How could a company (I can’t reveal the name now just to be sure you took the quiz) with a COGS (cost of good sold) mostly made up of metals and metal components turn in this kind of a result on top of increased freight costs, increased SGA expense and increased R&D expense? In short, they took advantage of every commodity up-tick available during these past 3 months, re-capped here as part of their detailed comments according to their SEC filings. Speaking for machinery and equipment only, sales volume and price realization increased in North America due to sales of products used in coal mining applications. Similarly, high prices for oil and natural gas increased investment in pipeline construction and drilling. Sales also increased in Europe (mostly the Middle East) due to rising oil prices and increased production. Eastern Europe led by Russia, Ukraine and Kazakhstan also led to the increase. Asia Pacific numbers were up due to mine output (coal and iron ore) and construction and industrial production increases. The role of currency exchange also helped to boost the numbers.
Where the growth occurred may appear obvious but still the company’s own forecast is worth noting. Here is what our industrial bellwether had to say about the oil and gas industry for the balance of this year, “Prices of most commodities in the first half increased more than anticipated, particularly in those facing supply problems such as coal, oil, aluminum and copper. Our forecasts assume that coal and oil prices will average even higher in the second half than in the first half.” Our take on that forecast is different. We believe coal and oil prices will come down though the average price may not fall below the first half’s average. That will depend upon timing of course.
And finally a comment about steel pricing in terms of expectations from April vs. now the company said, “We are continuing to experience increased pressure on material costs due largely to very high steel and iron-related material prices….In recent months, there have been a variety of economic factors that have driven up these costs. We and our suppliers are aggressively working on cost reduction initiatives to mitigate the impact of commodity-related price increases.” The current expectation is a 2.5-3% price hike in materials costs instead of 1-1.5% forecasted in January. You can read our price predictions here, here here and here here.