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EXCEL - IDEA: XBRL DOCUMENT - Fushi Copperweld, Inc.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Fushi Copperweld, Inc.v239470_ex32-1.htm
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EX-31.1 - EXHIBIT 31.1 - Fushi Copperweld, Inc.v239470_ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 x    No ¨

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

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

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

As of November 3, 2011, the registrant had 38,204,138 shares of common stock outstanding.

 
 

 

TABLE OF CONTENTS
 
PAGE
PART I. FINANCIAL INFORMATION
 
     
Item 1. Financial Statements
3
     
 
Unaudited Condensed Consolidated Balance Sheets
3
     
 
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
4
     
 
Unaudited Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
   
Item 4. Controls and Procedures
29
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
30
     
Item 1A. Risk Factors
32
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
32
     
Item 3. Defaults Upon Senior Securities
32
   
Item 4. [Removed and Reserved]
 
   
Item 5. Other Information
32
     
Item 6. Exhibits
32
     
Signatures
33
 
 
2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

   
September 30,
   
December 31,
 
   
2011
   
2010
 
     
USD
     
USD
 
ASSETS
               
Current assets:
   
  
     
  
 
Cash
   
163,624,276
     
123,000,338
 
Accounts receivable, net of allowance for doubtful accounts
   
73,913,870
     
65,765,722
 
Inventories
   
18,899,317
     
16,143,922
 
Advances to suppliers
   
8,586,217
     
15,022,976
 
Prepaid expenses and other current assets
   
1,042,982
     
743,206
 
Total current assets
   
266,066,662
     
220,676,164
 
                 
Property, plant and equipment, net
   
119,064,234
     
124,177,512
 
Intangible assets, net
   
468,518
     
577,587
 
Land use rights, net
   
13,246,167
     
13,089,733
 
Deposits for land use rights
   
9,957,883
     
9,623,181
 
Goodwill
   
1,788,231
     
1,669,789
 
Other non-current assets
   
518,477
     
443,397
 
Total assets
   
411,110,172
     
370,257,363
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term bank loan
   
650,000
     
650,000
 
Accounts payable
   
5,361,105
     
3,241,428
 
Accrued expenses and other current liabilities
   
14,128,367
     
15,542,111
 
Total current liabilities
   
20,139,472
     
19,433,539
 
                 
Long-term bank loan
   
5,200,000
     
5,687,500
 
Deferred income tax liabilities
   
673,470
     
669,540
 
Other non-current liabilities
   
-
     
65,057
 
Total liabilities
   
26,012,942
     
25,855,636
 
                 
Shareholders’ equity:
           
  
 
Common stock, $0.006 par value, 100,000,000 shares authorized; 38,204,138 and 38,099,138 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
   
229,226
     
228,596
 
Additional paid-in capital
   
169,028,404
     
167,596,792
 
Retained earnings
   
166,871,835
     
140,462,840
 
Accumulated other comprehensive income
   
48,967,765
     
36,113,499
 
Total shareholders’ equity
   
385,097,230
     
344,401,727
 
Commitments and contingencies
   
-
     
 -
 
Total liabilities and shareholders’ equity
   
411,110,172
     
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 COMPREHENSIVE INCOME
 
   
Three-Month Period Ended September 30,
   
Nine-Month Period Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
USD
   
USD
   
USD
   
USD
 
                         
Revenues
    74,279,340       66,507,433       219,158,766       195,062,641  
Cost of revenues
    54,353,890       46,842,955       161,047,950       137,986,750  
    Gross profit
    19,925,450       19,664,478       58,110,816       57,075,891  
                                 
Selling expenses
    1,127,259       1,457,154       3,519,065       4,074,280  
General and administrative expenses
    5,061,337       3,117,062       15,035,656       10,923,878  
    Total operating expenses
    6,188,596       4,574,216       18,554,721       14,998,158  
                                 
    Income from operations
    13,736,854       15,090,262       39,556,095       42,077,733  
                                 
Interest income
    222,852       200,295       663,776       590,236  
Interest expense
    (116,378 )     (120,176 )     (340,282 )     (697,367
Gain on cross-currency interest swap derivative
    -       -       -       128,861  
Loss on extinguishment of HY notes
    -       -       -       (2,395,778 )
Other expense, net
    (757,407 )     (176,001     (1,677,122 )     (194,445 )
    Total other expense, net
    (650,933 )     (95,882     (1,353,628 )     (2,568,493 )
                                 
    Income before income taxes
    13,085,921       14,994,380       38,202,467       39,509,240  
Income tax expense
    4,137,255       2,072,009       11,793,472       5,197,187  
                                 
    Net income
    8,948,666       12,922,371       26,408,995       34,312,053  
                                 
Other comprehensive income:
                               
Foreign currency translation adjustment, net of nil income taxes
    5,322,885       4,433,165       12,854,266       6,198,740  
                                 
     Comprehensive income
    14,271,551       17,355,536       39,263,261       40,510,793  
                                 
Earnings per share:
                               
Basic
    0.23       0.34       0.69       0.94  
Diluted
    0.23       0.34       0.69       0.93  

See accompanying notes to unaudited condensed consolidated financial statements

 
4

 

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

   
Nine-Month Period Ended September 30,
 
   
2011
   
2010
 
   
USD
   
USD
 
Cash flows from operating activities:
           
Net cash provided by operating activities
    40,676,212       23,215,333  
                 
Cash flows from investing activities:
               
Payment for acquisitions of Jinchuan and Hongtai
    -       (6,375,000 )
Cash acquired from acquisitions of Jinchuan and Hongtai
    -       901,442  
Purchases of property and equipment
    (1,160,718 )     (1,869,029 )
Net cash used in investing activities
    (1,160,718 )     (7,342,587 )
                 
Cash flows from financing activities:
               
Proceeds from interest-free loans provided by Mr. Li Fu
    -       15,000,000  
Payment for acquisition of  Jinchuan
    (4,819,107 )     -  
Repayment of revolving line of credit
    -       (4,033,783 )
Proceeds from long-term bank loans
    -       6,500,000  
Repayment of long-term bank loans
    (487,500 )     -  
Repayment of notes payable
    -       (35,600,000 )
Proceeds from issuance of common stock
    -       59,800,050  
Proceeds from exercise of warrants and stock options
    628,495       1,207,824  
Transaction costs paid in connection with issuance of common stock
    -       (3,438,550 )
Net cash (used in) provided by financing activities
    (4,678,112 )     39,435,541  
                 
Effect of foreign currency exchange rate changes on cash
    5,786,556       1,960,862  
Net increase in cash
    40,623,938       57,269,149  
                 
Cash at beginning of period
    123,000,338       60,597,849  
Cash at end of period
    163,624,276       117,866,998  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
    340,282       1,425,833  
Income taxes paid
    7,665,233       6,161,271  
Non-cash investing and financing activities
               
Accrual for the acquisition of Jinchuan
    -       4,819,107  
Issuance of common stock in connection with the acquisition of Hongtai
    -       2,600,000  
Payable for purchase of property and equipment
    554,538       314,294  

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 (“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 (collectively, the ‘‘Company’’). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the year then ended.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of the financial position of the Company as of September 30, 2011, the results of operations for the three-month periods ended September 30, 2011 and 2010, and the results of operations and cash flows for the nine-month periods ended September 30, 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 value of share-based compensation expense, and the accruals for tax uncertainties and other contingencies. The current economic environment has increased the 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 during the three-month periods ended September 30, 2011 and 2010 and nine-month periods ended September 30, 2011 and 2010 are as follows:

