Quarterly Financial Report

Second Quarter

By P&M Corporate Finance

Economic data provided by the Bureau of Economic Analysis for the second quarter of 2008 indicates that U.S. economic growth accelerated from the first quarter of 2008. Real gross domestic product, the output of goods and services produced by labor and property in the United States, increased at an annual rate of 2.8 percent in the second quarter of 2008, following a 0.9 percent gain in the first quarter of 2008. The strong second quarter GDP growth primarily reflected contributions from exports, personal consumption expenditures, nonresidential structures and government spending.

The Index of Consumer Sentiment was 70.3 in September, an increase from the August level of 63, mostly as a result of lower inflation. However, the increase in consumer sentiment should be carefully analyzed. According to Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers, "Consumers have expressed heightened apprehensions about prospects for the economy due to the escalating financial crisis adding to the deep declines recorded over the past year."

The Purchasing Managers Index experienced a significant drop in September from August, when the PMI registered an index level of 43.5, the lowest level since 2001. Overall, the September level showed a contraction in manufacturing and moderating inflationary pressures. Production, new orders and inventories all decreased over the month.

The Consumer Price Index decreased 0.4 percent in August, following a 0.5 percent increase in July, to a level of 219.1, which is 5.4 percent higher than August 2007. During the first eight months of 2008, the CPI rose at a 4.3 percent seasonally adjusted annual rate. This compares with an increase of 4.1 percent for all of 2007. A contributing factor to the overall increase in the CPI has been the cost of energy. Gasoline prices increased at a 22.1 percent annual rate, and the energy index rose at a 22.4 percent annual rate.

Fueled by turmoil in the financial markets, declining automotive production and increasing unemployment, much of the economic data is pointing toward a continued slowdown. Despite a continued healthy demand for manufacturing equipment, other factors, such as forging and stamping production, metal fabrication capacity utilization, commodity pricing and construction spending, indicated signs of economic weakness coming out of the second quarter.

Automotive production
U.S. light vehicle production in August decreased 15.9 percent from July levels to 7.99 million units on an SAAR basis. The significant drop in production in August was mostly the result of overall negative economic conditions dampening consumer demand. Expected second quarter production cuts focused on trucks and sport utility vehicles materialized as manufacturers adjusted inventory levels to meet market demand.

U.S. residential housing starts in August were at an SAAR of 895,000. This is 6.2 percent below the July rate of 954,000 and 33.1 percent below the August 2007 rate of 1.337 million. Nonresidential construction, which was experiencing steady growth until June, turned downward in July and August. However, despite a 1.9 percent decrease to $416 billion in August over June, the value of U.S. nonresidential construction in August was still 16.9 percent above the August 2007 value of $356 billion.

Machine tools
July U.S. machine tool consumption totaled $303.4 million, down 21.5 percent from June, but up 5.7 percent from the $287 million reported for July 2007. With a year-to-date total of $2.7 million, 2008 is up 15.5 percent over the comparable period in 2007. "Despite the consecutive 1.3 percent increases in durable goods orders for June and July, manufacturing technology orders turned down sharply in July, with much of the downturn in fabricating and forming," said Peter Borden, president of the American Machine Tool Distributors' Association, Rockville, Md. "However, 2008 remains stronger than both 2006 and 2007."

New orders
New orders of fabricated metal products in August declined 0.6 percent to $28.2 billion. This followed a 1.1 percent increase in July, and it represents an increase of 0.9 percent from August 2007. New orders for all manufactured goods in April declined $9.9 billion, or 4.5 percent, to $208.5 billion. This was the largest percent decrease in new orders since January 2008 and followed four consecutive monthly increases.

Production and capacity utilization
The forging and stamping production index decreased 0.9 percent in August to 122.5 but was up 3.1 percent from last year. The forging and stamping production index scored higher than overall industrial production, which recorded a level of 110.3 in August. Metal fabrication capacity utilization in August was unchanged from July at 78.3, but it represented a decline of 3.6 percent from its August 2007 level and was slightly below overall industrial capacity utilization of 78.7 percent.

Commodity pricing
For the 12 months of September 2007 through August 2008, aluminum increased 6.4 percent, copper decreased 12.1 percent, nickel decreased 42.4 percent and zinc decreased 41.9 percent. Ferrous scrap prices increased 18.6 percent, and steel sheet prices increased 87.6 percent throughout this period. Ferrous scrap and steel sheet were bolstered by a run-up in prices through July, which was followed by a 31.3 percent and 8.7 percent price decrease in August, respectively.

Metal fabrication industry
The metal fabrication industry has underperformed the S&P 500 Index over the past 12 months, with the metal fabrication index declining 56.1 percent and the S&P 500 Index declining 41.4 percent. Most of the underperformance resulted over the last three months, as the uncertainty surrounding the federal government's response to the credit crisis weighed heavily on U.S. financial markets. The metal fabrication index used for this comparison contains select large public companies in multiple metal fabricating industries.

End markets
Over the past 12 months, stocks in select metals-intensive end market segments, other than aerospace and defense, underperformed the S&P 500 Index. Through the 12-month period, heavy construction experienced a decline of 62.7 percent, while machine tools and automotive experienced declines of 53.2 percent and 52.8 percent, respectively. Over the same period, the S&P 500 Index and aerospace and defense each declined 41.4 percent. The outlook for metals end markets as a whole remains highly dependent on sector-specific drivers, particularly automotive and aerospace and defense.


M&A activity
Middle-market deal volume (defined as transactions with disclosed deal values less than $500 million) in the first half of 2008 was 5,590, compared with 6,649 for the first half of 2007, representing a decline of 16.2 percent. Total deal value during this period declined from $152.7 billion in 2007 to $115.1 billion in 2008, representing a decline of 24.6 percent.

Lending activity
Middle-market leverage multiples reached their highest levels in the past 10 years during the first half of 2007, but they began to recede during the second half of the year as the markets tightened, averaging out at 5.6x EBITDA, up from 4.7x in 2006. In 2008, the middle market has experienced significant reduction in debt availability, as average leverage multiples dropped to 4.1x EBITDA in the second quarter. FFJ

P&M Corporate Finance
P&M Corporate Finance LLC (PMCF) is an investment banking firm focused on providing strategic M&A advisory services to middle-market companies, with 28 professionals in offices in Chicago, Cleveland and Detroit. PMCF has a dedicated industrials team, which focuses on helping clients achieve their goals through a variety of transaction alternatives, including sell-side, acquisition, financing and other strategic solutions. The team's deep knowledge of the metals market covers a wide range of processes and segments, including casting, distribution, fabricating, forging, machining, stamping and processing. For inquiries regarding its services, contact Paul Flanagan at 248/223-3550 or Eamon Moran at 248/603-5285 or visit
















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