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This excerpt taken from the WOR 10-Q filed Oct 10, 2007. Market & Industry Overview
ship percentage of joint venture construction sales would not materially change the sales breakdown in the graph. Approximately 50% of the sales of our Steel Processing business segment, and substantially all of the sales of the Automotive Body Panels operating segment are to the automotive market. North American vehicle production, primarily for the big three automakers (Chrysler, Ford, and General Motors) has a substantial impact on demand from these operations. These businesses are also impacted by the market price of steel and, to a lesser extent, the market price of commodities used in their operations, such as zinc, natural gas, and fuel oil. The majority of the sales of three of our unconsolidated joint ventures also go to the automotive end market. These sales are not consolidated in our results. However, adding our ownership percentage of joint venture sales to the automotive market does not materially change the sales breakdown in the graph above. Sales in our Pressure Cylinders business segment and our Steel Packaging operating segment, and approximately 25% of the sales of our Steel Processing segment are to other markets such as appliance, leisure and recreation, distribution and transportation, HVAC, lawn and garden, and consumer specialty products. Given the
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Table of Contentsmany different product lines that make up these sales and the wide variety of end markets, it is very difficult to list the key market indicators that drive this portion of our business. However, we believe that U.S. GDP growth is a good economic indicator for this portion of our business. We use the following information to monitor our major end markets:
U.S. GDP growth rate increases are indicative of a growing economy and can be an indication of the strength in demand and, in many cases, pricing for our products. Conversely, the opposite is also generally true. Historically, we have seen declining U.S. GDP growth rates year-over-year can have a negative effect on our results, as a softer economy generally hurts demand and causes prices to fall. Changes in U.S. GDP growth rates can also signal changes in conversion costs related to production and selling, general and administrative (“SG&A”) expenses. The market price of hot rolled steel is the most significant factor impacting our selling prices, and can also impact earnings. In a rising price environment, our results are generally favorably impacted as lower priced material, purchased in previous periods, flows through cost of goods sold, while our selling prices increase at a faster pace to cover current replacement costs. On the other hand, when steel prices fall, we have higher priced material flowing through cost of goods sold while selling prices compress to what the market will bear. This first-in, first-out (“FIFO”) inventory costing method results in inventory holding gains and losses, which we attempt to limit through proper inventory management. No single customer makes up more than 5% of our consolidated net sales. While our automotive business is largely driven by Big Three production schedules, our customer base is broader than the Big Three and includes many of their suppliers as well. Automotive shutdowns in July and December can cause weaker demand in our first and third quarters. We continue to pursue customer diversification beyond the Big Three automakers and their suppliers. The Dodge Index, in the table above, represents the value of total construction contracts, including residential and non-residential building and non-building construction. This overall index serves as a broad indicator of the construction markets in which we participate, as it consists of actual construction starts. The price of framing lumber can also affect our Metal Framing business as customers may choose alternate building materials such as wood for some applications. Although the chart above shows no increase in the price of framing lumber versus the prior year, overall framing lumber pricing remains near four-year lows. The market trends of certain other commodities such as zinc, natural gas and fuel oil are important to us as they represent a significant portion of our manufacturing expenses. A rise in the price of any of these commodities could increase our manufacturing costs. We attempt to limit the impact of pricing fluctuations through contracts and hedging activities, where available.
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