   
Three-Month Period Ended September 30,
 
   
2011
   
2010
 
   
USD
   
%
   
USD
   
%
 
                         
PRC
   
60,378,513
     
81
%
   
52,658,717
     
79
%
US
   
10,195,436
     
14
%
   
10,622,814
     
16
%
Other countries
   
3,705,391
     
5
%
   
3,225,902
     
5
%
Total
   
74,279,340
     
100
%
   
66,507,433
     
100
%

   
Nine-Month Period Ended September 30,
 
   
2011
   
2010
 
   
USD
   
%
   
USD
   
%
 
                         
PRC
   
173,356,367
     
79
%
   
152,803,500
     
78
%
US
   
32,561,751
     
15
%
   
31,494,741
     
16
%
Other countries
   
13,240,648
     
6
%
   
10,764,400
     
6
%
Total
   
219,158,766
     
100
%
   
195,062,641
     
100
%

 
6

 

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 59% and 63% of the Company’s raw materials for the nine-month periods ended September 30, 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 “VIE Agreements”) among Fushi International (Dalian) Bimetallic Cable Co., Ltd. (“Fushi International”), Dalian Fushi and its equity holders, 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 ASC Topic 810, Consolidation, issued by the Financial Accounting Standards Board, 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.

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

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 September 30, 2011 amounted to $51,141,677 and $216,199, respectively, and revenues and net loss of Dalian Fushi for the nine-month period ended September 30, 2011 amounted to nil and $2,569,305 respectively, were included in the accompanying consolidated financial statements as of and for the nine-month period ended September 30, 2011.

Note–3 - Accounts receivable

Accounts receivable consist of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Trade receivables
    74,471,517       66,304,625  
Allowance for doubtful accounts
    (557,647 )     (538,903 )
Accounts receivable, net
    73,913,870       65,765,722  

 
7

 

Note–4 - Inventories

Inventories consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Raw materials
   
10,288,851
     
7,916,853
 
Work in progress
   
3,095,577
     
3,089,533
 
Finished goods
   
5,514,889
     
5,137,536
 
Total inventories
   
18,899,317
     
16,143,922
 

Note–5 – Property, plant and equipment

Property, plant and equipment consist of the following:

   
September 30,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Plant and buildings
    66,207,901       64,213,601  
Machinery and equipment
    93,670,672       88,747,928  
Office equipment and furniture
    1,598,938       1,531,608  
Motor vehicles
    4,731,967       4,537,499  
Construction in progress
    2,319,353       3,493,726  
Total property, plant and equipment
    168,528,831       162,524,362  
Less accumulated depreciation
    (49,464,597 )     (38,346,850 )
Property, plant and equipment, net
    119,064,234       124,177,512  

Depreciation expense was $3,273,909 and $3,049,809 for the three-month periods ended September 30, 2011 and 2010, respectively, and $9,842,417 and $8,759,839 for the nine-month periods ended September 30, 2011 and 2010, respectively.

Note 6 - Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:
 
 
Note
 
September 30,
2011
   
December 31,
2010
 
     
USD
   
USD
 
               
Accrued payroll
      1,947,393       2,100,461  
Income tax payable
      6,910,347       2,599,717  
Value-added-tax payable
      1,024,312       1,862,864  
Accrual for the acquisition of Jinchuan
      -       5,075,000  
Others
(a)
    4,246,315       3,904,069  
Total accrued expenses and other current liabilities
      14,128,367       15,542,111  

(a) Others mainly represent accrued shipping and handling costs.

 
8

 

Note 7 - Bank Loans

Bank loans consist of the following:

Name of lender
 
September 30,
2011
   
December 31,
2010
 
   
USD
   
USD
 
             
Revolving line of credit
    -       -  
Regions Bank term loan – current portion
    650,000       650,000  
Regions Bank term loan – noncurrent portion
    5,200,000       5,687,500  
Total bank loans
    5,850,000       6,337,500  

Principal payments on the outstanding bank loan as of September 30, 2011 are as follows:

   
Amount
 
   
USD
 
       
October 1, 2011 to December 31, 2011
    162,500  
2012
    650,000  
2013
    650,000  
2014
    650,000  
2015
    650,000  
2016
    650,000  
Beyond 2016
    2,437,500  
         
Total
    5,850,000  

On June 27, 2011, Copperweld Bimetallics LLC (“Copperweld”), a wholly-owned subsidiary of Fushi, entered into an amendment (the “First Amendment”) to the loan agreement with Regions Bank, pursuant to which the maximum amount of the revolving credit facility was increased from $2.5 million to $4.5 million.  As a result, the total facility was increased from $9 million to $11 million. Pursuant to the First Amendment, Regions Bank has the right to demand full repayment in August 2014 of the total outstanding balance unless the Company renews the loan before this date.

 
9

 

Note 8 - Earnings per share

Basic and diluted earnings per share are calculated as follows:

   
Three-Month
Period Ended September 30,
   
Nine-Month Period Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
USD
   
USD
   
USD
   
USD
 
Numerator:
                       
Net income
    8,948,666       12,922,371       26,408,995       34,312,053  
Net income attributable to participating securities
- non-vested shares
    (21,964 )     (21,428 )     (64,819 )     (56,896 )
Net income for basic and diluted earnings per share
    8,926,702       12,900,943       26,344,176       34,255,157  
Denominator:
                               
Denominator for basic earnings per share:
                               
Weighted average number of shares of common stock outstanding
    38,204,078       37,694,626       38,186,708       36,553,784  
Plus:
                               
Warrants
    -       179,971       3,586       203,953  
Stock options
    50,670       113,554       74,828       176,433  
Denominator for diluted earnings per share
    38,254,748       37,988,151       38,265,122       36,934,170  
Earnings per share:
                               
Basic
    0.23       0.34       0.69       0.94  
Diluted
    0.23       0.34       0.69       0.93  

The following table summarizes potentially dilutive securities excluded from the calculation of diluted earnings per share for the three-month periods and the nine-month periods ended September 30, 2011 and 2010, because their effects are anti-dilutive:

   
Three-Month
Period Ended September 30,
   
Nine-Month Period Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Shares issuable upon exercise of stock options
    921,455       621,000       921,455       621,000  
Shares issuable upon exercise of warrants
    100,000       100,000       100,000       100,000  

Note 9 – Income Tax

The effective income tax rates for the three-month periods ended September 30, 2011 and 2010 were 31.6% and 13.8%, respectively. The effective income tax rates for the nine-month periods ended September 30, 2011 and 2010 were 30.9% and 13.2%, respectively. The effective income tax rates for the three-month and nine-month periods ended September 30, 2011 differ from the PRC statutory income tax rate of 25% primarily due to expiry of Fushi International’s 50% tax holiday as of December 31, 2010, resulting in an increase of the applicable income tax rate of Fushi International from 12.5% to 25% from 2011 onwards, and the recognition of valuation allowances for deferred income tax assets relating to the entities which were in cumulative loss positions.

As of September 30, 2011 and December 31, 2010, full valuation allowances of $22,751,120 and $20,010,349 were provided against the deferred income tax assets arising from tax loss carry-forwards and deductible temporary differences of entities which were in cumulative loss positions.

