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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from              to             

 

Commission File Number 0-25032

 


 

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 


 

DELAWARE   25-1724540

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

600 Mayer Street

Bridgeville, PA 15017

(Address of principal executive offices, including zip code)

 

(412) 257-7600

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

 

As of April 30, 2005, there were 6,363,780 shares outstanding of the Registrant’s Common Stock, $0.001 par value per share.

 



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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 

This Quarterly Report on Form 10-Q contains historical information and forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Statements looking forward in time, including statements regarding future growth, cost savings, production capacity, broader product lines, quality, reliability, price and delivery needs, enhanced competitive posture, effect of new accounting pronouncements and no material financial impact from litigation or contingencies are included in this Form 10-Q pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

 

The Company’s actual results will be affected by a wide range of factors including compliance with Section 404 of the Sarbanes-Oxley Act of 2002; the concentrated nature of the Company’s customer base to date and the Company’s dependence on its significant customers; the receipt, pricing and timing of future customer orders; changes in product mix; the limited number of raw material and energy suppliers and significant fluctuations that may occur in raw material and energy prices; the Company’s reliance on certain critical manufacturing equipment; the ability to acquire the ESR Building or to extend the lease ; the Company’s ongoing requirement for continued compliance with environmental laws; and the ultimate outcome of the Company’s current and future litigation matters. Many of these factors are not within the Company’s control and involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Any unfavorable change in the foregoing or other factors could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company’s control.

 

DESCRIPTION


   PAGE NO.

PART I.   FINANCIAL INFORMATION     
Item 1.   Financial Statements     
   

Consolidated Condensed Statements of Operations

   02
   

Consolidated Condensed Balance Sheets

   03
   

Consolidated Condensed Statements of Cash Flows

   04
   

Notes to the Unaudited Consolidated Condensed Financial Statements

   05
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    09
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    13
Item 4.   Controls and Procedures    13
PART II.   OTHER INFORMATION     
Item 1.   Legal Proceedings    15
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    15
Item 3.   Defaults Upon Senior Securities    15
Item 4.   Submission of Matters to a Vote of Security Holders    15
Item 5.   Other information    15
Item 6.   Exhibits    15
SIGNATURES    16
CERTIFICATIONS    17

 

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Part I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Information)

(Unaudited)

 

    

For the

Three-month period ended
March 31,


 
     2005

    2004

 

Net sales

   $ 43,019     $ 21,307  

Cost of products sold

     36,410       19,344  

Selling and administrative expenses

     1,907       1,528  
    


 


Operating income

     4,702       435  

Interest expense and other financing costs

     (172 )     (88 )

Other income

     60       8  
    


 


Income before taxes

     4,590       355  

Income tax expense

     1,652       128  
    


 


Net income

   $ 2,938     $ 227  
    


 


Earnings per common share:

                

Basic

   $ 0.46     $ 0.04  
    


 


Diluted

   $ 0.45     $ 0.04  
    


 


Weighted average shares of Common Stock outstanding:

                

Basic

     6,350,547       6,296,053  

Diluted

     6,468,475       6,336,034  

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in Thousands)

 

 

     March 31,
2005


    December 31,
2004


 
     (Unaudited)        

ASSETS

                

Current assets

                

Cash and cash equivalents

   $ 833     $ 241  

Accounts receivable, (less allowance for doubtful accounts of $414 and $557, respectively)

     29,352       24,562  

Inventory

     43,722       38,318  

Deferred taxes

     1,045       1,436  

Other current assets

     1,482       1,982  
    


 


Total current assets

     76,434       66,539  

Property, plant and equipment, net

     40,195       40,716  

Other assets

     578       585  
    


 


Total assets

   $ 117,207     $ 107,840  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities

                

Trade accounts payable

   $ 16,210     $ 11,666  

Outstanding checks in excess of bank balance

     954       2,638  

Accrued employment costs

     2,099       2,044  

Current portion of long-term debt

     1,977       1,830  

Other current liabilities

     2,023       442  
    


 


