Attached files

file filename
EX-31.2 - Fushi Copperweld, Inc.v221469_ex31-2.htm
EX-32.1 - Fushi Copperweld, Inc.v221469_ex32-1.htm
EX-31.1 - Fushi Copperweld, Inc.v221469_ex31-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

o QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011

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
organization)
 (I.R.S. Employer Identification No.)   
 
TYG Center Tower B, Suite 2601,
Dong San Huan Bei Lu Bing 2,
Beijing, PRC 100027
 
(Address of principal executive offices) (Zip Code)

(+1) 931.433.0460
(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 o   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 ¨   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 o Non-accelerated filer (Do not check if a smaller reporting company) o   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 o No o

As of May 4, 2011, the registrant had 38,203,638 shares of common stock outstanding.

 
 

 

TABLE OF CONTENTS
 
PAGE
PART I. FINANCIAL INFORMATION
 
     
Item 1. Financial Statements
3
     
 
Fushi Copperweld, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets
3
 
   
 
Fushi Copperweld, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Income and Other Comprehensive Income
4
     
 
Fushi Copperweld, Inc. and Subsidiaries Unaudited Condensed Statements of Cash Flows
5
     
 
Notes to the Unaudited Condensed Financial Statements
6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
20
   
Item 4. Controls and Procedures
21
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
21
     
Item 1A. Risk Factors
21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
21
     
Item 3. Defaults Upon Senior Securities
21
   
Item 4. Other Information
21
     
Item 5. Exhibits
21
     
Signatures
22

 
2

 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

   
March 31,
   
December 31,
 
   
2011
   
2010
 
     
USD
     
USD
 
ASSETS
               
Current assets:
   
  
     
  
 
Cash
   
134,438,395
     
123,000,338
 
Accounts receivable, net of allowance for doubtful accounts
   
63,238,073
     
65,765,722
 
Inventories
   
18,624,451
     
16,143,922
 
Advances to suppliers
   
13,279,119
     
15,022,976
 
Prepaid expenses and other current assets
   
909,681
     
743,206
 
Total current assets
   
230,489,719
     
220,676,164
 
                 
Property, plant and equipment, net
   
121,766,952
     
124,177,512
 
Intangible assets
   
510,318
     
577,587
 
Land use rights
   
13,095,516
     
13,089,733
 
Deposits for land use rights
   
9,698,760
     
9,623,181
 
Goodwill
   
1,741,697
     
1,669,789
 
Other non-current assets
   
584,053
     
443,397
 
Total assets
   
377,887,015
     
370,257,363
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
   
  
         
Current portion of long-term bank loan
   
650,000
     
650,000
 
Accounts payable
   
5,039,350
     
3,241,428
 
Accrued expenses and other current liabilities
   
11,215,401
     
15,542,111
 
Total current liabilities
   
16,904,751
     
19,433,539
 
Long-term bank loan
   
5,525,000
     
5,687,500
 
Deferred income tax liabilities
   
671,091
     
669,540
 
Other non-current liabilities
   
41,190
     
65,057
 
Total liabilities
   
23,142,032
     
25,855,636
 
                 
Shareholders’ equity:
           
  
 
Common stock, $0.006 par value, 100,000,000 shares authorized; 38,203,638 and 38,099,138 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively
   
229,223
     
228,596
 
Additional paid-in capital
   
168,457,599
     
167,596,792
 
Retained earnings
   
147,289,125
     
140,462,840
 
Accumulated other comprehensive income
   
38,769,036
     
36,113,499
 
Total shareholders’ equity
   
354,744,983
     
344,401,727
 
Commitments and contingencies
               
Total liabilities and shareholders’ equity
   
377,887,015
     
370,257,363
 
 
See accompanying notes to unaudited condensed consolidated financial statements

 
3

 

FUSHI COPPERWELD, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 
   
Three-Month Period Ended March 31,
 
   
2011
   
2010
 
   
USD
   
USD
 
             
Revenues
    65,925,866       59,549,842  
Cost of revenues
    48,777,114       41,728,576  
Gross profit
    17,148,752       17,821,266  
                 
Operating expense:
               
Selling expenses
    1,149,524       1,251,962  
General and administrative expenses
    5,515,123       3,722,550  
Total operating expenses
    6,664,647       4,974,512  
                 
Income from operations
    10,484,105       12,846,754  
                 
Other income (expense):
               
Interest income
    228,854       192,790  
Interest expense
    (98,094 )     (508,482 )
Gain on cross-currency interest swap derivative
    -       128,861  
Loss on extinguishment of HY Notes
    -       (2,395,778 )
Other expense, net
    (354,892 )     (141,072 )
Total other expense
    (224,132 )     (2,723,681 )
                 
Income before income taxes
    10,259,973       10,123,073  
Income tax expense
    (3,433,688 )     (1,050,534 )
                 
Net income
    6,826,285       9,072,539  
                 
Other comprehensive income:
               
Foreign currency translation adjustment, net of nil income taxes
    2,655,537       (124,739 )
Comprehensive income
    9,481,822       8,947,800  
                 
Earnings per share:
               
Basic
    0.18       0.26  
Diluted
    0.18       0.26  
                 
See accompanying notes to unaudited condensed consolidated financial statements

 
4

 

