Results of Operations

The Company recorded a net loss for the three-month period ended March 31, 2009 of $3.8 million, or $0.57 per diluted share, which included unusual charges of $3.6 million equivalent to $0.53 per share, after-tax, primarily due to the deepening recession and economic uncertainty. The following unusual charges (totaling $6.0 million pre-tax) are included in the 2009 financial results:

• $1.9 million increase to the bad debt reserve due to the inability of a privately held service center customer to pay amounts owed on 2008 business and a related $0.5 million increase to inventory reserves;

• $1.5 million due to a decline in raw material values and the consumption of high cost material during the quarter;

• $1.0 million write-down of stock inventory;

• $0.9 million attributed to the reduction of operating levels; and

• $0.2 million resulting from a 20% reduction in salaried employees.

An analysis of the Company's operations for the three-month periods ended March 31, 2009 and 2008 is as follows:

                                                           For the
                                                  Three-month period ended
                                                          March 31,
         (dollars in thousands)                    2009               2008
         Net sales:
         Stainless steel                       $     33,762       $     42,028
         Tool steel                                   3,329              9,107
         High-strength low alloy steel                2,743              4,011
         High-temperature alloy steel                 2,019              1,146
         Conversion services                            304                525
         Other                                           29                 28


         Total net sales                             42,186             56,845
         Cost of products sold                       43,864             46,779
         Selling and administrative expenses          4,737              3,075


         Operating income (loss)               $     (6,415 )     $      6,991


         Tons Shipped                                 9,593             11,767

Market Segment Information



                                                        For the
                                                Three-month period ended
                                                       March 31,
          (dollars in thousands)                 2009             2008
          Net sales:
          Service centers                    $      17,532    $      29,234
          Forgers                                   12,971            9,018
          Rerollers                                  6,004           11,239
          Original equipment manufacturers           4,399            5,441
          Wire redrawers                               947            1,369
          Conversion services                          304              525
          Miscellaneous                                 29               19


          Total net sales                    $      42,186    $      56,845

Three-month period ended March 31, 2009 as compared to the same period in 2008

Net sales for the three-month period ended March 31, 2009 decreased $14.7 million, or 25.8%, as compared to the similar period in 2008. The decrease reflects an 18.5% decline in consolidated shipments and lower surcharges. A decrease in shipments of tool steel products, power generation products and petrochemical products of 42%, 29% and 21%, respectively, were partially offset by increases in commodity and aerospace product shipments of 16% and 3%, respectively. Lower raw material surcharges were recognized as a result of lower raw material prices experienced during the three-month period ended March 31, 2009 in comparison to the three-month period ended March 31, 2008.

Cost of products sold, as a percentage of net sales, was 104.0% and 82.3% for the three-month periods ended March 31, 2009 and 2008, respectively. The 2009 results include $3.9 million of the unusual charges outlined above, representing 9.2% of net sales. The remaining increase is primarily due higher raw material costs in relation to sales prices and higher operation costs due to lower production volumes.

Selling and administrative expenses increased by $1.7 million in the three-month period ended March 31, 2009 as compared to the similar period in 2008. The increased cost primarily relates to $2.1 million of the unusual charges outlined above.

The effective income tax (benefit) rate in the three-month period ended March 31, 2009 was (40.3)% as compared to 33.0% for the three-month period ended March 31, 2008. The effective income tax rate in the current period reflects a projected net operating loss and benefits related to federal and state loss carrybacks and carryforwards, whereas the prior year maintained taxable income and benefitted from the domestic manufacturing deduction and also from investment tax credits generated from capital improvements made at the Dunkirk facility in 2008.