Total current liabilities

     23,263       18,620  

Bank revolver

     10,442       8,635  

Long-term debt

     3,016       3,555  

Deferred taxes

     10,232       10,093  
    


 


Total liabilities

     46,953       40,903  
    


 


Commitments and contingencies

     —         —    

Stockholders’ equity

                

Senior Preferred Stock, par value $0.001 per share; 1,980,000 shares authorized; 0 shares issued and outstanding

     —         —    

Common Stock, par value $0.001 per share; 10,000,000 shares authorized; 6,633,837 and 6,601,112 shares issued

     7       7  

Additional paid-in capital

     29,081       28,699  

Retained earnings

     42,800       39,862  

Treasury Stock at cost; 270,057 and 269,900 common shares held

     (1,634 )     (1,631 )
    


 


Total stockholders’ equity

     70,254       66,937  
    


 


Total liabilities and stockholders’ equity

   $ 117,207     $ 107,840  
    


 


 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

    

For the

Three-month period ended

March 31,


 
     2005

    2004

 

Cash flow from operating activities:

                

Net income

   $ 2,938     $ 227  

Adjustments to reconcile to net cash and cash equivalents

                

Provided by operating activities:

                

Depreciation and amortization

     769       786  

Deferred taxes

     539       21  

Tax benefit from exercise of stock options

     115       3  

Changes in assets and liabilities:

                

Accounts receivable, net

     (4,790 )     (2,535 )

Inventory

     (5,404 )     (6,279 )

Trade accounts payable

     4,544       2,658  

Accrued employment costs

     147       703  

Other, net

     2,415       427  
    


 


Net cash provided by (used in) operating activities

     1,273       (3,989 )
    


 


Cash flow from investing activities:

                

Capital expenditures

     (584 )     (174 )
    


 


Net cash used in investing activities

     (584 )     (174 )
    


 


Cash flow from financing activities:

                

Net borrowings under revolving line of credit

     1,807       668  

Repayments of long-term debt

     (484 )     (498 )

Net change in bank overdrafts

     (1,684 )     (272 )

Proceeds from issuance of common stock

     264       42  
    


 


Net cash (used in) financing activities

     (97 )     (60 )
    


 


Net increase (decrease) in cash and cash equivalents

     592       (4,223 )

Cash and cash equivalents at beginning of period

     241       4,735  
    


 


Cash and cash equivalents at end of period

   $ 833     $ 512  
    


 


Supplemental disclosure of cash flow information:

                

Interest paid

   $ 167     $ 87  

Income taxes paid

   $ 594     $ 0  

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Note 1 - Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements of operations for the three-month periods ended March 31, 2005 and 2004, balance sheets as of March 31, 2005 and December 31, 2004, and statements of cash flows for the three-month periods ended March 31, 2005 and 2004, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2004. In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, all of which were of a normal recurring nature, necessary to present fairly, in all material respects, the consolidated financial position at March 31, 2005 and December 31, 2004 and the consolidated results of operations and of cash flows for the periods ended March 31, 2005 and 2004, and are not necessarily indicative of the results to be expected for the full year.

 

Note 2 – Common Stock

 

The reconciliation of the weighted average number of shares of Common Stock outstanding utilized for the earnings per common share computations are as follows:

 

     For the Three-month period ended
March 31,


     2005

   2004

Weighted average number of shares of Common Stock outstanding

   6,350,547    6,296,053

Assuming exercise of stock options reduced by the number of shares which could have been purchased with the proceeds from the exercise of such stock options

   117,928    39,981
    
  

Weighted average number of shares of Common Stock outstanding, as adjusted

   6,468,475    6,336,034
    
  

 

Note 3 – Stock-Based Compensation Plans

 

The following table illustrates the effect on net income and earnings per share between the Company’s use of the intrinsic value method and the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee and director compensation (dollars, except per share amounts, in thousands):

 

