The Daily China Business Stock for 06/17/2008 is FSIN
Fushi Copperweld, Inc. is the global leader in developing, designing, manufacturing, marketing, and distributing bimetallic wire products, principally copper-clad aluminum and copper-clad steel. Our products are primarily focused on serving end-user applications in the telecommunication, utility, and automotive markets. We add value through innovative design and engineering, excellence in manufacturing, superior product quality, and follow-on customer service.
We were incorporated as a Nevada company on October 6, 1982 under the name M, Inc. We changed our corporate name to Parallel Technologies, Inc. in June 1991. We were formed as a "blank check" entity for the purpose of seeking a merger, acquisition or other business combination transaction with a privately-owned entity seeking to become a publicly-owned entity. In a series of restructuring transactions which began in 2005 and were completed in 2006 (the â€śRestructuringâ€ť), we acquired Fushi Holdings, Inc., incorporated in the state of Delaware, which is a holding company for Fushi International (Dalian) Bimetallic Cable Co., Ltd(â€śFushi International (Dalian)â€ť), organized under the laws of the Peopleâ€™s Republic of China (PRC). As a result of the restructuring transactions, Fushi International (Dalian) acquired substantially all of the manufacturing assets and business and controls the remaining assets and financial affairs of Dalian Fushi Bimetallic Manufacturing Co., Ltd (â€śDalian Fushiâ€ť). Dalian Fushi is a limited liability company organized under the laws of the PRC, which is engaged in the manufacture and sale of bimetallic wire products. Following the restructuring, Dalian Fushi became a non-operating entity. The Restructuring is more fully described in our Current Report on Form 8-K filed with the SEC on December 14, 2005.
On September 25, 2007 Fushi International entered a LL Membership Interest Purchase Agreement (the â€śPurchase Agreementâ€ť) to acquire Copperweld Holdings, LLC, a limited liability company incorporated in the state of North Carolina and the sole member of Copperweld Bimetallics, LLC, a limited liability company incorporated in the state of Delaware (â€śCopperweldâ€ť) and all of the issued and outstanding membership interest of International Manufacturing Equipment Suppliers, LLC (â€śIMESâ€ť). Copperweld is the parent company of Copperweld Bimetallics UK, LLC, a limited liability company registered in the United Kingdom and Copperweld International Holdings, LLC, a limited liability company incorporated in the state of North Carolina. We closed on the purchase agreement as of the beginning of business on October 29, 2007 with all of the Copperweld entities and IMES becoming subsidiaries of Fushi International Inc.
Effective January 15, 2008, we changed our name from Fushi International, Inc. to Fushi Copperweld, Inc. to recognize the worldwide importance of the Copperweld brand while continuing to leverage the Fushi brand, especially in the PRC. We, and our customers, view the Copperweld brand as the premium brand of bimetallic products and will promote the Copperweld brand as a premier product, worldwide.
Our Corporate Structure
The following diagram shows the structure of our company from an operating perspective after giving effect to the Restructuring and our acquisition of Copperweld. The structure does not include Copperweld Holdings LLC, Copperweld International Holdings, LLC or International Manufacturing Equipment Sales, Inc. which we plan to dissolve. The top management functions reside at the Fushi Copperweld level with executive management, operations management, sales management and financial management functioning at this level. The PRC manufacturing, while managed at the corporate level, functions through Fushi Holdings, Fushi International (Dalian) and Dalian Fushi. The US and United Kingdom manufacturing occurs through Copperweld and report to an executive at the Fushi Copperweld level.
The functions of each location are clearly defined with information reporting occurring for each entity. To facilitate management of the various operations, we plan to employ an Enterprise Resource Planning (ERP) system and a Manufacturing Execution System (MES) as one integrated information and management system. The system is in use in Fayetteville and we are in the process of implementing the system in Dalian. Once fully installed, the system will provide management with information that will allow us to further improve efficiencies of our operations through more effective management of our resources.
Prior to the acquisition of Copperweld, we engaged, solely through our wholly owned operating subsidiary Fushi International (Dalian), in developing, designing, manufacturing, marketing and distributing bimetallic wire products, principally copper-clad aluminum wires (â€śCCAâ€ť). Through our Dalian facility operated by Fushi International (Dalian) we service the Asia-Pacific region, primarily the PRC market which constituted approximately two-thirds of our sales in fiscal year 2007 on a pro forma basis. Through our CCA products, we believe that we are the leading PRC provider of bimetallic wire in terms of quality, capacity, and products sold. We view the PRC as the fastest growing market for bimetallic wire worldwide and we expect to see our strong growth within the PRC continue due to organic expansion of our PRC business using Dalian legacy equipment and as a result of our October 29, 2007 acquisition of Copperweld. Additionally, we anticipate expanded product offering and higher quality from the incorporation of superior cladding technology and our planned transfer of higher capacity machinery from Copperweld to our Dalian facility. We expect to deploy the new, higher quality CCA production capacity in Dalian by the second quarter of 2008 and expect CCS production capacity to be fully operational by the end of 2008.
Within the PRC, Telecommunication applications currently serve as the largest market for bimetallic wire. We expect demand to remain strong and for this market to continue its strong growth patterns. Our expectation is based on our belief that the PRCâ€™s leading telecom providers will continue to see strong growth of broadband and mobile subscribers, which is a key driver for investment into telecommunication infrastructure. According to data on the websites of China Telecom and China Netcom, the two largest broadband providers within the PRC accounting for over 80% combined market share, reported growth in their subscriber base in fourth quarter of 2007 of approximately 6% and annual subscriber base growth of 28% for 2007. Furthermore, since the PRC has lower penetration levels for broadband and mobile subscribers than developed countries in North America and Europe we believe the PRCâ€™s telecommunication carriers will maintain their strong demand for infrastructure build out in 2008.
During fiscal year 2007, through development of a bimetallic flat wire product for use in electrical transformers, we have begun to expand our sales into the utility industry. CCA flat wire offers greater value than copper wire because of its reduced cost, improved bond, and weight while it maintains conductivity standards needed by utility companies. We believe that our proprietary process for making flat wire will continue to open this additional market for us. The addition of Copperweldâ€™s cladding technology expected in the second quarter of 2008 should enable us to produce larger diameter flat wire products for the PRC market, further expanding our product offerings.
