100.0%  $13.7    100.0%  $(2.5)   -18.2%

 

Total income from operations was $11.2 million in the quarter ended September 30, 2012 compared to $13.7 million in the same period of 2011, representing a decrease of 18.2%, or $2.5 million. The decrease was primarily due to a lower gross profit as a result of lower revenues and a higher selling and G&A expenses.

 

21
 

 

Other Income (Expense)

 

Interest income (expenses)

   Three Months Ended September
30,
   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Interest Income  $0.2   $0.2   $-    -%
Interest Expenses  $(0.1)  $(0.1)  $-    -%
Net Interest Income (Expenses)  $0.1   $0.1   $-    -%
as a percentage of revenues   0.1%   0.1%        -%

 

Net interest income was stable in the third quarter of 2012 compared to the same period of 2011.

 

Income Taxes

 

   Three Months Ended September
30,
   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Income before Income Taxes  $11.5   $13.1   $(1.6)   -12.2%
Income Tax Expense   3.8    4.2    (0.4)   -9.5%
Effective income tax rate   33.0%   31.6%        1.4%

 

The Company’s effective income tax rate was 33.0% in the third quarter of 2012, compared to 31.6% in the same quarter of last year. On a percentage basis, there were more losses generated from loss-making entities in US, Europe and PRC in the third quarter of 2012 compared to the same quarter of last year, which resulted in a higher effective tax rate. Full valuation allowances were provided for the deferred income tax assets relating to these losses.

 

Our PRC subsidiaries have a cash balance of $210.6 million as of September 30, 2012 which is planned to be permanently reinvested in the PRC. Distributions from our PRC subsidiaries are subject to US federal income tax of 34%, less any applicable foreign tax credits. Due to our plan to indefinitely reinvest our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of $301 million and $269 million as of September 30, 2012 and December 31, 2011, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.

 

Net Income

 

As a result of the above factors, we had net income of $7.7 million in the third quarter of 2012 compared to net income of $8.9 million in the same quarter of 2011.

 

22
 

 

Nine Months Ended September 30, 2012 compared to nine months ended September 30, 2011:

 

Revenues from external customers by segment

 

The following tables set forth revenues from external customers in millions of US dollars and metric tons (MT) of copper-clad products sold by segment:

 

(in millions, except  Revenues         
percentage)  Nine Months Ended September 30,         
   2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
PRC  $161.3    76.0%  $176.4    80.5%  $(15.1)   -8.6%
US   50.8    24.0%   42.8    19.5%   8.0    18.7%
Total revenues  $212.1    100.0%  $219.2    100.0%  $(7.1)   -3.2%

 

(in MTs, except  Metric Tons Sold         
percentage)  Nine Months Ended September 30,         
   2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
PRC *   21,187    73.3%   21,848    76.4%   (661)   -3.0%
US   7,701    26.7%   6,742    23.6%   959    14.2%
Total sales volume   28,888    100.0%   28,590    100.0%   298    1.0%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

Revenues were $212.1 million in the first three quarters of 2012, a decrease of $ 7.1 million, or 3.2%, compared to $ 219.2 million in the same period of last year, which was primarily due to lower unit selling prices as a result of decrease of raw materials price, particularly copper, offset by higher sales volume in the first three quarters of 2012 compared to the same period of 2011.

 

The PRC segment experienced a decrease of 8.6 % in revenues for the nine months ended September 30, 2012, which is primarily due to a 3.0% decrease in quantities sold and 7.2% decrease in average selling prices of copper-clad products as a result of lower raw material prices. On the other hand, the appreciation of the average exchange rate of RMB against USD in the first three quarters of 2012 compared with the same period of 2011 has also attributed to a 2.6% or $4.1 million increase in revenue as a result of translating PRC entities’ revenue denominated in RMB to USD.

 

The US segment experienced an increase of 18.7% in revenues for the nine months ended September 30, 2012 compared to that of 2011. The increase is primarily due to a 14.2% increase in quantities sold which is partially due to the operations in Liege, Belgium.

