Quarterly Financial Report

Fourth Quarter

By P&M Corporate Finance

2008 was characterized by political and economic headlines as the country officially entered a recession going into 2009. The following data compiled by P&M Corporate Finance LLC summarizes key macroeconomic indicators, illustrating how the broader economy responded to the meltdown in the financial services sector, the Wall Street and automotive company bailouts, and the election.

Economic data provided by the Bureau of Economic Analysis for the third quarter of 2008 indicates U.S. economic growth decreased from the second quarter of 2008. Real gross domestic product decreased at an annual rate of 0.5 percent in the third quarter of 2008, following a 2.8 percent gain in the second quarter. Weak third quarter GDP results primarily reflected negative contributions from personal consumption expenditures, residential fixed investment and software spending partially offset by positive contributions from federal government spending, private investment exports, nonresidential construction, and state and local government spending.

The Index of Consumer Sentiment was 60.1 in December, an increase from the November level of 55.3 but a decrease from the September level of 70.3. Current index levels indicate consumers continue to be pessimistic about future economic prospects driven by declining incomes. Lower prices have provided some relief, according to Richard Curtin, director of the Reuters/University of Michigan Surveys of Consumers. "The most significant change recorded in the December survey was the record plunge in inflation expectations," he said.

The Purchasing Managers Index continued its decline in December to 32.4, its lowest level since 1980. The December level indicates economic activity in the manufacturing sector declined for the fifth consecutive month. None of the industries that make up the manufacturing sector reported growth during the month, making December one of the slowest months in history for the U.S. manufacturing base. New orders contracted and are at their lowest level since 1948. The Consumer Price Index decreased 0.7 percent in December to a level of 211.5, which represented the fifth consecutive monthly decline. During 2008, the CPI rose at a 0.7 percent seasonally adjusted annual rate, the smallest calendar year increase since 1954. This compares with an increase of 4.1 percent for all of 2007. The largest contributing factor of the December CPI decline was the gasoline index, which fell 17.2 percent, accounting for almost 90 percent of the decrease.

2008 was a remarkable year in the metals industry. U.S. automotive production continued its decline, the residential construction market remained soft and the U.S. machine tool industry failed to maintain any of the momentum it experienced in the middle of the year. As many of the following indicators illustrate, most of the declines took place during the second half of 2008, a time characterized by turmoil in the financial services industry and frozen credit markets. Without credit markets functioning properly, businesses were unable to attract the necessary capital to fund investments or acquisitions, consumers were cut off from home purchases and refinancing, and large capital goods manufacturers (i.e., aerospace and capital equipment) were unable to maintain healthy backlogs as order books dwindled.

Automotive production
U.S. light-vehicle production in December decreased 11.4 percent from November levels to 6.6 million units on an SAAR basis. Annual production in 2008 was 19.2 percent below 2007 production levels. The significant drop was mostly the result of overall negative economic and credit market conditions. Demand for light vehicles in the U.S. will remain weak, as current production levels continue to outpace demand, resulting in low Q1 2009 production. Expect declines of greater than 10 percent on an SAAR basis for 2009.

U.S. residential housing starts in November were at a SAAR of 625,000. This is 18.9 percent below the November rate of 771,000 and 47.9 percent below the November 2007 rate of 1.2 million. Nonresidential construction, which experienced steady growth during the first half of 2008, turned downward in the third quarter and began to recover in the fourth quarter. The trends are telling, as residential housing starts continue to decline, while private, nonresidential construction began to show signs of recovery in the fourth quarter.

Machine tools
November U.S. machine tool consumption totaled $185.6 million, down 20.4 percent from October and down 61.6 percent from the annual high of $483.6 million reported in September 2008. "The November numbers demonstrate the much-publicized slowdown in manufacturing," said Peter Borden, president of the American Machine Tool Distributors' Association, Rockville, Md. "After three years of averaging over 2,000 units per month, unit consumption fell back to a level that we have not seen since January 2004 and January 2005."

New orders
New orders of fabricated metal products in November declined 0.2 percent to $27.5 billion. This followed a 1 percent decrease in October, and it represents a decrease of 0.1 percent from November 2007. New orders for manufactured durable goods in November declined $1.8 billion, or 1 percent, to $186.9 billion. This was the fourth consecutive monthly decrease for new orders of manufactured durable goods.

Production and capacity utilization
The forging and stamping production index decreased 4.5 percent in December to 112.6 and was down 4.8 percent from last year. The forging and stamping production index scored higher than overall industrial production, which recorded a level of 103.6 in December. Metal fabrication capacity utilization in December was 71, a 4.2 percent decrease from November, which represented the fourth consecutive month of capacity declines in the overall metal fabrication industry.

Commodity pricing
Over the past 12 months, aluminum decreased 34.1 percent, copper decreased 54.3 percent, nickel decreased 61.5 percent and zinc decreased 52.8 percent. Ferrous scrap prices decreased 34 percent, and steel sheet prices increased 4 percent throughout this period. Ferrous scrap and steel sheet experienced a dramatic run-up in prices through July, followed by a 66 percent and 45.7 percent drop from July through December, 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 37.9 percent and the S&P 500 Index declining 35.1 percent. Most of the underperformance resulted from the uncertainty surrounding the federal government's response to the credit crisis and weighed heavily on U.S. financial markets during the third quarter. 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 declined 45.6 percent, machine tools declined 42.5 percent and automotive declined 46.7 percent. Over the same period, the S&P 500 index and aerospace and defense each declined 28.2 percent. During the fourth quarter, public equities in each industry segment began to trend upward, demonstrating signs of a potential "bottoming out" of the market. Concerns remain despite this, particularly within automotive.


Merger and acquisition activity
Middle-market deal volume (defined as transactions with disclosed deal values less than $500 million) in 2008 was 10,700, compared with 12,819 in 2007, representing a decline of 16.5 percent. Total deal value during this period declined from $293 billion in 2007 to $219 billion in 2008, representing a decline of 25.3 percent.

Lending activity
In 2007, middle-market leverage multiples reached their highest levels in the past 10 years. 2008 was a different story, as banks curbed lending in response to liquidity issues in the broader market. This credit freeze effectively forced deal volume to recede, and it also limited completed credits to asset-backed, or secured, structures. This resulted in average middle-market lending multiples in 2008 of 4.5x EBITDA, compared with 5.6x EBITDA in 2007. Anticipate a slow recovery, with credit markets starting to open up during 2009.

P&M Corporate Finance
P&M Corporate Finance LLC (PMCF) is an investment banking firm focused on providing strategic merger and acquisition advisory services to the middle market. PMCF's deep knowledge of the metals market covers a wide range of processes and segments, including casting, distribution, fabricating, forging, machining, stamping and processing. PMCF has a dedicated industrials team that focuses on helping clients achieve their goals through a variety of transaction alternatives, including sell-side, acquisition, financing and other strategic solutions. PMCF has offices in Chicago, Cleveland and Detroit. If you are interested in learning more about the company's services, please contact Paul Flanagan at 248/223-3550, Mike Paparella at 216/274-6530, Scott George at 312/602-3613 or visit





















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