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Business direct weekly (MI)
December 2, 2004
Materials Costs Blamed For Drops in Income
By C. Beeke
Despite growth in sales, some western Michigan manufacturers blamed raw material costs for
quarterly downturns in net income.
From appliance makers to office furniture to auto suppliers, the costs of steel and other raw
materials bit sharply into net earnings for a few companies this quarter.
Knape & Vogt Manufacturing Co. [Nasdaq: KNAP] in Grand Rapids increased net sales by 6.6
percent in its first quarter, compared to the same period last year, but dropped nearly half in net
income — from $669,875 to $390,511. The drawer slide and office furniture manufacturer cited
higher steel costs of about $700,000 pre-tax in the first quarter.
"Steel is the most significant raw material purchased by KV," the company reported in its firstquarter
results. "Average steel costs have risen by over 70 percent since the start of the calendar
year resulting in higher material costs for KV during the first quarter of approximately $2.5
million."
The company passed on about $1.8 million of the increases to its customers, but could not push
through the rest of the burden, it added.
"Going forward, KV's profitability will benefit from price increases that were agreed to by its
customers late in the first quarter. In addition, KV has been working closely with its steel vendors
to identify lower-cost solutions, and the company is utilizing alternative sourcing options when
available," Knape & Vogt reported.
Whirlpool Corp. in Benton Harbor [NYSE: WHR] faced vendor trouble earlier this year when
Ispat Inland Inc. tried to implement a steel surcharge for the appliance manufacturer. Whirlpool
sued over the increase, alleging a contract violation.
Ispat dropped the surcharge and continued shipments at the agreed-upon price, Whirlpool
reported.
Steel costs still affected the company's net income, helping drop it from $105 million in last year's
third quarter to $101 million this year. That despite a net sales increase of 6.6 percent.
"Our quarterly operating results were negatively impacted by raw material cost increases and
record-high oil prices," chairman, president and CEO Jeff Fettig said in the earnings
announcement. "The magnitude of these cost increases could not be offset by our record level of
productivity and overall business spending controls. Additionally material and component supply
shortages impacted our sales."
Logistics expenses rose for Whirlpool because of carrier shortages, global communications
manager Steven Duthie said. (See Business Direct Weekly's Nov. 18-24 edition for more on the
logistics industry.)
As with Knape & Vogt, Whirlpool responded to higher costs by raising prices.
"We have taken specific actions to deal with this environment," Fettig continued, "which include
driving higher levels of productivity in all business operations, implementing price increases of
approximately five to 10 percent in most key markets around the world — including the U.S. —
and accelerating the rate of innovation of new products to the market."
The full effect of these strategies won't be realized until 2005, he noted.
Other steel users have experienced shortages, as well, reported the Precision Metalforming
Association in Washington, D.C. September steel imports declined 2.8 percent from the previous
month, adding to problems PMA members have had obtaining sufficient quantities, president
William Gaskin said.
In PMA's September survey, 36 percent of members had orders canceled for steel they expected
to receive that month, 73 percent received partial shipments and 89 percent had shipments come
in late.
Yet, the Port of Indiana-Burns Harbor in Portage, Ind., has seen more steel than ever come across
its barges. The Lake Michigan port hauls steel and other cargo for Indiana and western Michigan
and reported September steel shipments up 23 percent compared with last year.
"We're moving the most we've ever moved," spokesman Jody Peacock said. "We are seeing
record numbers in shipments."
"All of its imported steel," with much going to steel mills in Indiana, but some filling contracts
directly with western Michigan companies, port director Stephen Mosher added.
Western Michigan companies will continue to feel a strain on profits, predicted Brian Long of the
National Association of Purchasing Management in Grand Rapids and Kalamazoo.
"Local firms will continue to find themselves squeezed by higher prices for raw materials, and
profits, if any, will be squeezed razor thin," the purchasing analyst said in a September
purchasing report. "Tier-one auto suppliers will be especially hard hit."
A couple participants in the association's survey reported that steel may have topped out in price
in October. Long was careful not to get burned a second time, after predicting in June that steel
prices would start to fall by August. (See Business Direct Weekly's Aug. 5-11 edition.)
"However, since we saw a similar pattern in steel pricing early in the summer, it is too early to
conclude that our problems in the steel supply chain are now over," Long said in the report.
Many raw materials remain on the list of worries for manufacturers, with aluminum, stainless
steel, lumber, copper, oil, foam, domestic plywood and others all rising in price, the NAPM
reported.
Natural gas prices are expected to remain up over the winter, the Michigan Public Service
Commission reported, hiking heating bills by 14 and 17 percent compared with last year.
Gasoline prices will stay in the $1.90 range for all of 2005, the Energy Information
Administration reported.
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