  

Revenues by industry

 

The following table presents the breakdown of revenues in millions of US dollars by industry:

 

   Revenues         
(in millions, except  Nine Months Ended September 30,         
percentage)  2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
Telecommunication  $59.1    27.9%  $72.9    33.3%  $(13.8)   -18.9%
Utility   137.2    64.7%   137.0    62.5%   0.2    0.1%
Transportation   3.2    1.5%   3.2    1.5%   -    -%
Other   12.6    5.9%   6.1    2.7%   6.5    106.6%
Total revenues  $212.1    100.0%  $219.2    100.0%  $(7.1)   -3.2%

 

23
 

 

 The following table presents the breakdown of metric tons (MT) of copper-clad products sold to customers by industry:

 

(in MTs, except  Metric Tons Sold
Nine Months Ended September 30,
         
percentage)  2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
Telecommunication   10,000    34.6%   11,263    39.4%   (1,263)   -11.2%
Utility *   16,613    57.5%   15,477    54.1%   1,136    7.3%
Transportation   440    1.5%   387    1.3%   53    13.7%
Other   1,835    6.4%   1,463    5.2%   372    25.4%
Total sales volume   28,888    100.0%   28,590    100.0%   298    1.0%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

During the nine months ended September 30, 2012, our sales to the telecommunication markets decreased by 1,263 metric tons, or 11.2%, compared to the same period of 2011, which was primarily due to the continued slowdown in the telecommunication infrastructure build out in the PRC and US.

 

Our sales to utility markets increased by 1,136 metric tons, or 7.3%, in the first three quarters of 2012 compared to the first three quarters of 2011. We expect modest growth in utilities-related sales in 2012 as a result of our business development efforts as well as ongoing adoption trends elsewhere in Europe and Asia.

 

Capacity and Output

 

The following table summarizes installed cladding capacities per annum and metric ton sold by products in the third quarter of 2012:

 

 

    Nine Months Ended September 30, 2012  
    PRC     US  
    Capacity
(MT)
    Total
Volume
(MT)
    Capacity
(MT)
    Total
Volume
(MT)
 
CCA     40,000       20,825       12,400       1,972  
CCS     8,200       50       16,300       5,142  
Total     48,200       20,875       28,700       7,114  

 

  

Product Mix

 

The following table summarizes the breakdown of metric tons (MT) of copper-clad products sold to customers by product mix:

 

(in MTs, except  Metric Tons Sold         
percentage)  Nine Months Ended September 30,         
   2012   2011   Change in   Change in 
   MT   %   MT   %   MT   % 
CCA   22,797    78.9%   23,508    82.2%   (711)   -3.0%
CCS   5,192    18.0%   4,628    16.2%   564    12.2%
Others   899    3.1%   454    1.6%   445    98.0%
Total sales volume *   28,888    100.0%   28,590    100.0%   298    1.0%

 

* Does not include sales volume contributed by Jinchuan. The sales volume of power cables in Jinchuan is measured in meters.

 

Sales volume of CCA in our PRC segment decreased by 2.4%, or 517 metric tons, in the first three quarters of 2012 compared to the same period of 2011 due to the slowdown of the PRC’s 3G build out. Sales volume of CCA in our US segment decreased by 8.9%, or 194 metric tons, in the first three quarters of 2012 compared to the same period of 2011 due to less orders of certain main customers in the U.S.

 

Sales volume of CCS in our US segment increased by 15.2%, or 679 metric tons in the first three quarters of 2012 compared to the same period of 2011. We experienced increased activity and saw an increase in quote activity during the first three quarters of 2012 in the European market. We have begun to see traction in diverse markets including China, India, the Philippines, Indonesia, Malaysia, and Singapore, particularly for our grounding wire applications.

 

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Gross Profit and Gross Margin

 

   Nine Months Ended September 30,   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Gross Profit  $55.1   $58.1   $(3.0)   -5.2%
Gross Margin   26.0%   26.5%        -0.5%

 

Gross profit decreased by 5.2% to $55.1 million from $58.1 million in the first three quarters of 2012. As a percentage of revenues, gross margin decreased to 26.0% in the first three quarters of 2012 from 26.5% in the same period in 2011. The decrease in gross margin was primarily due to lower metric tons shipped in our PRC segment which has a higher margin than our US segment. In addition, the lower than average gross margin of our Liege tubing facility, which started sales in the first quarter of 2012, also contributed to the decrease in gross margin.

 

Selling Expenses

 

   Nine Months Ended September 30,   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Selling Expenses  $5.3   $3.6   $1.7    47.2%
as a percentage of revenues   2.5%   1.6%        0.9%

 

Selling expenses were $5.3 million in the three quarters ended September 30, 2012, an increase by 47.2%, or $1.7 million compared to the same period in 2011. As a percentage of revenues, selling expenses increased from 1.6% in the first three quarters of 2011 to 2.5% in the first three quarters of 2012. The increase in selling expenses was primarily related to the ramp-up of operations at Liege, as well as ongoing business development activities.