     For the Three-month period ended
March 31,


 
     2005

    2004

 

Net income, as reported

   $ 2,938     $ 227  

Total stock-based compensation expense determined Under fair-value based method, net of taxes

     (44 )     (39 )
    


 


Pro forma net income

   $ 2,894     $ 188  
    


 


Earnings per common share:

                

Basic – as reported

   $ 0.46     $ 0.04  
    


 


Basic – pro forma

   $ 0.46     $ 0.03  
    


 


Diluted – as reported

   $ 0.45     $ 0.04  
    


 


Diluted – pro forma

   $ 0.45     $ 0.03  
    


 


 

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Note 4 – Recent Accounting Pronouncements

 

In November of 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). The purpose of this statement is to clarify the accounting of abnormal amounts of idle facility expense, freight, handling costs and waste material. ARB No. 43 stated that under some circumstances these costs may be so abnormal that they are required to be treated as current period costs. SFAS 151 requires that these costs be treated as current period costs regardless if they meet the criteria of “so abnormal.” In addition, the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provision of this Statement shall be effective for inventory costs incurred during fiscal years beginning after December 31, 2004. The adoption of SFAS 151 did not have a material impact on the Company’s results of operations or financial position during the first quarter 2005.

 

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”). This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. SFAS 123-R eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. SFAS 123-R requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the Company’s financial statements. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides the SEC’s staff views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC issued a press release that delays the adoption date of SFAS 123R to January 1, 2006. Therefore, the Company will adopt SFAS 123-R as of January 1, 2006 utilizing similar valuation methodologies that generate the pro-forma disclosures included in this quarterly report.

 

Note 5 - Inventory

 

The major classes of inventory are as follows (dollars in thousands):

 

     March 31, 2005

   December 31, 2004

Raw materials and supplies

   $ 5,762    $ 5,160

Semi-finished and finished steel products

     35,583      30,820

Operating materials

     2,377      2,338
    

  

Total inventory

   $ 43,722    $ 38,318
    

  

 

Note 6 - Property, Plant and Equipment

 

Property, plant and equipment consists of the following (dollars in thousands):

 

     March 31, 2005

    December 31, 2004

 

Land and land improvements

   $ 1,014     $ 1,014  

Buildings

     6,203       6,203  

Machinery and equipment

     52,462       52,358  

Construction in progress

     832       893  
    


 


       60,511       60,468  

Accumulated depreciation

     (20,316 )     (19,752 )
    


 


Property, plant and equipment, net

   $ 40,195     $ 40,716  
    


 


 

The ESR building in Bridgeville, PA, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment, was not included in the purchase of the Bridgeville facility from AK Steel in 2003. On February 2, 2005, the Company entered into a written agreement with AK Steel to purchase the ESR building and certain other parcels. The Company will continue to operate the equipment in the ESR building under an existing lease, which was extended to March 8, 2006. In the event the purchase of the ESR building is not completed prior to the expiration of the lease, and the lease is not otherwise extended beyond March 8, 2006, the relocation of the ESR equipment would have an adverse material effect on the financial condition of the Company.

 

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The Company incurred a write-off of $342,000 of fixed assets in the Bridgeville facility, mainly for flat bar processing equipment. The write-off was a result of the Company’s decision to move its small flat bar production to the Dunkirk facility.

 

Note 7 – Commitments and Contingencies

 

On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company caused certain crankshafts sold by Teledyne to be defective. As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.

 

In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is available for this claim and has reached an agreement with United States Aviation Underwriters, Inc., (“USAU”) a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, regarding the allocation of certain potential costs associated with the Teledyne claim. At this time, the Company is engaged in discovery and believes that the final disposition of this suit will not have a material adverse effect on the financial condition and the results of operations of the Company.