FUSHI COPPERWELD, INC.  AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Three-Month Period Ended March 31,
 
   
2011
   
2010
 
   
USD
   
USD
 
Cash flows from operating activities:
           
Net cash provided by operating activities
    15,013,956       6,680,019  
                 
Cash flows from investing activities:
               
Payment for acquisition of Jinchuan
    -       (5,075,000 )
Purchases of property, plant and equipment
    (282,486 )     (1,262,493 )
Cash acquired from acquisition of Jinchuan
    -       859,243  
Net cash used in investing activities
    (282,486 )     (5,478,250 )
                 
Cash flows from financing activities:
               
Payment for acquisition of  Jinchuan
    (4,819,107 )     -  
Repayment on revolving line of credit
    -       (4,033,783 )
Repayment on bank loan
    (162,500 )     -  
Repayment of notes payable
    -       (35,600,000 )
Proceeds from issuance of common stock and warrants
    622,275       59,800,050  
Transaction costs paid in connection with issuance of common stock
    -       (3,438,550 )
Net cash provided by (used in) financing activities
    (4,359,332 )     16,727,717  
                 
Effect of foreign currency exchange rate changes on cash
    1,065,919       8,891  
Net increase in cash
    11,438,057       17,938,377  
                 
Cash at beginning of period
    123,000,338       60,597,849  
                 
Cash at end of period
    134,438,395       78,536,226  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
    98,595       1,395,799  
Income taxes paid
    2,572,995       1,802,931  
Accrual for the acquisition of Jinchuan
    -       4,819,107  

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 concentration 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 (‘‘SEC’’). The condensed consolidated balance sheet as of December 31, 2010 was derived from the audited consolidated financial statements of Fushi Copperweld, Inc. (“Fushi”) and subsidiaries (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, 2010, and the related consolidated statements of income and other comprehensive income, shareholders’ equity and cash flows for the year then ended.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of March 31, 2011, and the results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010, 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 expense, 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 concentration and risks

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

   
Three-Month Period Ended March 31,
 
   
2011
   
2010
 
   
USD
   
%
   
USD
   
%
 
                         
PRC
    50,279,987       76 %     45,693,565       76 %
US
    11,148,647       17 %     10,024,017       17 %
Other countries
    4,497,232       7 %     3,832,260       7 %
Total
    65,925,866       100 %     59,549,842       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.

The Company purchases raw materials from a limited number of suppliers. In the aggregate, five major suppliers provided approximately 53% and 73% of the Company’s raw materials for the three-month periods ended March 31, 2011 and 2010, 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.

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 equity ownership interest in Dalian Fushi Bimetallic Manufacturing Co., Ltd. (“Dalian Fushi”), which holds the title to an office building and land use rights in Dalian on behalf of the Company. Dalian Fushi has had no operations since 2006. 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 “Restructuring Agreements”) among Fushi International (Dalian) Bimetallic Cable Co., Ltd. (“Fushi International”), Dalian Fushi and its shareholders, Fushi, through Fushi International, is able to (i) direct the activities of Dalian Fushi that most significantly impact its economic performance; and (ii) absorb losses and receive benefits from Dalian Fushi that could potentially be significant to it. As a result, in accordance with Accounting Standards Update (“ASU”) 2009-17 issued by the Financial Accounting Standards Board (“FASB”), the Company is considered to be the primary beneficiary of Dalian Fushi and the financial statements of Dalian Fushi are consolidated in the Company’s consolidated financial statements.

 
6

 

Total assets, primarily an office building and land use rights, and total liabilities, including accrued expenses and other current liabilities, of Dalian Fushi as of March 31, 2011 amounted to USD 51,464,517 and USD 210,674, respectively, and revenues and net loss of Dalian Fushi for the three-month period ended March 31, 2011 amounted to nil and USD 795,178 respectively, were included in the accompanying consolidated financial statements as of and for the three months ended March 31, 2011.

Note–3 - Accounts receivable

Accounts receivable consist of the following:

   
March 31,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Trade receivables
    63,781,207       66,304,625  
Allowance for doubtful accounts
    (543,134 )     (538,903 )
Accounts receivable, net
    63,238,073       65,765,722  

Note–4 - Inventories

Inventories consist of the following:

   
March 31,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Raw materials
    9,270,318       7,916,853  
Work in progress
    4,308,397       3,089,533  
Finished goods
    5,045,736       5,137,536  
Total inventories
    18,624,451       16,143,922  
 
Note–5 – Property, plant and equipment

Property, plant and equipment consist of the following:

   
March 31,
2011
   
December 31,
2010
 
   
USD
   
USD
 
                 
Plant and buildings
    64,550,714       64,213,601  
Machinery and equipment
    89,370,582       88,747,928  
Office equipment and furniture
    1,545,532       1,531,608  
Motor vehicles
    4,572,814       4,537,499  
Construction in progress
    3,661,549       3,493,726  
Total property, plant and equipment
    163,701,191       162,524,362  
Less accumulated depreciation
    (41,934,239 )     (38,346,850 )
Property, plant and equipment, net
    121,766,952       124,177,512  

Depreciation expense was USD 3,278,677 and USD 2,727,425 for the three-month periods ended March 31, 2011 and 2010, respectively.
 