We believe that the utility market for bimetallics in the PRC is underdeveloped relative to other markets worldwide and could serve as an area of significant growth for our Dalian facility. Our expectation is based on the response by the two largest power grid operators, State Grid Corporation (SGCC) and China Southern Grid (SGC), to widespread blackouts and power shortages experienced in the PRC between 2002 and 2005. According to strategy laid out by SGCC and SGC for the Eleventh Five Year Plan, they plan to spend RMB 1,200 billion in total transmission and distribution (â€śT&Dâ€ť) capital expenditures over a five year time period beginning in 2007. Additionally, as we expand our product offering from our Dalian facility to include CCS in late 2008, we expect to expand into additional markets for our utility applications. For example, we view CCS as an ideal substitute to copper for use in grounding and electrified railway applications due its lower cost and superior strength.
Copperweld operates two manufacturing facilities in Fayetteville, Tennessee and Telford, England. Through these facilities we are engaged in developing, designing, manufacturing, marketing and distributing bimetallic products, principally CCA and CCS. We believe that through our operations at these two facilities our Copperweld subsidiary is the leading provider of bimetallic wire in the North American and European markets.
Copperweldâ€™s Fayetteville plant will continue to produce CCA and CCS for the growing demand in the Americas, European, Middle Eastern and African markets where we believe demand from telecommunications companies will remain stable. We expect to see increased growth in the automotive, utility and consumer goods markets in North America and Europe.
Since 2006, Copperweld has sold to customers who provide aftermarket products to the automotive industry. Copperweld will continue to test its products with Tier 1 suppliers to the auto industry. The high price of copper combined with reduced weight in automobiles has created opportunities that we expect to capitalize on in 2008. We have added additional product capabilities to our Fayetteville facility in anticipation of demand and to further our ability to provide products to end-users for automotive applications. The new equipment will allow us to draw CCA to smaller diameters and new bunching equipment will allow us to provide bulk cable for wiring harnesses in automobiles.
Similarly, our planned addition of stranding equipment in Fayetteville will provide our Copperweld subsidiary with the ability to provide additional products to the utility market, a market where Copperweld is the dominant supplier of CCS. The additional stranding equipment will bring us closer to the customer and reduce delivery times as we bring in-house value-added product enhancements.
The consumer goods market is driven by the high price of copper and not by any demonstrated advantages of bimetallic technology. Copperweld is working with several suppliers to appliance manufacturers and with United Laboratories to gain product approvals. We believe the price of copper will continue to provide customers with an economic incentive to convert from copper to CCA. The addition of drawing and bunching equipment will provide Copperweld with the ability to provide bulk cable to the white goods market.
We expect demand for bimetallic wire with diameters of less than 0.25 mm to continue to increase worldwide. We plan to supply smaller diameter wire from our Dalian facility which is better equipped to produce this product cost effectively because it is a more labor intensive product. As we further integrate the combined Company, we also expect to shift supply from Copperweldâ€™s customers located in the Asia-Pacific geographic region to our Dalian facility to provide more efficient service and delivery.
During December 2007, we purchased additional equipment for our Fayetteville plant that will enable us to expand our finishing capabilities of our products. We expect this capacity to be in production by the end of the second quarter 2008. We anticipate the equipment to add increased value to our products and immediately improve margins seen at our Fayetteville plant by removing third party processors from between us and our end-user customers.
Our Telford facility provides manufacturing, sales and service to our European customers. The facility has drawing and stranding equipment that produces bimetallic products for the telephony segment of the telecommunications market. Telford also has extrusion capabilities and supplies markets outside of telecom. In both cases, the CCA and CCS originates primarily from Fayetteville and is imported and finished to customer specifications. Telfordâ€™s finishing capabilities are unique to the company and provide higher value added products.
We are engaged in the manufacture and sale of bimetallic wire, principally copper-clad aluminum (â€śCCAâ€ť) and copper-clad steel (â€śCCSâ€ť). CCA and CCS are bimetallic products that have a copper strip formed around and bonded to a solid core of aluminum or steel.
CCA combines the conductivity and corrosion resistance of copper with the light weight and relatively low cost of aluminum. In many applications, it is more robust than an aluminum conductor. Easy to handle and install, CCA is widely used in applications requiring the conductivity of copper while retaining the light weight advantages of aluminum. Because television and networks have high frequency transmission signals and the high frequency signals are transmitted on the surface layer of a wire, CCA is an ideal inner conductor for trunk and distribution cables for the cable TV industry and for cables used in the cellular phone industry.
Our copper-clad steel (CCS) is an ideal substitute for solid copper, and is recognized around the world through its trademarked name, CopperweldÂ®. CopperweldÂ® combines the strength of steel with the conductivity of copper, offering increased strength in comparison to solid copper. The signal carrying capability of copper combined with the high resistance of steel, which decreases feedback and thus enhances signal quality, makes CCS the center conductor of choice in telecommunications. CCS is widely used in utility applications and has been introduced into automotive applications. CopperweldÂ® is available in a variety of sizes, conductivities and strengths to meet the requirements of the most demanding customer. Our CCS delivers outstanding reliability and value relative to solid copper.
Prior to the acquisition of Copperweld, we engaged in business primarily in the PRC through manufacture and sale of CCA at our facility in Dalian, PRC. Acquiring Copperweld should allow us to incorporate superior proprietary technology and higher production capacity machinery for CCA by second quarter 2008 and CCS by the end of 2008 into our Dalian facility. Furthermore, the Copperweld acquisition has allowed for expansion and entrance into the worldwide bimetallic market with the addition of CCA and CCS manufacturing facilities in Fayetteville, Tennessee and Telford, England.
Our copper-clad products offer superior value compared to copper and are increasingly utilized as customers look to offset the rising cost of solid copper. The applications base for CCA and CCS as substitutes and/or improvements over solid copper are expanding to an ever-growing variety of end-user applications on a worldwide basis. Products manufactured by our facilities are typically used in the following products:
Telecommunications products â€“ Due primarily to the signal carrying capabilities of copper at the surface of the center conductor, bimetallic wire is the standard for telecommunication applications. The primary products in this grouping include coaxial cables for CATV, trunk and distribution cables, cables for the cellular industry and telephony drop cable. We believe that we are the leading supplier of bimetallic wire for telecommunication cables in the Asia-Pacific, the Americas and Europe.