 

Note 8 - - Business Segments

 

The Company is comprised of two business segments: Universal Stainless & Alloy Products, which consists of the Bridgeville and Titusville facilities, and Dunkirk Specialty Steel, the Company’s wholly owned subsidiary located in Dunkirk, New York. The Universal Stainless & Alloy Products manufacturing process involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. Dunkirk Specialty Steel’s manufacturing process involves hot rolling and finishing of specialty steel bar, rod and wire. The Segment Data are as follows (dollars in thousands):

 

     For the Three-month period ended
March 31,


 
     2005

    2004

 

Net sales:

                

Universal Stainless & Alloy Products

   $ 38,425     $ 18,845  

Dunkirk Specialty Steel

     13,667       6,745  

Intersegment

     (9,073 )     (4,283 )
    


 


Consolidated net sales

   $ 43,019     $ 21,307  
    


 


Operating income:

                

Universal Stainless & Alloy Products

   $ 2,679     $ 401  

Dunkirk Specialty Steel

     1,863       34  

Intersegment

     160       —    
    


 


Total operating income

   $ 4,702     $ 435  
    


 


Interest expense and other financing costs:

                

Universal Stainless & Alloy Products

   $ 107     $ 54  

Dunkirk Specialty Steel

     65       34  
    


 


Total interest expense and other financing costs

   $ 172     $ 88  
    


 


Other income

                

Universal Stainless & Alloy Products

   $ 3     $ 6  

Dunkirk Specialty Steel

     57       2  
    


 


Total other income

   $ 60     $ 8  
    


 


 

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     March 31,
2005


   December 31,
2004


Total assets:

             

Universal Stainless & Alloy Products

   $ 91,893    $ 86,375

Dunkirk Specialty Steel

     21,991      18,418

Corporate assets

     3,323      3,047
    

  

Consolidated total assets

   $ 117,207    $ 107,840
    

  

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

An analysis of the Company’s operations for the three-month periods ended March 31, 2005 and 2004 is as follows (dollars in thousands):

 

     For the Three-month period ended
March 31,


     2005

   2004

Net sales

             

Stainless steel

   $ 33,619    $ 16,168

Tool steel

     6,017      3,166

High-strength low alloy steel

     1,122      861

High-temperature alloy steel

     1,025      709

Conversion services

     1,114      332

Other

     122      71
    

  

Total net sales

     43,019      21,307

Cost of products sold

     36,410      19,344

Selling and administrative expenses

     1,907      1,528
    

  

Operating income

   $ 4,702    $ 435
    

  

 

Market Segment Information

 

     For the Three-month period ended
March 31,


     2005

   2004

Net sales:

             

Service centers

   $ 18,307    $ 9,906

Rerollers

     12,028      4,070

Forgers

     6,263      3,816

Wire redrawers

     2,872      1,196

Original equipment manufactures

     2,324      1,934

Conversion services

     1,114      332

Miscellaneous

     111      53
    

  

Total net sales

   $ 43,019    $ 21,307
    

  

Tons Shipped

     15,230      9,087
    

  

 

Three-month period ended March 31, 2005 as compared to the same period in 2004

 

The increase in net sales for the three-month period ended March 31, 2005 as compared to the similar period in 2004 reflects increased shipments within each market segment as well as the adoption of surcharge mechanisms for additional raw material components and base price increases implemented during the past 12 month period. Shipments of aerospace, power generation, petrochemical and tool steel products have increased substantially in comparison to the prior year period due to improved economic conditions and greater demand for higher value-added niche products.

 

Cost of products sold, as a percentage of net sales, was 84.6% and 90.8% for the three-month periods ended March 31, 2005 and 2004, respectively. The decrease is primarily due to the impact of raw material surcharges and base price increases implemented in the past 12 months, as well as higher production volumes, more than offsetting higher raw material, labor, energy and other manufacturing costs.

 

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Selling and administrative expense was $1.9 million for the current quarter, an increase of $379,000 from the first quarter 2004 amount of $1.5 million. The increase was primarily due to the write-off of an office building at the Dunkirk Specialty Steel facility in the amount of $184,000. Attempts to sell the Dunkirk Building since February 2002 have not been successful. In addition, the Company does not have any prospective buyers for the Dunkirk Building as of March 31, 2005. The change in circumstances caused the Company’s management to reduce the value of the Dunkirk Building at this time.