 
7

 
 
Note 6 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:
 
   
Note
 
March 31,
2011
   
December 31,
2010
 
       
USD
   
USD
 
                 
Accrued payroll
        2,674,381       2,100,461  
Income tax payable
        3,460,492       2,599,717  
Value-added-tax payable
        807,048       1,862,864  
Accrual for the acquisition of Jinchuan
        -       5,075,000  
Others
 
(a)
    4,273,480       3,904,069  
Total accrued expenses and other current liabilities
        11,215,401       15,542,111  
 
(a) Others mainly represent accrued interest and professional expenses.

Note 7 - Bank Loans

Bank loans consist of the following:

Name of lender
 
March 31,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Regions Bank term loan – current portion
    650,000       650,000  
Regions Bank term loan – noncurrent portion
    5,525,000       5,687,500  
Total bank loans
    6,175,000       6,337,500  

Principal payments on the outstanding bank loan as of March 31, 2011 are as follows:

December 31,
 
Amount
 
   
USD
 
       
April 1, 2011 to December 31, 2011
    487,500  
2012
    650,000  
2013
    650,000  
2014
    650,000  
2015
    650,000  
2016
    650,000  
Beyond 2016
    2,437,500  
         
Total
    6,175,000  

Pursuant to the loan agreement, the Regions Bank has the right to demand all of the outstanding balance due in August 2013 unless the Company could renew the loan before then.
 
Note 8 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

   
Three-Month Period Ended 
March 31,
 
   
2011
   
2010
 
   
USD
   
USD
 
Numerator:
           
Net income for basic and diluted earnings per share
    6,826,285       9,072,539  
                 
Denominator:
               
Denominator for basic earnings per share-
               
Weighted average number of common stock outstanding
    38,151,832       34,673,692  
Warrants
    18,369       326,534  
Stock options
    140,717       222,788  
Nonvested shares
    77,467       86,833  
Denominator for diluted earnings per share
    38,388,385       35,309,847  
Earnings per share
               
Basic
    0.18       0.26  
Diluted
    0.18       0.26  

 
8

 

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods ended March 31, 2011 and 2010, because their effects are anti-dilutive:

   
Three-Month Period Ended 
March 31,
 
   
2011
   
2010
 
                 
Shares issuable upon exercise of share options
   
983,000
     
697,333
 
Shares issuable upon exercise of warrants
   
100,000
     
100,000
 

 Note 9 – Income Tax

Fushi International’s 50% tax holiday expired by the end of 2010 which changed its applicable tax rate from 12.5% for 2010 to 25% from 2011 onwards.  The effective income tax rates for the three-month periods ended March 31, 2011 and 2010 were 33% and 10%, respectively.  The effective income tax rate for the three-month period ended March 31, 2011 differs 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 losses.

As of March 31, 2011 and December 31, 2010, full valuation allowances of USD 20,937,062 and USD 20,010,349 were provided against the deferred income tax assets arising from tax loss carryforwards and deductible temporary differences of the entities which were in cumulative losses.

As of and for the three-month period ended March 31, 2011, 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 10 - Warrants

A summary of the warrant activities for the three-month period ended March 31, 2011 is as follows:

   
Number of
Warrants
Outstanding
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Life
 
         
USD
   
Years
 
                   
Outstanding as of December 31, 2010
    200,000       11.44       0.47  
Exercised
    (100,000 )                
Outstanding as of March 31, 2011
    100,000       16.8       0.72  
 
For the three-month period ended March 31, 2011, 100,000 warrants were exercised at an exercise price of USD 6.00 per share. The Company received USD 600,000 in cash.

Note 11– Share based compensation
 
Nonvested shares
 
On March 17, 2011, the Board of Directors approved the grant of 48,000 nonvested shares to certain employees, of which 12.5% vest at the end of each quarter from the date of grant over eight quarters.

 
9

 

A summary of the nonvested shares activity for the three-month period ended March 31, 2011 is as follows:

   
Number of
Nonvested
Shares
   
Weighted
Average Grant
Date Fair 
Value
 
         
USD
 
             
Outstanding as of December 31, 2010
    70,000       8.74  
Granted
    48,000       8.09  
Outstanding as of March 31, 2011
    118,000       8.47  
 
The Company recognized USD 34,600 and USD 109,778 compensation expense for nonvested shares in general and administrative expenses for the three-month periods ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, there was USD 965,205 of total unrecognized compensation cost related to nonvested shares, which is to be recognized over a weighted average period of 1.87 years.

Stock options
 
On March 17, 2011, the Board of Directors approved the grant of options to purchase an aggregate of 48,000 shares of common stock to certain employees at an exercise price of USD 8.09 per share with a contractual term of three years after vesting. The options vest 1/3 at the end of each one-year anniversary from the date of grant over 3 years.

On March 28, 2011, the Board of Directors approved the grant of options to purchase an aggregate of 6,000 shares of common stock to one employee at an exercise price of USD 8.83 per share with a contractual term of three years after vesting. The options vest 1/3 at the end of each one-year anniversary from the date of grant over 3 years.