Utility products â€“ Our CCA and CCS products are used for grounding applications and in power cables, electrified railways, transformer windings and tracer wire. We produce single end, three wire, seven wire and 19 wire strand constructions and hybrid cables that utilize a combination of CCA, CCS and copper wires that are used in these products.
Automotive products â€“ O ur CCA and CCS wires are used in wiring harnesses for automobiles, trucks, motorcycles, commercial off road equipment and trailers. We also provide bimetallic wire for aftermarket applications such as booster cables. Automotive wiring harnesses include a variety of energy or control signal applications.
The Bimetallic Industry
We operate in the bimetallic wire manufacturing industry. We sell both directly to end-user manufacturers of our product and distributors typically within the wire and cable industry who in turn use bimetallic wire in products for sale into the Telecommunication, Utility, and Automotive markets. The bimetallic wire industry can be characterized as fast-growing on a worldwide basis and increasingly competitive, specifically in China where there is considerable fragmentation. A significant barrier to entry into this industry is technology, specifically in respect to cladding technologies. Cladding processes are typically proprietary in nature and have a direct impact on quality of the product, which is largely dependent on the characteristics of the bond between the differing metals. For many product offerings, there is significant differentiation among industry participants from a manufacturing, technological and quality standpoint.
Copper wires have historically been the dominant product for use in the wire and cable manufacturing industry due to its electrical conductivity and corrosion resistance; however, due to the rising costs of copper and demand for greater value products, end-user manufacturers in the industry have increasingly pursued and considered alternative technologies such as bimetallics. Relative to traditional copper wires, we believe that bimetallic wires offer greater value to end-users through its lower weight, theft deterrence and lower prices while still retaining the corrosion resistance and conductivity needs of the end-user. Because of the benefits of bimetallic wire, we believe there are substantial opportunities to capture increased market share in applications that have historically been largely dominated by traditional copper wire. As the leading bimetallic manufacturing in cladding technologies and quality, and increased capacity abilities, we believe we are well position to capitalize on the growing bimetallic demand worldwide.
The bimetallic wire industry is raw materials intensive with copper, aluminum and steel comprising the major cost components for products. Changes in the cost of raw materials are generally passed through to the customer, although there can be timing delays of varying lengths depending on the volatility in metal prices, the type of product, and competitive conditions.
Manufacturing copper-clad products involves bonding copper strip to an aluminum or steel core, drawing the clad product to a finished diameter and heat treating as necessary depending upon the customerâ€™s specifications. We use proprietary technologies developed in Dalian and Fayetteville. We also own the worldwide rights to other technologies. These proprietary technologies allow us to produce superior copper-clad products compared to other producers. The Copperweld acquisition has allowed us to share technology between our manufacturing locations. We have and will continue to integrate our technologies and equipment so we can better serve our customers from the location that permits us to deliver our products most efficiently to our customers. Our technology base allows us to produce superior products, our combined research and development department supports continuing development and the geographical spread of our manufacturing locations improves our ability to provide superior service to our international customer base.
Research and Development
We have combined our Research and Development Departments under a single manager to improve efficiencies and improve our coordination between facilities. We will continue to increase our R&D capacity and resources. In the fiscal years ended December 31, 2007, 2006 and 2005, we spent $154,127, $195,058 and $65,000 respectively, on research and development. We are dedicated to improving our current products and to developing new technologies and products that will improve the performance and capabilities of bimetallic materials. Because of our research and development ("R&D") initiatives in Dalian, we are recognized by the Dalian Municipal Government as a "new- and high-technology" enterprise and have been receiving governmental funding or subsidies for our operations and R&D activities. Complementary to our internal product research and development is outside research from Chinaâ€™s scientific research institutions. We have cooperated closely with various scientific research institutions to advance development of new products and production methods. We have on-going relationships with Tsinghua University, North East University of China and Dalian Institute of Technology. Recently, we have formed strategic partnership with the Optical and Electronic Cable Association of China to establish a joint research and development center to further enhance our technology leadership in the industry. Furthermore, in November 2007, we were appointed to the Copper-Clad Aluminum Executive Standards committee by the National Standardization Administration of China. As part of the Copper-Clad Aluminum Executive Committee, we will assist in drafting Chinaâ€™s first-ever nationwide standards for copper-clad aluminum wire.
Our quality control begins with our ordering process because we believe that to produce quality products we must use high quality raw materials. We provide our suppliers with our required specifications that apply to each category of raw material that we use. When the raw materials arrive, our quality inspectors inspect each shipment for critical factors. During the manufacturing process, every employee has the responsibility and authority to identify non-conforming material or any material that shows manufacturing imperfections. Inspectors test our products during and after the manufacturing processes.
In our final inspection process, we complete additional testing to insure the customer receives what he has ordered. Additional testing in our laboratories includes breaking load, elongation, torsions, conductivity and the uniformity of the copper surface depending on the product and the individual customerâ€™s requirements. We follow ISO guidelines in our process and in maintaining our testing equipment.
We typically warrant all of our products and provide replacement or credit to our customers who are not satisfied with our products for a period of one year from the date of shipment. When we receive an indication that a product did not perform as expected, our quality control specialist and laboratory personnel test the product to determine if our process was correct for the specifications submitted by the customer and if the manufacturing process was completed as planned. If we failed to produce the product according to the customerâ€™s specifications or if the manufacturing process was flawed, we provide immediate credit to the customer. If we produced the product to the customerâ€™s specifications and if the manufacturing process was not flawed, we send a team to the customerâ€™s facilities to see if we can assist the customer in correcting its process. Typically a team consists of at least one engineer, at least one experienced production person and the customerâ€™s sales representative. If the product was manufactured to the proper specifications, our team works with the customer in developing corrective action to solve their problem.
We have not established reserve funds for potential customer claims because, historically, we have not experienced significant customer complaints about our products and none of our customers have requested damages for any loss incurred due to product quality problems. We believe that our customer support teams, our quality assurance and manufacturing monitoring procedures will continue to keep claims at a level that does not support a need for a reserve. We review customer returns on a monthly basis and may establish a reserve fund as we expand our business by volume and products. If we were to experience a significant increase in warranty claims, our financial results could be adversely affected.