 

Interest expense and other financing costs increased from $88,000 for the three-month period ended March 31, 2004 to $172,000 for the three-month period ended March 31, 2005 primarily due to the utilization of the Company’s revolving credit facility to fund working capital requirements occurring during the normal course of business over the past year.

 

The effective income tax rate utilized in the three-month periods ended March 31, 2005 and 2004 was 36.0% and 36.1%, respectively. The effective income rate utilized in the current period reflects the anticipated effect of the Company’s permanent tax deductions against expected income levels in 2005.

 

Business Segment Results

 

An analysis of the net sales and operating income for the reportable segments for the three-month periods ended March 31, 2005 and 2004 is as follows (dollars in thousands):

 

Universal Stainless & Alloy Products Segment:

 

     For the Three-month period ended
March 31,


     2005

   2004

Net sales

             

Stainless steel

   $ 21,777    $ 10,720

Tool steel

     5,907      3,080

High-strength low alloy steel

     393      413

High-temperature alloy steel

     1,025      549

Conversion services

     951      249

Other

     117      46
    

  

       30,170      15,057

Intersegment

     8,255      3,788
    

  

Total net sales

     38,425      18,845

Material cost of sales

     19,826      7,602

Operation cost of sales

     14,779      9,811

Selling and administrative expenses

     1,141      1,031
    

  

Operating income

   $ 2,679    $ 401
    

  

 

Net sales for the three-month period ended March 31, 2005 for this segment, which consists of the Bridgeville and Titusville facilities, was $38.4 million, or $19.6 million more than the same period a year ago. The 104% net sales increase reflects substantial growth in all customer categories, both in tons shipped and base price increases for the Company’s products.

 

Operating income for the Universal Stainless & Alloy Products segment increased by $2.3 million from first quarter 2004 to $2.7 million, or 7.0% of net sales. This increase was primarily due to higher sales volume and base price increases, partially offset by the write-off of $342,000 of fixed assets in Bridgeville mainly for flat bar processing equipment resulting from the Company’s decision to move all of its small flat bar production to the Dunkirk facility.

 

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Dunkirk Specialty Steel Segment:

 

     For the Three-month period ended
March 31,


     2005

   2004

Net sales

             

Stainless steel

   $ 11,842    $ 5,448

Tool steel

     110      86

High-strength low alloy steel

     729      448

High-temperature alloy steel

     —        160

Conversion services

     163      83

Other

     5      25
    

  

       12,849      6,250

Intersegment

     818      495
    

  

Total net sales

     13,667      6,745

Material cost of sales

     7,114      3,477

Operation cost of sales

     3,924      2,737

Selling and administrative expenses

     766      497
    

  

Operating income

   $ 1,863    $ 34
    

  

 

Net sales for the quarter ended March 31, 2005 increased $6.9 million, or 103% from the similar period in 2004 as a result of greater sales across all markets, especially service centers and wire redrawers. The Dunkirk Specialty Steel segment sales also benefited from process improvements at the Titusville and Bridgeville facilities that created greater volumes of reroll billet feedstock shipped during the current quarter.

 

The Dunkirk Specialty Steel segment generated operating income of $1.9 million, which is 13.6% of net sales in the current quarter compared to a nearly break-even first quarter 2004. The operating income achieved was partially offset by the write-off of an office building that was part of the original purchase of the Dunkirk assets in February 2002. The asset value of $184,000 was written off once it was determined that there were no perspective buyers for the property. The building had been available for sale since the Company purchased Dunkirk Specialty Steel in early 2002.