The weighted average option fair value of USD 3.32 per share or an aggregate of USD 179,260 on the date of grant during the three-month period ended March 31, 2011 were determined based on the Black-Scholes option pricing model, using the following assumptions:

Expected volatility
60%
Expected dividend yield
0%
Expected term (years)
3 years
Risk-free interest rate (per annum)
1.02%-1.29%
Fair value of underlying common stock (per share)
USD 8.09-8.83
 
The expected volatility was based on historical volatility of the Company’s common stock.

A summary of stock option activities for the three-month period ended March 31, 2011 is as follows:

   
Number of
Options
Outstanding
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining
Contractual Life
   
Aggregate
Intrinsic Value
 
         
USD
   
Years
   
USD
 
                         
Outstanding as of December 31, 2010
    1,299,333       11.29              
Grant
    54,000       8.17              
Forfeited
    (413 )     8.61              
Exercised
    (4,500 )     4.95              
Expired
    (28,050 )     11.5              
Outstanding as of March 31, 2011
    1,320,370       11.18       4.01       678,357  
Exercisable as of March 31, 2011
    902,185       12.01       1.78       663,957  

The Company recognized USD 139,652 and USD 83,279 of compensation expense for stock options in general and administrative expenses for the three-month periods ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, there was USD 1,671,880 of total unrecognized compensation cost related to stock options, which is to be recognized over a weighted average period of 3.57 years.

 
10

 

Note 12 - Commitments and contingencies

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 and his affiliates in a going private transaction for $11.50 per share in cash, subject to certain conditions (the “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 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. No decisions have been made by the Special Committee with respect to the Company’s response to the proposal.

Shareholder class action complaints have been filed against Fushi and certain officers and directors in connection with the Fu Proposal in Nevada. 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 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 Fu Proposal is unfair. The Company has reviewed the allegations and believes, after consultation with the legal counsel, that they are without merit. In accordance with ASC Topic 450, no loss contingency was accrued as of March 31, 2011 since it is not probable that a liability has been incurred and the amount of loss cannot be reasonably estimated.

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

Note 13 - Segment Information

The segment information is as follows:
   
Three–Month Period Ended March 31, 2011
 
   
PRC
   
US
   
Total
 
   
USD
   
USD
   
USD
 
                   
Revenues from external customers
    51,291,699       14,634,167       65,925,866  
Intersegment revenues
    691,310       -       691,310  
Segment operating income
    12,290,092       527,896       12,817,988  

   
Three–Month Period Ended March 31, 2010
 
   
PRC
   
US
   
Total
 
   
USD
   
USD
   
USD
 
                   
Revenues from external customers
    46,243,754       13,306,088       59,549,842  
Intersegment revenues
    1,120,948       -       1,120,948  
Segment operating income
    13,379,273       470,190       13,849,463  

Reconciliation of segment operating income to consolidated income before income taxes is as follows:
 
   
Three-Month Period Ended March 31,
 
   
2011
   
2010
 
   
USD
   
USD
 
             
Total segment operating income
    12,817,988       13,849,463  
Corporate operating expenses
    (2,333,883 )     (1,002,709 )
Interest income
    228,854       192,790  
Interest expense
    (98,094 )     (508,482 )
Gain on cross-currency interest swap derivative
    -       128,861  
Loss on extinguishment of HY Notes
    -       (2,395,778 )
Other expense, net
    (354,892 )     (141,072 )
Consolidated income before income taxes
    10,259,973       10,123,073  
 
Note 14 – Reclassification

Certain items in the prior period’s unaudited condensed consolidated statement of income and other comprehensive income have been combined to conform to the current period presentation. These reclassifications had no effect on net income as previously reported.

Furthermore, with respect to the unaudited condensed consolidated statement of cash flows, cash flows relating to the cross-currency interest swap derivative was reclassified from investing activity to operating activity, resulting in a decrease in cash used in investing activity of USD 1,190,368 and a decrease in cash provided by operating activity of the corresponding amount for the three-month period ended March 31, 2010.
 
Note 15 – Subsequent Events
 
On May 6, 2011, a shareholder class action complaint was 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, June 30, 2010 and September 30, 2010.  The action is pending in the United States District Court for the Southern District of New York, and is captioned as follows:  Brian Levy, on behalf of himself and all others similarly situated v. Fushi Copperweld, Inc., Li Fu, Wenbing Christopher Wang, Beihong Linda Zhang, and Joseph J. Longever, Case No. 1:11-CV-03104-PGG.
 
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 plaintiff's allegations are without merit and intends to defend the litigation vigorously.
 

 
11

 

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 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.
 
The "Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi Copperweld, Inc., (ii) Fushi Holdings, Inc., (iii) Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Dalian Jinchuan Power Cable Co., Ltd. (“Jinchuan”); (v) Dalian Fushi Bimetallic Wire Manufacturing, Co., Ltd. (“Dalian Fushi”), (vi) Shanghai Hongtai Industrial Co., Ltd (“Hongtai”), (vii) Fushi International (Jiangsu) Bimetallic Cable Co., Ltd (“Fushi International (Jiangsu)”), (viii) Copperweld Holdings, LLC, (ix) Copperweld Bimetallic, LLC (“Copperweld”) and (x) Copperweld Bimetallics UK, LLC. U nless the context otherwise requires, all references to (i)  “PRC” and “China” are to the People’s Republic of China; (ii) “US dollar,” “$”, “USD” and “US$” are to United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

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 first quarter of 2011, our products were sold to over 222 customers in 27 countries. We market our products under the trademarked names of “Copperweld®” and “Fushi TM ,” and sell primarily to cable manufacturers and to a less 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, starting with the second fiscal quarter of 2009, we began to 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), and Telford, England, (UK) facilities. We have combined our US and UK operations as one segment since the UK operating company is a subsidiary of the US operating company and its 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 and UK 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 into new machinery and research and development that will improve the performance and capabilities of our bimetallic products and allow us to enter new markets;

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

 
12

 

 
·
Protecting and enhancing the Fushi Copperweld brand; and 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, compared to solid copper 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 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 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.