Raw Materials and Suppliers
Our principal raw materials consist of copper, steel and aluminum rod. Other materials including packaging and shipping materials, lubricants and replacement parts for the equipment represent a relatively small part of our costs. Copper, steel and aluminum are available in the market and we have not experienced shortages. We are constantly reviewing sources for raw materials so that we do not expect shortages of these materials as we expand our business. During 2007, the largest raw material by weight was aluminum where, on a pro forma basis, Fushi and Copperweld purchased 17,917 metric tons of aluminum at an average cost of $2,481 per ton. Copper was second by volume at 7,809 tons at an average price of $8,016 per ton followed closely by steel at 7,104 tons with an average price of $946 per ton.
We have continued to significantly diversify our sources of supply. During 2006, two suppliers accounted for 41% of our raw material supply. During 2007, our five top suppliers provided 38.6% of our raw materials. Our acquisition of Copperweld made additional suppliers in different parts of the world available to us so we believe that we will continue to reduce our dependence on only a few suppliers in future periods.
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 pass changes in raw material costs to our customers. When we determine that purchase contracts with our primary suppliers are beneficial to us in order to maintain supplies of raw materials, we typically specify the quantity of raw material purchases for the following 6 to 12 months, based on our projected manufacturing output determined by the purchase orders we receive and from projections of expected sales provided by our global sales group. The raw materials are delivered in installments based on our order flow throughout the period. See "Risk Factors - Risks Related to Our Business- We depend on a few suppliers for a significant portion of our principal raw materials and we do not have any long-term supply contracts with our raw materials suppliers. Interruptions of production at our key suppliers may affect our results of operations and financial performance."
In addition to these short-term purchase contracts, we also purchase from our primary suppliers or other suppliers to satisfy additional raw materials needs from additional orders we did not previously project. Due to fluctuating world wide supply and demand for our principal raw materials, we cannot guarantee that necessary materials will continue to be procured at the prices currently available or that are acceptable to our customers. However, prices adversely affecting the supply and prices of our raw materials have an equal or greater adverse effect on producers of alternatives to our bimetallic products. We maintain multiple suppliers for each type of raw material that we use and monitor the availability of additional suppliers so that we have access to sufficient raw material sources necessary to meet customer demand. Notwithstanding our supply availability practices, we do not have a guarantee that raw material availability will meet our demands. To the extent that our suppliers are not able to provide raw materials in sufficient quantity and quality on a timely and cost-efficient basis, our results of operations could be adversely impacted until we find other qualified suppliers.
Payment terms vary with each supplier. Some suppliers require payment prior to shipment, others offer varying terms from three to 30 days following shipment. Demand for raw material in the PRC often requires that we prepay for our raw materials. Price is often affected by our payment terms; therefore, we typically agree to shorter terms in exchange for reduced pricing for our raw materials. See â€śRisk Factors- Risks Related to Our Business- Increases in raw materials prices will increase our need for working capital.â€ť
Our products' target markets are manufacturers of finished wire, cable products and other products using conductive materials. In most cases, our customers incorporate our products into end-products that they subsequently supply to their customers. The products we manufacture are used by these end-product makers as standard components, materials or parts that are built to their specifications. Therefore, our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used. Our technical and sales staff frequently provides technical and sales support to our customers.
We have a large customer base, with approximately 300 customers in 30 countries around the world. The geographic dispersion and large number of customers provide a diverse base of revenue sources that we believe provide additional insulation to slowing economic conditions in selected regions. As a result of our large and diverse customer base our largest customers account for an increasingly smaller, but healthy, percentage of net sales compared to past fiscal years. Our top 5 customers represented 24.6% and 28.9% of our net sales during the fiscal years ended December 31, 2007 and 2006, respectively on a pro forma basis. Times Fiber is the only customer that represents over 10% of the Copperweldâ€™s 2007 sales, as well as on a pro-forma basis for the Company. Further, we anticipate that our overall customer composition and the concentration of our top customers will change as we expand our business and shift our product portfolio to higher-margin products; however, we can give no assurance that this will be the case.
Mr. Li Fu was appointed our Chairman and CEO on December 13, 2005. Mr. Fu is a founder of Dalian Fushi and has been the Executive Director of Dalian Fushi since he founded the company in 2001. Prior to founding Dalian Fushi and focusing his time on Dalian Fushi's management and operations, Mr. Fu had founded and managed Dalian Fushi Enterprise Group Co., Ltd., a holding company owning various subsidiaries in the hotel, process control instrumentation, international trade, automobile maintenance and education businesses. Mr. Fu graduated from PLA University of Science and Technology with a degree in Engineering.
Mr. Wenbing Christopher Wang has served as our Chief Financial Officer since December 13, 2005 and on January 21, 2008 was appointed as our President and director. Mr. Wang has served as Chief Financial Officer of Dalian Fushi since March 2005. Mr. Wang served as an Executive Vice President of Redwood Capital, Inc. from November 2004 to March 2005, with specific focus on providing strategic and financial advisory services to China based clients seeking access to the U.S. capital markets. Mr. Wang previously served as Assistant VP of Portfolio Management at China Century Investment Corporation from October 2002 to September 2004. Mr. Wang began his investment banking career at Credit Suisse First Boston (HK) Ltd in 2001. From 1999 to 2000, Mr. Wang worked for VCChina as Management Analyst. Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance and Corporate Accounting from Simon Business School of University of Rochester.
Barry Raeburn was appointed director of our Company on June 15, 2007, is the chairman of our audit committee and is a member of our compensation committee. Mr. Raeburn holds considerable expertise in international business operations with a specific focus on equity finance, corporate finance, mergers and acquisitions, and corporate risk management. From November 2007 through the present, Barry Raeburn is Chief Financial Officer and Chief Operating Officer of LS2, Inc. a government services contractor based in Reston VA. Mr. Raeburn is currently a member of the board of directors of China Green Agriculture, Inc. From September 2005 to October 2007, Mr. Raeburn was Executive Vice President of Finance and Corporate Development for Harbin Electric, a developer and manufacturer of customized linear motors and other special electric motors based in China. During his tenure at Harbin Electric as Head of U.S Operations, he led the company in their successful upgrade listing to the NASDAQ Stock Exchange, assisted in various M&A evaluations, and provided key leadership in the areas of finance, accounting, investor and public relations, SEC compliance, corporate governance, and administration. Mr. Raeburn has extensive experience in global public equity markets. From to April 2003 to September 2005, Mr. Raeburn worked as a specialty technology analyst an investment bank covering early stage companies within multiple industries. Mr. Raeburn also spent the prior 6 years at a multi-billion dollar investment advisory firm as a financial analyst responsible for developing various quantitative ranking models and analyzing equity investments. His previous experience also includes forecasting and analysis of major macro economic activity. Mr. Raeburn graduated in 1996 with his BBA degree in Finance and Risk Management from Temple University.