Business Segment Results

An analysis of the net sales and operating income for the reportable segments for the three-month periods ended March 31, 2009 and 2008 is as follows:

Universal Stainless & Alloy Products Segment



                                                           For the
                                                  Three-month period ended
                                                          March 31,
         (dollars in thousands)                    2009               2008
         Net sales:
         Stainless steel                       $     25,995       $     27,310
         Tool steel                                   3,208              8,424
         High-strength low alloy steel                1,015              1,113
         High-temperature alloy steel                   734                569
         Conversion services                            188                357
         Other                                           29                 10


                                                     31,169             37,783
         Intersegment                                 5,516             10,415


         Total net sales                             36,685             48,198
         Material cost of sales                      20,266             23,339
         Operation cost of sales                     16,460             17,790
         Selling and administrative expenses          3,873              2,138


         Operating income (loss)               $     (3,914 )     $      4,931

Net sales for the three-month period ended March 31, 2009 for this segment, which consists of the Bridgeville and Titusville facilities, decreased $11.5 million, or 23.9%, as compared to the similar period in 2008. The decrease reflects an 18.8% decline in shipments and lower surcharges. A decrease in shipments of tool steel products, petrochemical products and power generation products of 43%, 30% and 26%, respectively, were partially offset by increases in commodity and aerospace product shipments of 21% and 2%, respectively.

The operating loss for the 2009 first quarter includes $5.0 million of the unusual charges described above. The remaining decrease is primarily due to lower shipment volumes, higher raw material costs in relation to sales prices and higher operation costs, as a percentage of sales, due to lower production volumes. Excluding the impact of the unusual charges, the material cost of sales increased from 48.4% in 2008 to 49.1% in 2009.

Dunkirk Specialty Steel Segment



                                                           For the
                                                  Three-month period ended
                                                          March 31,
         (dollars in thousands)                    2009               2008
         Net sales:
         Stainless steel                       $      7,767       $     14,718
         Tool steel                                     121                683
         High-strength low alloy steel                1,728              2,898
         High-temperature alloy steel                 1,285                577
         Conversion services                            116                168
         Other                                           -                  18


                                                     11,017             19,062
         Intersegment                                   365                988


         Total net sales                             11,382             20,050
         Material cost of sales                       8,794             11,839
         Operation cost of sales                      4,225              4,489
         Selling and administrative expenses            864                937


         Operating income (loss)               $     (2,501 )     $      2,785

Net sales for the three-month period ended March 31, 2009 decreased $8.7 million, or 43.2%, as compared to the similar period in 2008. The decrease reflects a 27.7% decline in shipments and lower surcharges. Shipments of commodity and aerospace products decreased 50% and 19%, respectively, compared to the same period in 2008.

The operating loss for the 2009 first quarter includes $1.0 million of the unusual charges described above. The remaining decrease is primarily due to lower shipment volumes, higher raw material costs in relation to sales prices and higher operation costs, as a percentage of sales, due to lower production volumes. Excluding the impact of the unusual charges, the material cost of sales increased from 59.1% in 2008 to 70.8% in 2009.

Liquidity and Capital Resources

The Company has financed its operating activities through cash on hand at the beginning of the period. At March 31, 2009, working capital approximated $100.6 million as compared to $94.8 million at December 31, 2008. The increase is primarily attributable to receipt of a $12 million, five-year term loan from PNC Bank ("Term Loan") and a $2.0 million increase in refundable taxes partially offset by an $8.3 million decrease in managed working capital, defined as accounts receivable, inventory and accounts payable. Accounts receivable decreased $3.9 million as a result of decreased sales for the three-month period ended March 31, 2009 in comparison to the three-month period ended December 31, 2008 and a $1.9 million increase in the bad debt reserve, partially offset by customers extending payment terms to preserve cash due to economic conditions. The decrease in inventory is primarily due to the shipment of higher cost material during the quarter, a 16% reduction in the quantity of work-in-process inventory, lower material values and the impact of curtailing operations to match the reduction in the Company's backlog, which decreased from $75 million at December 31, 2008 to $58 million at March 31, 2009. The decrease in accounts payable is also related to lower material values and the impact of curtailing operations. The ratio of current assets to current liabilities increased to 7.0:1 at March 31, 2009 from 4.9:1 at December 31, 2008. The debt to total capitalization ratio increased from 1.0% at December 31, 2008 to 8.6% at March 31, 2009 due to the issuance of the Term Loan.