As of and for the nine-month period ended September 30, 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.

 
10

 

Note 10 - Warrants

The following is a summary of the warrant activity:

   
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    
Exercised
    (100,000 )     6.00    
Outstanding as of September 30, 2011
    100,000       16.80  
0.17

During the nine-month period ended September 30, 2011, 100,000 warrants were exercised at an exercise price of $6.00 per share. The Company received $600,000 in cash.

Note 11– Share based compensation

Non-vested shares

On March 17, 2011, the Board of Directors approved the grant of 48,000 non-vested shares to certain employees, of which 12.5% vest at the end of each quarter from the date of grant over eight quarters.

A summary of the non-vested shares activity is as follows:

   
Number of
Non-vested
Shares
   
Weighted
Average Grant
Date Fair
Value
 
         
USD
 
             
Outstanding as of December 31, 2010
    70,000       8.74  
Granted
    48,000       8.09  
 Vested
    (24,000 )     8.09  
Outstanding as of September 30, 2011
    94,000       8.50  

The Company recognized $83,185 and $109,778 share-based compensation expense for non-vested shares in general and administration expenses for the three-month periods ended September 30, 2011 and 2010, respectively, and $200,925 and $329,333 for the nine-month periods ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, there was $798,865 of total unrecognized compensation cost related to non-vested shares, which is to be recognized over a weighted average period of 1.49 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 $ 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 $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.

 
11

 

The weighted average option fair value of $3.32 per share or an aggregate of $179,260 on the date of grant during the nine-month period ended September 30, 2011 were determined based on the Black-Scholes option pricing model, using the following assumptions:

Expected volatility
60%
Expected dividend yield
0%
Expected term
3 years
Risk-free interest rate (per annum)
1.02% to 1.29%
Fair value of underlying common stock (per share)
$8.09 to 8.83

The expected volatility was estimated based on historical volatility of the Company’s common stock.

 A summary of stock option activities 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              
Granted
    54,000       8.17              
Forfeited
    (478 )     8.61              
Exercised
    (5,000 )     4.95              
Expired
    (211,800 )     13.68              
Outstanding as of September 30, 2011
    1,136,055       10.72       4.09       -  
Exercisable as of September 30, 2011
    750,531       11.37       1.80       -  

The Company recognized $127,939 and $44,780 of compensation expense for stock options in general and administration expense for the three-month periods ended September 30, 2011 and 2010, respectively, and $408,433 and $198,874 for the nine-month periods ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, there was $1,402,913 of total unrecognized compensation cost related to stock options, which is to be recognized over a weighted average period of 3.29 years.

Note 12 - Commitments and contingencies

 
(1)
On November 3, 2010, the Company’s Board of Directors received a proposal from its Chairman and Chief Executive Officer, Mr. Li Fu ("Mr. Fu") and Abax Global Capital (Hong Kong) Limited on behalf of funds managed by it and its affiliates ("Abax") for Mr. Fu and Abax to acquire all of the outstanding shares of common stock of Fushi not 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 believes the allegation is without merit and the Company has viable defenses to the allegations.  Nevertheless, there is a possibility that a loss may have been incurred. In accordance with ASC Topic 450, no loss contingency was accrued as of September 30, 2011 since the possible loss or range of loss cannot be reasonable estimated.

 
12

 

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

 
(3)
Pursuant to the agreement between Fushi Copperweld, Inc. and Nexans Deutschland Industries GmbH & Co. KG (“Nexans”), certain sales of copper-clad aluminum (“CCA”) products of the Company are subject to royalty payments to Nexans, which are expensed as incurred. Royalty expenses were insignificant for the periods presented.

 
(4)
On September 29, 2011, the Company obtained the approval from the Commercial Court of Liege in Belgium for a lease agreement, pursuant to which the Company will lease land, buildings and equipments from the court appointed Receivers of Leaf Business Holdings, in bankruptcy in Liege, Belgium. The lease agreement is effective from October 1, 2011 to December 31, 2014. The monthly rental fee is Euro 8,333 ($11,207) from October 1, 2011 to December 31, 2011 and Euro 16,200 ($21,787) thereafter through December 31, 2014.  Future minimum lease payment under this agreement is Euro 24,999($33,623) from October 1, 2011 to December 31, 2011, and Euro 194,400($261,448) for each of the three-year ended December 31, 2012, 2013 and 2014.
 
The Company has an option to purchase the leased assets for a total consideration of Euro 5,750,000 ($7,733,175) (the “Option Exercise Price”). If the option to purchase is exercised before December 31, 2012, the Option Exercise Price will be reduced by an amount equal to half of the accumulated rental fees due on that date. If the option to purchase is exercised between January 1, 2013 and December 31, 2014, the Option Exercise Price will be reduced by an amount equal to a quarter of the accumulated rental fees due on that date. Leaf Business Holdings was engaged in casting, cold folding, cold rolling and drawing non-ferrous metals, primarily copper, before its liquidation.
 
Note 13 - Segment Information

The segment information is as follows:

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

   
Three–Month Period Ended September 30, 2010
 
   
PRC
   
US
   
Total
 
   
USD
   
USD
   
USD
 
                   
Revenues from external customers
    53,423,680       13,083,753       66,507,433  
Intersegment revenues
    1,571,072       10,242       1,581,314  
Depreciation and amortization
    2,712,638       482,728       3,195,366  
Segment operating income
    15,500,835       671,232       16,172,067  

 
13

 

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

   
Nine–Month Period Ended September 30, 2010
 
   
PRC
   
US
   
Total
 
   
USD
   
USD
   
USD
 
                   
Revenues from external customers
    154,552,468       40,510,173       195,062,641  
Intersegment revenues
    3,539,724       10,242       3,549,966  
Depreciation and amortization
    7,705,018       1,456,360       9,161,378  
Segment operating income
    43,441,281       1,869,752       45,311,033  

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

   
Three-Month Period Ended
 September 30,
 
   
2011
   
2010
 
   
USD
   
USD
 
             
Total segment operating income
    15,889,921       16,172,067  
Corporate operating expenses
    (2,153,067 )     (1,081,805 )
Interest income
    222,852       200,295  
Interest expense
    (116,378 )     (120,176 )
Other expense, net
    (757,407 )     (176,001 )
Consolidated income before income taxes
    13,085,921       14,994,380  

   
Nine-Month Period Ended
September 30,
 
   
2011
   
2010
 
   
USD
   
USD
 
             
Total segment operating income
    45,927,168       45,311,033  
Corporate operating expenses
    (6,371,073 )     (3,233,300 )
Interest income
    663,776       590,236  
Interest expense
    (340,282 )     (697,367 )
Gain on cross-currency interest swap derivative
    -       128,861  
Loss on extinguishment of HY Notes
    -       (2,395,778 )
Other expense, net
    (1,677,122 )     (194,445 )
Consolidated income before income taxes
    38,202,467       39,509,240  

 
14

 

Note 14 – Reclassification

Certain items in the prior period’s unaudited condensed consolidated statements of income and 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 statements 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 $6,840,368 and a decrease in cash provided by operating activity of the corresponding amount for the nine-month period ended September 30, 2010.