Mr. Feng Bai was appointed director of our Company on June 15, 2007, is a member of our audit committee and is chairman of our compensation committee. He founded Lighthouse Consulting Ltd. in Hong Kong in February 2003 and has been its Managing Director since then. Mr. Bai has been active in advising foreign corporations to invest and setup joint ventures in the PRC. Since 1999, Mr. Bai has been doing business in China mainly in consulting, investment and distribution. From 1997 to 1999, Mr. Bai was employed by the investment banking division of Banco Santander, focusing on clients and transactions in Asia. Mr. Bai received his M.B.A. degree from Harvard Business School in 1997 and graduated from Babson College in 1993 with a B.S. in Finance/Investment and International Business Administration. Mr. Bai presently also sits on the board of Harbin Electric, Inc.
Mr. Jiping Hua was appointed director of our Company on June 15, 2007 and is a member of our audit and compensation committees. Mr. Hue has been Chairman of China Optical & Electrical Cable Association since 2000 and is a preeminent expert in the wire and cable industry of Peopleâ€™s Republic of China. He brings to Fushi Copperweld over 40 years of experience focused on the research and development of special cable and new materials applications. He was one of the major authors of the widely used textbook, â€śInformation Transmission Line and Applicationsâ€ť. Over the years, Mr. Hua has been awarded the prestigious title of â€śExpert with Outstanding Contributionsâ€ť by the Ministry of Electrical Industry of China and has been the recipient of National Special Allowance to Outstanding Scientists from the Chinese government. Mr. Hua was also a member of the 10 th Shanghai Peopleâ€™s Congress, former President of the 23 rd Research Institute of Electronics Industry, Fellow of the China Institute of Electronics (CIE), Senior Member of the Institute of Electrical and Electronics Engineers (IEEE) and Director of the Shanghai Science & Technology Veterans Association. Mr. Hua graduated from the Shanghai Jiao Tong University in 1962 with a BS in Electrical Engineering.
Mr. John Francis Perkowski was appointed director of our Company on May 21, 2008. Mr. Perkowski is the Chairman and Chief Executive Officer of ASIMCO Technologies Limited, one of the premier automotive component companies in the PRC which he founded in February 2004. ASIMCO operates 17 manufacturing facilities in the PRC and has 52 sales offices throughout the country as well as regional offices in Detroit, Michigan, Tokyo, Japan and the United Kingdom. He also brings to Fushi Copperweld over 30 years of investment banking experience having held the positions of Managing Director at Paine Webber Inc., Partner of Kluge, Subotnick and Perkowski, Inc., an investment partnership in the United States and Principal of Pacific Alliance Group, a hedge fund investing in Asia. He is the author of â€śManaging the Dragon: How Iâ€™m Building a Billion Dollar Business in China,â€ť a sought after speaker on business in the PRC and author of numerous articles on the subject of the PRC and doing business in the PRC. Mr. Perkowski received an MBA from Harvard Universityâ€™s Graduate School of Business Administration, graduating with highest distinction and named a Baker Scholar. He graduated from Yale University, cum laude, where he was the recipient of the Gordon Brown Memorial Prize and was a starting player for the varsity football team.
MANAGEMENT DISCUSSION FROM LATEST 10K
Since our founding in 2002, we have grown to be the leading manufacturer of bimetallic products in the world. Today, we serve approximately 300 customers in 30 countries from our facilities in Dalian, Fayetteville and Telford. Historically, our principal product has been Copper-Clad Aluminum, or CCA, which combines the conductivity and corrosion resistance of copper with the light weight and relatively low cost of aluminum. On October 29, of 2007, we completed the acquisition of Copperweld Bimetallics, LLC (Copperweld) with manufacturing operations in Fayetteville, Tennessee USA and Telford, England. Having a long history as the international leader in the worldwide market, particularly outside of the PRC, Copperweld sold to 193 customers in 30 countries on five continents during 2007. The Fayetteville facility produces both CCA and Copper-Clad Steel, or CCS which combines the conductivity of copper with the strength of steel. Now, we not only produce both CCA and CCS, Fushi Copperweld has a worldwide presence that combines Fushiâ€™s recognition in China with the worldwide recognition of the Copperweld brand. As a result, we are now the leading producer of bimetallic wire products in the world.
Normally using 70% less copper than conventional copper wire, but offering materially the same utility and functionality, our CCA products provide a superior value compared to solid copper wire in a wide variety of applications such as, distribution lines for telecommunication networks, cables for the wireless industry, automotive and consumer products, video and data applications, electrical power cables, wire components for electronic devices, building wire, as well as other industrial wires. CCS combines the functionality of copper with the strength of steel to provide a higher value, stronger alternative to solid copper for use in coaxial drop cable for cable television, utility applications including ground cables and tracer wire, automotive wiring harness and other applications requiring specific levels of conductivity and higher levels of tensile strength. Copperweld CCS is synonymous with copper-clad steel and is registered as CopperweldÂ®. Traditionally the telecom industry has been the primary user of bimetallic products for the combined companies; however, the utility, automotive and consumer goods are market sectors providing strong demand for copper-clad products. Both CCA and CCS products are available in a large variety of sizes, conductivities and strengths for the different applications of customer inquiries. CCA and CopperweldÂ® deliver outstanding reliability, performance and value compared to solid copper.
The high price of copper over recent years has shifted demand to higher value products such as CCA and CCS. The volatility of copper is the primary cause of cost variations in our products. Although an increase in the price of copper may serve to reduce our gross margins as a percentage of net sales and a decline in copper prices will increase our gross margin as a percentage of net sales, changes in raw material costs do not materially affect our earnings per share. Because as is typical in the industry, we pass the dollar amount of changes to our customers rather than the percentage changes in our raw material costs; therefore, the impact on earnings per share from volatile raw material prices is minimal.