Highlights for the three months ended March 31, 2011 include:

 
·
Revenues increased by 10.7% from $59.5 million in the first quarter of 2010 to $65.9 million;

 
·
Organic revenues growth of 7.6%, excluding the contribution from the acquisition of Dalian Jinchuan;

 
·
Net cash provided by operating activities of $15.0 million, up 124% from $6.7 million in the first quarter of 2010; and

 
13

 

 
·
A strong cash position of $134.4 million at the end of first quarter of 2011.

Current Business Environment and Outlook for the remainder of 2011

The bimetallic conductor industry is a subset of the broader wire and cable industry, which consumed approximately 14,585,000 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.

In addition to these macro-level trends, the Company is presented with tremendous 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 Asian markets on the benefits of CCS for the telecommunication, utilities, and transportation market in anticipation of large-scale production of 8,200 MT of annual CCS capacity at our Dalian facility in the third quarter of fiscal year 2011. 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, economies of scale generated, 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 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
       
   
March 31,
   
March 31,
   
Change
 
   
2011
   
2010
   
%
 
                   
Revenues
    65.9       59.5       10.7 %
Gross profit
    17.1       17.8       -3.9 %
Selling, general and administrative expenses
    6.7       5.0       34.0 %
Income from operations
    10.5       12.8       18.0 %
Income before income taxes
    10.3       10.1       2.0 %
Income tax expense
    (3.4 )     (1.1     209.1 %
Net income
    6.8       9.1       -25.3 %

 
14

 

Three Months Ended March 31, 2011 compared to three months ended March 31, 2010:

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 March 31,
             
   
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in
amount
   
Change in
%
 
PRC
 
$
51.3
     
77.8
%
 
$
46.2
     
77.6
%
 
$
5.1
     
11.0
%
US
   
14.6
     
22.2
%
   
13.3
     
22.4
%
   
1.3
     
9.8
%
Total revenues
 
$
65.9
     
100.0
%
 
$
59.5
     
100.0
%
 
$
6.4
     
10.7
%

(in MTs, except 
 
Metric Tons Sold
             
percentage
 
Three Months Ended March 31,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in 
%
 
PRC *
    6,732       74.8 %     6,669       73.3 %     63       0.9 %
US
    2,265       25.2 %     2,431       26.7 %     -166       -6.8 %
Total sales volume
    8,997       100.0 %     9,100       100.0 %     -103       -1.1 %

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

Revenues were $65.9 million in the first quarter of 2011, an increase of $6.4 million, or 10.7%, compared to $59.5 million in the same period of last year, which was primarily driven by higher average selling prices primarily due to increased copper prices, and inclusion of Jinchuan operation for the full quarter. The increase of revenues excluding the effect of the acquisition of Jinchuan in the current quarter was 7.6%, compared with the same quarter of 2010.

The PRC segment experienced an increase of 11.0% in revenues in the first quarter of 2011, which is primarily due to a 5.8% increase in average selling prices of copper-clad products as a result of higher copper costs and a 0.9% increase in quantities sold. The increase of revenues is also due to the inclusion of Jinchuan operation for the full quarter, which contributed $6.5 million in revenues in the first quarter of 2011, compared with $4.3 million in revenues from February 5, 2010 (date of acquisition) to March 31, 2010.
 
The US segment experienced an increase of 9.8% in revenues in the first quarter of 2011 compared to that of 2010. The increase is primarily due to an 18.0% increase in average selling price of copper-clad product as a result of higher copper costs but partially offset by a 6.8% decrease in quantities sold. We expect to see continued strengthening of global demand in markets serviced by operations within our US segment in 2011 and believe that global demand will continue to increase. 
 
 
15

 
      
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 March 31,
             
percentage)
 
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in
amount
   
Change in
%
 
Telecommunication
 
$
24.3
     
36.9
%
 
$
25.1
     
42.2
%
 
-0.8
     
-3.2
%
Utility
   
38.6
     
58.5
%
   
29.5
     
49.6
%
   
9.1
     
30.8
%
Transportation
   
1.1
     
1.7
%
   
0.6
     
1.0
%
   
0.5
     
83.3
%
Other
   
1.9
     
2.9
%
   
4.3
     
7.2
%
   
-2.4
     
-55.8
%
Total revenues
 
$
65.9
     
100.0
%
 
$
59.5
     
100.0
%
 
 $
6.4
     
10.7
%
 
 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 March 31,
             
percentage
 
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Telecommunication
   
3,717
     
41.3
%
   
4,351
     
47.8
%
   
-634
     
-14.6
%
Utility *
   
4,720
     
52.5
%
   
3,703
     
40.7
%
   
1,017
     
27.5
%
Transportation
   
136
     
1.5
%
   
74
     
0.8
%
   
62
     
83.8
%
Other
   
424
     
4.7
%
   
972
     
10.7
%
   
-548
     
-56.4
%
Total sales volume
   
8,997
     
100.0
%
   
9,100
     
100.0
%
   
-103
     
-1.1
%

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

In the first quarter of 2011, our sales to the telecommunication markets decreased by 634 metric tons, or 14.6%, compared to the same period of 2010, which was primarily due to a slowdown in the 3G build out in the PRC.
 