 
15

 
 
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”), (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 Jiangsu”), (viii) Copperweld Holdings, LLC, (ix) Copperweld Bimetallic, LLC (“Copperweld”) and (x) Copperweld Bimetallics UK, LLC. Unless 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 third quarter of 2011, our products were sold to over 260 customers in 26 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, we manage our worldwide operations based on two geographic segments: 1) “PRC” which consists of our facilities located in the People’s Republic of China (PRC) and 2) “US” which consists of our Fayetteville, Tennessee, (US), 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 in new machinery and research and development intended to 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;

 
16

 

 
·
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 focus 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 the 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. 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 chosen 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.

The pricing volatility of our raw materials, especially copper, is a primary cause of cost variations in our products. 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 gross profit on a per ton basis remains relatively stable. As a result, the impact on earnings per share from volatile raw material prices is minimal, although there are timing delays of varying lengths depending upon volatility of metals prices, the type of product, competitive conditions and particular customer arrangements.

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

Highlights for the three months ended September 30, 2011 include:

 
·
Net income of $8.9 million, compared to $12.9 million, in the third quarter of 2010;

 
·
Net cash generated from operations of $19.9 million, compared to $20.1 million net cash generated from operations in the third quarter of 2010;

 
·
A strong cash position of $163.6 million at quarter end; and

 
17

 

 
·
Established operational hub in continental Europe

Current business environment and outlook:

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 expanding and increasingly competitive. This is especially true in the PRC where there is considerable fragmentation of manufacturers. Although challenging global macroeconomic conditions currently exist, and the resulting headwinds such an environment creates, we continue to see strong long-term 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, higher value alternatives.

In addition to these macro-level trends, the Company continues 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.

In addition, we continue to view CCS has a significant growth opportunity within the PRC, as well as the broader Asia-Pacific 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.For the time being, we continue to face delays in CCS production as securing a consistent supply of copper strip required to produce quality CCS has been more difficult than we anticipated.. We are focused on resolving this supply problem and are working diligently to identify a regional provider, and believe we will be able to see a strong ramp-up in CCS sales once full-scale production commences uninhibited by supply constraints.

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.

 
18

 

Results of Operations

The following table sets forth, for the periods indicated, income statement data in millions of US dollars:
   
Three Months Ended
         
Nine Months Ended
       
  
 
September
30,
   
September
30,
   
Change
   
September 
30,
   
September
30,
   
Change
 
  
 
2011
   
2010
   
%
   
2011
   
2010
   
%
 
Revenues
  $ 74.3     $ 66.5       11.7 %   $ 219.2     $ 195.1       12.3 %
Gross profit
    19.9       19.7       1.0 %     58.1       57.1       1.8 %
Selling, general and administrative expenses
    6.2       4.6       34.8 %     18.5       15.0       23.3 %
Income from operations
    13.7       15.1       (9.3 ) %     39.6       42.1       (5.9 ) %
Income before income taxes
    13.1       15.0       (12.7 ) %     38.2       39.5       (3.3 ) %
Income tax expense
    4.2       2.1       100.0 %     11.8       5.2       126.9 %
Net income
    8.9       12.9       (31.0 ) %     26.4       34.3       (23.0 ) %

Three Months Ended September 30, 2011 compared to three months ended September 30, 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
             
percentages)
 
Three Months Ended September 30,
             
   
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in
amount
   
Change in
%
 
PRC
 
$
61.3
     
82.5
%
 
$
53.4
     
80.3
%
 
$
7.9
     
14.8
%
US
   
13.0
     
17.5
%
   
13.1
     
19.7
%
   
(0.1
)
   
(0.8)
%
Total revenues
 
$
74.3
     
100.0
%
 
$
66.5
     
100.0
%
 
$
7.8
     
11.7
%

(in MTs, except 
 
Metric Tons Sold
             
percentages)
 
Three Months Ended September 30,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
PRC *
    7,227       77.7 %     7,388       75.7 %     (161 )     (2.2 ) %
US
    2,073       22.3 %     2,372       24.3 %     (299 )     (12.6 ) %
Total sales volume
    9,300       100.0 %     9,760       100.0 %     (460 )     (4.7 ) %

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

Revenues were $74.3 million in the third quarter of 2011, an increase of $7.8 million, or 11.7%, compared to $66.5 million in the same period of last year, which was primarily driven by higher average selling prices primarily due to increased copper prices, and partially offset by a decrease in sales volume in the third quarter of 2011.

The PRC segment experienced an increase of 14.8% in revenues in the third quarter of 2011, which is primarily due to a 17.2% increase in average selling prices of copper-clad products as a result of higher copper costs and partially offset by a 2.2% decrease in sales volume.

The US segment experienced stable revenues in the third quarter of 2011 compared to the same period of 2010. This is primarily due to a 13.9% increase in average selling price of copper-clad product as a result of higher copper costs which were offset by a 12.6% decrease in sales volume. The decrease of sales volume in our US segment is because a challenging macroeconomic environment and uncertainty in the marketplace drove a trend to smaller order sizes as customers became more cautious with respect to holding inventory, specifically in the US and Europe.

 
19

 

Revenues by industry

The following table presents the breakdown of revenues in millions of US dollars by industry:
 
   
Revenues
             
(in millions, except 
 
Three Months Ended September 30,
             
percentages)
 
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in
amount
   
Change in
%
 
Telecommunication
  $ 24.1       32.4 %   $ 23.9       35.9 %   $ 0.2       0.8 %
Utility
    47.1       63.4 %     39.6       59.5 %     7.5       18.9 %
Transportation
    1.2       1.7 %     1.1       1.7 %     0.1       9.1 %
Other
    1.9       2.5 %     1. 9       2.9 %     0.0       0.0 %
Total revenues
  $ 74.3       100 %   $ 66.5       100.0 %   $ 7.8       11.7 %


 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 September 30,
             
percentages)
 
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Telecommunication
    3,707       39.9 %     4,169       42.7 %     (462 )     (11.1 ) %
Utility *
    4,948       53.2 %     4,941       50.6 %     7       0.1 %
Transportation
    152       1.6 %     135       1.4 %     17       12.6 %
Other
    493       5.3 %     515       5.3 %     (22 )     (4.3 ) %
Total sales volume
    9,300       100.0 %     9,760       100.0 %     (460 )     (4.7 ) %

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

In the third quarter of 2011, our sales to the telecommunication markets decreased by 462 metric tons, or 11.1%, 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 7 metric tons, or 0.1%, in the third quarter of 2011, compared to the third quarter of 2010, as strong demand in the PRC which is offset by lower utilities sales in the US segment. 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 18.9% increase in revenues generated from utility sales was primarily attributable to higher average selling prices as a result of higher copper prices.