The price of copper impacts our operations in two significant ways.
First, copper is one of the principal raw materials used in manufacturing our product. Beginning in mid-2005, copper prices began trending upward. The upward trend continued during the first quarter of 2006 until a slight downturn during November and December. The trend for 2007 was similar to the previous year although the average Comex price was $7,103 per metric ton compared to $6,811 during 2006. When the prices of raw materials increase, we pass those increases through to our customers. Conversely, when raw material prices decline, we pass those declines through to our customers as well. The practice of passing changes in raw material costs to our customers is not a perfect hedge against fluctuating prices, but it allows us to protect our net margin as measured by net income or by earnings per share since our sales prices are determined at the time the sales order is received. In Dalian we regularly make advance payments to our suppliers to lock in copper supplies with the side benefit of locking in prices when copper prices are increasing. At December 31, 2007, we had outstanding advances to raw material suppliers of $2.3 million. In Fayetteville, some suppliers of copper cathode require us to pay for the shipments at the cathode stage even though the copper must be further processed which locks in the cost of our future supply. In neither location are we attempting to forecast the cost of copper or other raw materials, nor are we attempting to hedge the changing costs of raw materials.
The second way that the price of copper influences our operations is that our product is used as a viable substitute for copper. Historically, when there is a large differential between the price of copper and aluminum, demand for our product increases. When the differential narrows, demand for our product may moderate. However, cost is not the only factor affecting the demand for our copper-clad products. Our expanding markets such as automotive and utility have factors driving their demand for bimetallic products other than cost. Our products advantages over copper including lower weight, greater strength and lower susceptibility to theft, among other factors. So, while price is a factor, price alone does not drive our business.
The preceding chart reflects the trend in copper based on average monthly Comex prices. Copper prices began trending upward during the third quarter of 2005 and continued rather sharply through the second quarter of 2006. The average Comex copper prices declined during the fourth quarter of 2006 but remained above 2005 highs. Prices for 2007 followed the 2006 trend except the average monthly costs accelerated more rapidly during the first quarter and did not decline as low in the fourth quarter. The 2007 average Comex price for copper increased over the 2006 Comex average by approximately $292 per ton and exceeds the 2005 Comex average by $3,394 per ton. The average price per ton paid for copper during the 2007 year was $7,893 in Dalian and $8,175 in Fayetteville. As discussed previously, we do not attempt to hedge the costs of copper, but rather pass the changes in the price through to our customers.
The two other major components in our products are aluminum and steel. Aluminum has increased over 2005 levels by approximately $628 per ton but compared to copper has been stable. The following chart, based on Comex average monthly prices, shows an increase during the last quarter of 2006 which continued through April of 2007 when average aluminum prices began to decline ending 2007 close to 2005 levels. Based on monthly averages, the average price for aluminum declined by about $7 per ton during 2007. During the 2007 year, the average cost for aluminum paid by the Dalian facility was $2,285 per ton and by Fayetteville was $3,391 per ton. As with copper, we do not attempt to predict future prices for aluminum, but rather cover our risk by passing changes in the costs of aluminum to our customers.
The cost of steel varies by the type steel that is used for the various applications. The average cost of steel used by the Fayetteville facility over the past three years shows two factors compared to copper and to a lesser extent, to aluminum. First, the average cost of steel was less than one-half the cost of aluminum and was between one-eighth and one-fifth the cost of copper, during 2007. The average price paid by Fayetteville for steel increased $73 per ton between 2005 and 2007 with $26 of the increase occurring between 2006 and 2007. Consequently, changes in the price of steel have not been a major factor affecting the cost of our products to our customers. Our Dalian facility has not been a large consumer of steel because we have primarily produced CCA. We expect to begin production of CCS in Dalian during late 2008.
With respect to the overall business trend in 2008 and forward, we anticipate sales growth to continue to be aggressive and broadly based, principally due to consolidating our marketing and sales operations, the continuing demand for our products in the PRC and the influence of the Copperweld name throughout the world. We have the resources, technology, working capital and capacity to meet growing market demands. We are now strategically located so that we can serve the worldâ€™s demand for bimetallic products.
Results of Operations
Year ended December 31, 2007 compared to year ended December 31, 2006
The following table shows, for the periods indicated, information derived from our consolidated statements of income.
Net sales were $128.2 million in 2007 including sales from Fayetteville and Telford facilities for the period October 29 through the end of the period, compared to $67.6 million in 2006. Of the 89.7% sales growth in the fiscal year ended December 31, 2007, 74.8% was due to organic growth and 14.8% was attributable to sales from Fayetteville and Telford for November and December of 2007. The 74.8% organic growth was primarily driven by a 7.4% increase in the average selling price of product sold and 62.6% increase in the volume of bimetallic products sold. The increase in average selling price in 2007 was primarily due to the increase in raw material prices, particularly copper prices, and the increased sales volume primarily reflects expanded production capacity as a result of our capital investment.
Capacity in Transit: CCA 12,000 M Tons and CCS 10,000 M Tons
At December 31, 2007, we had combined production capacity for CCA of 41,000 metric tons and CCS capacity of 20,000 metric tons. We had an addition 12,000 metric tons of CCA capacity and 10,000 of CCS capacity in transit to Dalian. We expect to have the additional CCA capacity installed in Dalian by the first quarter of 2009 and the CCS capacity installed by the end of 2008. The average price of CCA produced in Dalian and sold primarily in the PRC was $6,209 per ton while the average price of CCA produced in Fayetteville and shipped to over thirty countries was $7,126 per ton. CCS produced in Fayetteville sold for an average of $4,041 during 2007. Both Dalian and Fayetteville sell a variety of CCA products and the price for each variety may vary based on the amount of manufacturing required and the ratio of copper to aluminum. Dalian did not sell a significant amount of CCS during 2007. The average selling price of CCS sold by Fayetteville was $4,041 per ton with the price varying by product type primarily based on the amount of copper (conductivity) in the product and the amount of manufacturing required. Sales referred to as Fayetteville include the sales from Telford also. (The average prices listed for Fayetteville represent an average for the entire year even though we acquired Fayetteville during the fourth quarter 2007. We did not produce sufficient quantities of CCS in Dalian to provide a meaningful comparison.)