Our sales to utility markets increased by 1,017 metric tons, or 27.5%, in the first quarter of 2011 compared to the first quarter of 2010, primarily due to strong demand in the PRC. As the 3G build out in China has slowed we have continued to see a shift in our customer mix towards utility customers, specifically in China, where we have been able to capture within regional markets where customers are more focused on price, particularly in light of higher copper prices. The 30.8% increase in revenues generated from utility sales was primarily attributable to (i) higher average selling prices as a result of higher copper prices, (ii) higher volumes, and (iii) inclusion of Jinchuan operations for the full quarter which contributed $6.5 million in the first quarter of 2011. The acquisition of Jinchuan allows us to process our products further downstream and provides a strategic expansion into the utility market sub-segment. 

Capacity and Output

The following table summarizes installed cladding capacities and metric ton sold by products in the first quarter of 2011:

   
Three Months Ended March 31, 2011
 
   
PRC
   
US
 
   
Capacity
(MT)
   
Total
Volume
(MT)
   
Capacity
(MT)
   
Total
Volume
(MT)
 
CCA
   
10,000
     
6,589
     
3,100
     
783
 
CCS
   
2,050
     
31
     
4,075
     
1,446
 
Total
   
12,050
     
6,620
     
7,175
     
2,229
 
 
We successfully installed 8,200 MT of CCS cladding capacity at our Dalian facility of the PRC segment in 2010. This additional capacity is targeted for the telecommunications, electric utilities and transportation industries in Asia where we believe have significant demand for CCS. We are currently working with our customers to increase demand for CCS at our Dalian facility to further accelerate our growth and believe we will begin to realize increased revenue from CCS products within our PRC segment in fiscal year 2011.
 
16

 
 
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 March 31,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
MT
 
CCA
   
7,371
     
81.9
%
   
7,330
     
80.5
%
   
41
     
0.6
%
CCS
   
1,477
     
16.4
%
   
1,619
     
17.8
%
   
-142
     
-8.8
%
Others
   
149
     
1.7
%
   
151
     
1.7
%
   
-2
     
-1.3
%
Total sales volume *
   
8,997
     
100.0
%
   
9,100
     
100.0
%
   
-103
     
-1.1
%
 
* 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 0.8%, or 52 metric tons in the first quarter of 2011 compared to the same period of 2010 due to stronger sales to utility markets, partially offset by the slowdown of the PRC’s 3G build out. Sales volume of CCA in our US segment decreased by 1.4%, or 11 metric tons in the first quarter of 2011 compared to the same period of 2010.

Sales volume of CCS in our US segment decreased by 10.0%, or 161 metric tons in the first quarter of 2011 compared to the same period of 2010, primarily due to the weaker demand in North America and Europe as a result of an increase in inventory destocking as our customers have postponed their purchases and ordered smaller than typical volumes when they have made purchases.

Gross Profit and Gross Margin

   
Three Months Ended March 31,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Gross Profit
 
$
17.1
   
$
17.8
   
$
-0.7
     
-3.9
%
Gross Margin
   
26.0
%
   
29.9
%
           
-3.9
%

Gross profit was $17.1 million in the first quarter ended March 31, 2011 compared to $17.8 million in the same period of 2010, representing a decrease of 3.9%. This decrease is primarily driven by higher copper prices, pricing pressure as a result of continued slowdown of the 3G network build out in China and the inclusion of a full quarter’s results from Dalian Jinchuan, which has a relatively low margin.

Selling Expenses

   
Three Months Ended March 31,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Selling Expenses
 
$
1.1
   
$
1.3
   
$
-0.2
     
-15.4
%
as a percentage of revenues
   
1.7
%
   
2.2
%
           
-0.5
%

Selling expenses were $1.1 million in the quarter ended March 31, 2011, a decrease by 15.4%, or $1.3 million compared to the similar period in 2010. As a percentage of revenues, selling expenses decreased from 2.2% in the first quarter of 2010 to 1.7% in the same period of 2011 as we benefited from the cost cutting initiatives implemented.
 
General and Administrative Expenses

   
Three Months Ended March 31,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
General and Administrative Expenses
 
$
5.5
   
$
3.7
   
$
1.8
     
48.6
%
as a percentage of revenues
   
8.3
%
   
6.3
%
           
2.0
%

General and administrative (G&A) expenses were $5.5 million in the quarter ended March 31, 2011 compared to $3.7 million in the same period in 2010, representing an increase of 48.6%, or $1.8 million. This increase is primarily due to the 2010 audit fee of $800,000 for which the audit was performed in the first quarter of 2011, and approximately $750,000 in advisor fees related to the Company’s privatization offer.  On a percentage basis, G&A expenses in the first quarter of 2011 increased to 8.3% of revenues from 6.3% in the first quarter of 2010.