Capacity and Output

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

   
Three Months Ended September 30, 2011
 
   
PRC
   
US
 
   
Capacity
(MT)
   
Total
Volume
(MT)
   
Capacity
(MT)
   
Total
Volume
(MT)
 
CCA
    10,000       7,073       3,062       638  
CCS
    2,050       49       4,274       1,391  
Total
    12,050       7,122       7,336       2,029  

 
20

 

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
             
percentages)
 
Three Months Ended September 30,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
CCA
    7,711       82.9 %     7,987       81.8 %     (276 )     (3.5 ) %
CCS
    1,440       15.5 %     1,600       16.4 %     (160 )     (10.0 ) %
Others
    149       1.6 %     173       1.8 %     (24 )     (13.9 ) %
Total sales volume *
    9,300       100.0 %     9, 760       100.0 %     (460 )     (4.7 ) %

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

Sales volume of CCA in our PRC segment decreased by 2.1%, or 154 metric tons, from 7,227 metric tons in the third quarter of 2010 to 7,073 metric tons in the third quarter of 2011 due to the slowdown of the PRC’s 3G build out, partially offset by the stronger sales to utility markets. Sales volume of CCA in our US segment decreased by 16.1%, or 122 metric tons, from 760 metric tons in the third quarter of 2010 to 638 metric tons in the third quarter of 2011 as the uncertain economic environment reduced order rates, particularly in the U.S. market.
Sales volume of CCS in our US segment decreased by 11.3%, or 178 metric tons, from 1,569 metric tons in the third quarter of 2010 to 1,391 metric tons in the third quarter of 2011, 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 September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Gross Profit
  $ 19.9     $ 19.7     $ 0.2       1.0 %
Gross Margin
    26.8 %     29.6 %             (2.8 ) %

Gross profit was $19.9 million in the quarter ended September 30, 2011, compared to $19.7 million in the same period of 2010, representing an increase of 1.0%. Gross margin in our PRC segment decreased by 2.5% from 33.8% in the third quarter of 2010 to 31.3% in the third quarter of 2011 due to higher copper prices. Gross margin for our US segment decreased by 6.5% from 12.5% in the third quarter of 2010 to 6.0% during the third quarter of 2011 primarily due to higher raw material prices and lower fixed cost absorption as a result of lower sales volumes.

Selling Expenses

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Selling Expenses
  $ 1.1     $ 1.5     $ (0.4 )     (26.7 ) %
as a percentage of revenues
    1.5 %     2.3 %             (0.8 ) %

Selling expenses were $1.1 million in the quarter ended September 30, 2011, a decrease by 26.7%, or $0.4 million, compared to the similar period in 2010, as we benefited from the cost cutting initiatives implemented since 2010. As a percentage of revenues, selling expenses decreased from 2.3% in the third quarter of 2010 to 1.5% in the same period of 2011.

General and Administrative Expenses

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
General and Administrative Expenses
  $ 5.1     $ 3.1     $ 2.0       64.5 %
as a percentage of revenues
    6.9 %     4.7 %             2.2 %

 
21

 

General and administrative (G&A) expenses were $5.1 million in the quarter ended September 30, 2011 compared to $3.1 million in the same period in 2010, representing an increase of 64.5%, or $2.0 million. This increase is primarily due to $0.3 million increase in audit and professional service fees, $0.3 million in advisory fees related to the ongoing privatization offer and $0.6 million increase in personnel cost because of headcount increase as a result of business expansion. On a percentage basis, G&A expenses in the third quarter of 2011 increased to 6.9% of revenues from 4.7% in the third quarter of 2010.

Income from operations

The following table sets forth income from operations by segment, in millions of dollars:
 
 (in millions, except percentages)
 
Three Months Ended September 30,
             
   
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in 
amount
   
Change in
%
 
PRC
 
$
16.0
     
116.8
%
 
$
15.5
     
102.7
%
 
$
0.5
     
3.2
%
US
   
(0.2
)
   
(1.5)
%
   
0.7
     
4.6
%
   
(0.9
)
   
(128.6)
%
Segment income from operations
   
15.8
     
115.3
%
   
16.2
     
107.3
%
   
(0.4
)
   
(2.5)
%
Corporate  expenses
   
(2.1
)
   
(15.3)
%
   
(1.1
)
   
(7.3)
%
   
(1.0
)
   
90.9
%
Total income from operations
 
$
13.7
     
100.0
%
 
$
15.1
     
100.0
%
 
$
(1.4
)
   
(9.3)
%

Total income from operations was $13.7 million in the quarter ended September 30, 2011 compared to $15.1 million in the same period of 2010, representing a decrease of 9.3%, or $1.4 million. This decrease is primarily due to higher G&A expenses.

Other Income (Expense)

Interest income (expenses)
   
Three Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Interest Income
 
$
0.2
   
$
0.2
   
$
0.0
     
0.0
%
Interest Expense
   
(0.1
)
   
(0.1
)
   
0.0
     
0.0
%
Net Interest Income (Expenses)
 
$
0.1
   
$
0.1
   
$
0.0
     
0.0
%
as a percentage of revenues
   
0.1
%
   
0.1
%
           
0.0
%

Net interest income remained stable in the third quarter of 2011 compared to that of the same period of 2010.

Income Taxes

   
Three Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Income before Income Taxes
  $ 13.1     $ 15.0     $ (1.9 )     (12.7 ) %
Income tax expense
    4.2       2.1       2.1       100.0 %
Effective income tax rate
    31.6 %     13.8 %             17.8 %

The effective income tax rate was 31.6% in the third quarter of 2011, compared to 13.8% 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, as a result of the expiration of Fushi International’s 50% tax holiday and the provision of full valuation allowance for the deferred income tax assets in loss-making entities in US and PRC.

Our PRC subsidiaries have cash balance of $151.2 million as of September 30, 2011. 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 $232 million and $195 million as of September 30, 2011 and December 31, 2010, respectively.

Net Income

As a result of the above factors, we had net income of $8.9 million in the third quarter of 2011 compared to net income of $12.9 million in the same quarter of 2010.

 
22

 

Nine Months Ended September 30, 2011 compared to nine months ended September 30, 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
             
percentages)
 
Nine Months Ended September 30,
             
   
2011
   
2010
             
   
Amount
   
%
   
Amount
   
%
   
Change in
amount
   
Change in
%
 
PRC
 
$
176.4
     
80.5
%
 
$
154.6
     
79.2
%
 
$
21.8
     
14.1
%
US
   
42.8
     
19.5
%
   
40.5
     
20.8
%
   
2.3
     
5.7
%
Total revenues
 
$
219.2
     
100.0
%
 
$
195.1
     
100.0
%
 
$
24.1
     
12.3
%


(in MTs, except 
 
Metric Tons Sold
             
percentages)
 
Nine Months Ended September 30,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
PRC *
    21,848       76.4 %     21,510       74.6 %     338       1.6 %
US
    6,742       23.6 %     7,324       25.4 %     (582 )     (8.0 )%
Total sales volume
    28,590       100.0 %     28,834       100.0 %     (244 )     (0.8 )%

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

Revenues were $219.2 million in the first nine months of 2011, an increase of $24.1 million, or 12.3%, compared to $195.1 million in the same period of last year, which was primarily driven by higher average selling prices primarily due to increased copper prices.

The PRC segment experienced an increase of 14.1% in revenues for the nine months ended September 30, 2011, which is primarily due to a 12.4% increase in average selling prices of copper-clad products, as a result of higher copper costs and a 1.6% increase in quantities sold.

The US segment experienced an increase of 5.7% in revenues for the nine months ended September 30, 2011, compared to that of 2010. The increase is primarily due to a 14.7% increase in average selling price of copper-clad product, as a result of higher copper costs, but partially offset by an 8.0% decrease in quantities sold because a challenging macroeconomic environment and uncertainty in the marketplace drove a trend to smaller order sizes as customers became more cautious with respect to holding inventory, specifically in the US and Europe.