 

Liquidity and Capital Resources

 

The Company has financed its operating activities during the three-month period ended March 31, 2005 through cash flows from operations and cash on hand at the beginning of the period, along with additional borrowings. At March 31, 2005, working capital approximated $53.2 million, as compared to $47.9 million at December 31, 2004. The ratio of current assets to current liabilities decreased from 3.6:1 at December 31, 2004 to 3.3:1 at March 31, 2005. The debt to total capitalization ratio is 18.1% at March 31, 2005 and 17.5% at December 31, 2004.

 

Cash received from sales of $ 39.1 million and $ 18.5 million represents the primary source of cash from operations for the three-month periods ended March 31, 2005 and March 31, 2004 respectively. An analysis of the primary uses of cash is as follows:

 

     For the Three-month period ended
March 31,


     2005

   2004

Raw material purchases

   $ 21,220    $ 11,664

Employment costs

     8,014      5,754

Utilities

     3,842      3,206

Other

     6,837      1,712
    

  

Total uses of cash

   $ 39,913    $ 22,326
    

  

 

Cash used in raw material purchases increased in the 2005 first quarter in comparison to same period in 2004 primarily due to higher quantities of product purchased and significantly higher transaction prices. Increased employment costs are primarily due to higher production volumes and increased payouts under the Company’s profit

 

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sharing and other incentive compensation plans. Increased utility costs are primarily due to higher consumption and rates charged for electricity and natural gas. In October 2004, the Company’s electricity costs at the Bridgeville facility increased by approximately $200,000 per month due to a Public Utility Commission ruling that reduced the number of off-peak power hours available to conduct its melting operations. The increase in other uses of cash, the majority of which is cash for outside conversion services, plant maintenance and production supplies, is directly attributable to support higher production volumes.

 

The Company continuously monitors market price fluctuations of its key raw materials. The following table reflects the average market value per pound for selected months during the last two-year period.

 

    

Dec

2003


   March
2004


  

Dec

2004


  

March

2005


Nickel

   $ 6.43    $ 6.22    $ 6.25    $ 7.34

Chrome

   $ 0.54    $ 0.70    $ 0.70    $ 0.75

Molybdenum

   $ 7.10    $ 9.98    $ 32.46    $ 33.86

Carbon Scrap

   $ 0.09    $ 0.13    $ 0.18    $ 0.11

 

The Company’s capital expenditures were approximately $584,000 and $174,000 in the first quarters 2005 and 2004, respectively. The capital expenditure level is anticipated to increase throughout the remainder of 2005, although all capital improvements projects are evaluated independently and are based upon current market conditions and managements assessment of plant capacity and efficiency considerations.

 

The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment or material related party transaction arrangements.

 

The Company maintains a credit agreement with PNC Bank for a $15.0 million revolving credit facility (“PNC Line”) with a term expiring on June 30, 2006. This credit agreement also includes a term loan (“PNC Term Loan”) scheduled to mature on June 30, 2006. The credit agreement is collateralized by substantially all of the Company’s assets. As of March 31, 2005, the Company had $5.4 million of its $15.0 million revolving line of credit with PNC Bank available for borrowing.

 

Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term market rates, which may be further adjusted, based upon the Company maintaining certain financial ratios. In addition, the Company pays a commitment fee of 0.5% per annum on the unused portion of the PNC Line. As a condition of the PNC Line and the PNC Term Loan, the Company is required to maintain certain levels of net worth, working capital and other financial ratios to limit the amount of capital expenditures it may incur without PNC Bank’s approval and to restrict the payment of dividends. The Company was in compliance with all financial ratios and restrictive covenants at March 31, 2005.

 

In 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the Dunkirk Local Development Corporation. No principal or interest payments will be required under the Deferred Loan Agreement provided that the Company hires and retains 30 new employees through the Deferred Loan Agreement maturation date, with more than 50% of those jobs made available to certain Dunkirk City residents. As of March 31, 2005, the Company believes that it will meet the conditions of the Deferred Loan Agreement, although it can make no assurances to that effect. Therefore, the proceeds have been applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.