Income from operations

The following table sets forth income from operations by segment, in millions of dollars:
 
 (in millions, except percentage)
 
Three Months Ended March 31,
             
   
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in amount
   
Change in %
 
PRC
 
$
12.3
     
117.1
%
 
$
13.3
     
103.9
%
 
$
(1.0
)
   
-7.5
%
US
 
$
0.5
     
4.8
%
 
$
0.5
     
3.9
%
 
$
-
     
0
%
Segment income from operations
 
$
12.8
     
121.9
%
 
$
13.8
     
107.8
%
 
$
(1.0
)
   
-7.2
%
Corporate  expenses
 
$
(2.3
)
   
-21.9
%
 
$
(1.0
)
   
-7.8
%
 
$
(1.3
)
   
130.0
Total income from operations
 
$
10.5
     
100.0
%
 
$
12.8
     
100.0
%
 
$
(2.3
)
   
-18.0
%
 
 
17

 

Total income from operations was $10.5 million in the quarter ended March 31, 2011 compared to $12.8 million in the same period of 2010, representing a decrease of 18.0%, or $2.3 million. This decrease is primarily due to a lower gross profit driven by higher copper costs and shift in product mix. The decrease is also due to a higher than usual G&A expenses, which included 2010 audit fee of $800,000, and $750,000 advisor fees related to the Company’s privatization offer.

Other Income (Expense)

Interest income (expenses)
   
Three Months Ended March 31,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Interest Income
 
$
0.2
   
$
0.2
   
$
-
     
-
%
Interest Expenses
 
$
(0.1
)
 
$
(0.5
)
 
$
0.4
     
-80.0
%
Net Interest Income (Expenses)
 
$
0.1
   
$
(0.3
)
 
$
0.4
     
-133.33
%
as a percentage of revenues
   
0.2
%
   
-0.5
%
           
0.7
%

Net interest income was $0.1 million in the first quarter of 2011 compared to net interest expenses of $0.3 million in the same period of 2010. The change is primarily the result of the Company’s repurchased of its HY notes on February 26, 2010.

Income Taxes

   
Three Months Ended March 31,
   
Change
 
(in millions, except percentage)
 
2011
   
2010
   
Amount
   
%
 
Income before Income Taxes
 
$
10.3
   
$
10.1
   
$
0.2
     
2.0
%
Income tax expense
   
3.4
     
1.1
     
2.3
     
209.1
%
Effective income tax rate
   
33.0
%
   
10.9
%
           
22.1
%

The effective income tax rate was 33.0% in the first quarter of 2011, compared to 10.9% in the same quarter of last year. This is mainly due to the change of income tax rate from 12.5% in 2010 to 25% in 2011 for Fushi International (Dalian) as a result of the expiration of Fushi International’s 50% tax holiday and the provision of full valuation allowance for the deferred tax assets in loss-making entities in US and PRC.

Our PRC subsidiaries have cash balance of USD 121 million as of March 31, 2011 which is planned to be permanently reinvested in the PRC. The distributions from our PRC subsidiaries are subject to the US federal income tax at 34%, less any applicable foreign tax credits. Due to our policy of indefinitely reinvesting our earnings in our PRC business, we have not provided for deferred income tax liabilities on undistributed earnings of USD 228 million and USD 211 million as of March 31, 2011 and December 31, 2010, 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 $6.8 million in the first quarter of 2011 compared to net income of $9.1 million in the same quarter of 2010.

Selected Balance Sheet Data at March 31, 2011 and December 31, 2010:

   
Selected Balance Sheet Data
 
   
March 31,
2011,
   
December 31, 2010
   
Change
 
(in millions, except percentage)
             
Amount
   
%
 
Cash
 
$
134.4
   
$
123.0
   
$
11.4
     
9.3
%
Accounts Receivable, net
 
$
63.2
   
$
65.8
   
$
-2.6
     
-4.0
%
PP&E (a)
 
$
121.8
   
$
124.2
   
$
-2.4
     
-1.9
%
Total Assets
 
$
377.9
   
$
370.3
   
$
7.6
     
2.1
%
Short Term Debt
 
$
0.7
   
$
0.7
   
$
-
     
-
%
Long Term Debt
 
$
5.5
   
$
5.7
   
$
-0.2
     
-3.5
%
Shareholders' Equity
 
$
354.7
   
$
344.4
   
$
10.3
     
3.0
%

 
18

 

(a) For breakdown of property, plant and equipment, please refer to Footnote Note–5 for details.

Our financial condition continues to improve as measured by an increase of 3.0% in shareholders’ equity as of March 31, 2011 compared to December 31, 2010. Cash increased by $11.4 million, primarily due to the strong sales and cash collections. Accounts receivable decreased by 4.0% as a result of collections.

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 March 31, 2011, 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 first 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;

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 inventory. Capital expenditures have historically been necessary to expand the production capacity of the Company’s manufacturing operations.