Revenues by industry

The following table presents the breakdown of revenues in millions of US dollars by industry:
 
 
Revenues
           
(in millions, except 
Nine Months Ended September 30,
           
percentages)
2011
 
2010
           
 
Amount
   
%
 
Amount
   
%
 
Change in
amount
   
Change in
%
 
Telecommunication
  $ 72.9       33.3 %   $ 76.7       39.3 %   $ (3.8 )     (5.0 )%
Utility
    137.0       62.5 %     107.4       55.1 %     29.6       27.6 %
Transportation
    3.2       1.5 %     2.8       1.4 %     0.4       14.3 %
Other
    6.1       2.7 %     8.2       4.2 %     (2.1 )     (25.6 )%
Total revenues
  $ 219.2       100.0 %   $ 195.1       100.0 %   $ 24.1       12.3 %

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

 
23

 


 
(in MTs, except 
 
Metric Tons Sold
Nine Months Ended September 30,
             
percentages)
 
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
Telecommunication
    11,263       39.4 %     13,404       46.5 %     (2,141 )     (16.0 )%
Utility *
    15,477       54.1 %     13,162       45.6 %     2,315       17.6 %
Transportation
    387       1.3 %     356       1.2 %     31       8.7 %
Other
    1,463       5.2 %     1,912       6.7 %     (449 )     (23.5 )%
Total sales volume
    28,590       100.0 %     28,834       100.0 %     (244 )     (0.8 )%

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

During the nine months ended September 30, 2011, our sales to the telecommunication markets decreased by 2,141 metric tons, or 16.0%, compared to the same period of 2010, which was primarily due to a slowdown in the 3G build out in the PRC. We do see significant growth opportunities for telecommunication throughout other part of the world, particularly in emerging markets such as India and South America.

The decrease of sales volume to the telecommunication markets was offset by strong sales to utility markets. The sales volume to utility markets increased by 2,315 metric tons, or 17.6%, in the nine months ended September 30, 2011, compared to the similar period of 2010, primarily due to strong demand in the PRC and our continued industry mix shift strategy.

Capacity and Output

The following table summarizes installed cladding capacities and metric tons sold by products for the nine months ended September 30, 2011:

   
Nine Months Ended September 30, 2011
 
   
PRC
   
US
 
   
Capacity
(MT)
   
Total
Volume
(MT)
   
Capacity
(MT)
   
Total
Volume
(MT)
 
CCA
    30,000       21,342       9,186       2,166  
CCS
    6,150       165       12,821       4,463  
Total
    36,150       21,507       22,007       6,629  

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
             
percentages)
 
Nine Months Ended September 30,
             
   
2011
   
2010
             
   
MT
   
%
   
MT
   
%
   
Change in
MT
   
Change in
%
 
CCA
    23,508       82.2 %     23,488       81.5 %     20       0.1 %
CCS
    4,628       16.2 %     4,857       16.8 %     (229 )     (4.7 )%
Others
    454       1.6 %     489       1.7 %     (35 )     (7.2 )%
Total sales volume *
    28,590       100.0 %     28,834       100.0 %     (244 )     (0.8 )%

* 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 1.3%, or 275 metric tons, from 21,067 metric tons in the first nine months of 2010 to 21,342 metric tons in the first nine months of 2011, 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 10.5%, or 255 metric tons, from 2,421 metric tons in the first nine months of 2010, to 2,166 metric tons in the first nine months of 2011, due to continued destocking activities in the US.

 
24

 

Sales volume of CCS in our US segment decreased by 6.9%, or 331 metric tons, from 4,794 metric tons in the first nine months of 2010 to 4,463 metric tons in the first nine months of 2011, 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

   
Nine Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Gross Profit
  $ 58.1     $ 57.1     $ 1.0       1.8 %
Gross Margin
    26.5 %     29.3 %             (2.8 )%

Gross profit was $58.1 million for the nine months ended September 30, 2011, compared to $57.1 million in the same period of 2010, representing an increase of 1.8%. Gross margin decreased from 29.3%, in the first nine months of 2010, to 26.5%, in the nine months ended September 2011, primarily due to higher copper prices.

Selling Expenses

   
Nine Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Selling Expenses
  $ 3.5     $ 4.1     $ (0.6 )     (14.6 )%
as a percentage of revenues
    1.6 %     2.1 %             (0.5 )%

Selling expenses were $3.5 million for the nine months ended September 30, 2011, a decrease by 14.6%, or $0.6 million, compared to the similar period in 2010. As a percentage of revenues, selling expenses decreased from 2.1%, in the first nine months of 2010, to 1.6%, in the same period of 2011, as we benefited from the cost saving initiatives implemented in 2010.

General and Administrative Expenses

   
Nine Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
General and Administrative Expenses
  $ 15.0     $ 10.9     $ 4.1       37.6 %
as a percentage of revenues
    6.8 %     5.6 %             1.2 %

General and administrative (G&A) expenses were $15.0 million for the nine months period ended September 30, 2011, compared to $10.9 million in the same period in 2010, representing an increase of 37.6%, or $4.1 million. This increase is primarily due to approximately $1.1 million of advisor fees related to the Company’s privatization offer, $0.7 million of audit and professional service fees, and $1.3 million personnel costs because of headcount increase as a result of the expansion of our business. On a percentage basis, G&A expenses in first nine months of 2011 increased to 6.8% of revenues, from 5.6% in the first nine months of 2010.

Income from operations

The following table sets forth income from operations by segment, in millions of dollars:
 
 (in millions, except percentages)
Nine Months Ended September 30,
           
 
2011
 
2010
           
 
Amount
   
%
 
Amount
   
%
 
Change in amount
   
Change in
%
 
PRC
  $ 44.9       113.4 %   $ 43.5       103.3 %   $ 1.4       3.2 %
US
    1.0       2.5 %     1.8       4.3 %     (0.8 )     (44.4 )%
Segment income from operations
    45.9       115.9 %     45.3       107.6 %     0.6       1.3 %
Corporate  expenses
    (6.3 )     (15.9 )%     (3.2 )     (7.6 )%     (3.1 )     96.9 %
Total income from operations
  $ 39.6       100.0 %   $ 42.1       100.0 %   $ (2.5 )     (5.9 )%

Total income from operations was $ 39.6 million in nine months period ended September 30, 2011, compared to $42.1 million in the same period of 2010, representing a decrease of 5.9%, or $2.5 million. This decrease is primarily due to a higher G&A expenses as discussed above.

 
25

 

Other Income (Expense)

Interest income (expenses)
   
Nine Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Interest Income
 
$
0.7
   
$
0.6
   
$
0.1
     
16.7
%
Interest Expense
   
(0.3
)
   
(0.7
)
   
0.4
     
(57.1
)%
Net Interest Income (Expenses)
 
$
0.4
   
$
(0.1
)
 
$
0.5
     
(500.0
)%
as a percentage of revenues
   
0.2
%
   
0.0
%
           
0.2
%

Net interest income was $0.4 million for the nine months period ended September 30, 2011 compared to net interest expense of $0.1 million in the same period of 2010.

Income Taxes

   
Nine Months Ended September 30,
   
Change
 
(in millions, except percentages)
 
2011
   
2010
   
Amount
   
%
 
Income before Income Taxes
  $ 38.2     $ 39.5     $ (1.3 )     (3.3 )%
Income tax expense
    11.8       5.2       6.6       126.9 %
Effective income tax rate
    30.9 %     13.2 %             17.7 %

The effective income tax rate was 30.9% in the first nine months of 2011, compared to 13.2% in the same period 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, 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.

Net Income

As a result of the above factors, we had net income of $26.4 million in the first nine months of 2011, compared to net income of $34.3 million in the same period of 2010.