 

General and Administrative Expenses

 

   Nine Months Ended September 30,   Change 
(in millions, except percentage)  2012   2011   Amount   % 
General and Administrative Expenses  $19.4   $15.0   $4.4    29.3%
as a percentage of revenues   9.2%   6.8%        2.4%

 

General and administrative (G&A) expenses were $19.4 million in the first three quarters of 2012 compared to $15.0 million in the same period in 2011, representing an increase of 29.3%, or $4.4 million. The increase was primarily due to a $2.5 million increase in going-private related expenses in the nine months ended September 30, 2012 compared to the same period of 2011, and $1.2 million of G&A expenses incurred at our Liege facility.

 

Income from operations

 

The following table sets forth income from operations by segment, in millions of US dollars:

 

(in millions, except percentage)  Nine Months Ended September 30,         
   2012   2011   Change in   Change in 
   Amount   %   Amount   %   amount   % 
PRC  $39.4    129.9%  $44.9    113.4%  $(5.5)   -12.2%
US  $0.3    1.0%  $1.0    2.5%  $(0.7)   -70.0%
Segment income from operations  $39.7    130.6%  $45.9    115.9%  $(6.2)   -13.5%
Corporate  expenses  $(9.3)   30.6%  $(6.3)   -15.9%  $(3.0)   47.6%
Total income from operations  $30.4    100.0%  $39.6    100.0%  $(9.2)   -23.2%

 

Total income from operations was $30.4 million in nine months period ended September 30, 2012 compared to $39.6 million in the same period of 2011, representing a decrease of 23.2%, or $9.2 million. The decrease was primarily due to a lower gross profit as a result of lower revenues and higher selling and G&A expenses.

 

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Other Income (Expense)

 

Interest income (expenses)

   Nine Months Ended September 30,   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Interest Income  $0.7   $0.7   $-    -%
Interest Expenses  $(0.3)  $(0.3)  $-    -%
Net Interest Income (Expenses)  $0.4   $0.4   $-    -%
as a percentage of revenues   0.2%   0.2%        -%

 

Net interest income was stable in the third quarter of 2012 compared to the same period of 2011.

 

Income Taxes

 

   Nine Months Ended September 30,   Change 
(in millions, except percentage)  2012   2011   Amount   % 
Income before Income Taxes  $30.9   $38.2   $(7.3)   -19.1%
Income Tax Expense   11.0    11.8    (0.8)   -6.8%
Effective income tax rate   35.5%   30.9%        4.6%

 

The Company’s effective income tax rate was 35.5% in the first three quarters of 2012, compared to 30.9% in the same nine months of last year. On a percentage basis, there were more losses generated from loss-making entities in US, Europe and PRC in the first three quarters of 2012 compared to the first three quarters of last year, which resulted in a higher effective tax rate. Full valuation allowances were provided for the deferred income tax assets relating to these losses.

  

Our PRC subsidiaries have a cash balance of $210.6 million as of September 30, 2012 which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to US federal income tax of 34%, less any applicable foreign tax credits. Due to our plan to indefinitely reinvest our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of $301 million and $ 269 million as of September 30, 2012 and December 31, 2011, respectively. It is not practicable to estimate the amounts of unrecognized deferred income tax liabilities thereof.

 

Net Income

 

As a result of the above factors, we had net income of $19.9 million in the first three quarters of 2012 compared to net income of $26.4 million in the same period of 2011.

 

Selected Balance Sheet Data at September 30, 2012 and December 31, 2011:

 

   Selected Balance Sheet Data 
   September 30,
2012,
   December 31,
2011
   Change 
(in millions, except percentage)          Amount   % 
Cash  $217.7   $200.5   $17.2    8.6%
Accounts Receivable, net  $70.0   $64.0   $6.0    9.4%
PP&E (a)  $107.9   $117.4   $(9.5)   -8.1%
Total Assets  $450.1   $426.8   $23.3    5.5%
Short Term Debt  $2.8   $0.7   $2.1    300%
Long Term Debt  $7.8   $8.3   $(0.5)   -6.0%
Shareholders' Equity  $417.8   $396.2   $21.6    5.5%

 

(a) For breakdown of property, plant and equipment, please refer to consolidated financial statements footnote 5 for details.