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

   
Three Months Ended March 31,
 
(in millions)
 
2011
   
2010
 
Net cash provided by operating activities
 
$
15.0
   
$
6.7
 
Net cash used in investing activities
 
$
(0.3
)
 
$
(5.5
)
Net cash provided by (used in) financing activities
 
$
(4.4
 
$
16.7
 
Effect of exchange rate on cash
 
$
1.1
   
$
0.0
 
Cash at beginning of period
 
$
123.0
   
$
60.6
 
Cash at end of period
 
$
134.4
   
$
78.5
 
 
For the three months ended March 31, 2011, net cash provided by operating activities was $15.0 million, an increase of 123.9%, or $8.3 million compared to the same period in 2010, reflecting a significant improvement in operating cash flow year over year. The favorable change is primarily attributable to improved management of current assets, particularly, days sales outstanding (“DSO”) decreasing from 95 days in the first quarter of 2010 to 88 days in the first quarter of 2011, and the advances to suppliers turnover days decreasing from 32 days in the first quarter of 2010 to 26 days in the first quarter of 2011.

For the three months ended March 31, 2011, net cash used in investing activities was $0.3 million, which was attributable to purchase of PP&E.

For the three months ended March 31, 2011, net cash used in financing activities was $4.4 million, which was primarily attributable to the final payment for the Jinchuan acquisition.

At March 31, 2011, our cash balance was $134.4 million compared to $78.5 million at March 31, 2010 and $123.0 million at December 31, 2010.

DSO has decreased from 95 days at March 31, 2010, to 88 days at March 31, 2011, while days payable outstanding (DPO) decreased to 8 days at March 31, 2011, from 11 days at March 31, 2010.

 
19

 

The decrease in DSO is primarily attributable to increased efforts to step-up our collection efforts. Meanwhile, we continued our policy on extending credit terms to certain credible 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 who are unable to make such adjustments for customers.  We write off receivables specifically based on the facts we obtain about the customers’ ability to pay. The Company has established appropriate procedures to facilitate collection.

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

   
Year ended December 31, 2010
 
Three months ended March 31, 2011
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 remained flat at 32 days in the first quarter of 2011 compared to the same period of 2010. Advance to supplier’s turnover days has decreased from 32 days at March 31 2010, to 26 days at March 31, 2011. 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 March 31, 2011:

Contractual obligations
 
Total
   
Payment due by
less than 1 year
   
2 – 3 years
   
4-5 years
   
More than 5
years
 
Long-term debt*
 
$
6,972,615
     
809,746
     
1,565,995
   
$
1,494,667
   
$
3,102,206
 
Capital lease obligation
 
$
125,328
     
84,138
     
41,190
   
$
 -
   
$
 -
 
Total
 
$
7,097,943
     
893,884
     
1,607,185
   
$
1,494,667
   
$
3,102,206
 
 
* Pursuant to the loan agreement, the Regions Bank has the right to demand all of the outstanding balance due in August 2013 unless the Company could renew the loan before then.
 
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 March 31, 2011 and did not employ any commodity price derivatives in the first quarter of 2011.

 
20

 

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 $4.1 million based on our revenues, costs and expenses, assets and liabilities denominated in RMB as of March 31, 2011. As of March 31, 2011, our accumulated foreign currency translation gain as part of accumulated other comprehensive income amounted to $38,769,036 and our foreign currency translation gain recognized in other comprehensive income in the first quarter of 2011 was $2,655,537. 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 Chief Executive Officer (“CEO”) 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 CEO 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 CEO and CFO concluded that as of the date of this evaluation, our disclosure controls and procedures were effective.
 
(b) Changes in internal controls.
 
To remediate the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, related to (1) insufficient competent accounting personnel in applying U.S. generally accepted accounting principles in the financial reporting process and (2) ineffective review controls over the determination of the fair values of derivative financial instruments, share-based payment awards, assets acquired and liabilities assumed in business combinations, we have already taken measures as follows:
 
 
· 
Enhancing the supervision, monitoring and reviewing of financial statement preparation processes;
 
 
· 
Engaging qualified consultants to arrange training for financial and accounting personnel on a periodic basis so that they could have adequate knowledge about US GAAP and SEC rules and regulations; and
 
 
· 
Purchasing on-line database services on US GAAP and SEC rules so that the accounting personnel could access the full content of US GAAP and receive the latest US GAAP and SEC regulation updates.
 
Except as described above, 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 March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
During the three months ended March 31, 2011, there were no new material pending legal proceedings, other than routine litigation arising in the ordinary course of business, to which we are a party or of which our property is subject, and no material developments in the legal proceedings previously reported in our 2010 Annual Report on Form 10-K for the fiscal year ended December 31, 2010, except as described below.

Seth Korber vs. Li Fu, Joseph Longever, Wenbing Chris Wang, Barry Raeburn, Feng Bai, Jiping Hua, John Perkowski, and Fushi Copperweld, Inc., Case No. 13510.  The Company filed its motion to dismiss this action on March 15, 2011, which motion is pending.
 
Item 1A. Risk Factors

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 has not materially changed as of March 31, 2011.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Other Information

None.

Item 5.  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).

 
21

 

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: May 10, 2011
By:  
/s/ Craig H. Studwell
 
Name: Craig H. Studwell
 
Title: Chief Financial Officer
(Principal Accounting and Financial Officer)

 
22

 

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).

 
23