Selected Balance Sheet Data at September 30, 2011 and December 31, 2010:

   
Selected Balance Sheet Data
 
   
September 30,
2011
   
December 31, 2010
   
Change
 
(in millions, except percentages)
             
Amount
   
%
 
Cash
  $ 163.6     $ 123.0     $ 40.6       33.0 %
Accounts receivable, net of allowance for doubtful accounts
    73.9       65.8       8.1       12.3 %
Property, plant and equipment, net
    119.1       124.2       (5.1 )     (4.1 )%
Total assets
    411.1       370.3       40.8       11.0 %
Current portion of long-term bank loan
    0.7       0.7       0.0       0.0 %
Long-term bank loan
    5.2       5.7       (0.5 )     (8.8 )%
Shareholders' equity
    385.1       344.4       40.7       11.8 %

Our financial condition continues to improve as measured by an increase of 11.8% in shareholders’ equity, as of September 30, 2011, compared to December 31, 2010. Cash increased by $40.6 million, primarily due to strong sales and cash collections. Accounts receivable increased by 12.3% as a result of growth of revenues.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and capital expenditures principally through private placements of debt and equity, bank loans, and cash provided by operations. Significant factors affecting our cash liquidity include (1) cash provided by operating activities, (2) cash used for capital expenditures, and (3) our available credit facilities and other borrowing arrangements. At September 30, 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 and credit facility with the Regions Bank to invest in our non-PRC operations and are securing new working capital lines for non-PRC operations to finance our growing working capital needs.

 
26

 

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 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 purchases. 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 in millions of US dollars for the periods presented:

   
Nine Months Ended September 30,
 
(in millions)
 
2011
   
2010
 
Net cash provided by operating activities
  $ 40.7     $ 23.2  
Net cash used in investing activities
    (1.2 )     (7.3 )
Net cash (used in) provided by financing activities
    (4.7 )     39.4  
Effect of foreign currency exchange rate changes on cash
    5.8       2.0  
Cash at beginning of period
    123.0       60.6  
Cash at end of period
    163.6       117.9  

For the nine months ended September 30, 2011, net cash provided by operating activities was $40.7 million, an increase of 75.4%, or $17.5 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 91 days, in the first three quarters of 2010, to 85 days, in the first three quarters of 2011, and the advances to suppliers turnover days decreasing from 29 days, in the first three quarters of 2010, to 20 days in the first three quarters of 2011.

For the nine months ended September 30, 2011, net cash used in financing activities was $ 4.7 million, primarily representing the second installment payment for the acquisition of Jinchuan.

As of September 30, 2011, our cash balance was $ 163.6 million compared to $117.9 million at September 30, 2010 and $123.0 million at December 31, 2010.

DSO has decreased from 91 days at September 30, 2010, to 85 days at September 30, 2011, while days payable outstanding (DPO) decreased to 8 days at September 30, 2011, from 10 days at September 30, 2010.

The decrease in DSO is primarily attributable to our efforts to step-up our collection efforts. Meanwhile, we continued our policy on extending credit terms to certain credit-worthy customers that have long-standing business relationships with us, 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 extensions for customers.  We make provision for doubtful accounts 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:
 
   
Nine Months Ended September 30,  2011
 
Year ended December 31, 2010
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 decreased from 33 days, at September 30, 2010, to 30 days, at September 30, 2011.  Advance to supplier’s turnover days has decreased from 29 days, at September 30, 2010, to 20 days, at September 30, 2011. The Company’s major raw materials consist of aluminum, steel rods and copper strips. Changes in the price of copper, which has a 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.

 
27

 

COMMITMENTS AND CONTINGENCIES

Contractual Obligations

Set out below are our contractual obligations at September 30, 2011:

Contractual obligations
 
Total
   
Payment due
less than 1 year
   
2–3 years
   
4-5 years
   
More than 5
years
 
Long-term debt(1)
 
$
6,693,468
     
827,803
     
1,592,542
     
1,508,458
     
2,764,665
 
Capital lease obligation
   
80,583
     
80,583
     
-
     
-
     
-
 
Operating lease(2)
   
817,967
     
229,708
     
522,897
     
65,362
     
-
 
Total
 
$
7,592,018
     
1,138,094
     
2,115,439
     
1,573,820
     
2,764,665
 

(1) Pursuant to the loan agreement, Regions Bank has the right to demand full payment in August 2014 of the total outstanding balance due at that time, unless the Company renews the loan before then.

(2) The Company leases land, buildings and equipment from the court appointed Receivers of Leaf Business Holdings. in bankruptcy in Liege, Belgium. The lease agreement is effective from October 1, 2011 to December 31, 2014. The Company has an option to purchase the leased assets for a total consideration of Euro 5,750,000 ($7,733,175) (the “Option Exercise Price”). If the option to purchase is exercised before December 31, 2012, the Option Exercise Price will be reduced by an amount equal to half of the accumulated rental fees due on that date. If the option to purchase is exercised between January 1, 2013 and December 31, 2014, the Option Exercise Price will be reduced by an amount equal to a quarter of the accumulated rental fees due on that date.

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

Legal Proceedings

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risks

Commodity Price Risk

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

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

We did not have any commodity price derivatives or hedging arrangements outstanding at September 30, 2011 and did not employ any commodity price derivatives in the first three quarters of 2011.

 
28

 

Foreign Exchange Risk

While our reporting currency is the USD, a significant portion of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Furthermore, a significant portion of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between USD and RMB. If the RMB depreciates against the USD, the value of our RMB revenues, earnings and assets as expressed in our USD financial statements will decline. Assets and liabilities of the group entities with functional currencies other than USD are translated into USD using the exchange rates at the balance sheet dates, and revenue and expenses are translated at the average exchange rates during the reported periods. 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 $4.4 million, based on our revenues, costs and expenses, assets and liabilities denominated in RMB as of September 30, 2011. As of September 30, 2011, our accumulated foreign currency translation gain included in accumulated other comprehensive income amounted to $48,967,765, and our foreign currency translation gain recognized in other comprehensive income in the third quarter of 2011 and the first three quarters of 2011were $5,322,885 and $12,854,266, respectively.  We do not intend to enter into any hedging transactions in an effort to reduce our exposure to foreign exchange risk in the future. The value of the RMB against the USD and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. Since July 2005, the RMB has not been pegged to the USD. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the USD in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Credit Risk

We have not experienced significant credit loss, 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, and 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;

 
29

 

 
·
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; and

 
·
Having our financial and accounting personnel to attend intensive training on SEC accounting and reporting matters.

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 period ended September 30, 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
 
The following legal proceedings disclosures provide an update of those discussed under “Legal Proceedings” in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 as filed with the SEC on April 5, 2011 and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.
 
The Going Private Proposal Litigation
 
Twelve shareholder class action lawsuits have been filed against the Company, members of its Board of Directors (the “Board”), and/or others in connection with the November 3, 2010 non-binding proposal made by the Company’s Chairman and Chief Executive Officer, Mr. Li Fu, and Abax Global Capital (Hong Kong) Limited to acquire all of the outstanding shares of the Company’s Common Stock not currently owned by Mr. Fu and his affiliates for $11.50 per share in cash, as further described in the Schedule 13D/A and exhibits thereto filed on November 4, 2010 (the “Proposal”). Nine actions were filed in Nevada state court (Carson City, Clark County, or Washoe County); two actions were filed in Nevada federal district court; and one action was filed in Tennessee state court. All of the actions assert claims against the Company and/or members of the Board for alleged breaches of fiduciary duties in connection with the Proposal, as described further below.
 