 

Our financial condition continues to improve as measured by an increase of 5.5% in shareholders’ equity as of September 30, 2012 compared to December 31, 2011. Cash increased by $17.2 million, primarily due to cash provided by operating activities of $16.3 million, cash provided by financing activities of $0.9 million and the effect of foreign currency exchange rates on cash of $0.4 million.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

We have historically financed our operations and capital expenditures principally through private placements of debt and equity, bank loans, and cash provided by operations. Significant factors affecting our cash liquidity include (1) cash provided by operating activities, (2) cash used for capital expenditures, and (3) our available credit facilities and other borrowing arrangements. At September 30, 2012, the majority of our cash was held in RMB denominated bank deposits with PRC financial institutions. The PRC has strict rules for converting RMB to other currencies and for movement of funds from PRC subsidiaries to the US holding company. Consequently, we used funds from our public offering in the third quarter 2010 to invest in our non-PRC operations and have secured new working capital lines for non-PRC operations to finance our growing working capital needs.

 

Under PRC Company Law and relevant rules and regulations, our PRC subsidiaries may pay dividends only out of their retained earnings/net profit, if any, calculated according to PRC accounting standards, and only after accumulated losses from preceding years have been fully covered and the following appropriations have been made:

 

a) appropriations to the statutory surplus reserve equivalent to 10% of its net profits less any accumulated losses, as determined under PRC GAAP; no further appropriations to the statutory surplus reserve are required once this reserve reaches an amount equal to 50% of its respective registered capital, and

 

b) appropriations to a discretionary surplus reserve as approved by the shareholders in shareholders' meeting.

 

As is customary in the industry, we provide payment terms to most of our customers that exceed terms that we receive from our suppliers. Therefore, the Company’s liquidity needs have generally consisted of working capital necessary to finance receivables and raw material for inventory. Capital expenditures have historically been necessary to expand the production capacity of the Company’s manufacturing operations. We do not expect to incur significant capital expenditures in the period from October 1, 2012 to December 31, 2012.

 

For long lived assets, ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. For the nine months period ended September 30, 2012 and September 30, 2011, the Company incurred total repairs and maintenance expenses of approximately $1.3 million and $1.3 million, respectively. No major renewals and betterments were recognized for the first three quarters both of 2012 and 2011.

 

The following table sets forth a summary of our cash flows for the periods presented:

 

   Nine Months Ended September 30, 
(in millions)  2012   2011 
Net cash provided by operating activities  $16.3   $40.7 
Net cash used in investing activities  $(0.4)  $(1.2)
Net cash provided by financing activities  $0.9   $(4.7)
Effect of foreign currency exchange rate changes on cash  $0.4   $5.8 
Cash at beginning of period  $200.5   $123.0 
Cash at end of period  $217.7   $163.6 

 

For the nine months ended September 30, 2012, net cash provided by operating activities was $16.3 million, a decrease of 60.0%, or $24.4 million compared to the same period in 2011. The decrease in cash provided by operating activities was due to lower revenues as a result of lower sales volumes in our PRC segment and an increase in working capital needs at our Dalian and Liege facilities, as we built-up inventory in anticipation of higher demand levels during the rest of the year.

 

For the nine months ended September 30, 2012, net cash used in investing activities was $0.4 million, which was primarily for the purchase of PP&E.

 

For the nine months ended September 30, 2012, net cash provided by financing activities was $0.9 million, which was primarily from the proceeds from bank loans in Europe amounting to $15.8 million, the repayment of bank loans of $13.4 million, and the repayment of an interest-free loan provided by Mr. Li Fu amounting to $2 million.

 

At September 30, 2012, our cash balance was $217.7 million compared to $200.5 million at December 31, 2011.

 

Days sales outstanding (DSO) increased from 85 days at September 30, 2011 to 89 days at September 30, 2012, while days payable outstanding (DPO) increased from 8 days at September 30, 2011 to 10 days at September 30, 2012.

 

We continued our policy of extending credit terms to certain credit worthy customers that have long-standing business relationships with us in order to capture increased market share. We believe that our ability to extend credit terms puts pressure on our smaller competitors whose limited capital resources have become further strained due to the global economic crisis and are unable to make such accommodations for customers.  We make provisions for doubtful accounts receivable specifically based on the facts we obtain about the customers’ ability to pay. We have not experienced any significant write-off of accounts receivable. The Company has established appropriate procedures to facilitate collection. 

 

27
 

 

Standard Customer and Supplier Payment Terms (days) as below:

  

    Year ended December 31, 2011   Nine months ended September 30, 2012
Customer Payment Term   Payment in advance/up to 120 days   Payment in advance/up to 120 days
Supplier Payment Term   Payment in advance/up to 30 days   Payment in advance/up to 30 days

 

Inventory turnover days increased to 35 days at September 30, 2012 from 30 days at September 30, 2011. Advances to supplier’s turnover days decreased from 20 days at September 30, 2011 to 11 days at September 30, 2012. The Company’s major raw materials consist of aluminum, steel rods and copper strips. Changes in the price of copper, which has an established history of volatility, directly affect the prices of the Company’s products and the demand for products. The Company’s decision to make advanced purchases of raw materials is mainly based upon (1) the current and projected future market price of raw materials, (2) the demand and supply situation in the raw materials market, and (3) the forecasted demand of products. 