We significantly expanded and diversified our customer base in 2007 both through our acquisition of Copperweld and through organic growth. Our five largest customers accounted for 24.6% of total sales in 2007, down from 29% in 2006 and 41% in 2005. Times Fiber is the only customer that represents over 10% of the Copperweldâ€™s full year sales in 2007, as well as on a pro-forma basis for the Company, accounting for 10.8% of our combined sales in 2007. In fact, our ten largest customers in 2007 accounted for only 37.75% of net sales, on a pro forma basis including full year sales for Fayetteville facility. We believe this increased diversification significantly limits our market risk and gives us a stronger base on which to expand. We further believe our overall customer composition and the concentration of our top customers will change as we expand our business and seek to shift our product sales portfolio to higher margin products. However, the loss of, or significant reduction in orders from any of our largest customers may have a material adverse impact on our financial condition and operating results. We are continuing to expand and consolidate the direction of our combined sales and marketing group in order to focus our resources towards diversification of our customer base, product mix and geographic presence to mitigate customer concentration risk. Our objective is to focus on expanding our existing business relationships by offering a wider range of products and building new sales relationships throughout the world with our expanded sales organization.
Our manufacturing activities are determined and scheduled upon both firm orders and projected sales information gathered by our sales personnel from direct contact with our customers. Customers typically submit purchase orders seven to thirty days prior to the requested delivery date. However, depending on the product and the available equipment run schedules, the lead time can be as short as three days. The sales price is determined at the time of purchase based on a formula or a unit price for each product. In either case, the purchase price is a function of the market price of our raw materials at the time of purchase, subject to adjustment at the time of delivery. For some customers, we adjust our prices based on the cost of raw materials for the previous month.
Geographically, a substantial portion of our customers served by our Dalian sales force is based in the PRC. Some of our customers are US based corporations that have established subsidiaries operating inside the PRC. Several of these corporations were former customers of our Fayetteville facility but now place orders through their subsidiaries located in the PRC. We categorize these orders as domestic orders. On the other hand, most of our customers served by our Fayetteville and Telford based sales group are located in the Americas, Europe, Africa, Asia, excluding the PRC and the Middle East. We are transferring all of our Asian customers to our PRC based sales group in order to provide more efficient customer service. As a result, we anticipate that most of our net sales will continue to be derived from sales to our Asian customers. During the fourth quarter of 2007, we provided additional resources to our Fayetteville operation that will allow it to expand our penetration of the Eastern European, African, Middle East and Americas markets. Combined, we expect our sales growth to continue worldwide because of our working capital base, our combined sales force, our production capacity and our commitment to innovative research and development of our existing products and for developing new products.
Cost of Goods Sold
Cost of goods sold increased to $85.8 million in 2007, from $42.8 million in 2006. As measured by percentage of net sales, our cost of goods sold was 66.9% in 2007 compared with 63.3% in 2006. Cost of goods sold principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, shipping and handling costs, and other fixed costs associated with the manufacturing process . The increase in Cost of Goods Sold as a percentage of net sales was principally due to the cost of adding capacity in Dalian and labor and overhead costs in Fayetteville that historically have been greater than in Dalian.
Copper, aluminum and steel are the primary raw materials we use in the manufacture of our products. In 2007, we purchased over 7,809 tons of copper, 17,917 tons of aluminum, and 7,104 tons of steel, including Fayettevilleâ€™s purchases for the full year. Raw material costs accounted for 76.68% of total costs for Fayetteville and 92.73% for Dalian in 2007. Other variable costs included manufacturing labor, maintenance, shipping and handling, and utility expenses. Depreciation and overhead costs as a percentage of COGS were 5.39% in 2007. The manufacturing related depreciation for 2007 was $769,983.
We also significantly diversified our sources of supply. In Dalian we have historically relied on two key suppliers for the procurement of copper strip and aluminum. These two suppliers combined to account for approximately 41% of our total raw material purchases during the fiscal years prior to 2007. During 2007, four suppliers provided 43.0% of our raw material for us. With the addition of Fayetteville and Telford, we will increase the number of raw material suppliers further spreading our supply risk over a larger number of suppliers. We will continue our strategy of expanding our sources of supply to overcome supply and price issues that can develop with only one or two suppliers, particularly for copper.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Net sales increased 155.5% for the quarter ended March 31, 2008 compared to the comparable quarter of the previous year. Approximately one-third of the increase resulted from the Copperweld acquisition in October of 2007. The balance of the increase is primarily due to an increase in volume at the Dalian facility from 3,408 metric tons to 5,771 metric tons, representing a 69.4% growth. Gross profit increased $7.05 million or 91.7% quarter over quarter. Net income increased by $2.6 million or 52.2% for the quarter ended March 31 2008 compared to the same quarter in 2007. The gross margin declined from 36.4% to 27.3% from the first quarter of 2007 to the same quarter this year due primarily to lower margins contributed by the Fayetteville and Telford facilities. Basic earnings per share was $0.28 and on a fully diluted basis was $0.26.
Our financial condition continues to improve as shown by an increase of 17.8% in shareholdersâ€™ equity during the first quarter of 2008. Cash decreased 1.7% during the quarter and our accounts receivable increased by 45.6% as a result of increased sales volume. Property, plant and equipment increased by 8.9% during the quarter ended March 31, 2008 compared to the prior year end. Short term debt increased by 61.1% as a result of an increase in short term borrowings. Long term debt declined by 25.0% because the holder of $20.0 million in our convertible notes converted $15.0 million of such notes during the first quarter of 2008.
Net sales were $54.0 million during the first quarter of 2008 compared to $21.1 million during the first quarter of 2007. Of the 155.5% in sales growth in the quarter ended March 31, 2008, Fayetteville and Telford contributed $18.0 million or 33.4% of first quarter sales based on net revenue. Dalian increased net revenue by 70.2% based on net revenue for the quarter ended March 31, 2008 compared to the same quarter in 2007. The increase in Dalianâ€™s net revenue was based on increased volumes. The majority of the increase quarter over quarter resulted from increased volumes coming from the addition of Fayetteville and Telford, including sales from CCS that we had not had prior to the current quarter.