On or about November 5, 2010, the Company became aware that the first of the shareholder class actions had been filed against the Company and the Board in connection with the Proposal. Plaintiffs allege, among other things, that the proposed buyout price and the process of evaluating the Proposal are unfair and inadequate. Plaintiffs seek, among other relief, to enjoin defendants from consummating the Proposal and to direct defendants to exercise their fiduciary duties to negotiate a transaction that is in the best interests of the Company’s shareholders.
 
The Company has moved, or will move, to dismiss each of the complaints because, among other reasons, Plaintiffs’ claims are not ripe for adjudication and fail to state a claim upon which relief can be granted. The Company has reviewed the allegations contained in the complaints and believe they are without merit.  The Company intends to defend the litigation vigorously.
 
To date, the two actions pending in Nevada federal district court have been dismissed.  The Nevada state court actions have been consolidated into a single action.  The motion to dismiss the Tennessee state court action remains pending.

The updated actions are captioned as follows:

Arthur I. Murphy, Jr. IRA v. Fushi Copperweld Inc., Li Fu, Joseph J. Longever, Wenbing Christopher Wang, Barry L. Raeburn, Bai Feng, Jiping Hua, and John Francis Perkowski, Case No. 10OC00512 (“Murphy”), filed on November 4, 2010, in the First Judicial District Court of the State of Nevada in and for Carson City.  On August 1, 2011, Plaintiff Murphy voluntarily dismissed his complaint, filed prior to consolidation of the Nevada state court actions.
 
DeanVictor v. Li Fu, Case No. 10-OC-00534 1B (“Victor”), filed on November 24, 2010, in the First Judicial District Court of the State of Nevada in and for Carson City.  On August 1, 2011, Plaintiff Victor voluntarily dismissed his complaint, filed prior to consolidation of the Nevada state court actions.
 
 
30

 
 
Brian Levy v. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Craig H. Studwell, Wenbing Christopher Wang, John F. Perkowski, Feng Bai, Jiping Hua, Barry L. Raeburn, and Abax Global Capital (Hong Kong) Ltd., Case No. 10OC00555-1B (“Levy”), filed on December 7, 2010, in the First Judicial District Court of the State of Nevada in and for Carson City.  Plaintiff Levy voluntarily dismissed this action on April 29, 2011.
 
NVEST AB v. Fushi Copperweld, Inc., Case No. 10OC005591B (“NVEST”), filed on December 8, 2010, in the First Judicial District Court of the State of Nevada in and for Carson City.  On August 1, 2011, Plaintiff NVEST AB voluntarily dismissed its complaint, filed prior to consolidation of the Nevada state court actions.
 
John Wilcoxon v. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Wenbing Christopher Wang, John Francis Perkowski, Feng Bai, Jiping Hua, and Barry L. Raeburn, Case No. A-10-628936-C (“Wilcoxon”), filed on November 8, 2010, in the Eighth Judicial District Court of the State of Nevada in and for Clark County.  On March 7, 2011, the Eighth Judicial District Court consolidated the Wilcoxon, Gober, Antler, and Tejeda actions under the Wilcoxon case number.

James D. Kennedy v. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Wenbing Christopher Wang, Barry L. Raeburn, Feng Bai, Jiping Hua, and John Francis Perkowski, Case No. 10-03518 (“Kennedy”), filed on November 23, 2010, in the Second Judicial District Court of the State of Nevada in and for Washoe County.  On August 1, 2011, Plaintiff Kennedy voluntarily dismissed his complaint, filed prior to consolidation of the Nevada state court actions.

Mohamed Hussien vs. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Wenbing Christopher Wang, Barry L. Raeburn, Feng Bai, Jiping Hua, and John Francis Perkowski, Case No. 3:10-CV-00699-LRH-RAM (“Hussien”), filed on November 8, 2010, in the United States District Court for the District of Nevada.  The Court dismissed the Hussien action on April 7, 2011.

Thomas Turner vs. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Wenbing Christopher Wang, Barry L. Raeburn, Feng Bai, Jiping Hua, John Francis Perkowski, Case No. 3-10-CV-00711-RCJ-VPC (“Turner”), filed on November 15, 2010, in the United States District Court for the District of Nevada.  The Court dismissed the Turner action on May 9, 2011.
 
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 (“Korber”), filed on December 30, 2010, in the Chancery Court for Lincoln County, Tennessee, Seventeenth Judicial District at Fayetteville.  The Company and Mr. Wang have moved to dismiss this action, which motion remains pending before the Court.

The Federal Securities Class Action Litigation

Three federal securities class action suits were commenced against the Company and certain of its present and former officers and directors during the period from May 16, 2011 to June 20, 2011.  Two actions were commenced in the United States District Court for the Southern District of New York, and one action was commenced in the United States District Court for the Middle District of Tennessee.  Plaintiffs have voluntarily dismissed the New York actions, and the Tennessee action remains pending.
 
 
31

 

 
On or about May 17, 2011, the Company became aware that the first of the federal securities class actions had been filed against the Company and certain of its officers and directors in connection with the Company’s restatement of its financials.  Plaintiffs assert claims against the Company and the other named defendants for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act.  Plaintiffs seek damages and other relief on behalf of a purported class of shareholders who purchased the Company’s common stock during the period between August 14, 2007 and March 29, 2011.  Plaintiffs contend, among other things, that the Company’s financial statements were materially false and misleading when made during the class period.

The actions are captioned as follows: 

(1) 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, No. 1:11-CV-03104-PGG (S.D.N.Y) (“Levy”).  The Levy action was filed on May 16, 2011.  Plaintiffs voluntarily dismissed this action on September 20, 2011;

(2) Robert Wiener, on behalf of himself and all others similarly situated v. Fushi Copperweld, Inc., Joseph J. Longever, Craig H. Studwell, Wenbing Christopher Wang, and Beihong Linda Zhang, No. 11-CV-3772 (S.D.N.Y) (“Wiener”).  The Wiener action was filed on June 2, 2011.  Plaintiffs voluntarily dismissed this action on September 8, 2011;

(3) North Port Firefighters’ Pension – Local Option Plan, individually and on behalf of all others similarly situated v. Fushi Copperweld, Inc., Li Fu, Joseph J. Longever, Craig H. Studwell, Wenbing Christopher Wang, and Beihong Linda Zhang, No. 3:11-CV-0595 (M.D. Tenn.) (“North Port Firefighters”).  The North Port Firefighters action was filed on June 20, 2011.  Plaintiffs are scheduled to file a consolidated amended complaint in this action on November 14, 2011.
 
Item 1A. Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6.  Exhibits

Exhibit
No.
  
Document Description
     
31.1
 
Certification of the Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
 
Certification of the Principal Executive Officer and of the Principal Accounting and Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
     
101
 
Interactive Data Files.

 
32

 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FUSHI COPPERWELD, INC.
     
Date: November 9, 2011
By:  
/s/ Craig H. Studwell
 
Name: Craig H. Studwell
 
Title: Chief Financial Officer
(Principal Accounting and Financial Officer)

 
33

 

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).
     
101
 
Interactive Data Files.

 
34