 

COMMITMENTS AND CONTINGENCIES

 

Contractual Obligations

 

Set out below are our contractual obligations at September 30, 2012:

 

Contractual obligations   Total     Payment due by
less than 1 year
    1 – 3 years   3-5 years     More than
5
years
 
Long-term debt*   $ 8,150,773       842,239     7,308,534     -       -  
Operating lease   $ 562,322       249,921     312,401     -       -  
Total   $ 8,713,095       1,092,160     7,620,935     -       -  

 

* Our long term loan with Regions Bank with a principal amount of $5,200,000 as of September 30, 2012, shall be repaid in equal monthly principal payments plus interest each month until August 31, 2020. However, Regions Bank has the right to demand full repayment in August 2014 of the total outstanding balance unless we renew the loan before this date. We therefore have assumed a full repayment of the total outstanding balance of the term loan in August 2014.

 

The table above does not include royalty payments to Nexans as the amounts, timing and likelihood of such payments are not known.  The amounts of royalty payments typically will not be determined until sales revenues have been generated.

 

Legal Proceedings

 

Please refer to Part II, Item 1 of this Quarterly Report on Form 10-Q for information on legal proceedings.

 

Off-Balance Sheet Arrangements

 

We have not engaged in any off-balance sheet transactions.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Commodity Price Risk

 

Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities in the normal course of business. We do not speculate on commodity prices.

 

We are primarily exposed to price risk related to our purchase of copper used in the manufacture of our products. We purchase most of our raw materials at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating raw material prices. Our raw material price risk is mitigated because we generally pass changes in raw material costs to our customers.

 

We did not have any commodity price derivatives or hedging arrangements outstanding at September 30, 2012 and did not employ any commodity price derivatives in the first three quarters of 2012.

 

28
 

 

Foreign Exchange Risk

 

While our reporting currency is the USD, a significant portion of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Furthermore, a significant portion of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between USD and RMB . If the RMB depreciates against the USD, the value of our RMB revenues, earnings and assets as expressed in our USD financial statements will decline. Assets and liabilities of the group entities with functional currencies other than USD are translated into USD using the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. A 1% average appreciation (depreciation) of the RMB against the USD would increase (decrease) our comprehensive income by $4.0 million based on our revenues, costs and expenses, assets and liabilities denominated in RMB as of September 30, 2012. As of September 30, 2012, our accumulated foreign currency translation gain as part of accumulated other comprehensive income amounted to $54,596,273 and our foreign currency translation gain recognized in other comprehensive income in the third quarter of 2012 and the first three quarters of 2012 was $4,237,345 and $501,680, respectively. We do not intend to enter into any hedging transactions in an effort to reduce our exposure to foreign exchange risk in the future. The value of the RMB against the USD and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. Since July 2005, the RMB has not been pegged to the USD. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the USD in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Credit Risk

 

We have not experienced significant credit risk, as most of our customers are long-term customers with good payment records. We review our accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate at each quarter-end. We typically only extend 30 to 90 day trade credit to our largest customers that tend to be well-established and large businesses, although we do on occasion extend credit beyond 90 days when we believe a particular contract to be of important strategic interest. We have rarely seen accounts receivable uncollected beyond contract terms and have experienced minimal write-off of accounts receivable in the past.

 

Inflation Risk

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of total revenues if the selling prices of our products do not increase with these increased costs.

 

Item 4. Controls and Procedures

 

 (a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our co-Chief Executive Officers (“CEOs”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our co-CEOs and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our co-CEOs and CFO concluded that as of the date of this evaluation, our disclosure controls and procedures were effective.

 

(b) Changes in internal controls.

 

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

29
 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no further material developments in legal proceedings in which we are a party during the three months ended September 30, 2012.

 

Item 1A. Risk Factors

 

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 have not materially changed.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

30
 

 

Item 6.  Exhibits

 

Exhibit

No.

  Document Description
     
31.1   Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
     
101   Interactive Data Files

 

31
 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  FUSHI COPPERWELD, INC.
     
Date: November 9, 2012 By:   /s/ Craig H. Studwell
  Name: Craig H. Studwell
 

Title: Chief Financial Officer

(Principal Accounting and Financial Officer)

 

32
 

 

Exhibit Index

 

Exhibit

No.

  Document Description
     
31.1   Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

 

33