 

Critical Accounting Policies

 

Revenue recognition is the most critical accounting policy of the Company. The Company manufactures specialty steel product in accordance with customer purchase orders that contain specific product requirements. Each purchase order provides detailed information regarding the requirements for product acceptance. Executed material certification forms are completed indicating the Company’s compliance with the customer purchase order before the specialty steel products are packaged and shipped to the customer. Revenue is generally recognized at point of shipment because risk of loss and title has transferred. Revenue is also recognized in certain situations in which products available for shipment are held at the Company’s facility beyond the stated shipment date at the customer’s specific request. The impact on revenue was less than 1% in each period presented.

 

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In addition, management constantly monitors the ability to collect its unpaid sales invoices and the valuation of its inventory. The allowance for doubtful accounts includes the value of outstanding invoices issued to customers currently operating under the protection of the federal bankruptcy law and other amounts that are deemed potentially not collectible. An inventory reserve is provided for material on hand for which management believes cost exceeds fair market value and for material on hand for more than one year not assigned to a specific customer order.

 

Long-lived assets are reviewed for impairment annually by each operating facility. An impairment write-down will be recognized whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The Company incurred a write-off of an office building that was part of the original purchase of the Dunkirk assets in February 2002. The asset value of $184,000 was written off once it was determined that there were no perspective buyers for the property. The building had been available for sale since the Company purchased Dunkirk Specialty Steel in early 2002. Other than this transaction, the Company has not recognized an impairment write-down on any of its assets held at March 31, 2005.

 

In addition, management assesses the need to record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company believes it will generate sufficient income in addition to taxable income generated from the reversal of its temporary differences to utilize the deferred tax assets recorded at March 31, 2005.

 

2005 Outlook

 

These are forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995, and actual results may vary.

 

The Company estimates that second quarter 2005 sales will range from $40 to $45 million and that diluted EPS will range from $0.40 to $0.45. This compares with sales of $29.0 million and diluted EPS of $0.25 in the second quarter of 2004. The following factors were considered in developing these estimates:

 

  The Company’s total backlog at March 31, 2005 approximated $88 million compared to $72 million at December 31, 2004 reflecting continued strength of the Company’s niche markets – namely aerospace, power generation and petrochemical. However, the increase in backlog is substantially comprised of remelt steel products that will not ship until the 2005 third quarter and beyond due to remelt requirements.

 

  Tool steel sales are expected to remain ahead of last year as continued strength in the industrial manufacturing sector is expected to partially offset lower automotive production.

 

  The implementation of recent price increases will allow the Company to offset continuing manufacturing cost increases as well as support future capital improvements designed to increase production levels and efficiency.

 

  Sales from the Dunkirk Specialty Steel segment are expected to approximate $14 million as service center demand remains strong and the Company expects to continue to add redrawer and end user customers.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company has reviewed the status of its market risk and believes there are no significant changes from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, except as provided in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 4. CONTROLS AND PROCEDURES

 

The Company’s management performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s President and Chief Executive Officer and the Vice President of

 

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Finance, Chief Financial Officer and Treasurer concluded that, as of the end of the fiscal year covered by this quarterly report, the Company’s disclosure controls and procedures are effective in the timely identification of material information required to be included in the Company’s periodic filings with the SEC. During the quarter ended March 31, 2005, there have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation thereof, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company caused certain crankshafts sold by Teledyne to be defective. As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.

 

In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is available for this claim and has reached an agreement with United States Aviation Underwriters, Inc., (“USAU”) a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, regarding the allocation of certain potential costs associated with the Teledyne claim. At this time, the Company is engaged in discovery and believes that the final disposition of this suit will not have a material adverse effect on the financial condition and the results of operations of the Company.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

Item 5. OTHER INFORMATION

 

None.

 

Item 6. EXHIBITS

 

Exhibits

   
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d- 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

Date: May 12, 2005

 

/s/ C. M. McAninch


   

Clarence M. McAninch

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 12, 2005

 

/s/ Richard M. Ubinger


   

Richard M. Ubinger

Vice President of Finance,

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

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