We are continuing to expand our markets beyond telecom, which historically has been the major user of our products, both in Dalian and Fayetteville. Telecom represented 71.9% of sales for the quarter that ended at March 31, 2007, but dropped to 62.9% at the end of the first quarter of 2008 while the actual volume increased by 145.2% comparing the two quarters. We anticipate that telecom will continue to maintain current or expanded volumes but our goal is to expand into other markets as well. The addition of Telford and Fayetteville has provided additional sales opportunities in the utility area. We believe that automotive, while comparatively small at present, joins the utility market as a potential market for future growth.
At March 31, 2008, we had combined annual production capacity for CCA of 48,600 metric tons and CCS capacity of 20,000 metric tons on an annual basis. We expect to have additional CCA capacity installed in Dalian during the first quarter of 2009. Nexans confirmed our order for a new cladding line on March 18, 2008 and we made the deposit on the line on April 22, 2008 with delivery and installation expected in early 2009. The decision to purchase a new clad line versus refurbishing an existing line was made on the basis of costs. The estimated cost to refurbish a line from Fayetteville was approximately the same as purchasing a new machine. We plan to have additional CCS capacity installed by the end of 2008 if sales projections for CCS in the Asian markets warrant expansion. For the first quarter of 2008, the average price of CCA produced in Dalian and sold primarily in the PRC was $6,137 per ton while the average price of CCA produced in Fayetteville was $6,443 per ton. CCS produced in Fayetteville sold for an average of $3,968. Both Dalian and Fayetteville sell a variety of CCA products and the price for each variety may vary based on the amount of manufacturing required and the ratio of copper to aluminum. Dalian did not sell a significant amount of CCS during the first quarter of 2008. As with CCA, the average selling price of CCS varies by product type primarily based on the amount of copper in the product and the amount of manufacturing required. Sales referred to as Fayetteville include the sales from Telford also.
We continued to expand and diversify our customer base during the first quarter of 2008. Our five largest customers accounted for 19.9% of sales during the first quarter of 2008, down from 32.6% for the first quarter of 2007. No single customer represented more than 5.0% of net sales during the most recent quarter. During the same quarter last year, we had a customer that represented 11.0% of net sales. Our ten largest customers accounted for 32.3% of net sales during the first quarter of 2008 compared to 55.9% during the first quarter of 2007. We believe this increased diversification significantly limits our market risk and gives us a stronger base on which to expand. We further believe our overall customer composition and the concentration of our top customers will continue to change as we expand our business and seek to shift our product sales portfolio to higher margin products. However, the loss of, or significant reduction in orders from any of our largest customers may have a material adverse impact on our financial condition and operating results. We are continuing to expand and consolidate the direction of our combined sales and marketing group in order to focus our resources on diversification of our customer base, product mix and geographic presence to mitigate customer concentration risk. Our objective is to focus on expanding our existing business relationships by offering a wider range of products and building new sales relationships throughout the world with our expanded sales organization.
Our manufacturing activities are determined and scheduled upon both firm orders and projected sales information gathered by our sales personnel from direct contact with our customers. Customers typically submit purchase orders seven to thirty days prior to the requested delivery date. However, depending on the product and the available equipment run schedules, the lead time can be as short as three days. The sales price is determined at the time of purchase based on a formula or a unit price for each product. In either case, the purchase price is a function of the market price of our raw materials at the time of purchase, subject to adjustment at the time of delivery for many of our customers. For some customers, we adjust our prices based on the cost of raw materials for the previous month rather that prices at the time of shipment.
Geographically, a substantial portion of our customers served by our Dalian sales force is based in the PRC. Some of our customers are US based corporations that have established subsidiaries operating inside the PRC. Several of these corporations were former customers of our Fayetteville facility but now place orders through their subsidiaries located in the PRC. We categorize these orders as domestic orders within the PRC. On the other hand, most of our customers served by our Fayetteville and Telford based sales group are located in the Americas, Europe, Africa, Asia, excluding the PRC and the Middle East. We are transferring our Asian customers to our PRC based sales group in order to provide more efficient customer service. As a result, we anticipate that most of our net sales will continue to be derived from sales to our Asian customers. We anticipate that our sales growth can continue worldwide because of our working capital base, our combined sales force, our production capacity and our commitment to innovative research and development of our existing products and for developing new products.
Cost of goods sold increased to $39.3 million during the first quarter ending March 31, 2008, from $13.5 million first quarter of 2007. As measured as a percentage of net revenue, cost of goods sold for the first quarter of 2008 was 72.7% compared to 63.6% for the same quarter of 2007. The increase results from a higher ratio of cost of goods sold to net sales in Fayetteville and Telford. Cost of goods sold principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, shipping and handling costs, and other fixed costs associated with the manufacturing process. The increase in Cost of Goods Sold as a percentage of net sales was principally due to the cost of adding capacity in Dalian and labor and overhead costs in Fayetteville that historically have been greater than in Dalian.
Copper, aluminum and steel are the primary raw materials we use to manufacture our products. During the first quarter of 2008, we purchased over 3,094 tons of copper, 7,128 tons of aluminum and 2,267 tons of steel. Raw material costs accounted for 86.7% of total cost of goods sold during the first quarter of 2008 and 93.1% for the first quarter of 2007. Other variable costs included manufacturing labor, maintenance, shipping and handling, and utility expenses. Cost of goods sold excluding raw material costs as a percentage of cost of good sold was 13.7% for the quarter ended March 2008 and was 6.9% for the first quarter of 2007. The major change in cost of goods sold excluding raw materials, occurred in labor and overhead. As a percentage of net sales, manufacturing labor increased by 3.5% and manufacturing overhead increased by 7.6% comparing the quarter ending March 2007 and the quarter that ended with March 2008. The increase is reflective of the higher labor and overhead costs in Fayetteville and Telford.
We also significantly diversified our sources of supply. In Dalian, we have historically relied on two key suppliers for the procurement of copper strip and aluminum. These two suppliers combined to account for approximately 58.8% of our total raw material purchases during the quarter ended March 31, 2007. Our two largest suppliers accounted for 34.3% of our raw material purchases during the first quarter of 2008.