Cash received from sales activities of $44.3 million and $49.2 million represents the primary source of cash from operations for the three-month periods ended March 31, 2009 and 2008, respectively. The primary uses of cash follow:

                                                   For the
                                           Three-month period ended
                                                  March 31,
               (dollars in thousands)       2009             2008
               Raw material purchases   $      16,349    $      24,321
               Employment costs                 9,219           11,844
               Utilities                        4,991            5,112
               Other                           11,086            7,691

               Total uses of cash       $      41,645    $      48,968

Cash used in raw material purchases decreased in 2009 in comparison to 2008 primarily due to a reduction in the quantity of purchased materials due to curtailing operations and by lower unit transaction costs. The Company continuously monitors market price fluctuations of its key raw materials. The following table reflects the average market values per pound for selected months during the last 15-month period.

                                March     December     March     December
                                 2009       2008       2008        2007
                 Nickel         $ 4.40   $     4.39   $ 14.16   $    11.79
                 Chrome         $ 0.75   $     0.96   $  2.11   $     1.66
                 Molybdenum     $ 8.50   $     9.85   $ 33.78   $    32.54
                 Carbon Scrap   $ 0.09   $     0.11   $  0.18   $     0.14

The market values for these raw materials continue to fluctuate based on supply and demand, market disruptions, and other factors. The Company maintains sales price surcharge mechanisms, priced at time of shipment, to mitigate the risk of raw material cost fluctuations. There can be no assurance that these sales price adjustments will completely offset the Company's raw material and energy costs.

Decreased employment costs are primarily due to lower production volumes and decreased payout under the Company's profit sharing plan, which were partially offset by higher employee-related insurance costs. The increase in other uses of cash, the majority of which is cash for production supplies, plant maintenance, outside conversion services, insurance and freight is attributable to higher conversion and insurance expenditures, partially offset by lower selling and administrative expenses.

The Company had capital expenditures for the first quarter 2009 of $3.7 million, compared with $3.1 million for the same period in 2008. $2.5 million of the 2009 expenditures related to the initial phase of the Bridgeville melt shop upgrade. The 2008 expenditures were primarily for the addition of annealing and finishing equipment in Bridgeville, as well as the installation of the high-temperature annealing furnace in Dunkirk.

On February 27, 2009, the Company entered into a new unsecured credit agreement with PNC Bank which provides for a $12.0 million term loan scheduled to mature on February 28, 2014 and a $15.0 million revolving credit facility with the term expiring June 30, 2012. At March 31, 2009, the Company had all of its $15.0 million revolving line of credit with PNC Bank available for borrowings. The Company is in compliance with its covenants as of March 31, 2009.

The Company also executed an interest rate swap with PNC Bank, with a notional amount of $12.0 million, to convert the LIBOR floating rate under the Term Loan to a fixed interest rate for the life of the loan. Under the agreement, the Company's interest rate is currently fixed at 4.515%. The Company recorded a liability of $290,000, equal to the fair market value of the swap agreement at March 31, 2009. This change in fair market value, net of tax, is reported as other comprehensive loss within stockholders' equity.

The Company does not maintain off-balance sheet arrangements other than operating leases and the interest rate swap, nor does it participate in material related party transaction arrangements or non-exchange traded contracts requiring fair value accounting treatment, other than the interest rate swap.

The Company anticipates that it will fund its 2009 working capital requirements and its capital expenditures primarily from funds generated from operations and the Term Loan. Financing of the Company's long-term liquidity requirements, including capital expenditures, is expected from a combination of internally generated funds, borrowings, stock issuance or other sources of external financing, if needed.

Critical Accounting Policies

Revenue recognition is the most critical accounting policy of the Company. Revenue from the sale of products is recognized when both risk of loss and title have transferred to the customer, which in most cases coincides with shipment of the related products, and collection is reasonably assured. The Company manufactures specialty steel product to customer purchase order specifications and in recognition of requirements for product acceptance. Material certification forms are executed, indicating compliance with the customer purchase orders, before the specialty steel products are packed and shipped to the customer. Occasionally customers request that the packed products be held at the Company's facility beyond the stated shipment date. In these situations, the Company receives written confirmation of the request, acknowledgement that title has passed to the customer and that normal payment terms apply. The impact on revenue was less than 1% of net sales in each period presented.

Revenue from conversion services is recognized when the performance of the service is complete. Invoiced shipping and handling costs are also accounted for as revenue. Customer claims are accounted for primarily as a reduction to gross sales after the matter has been researched and an acceptable resolution has been reached.

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 specific reserves for 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 along with a reserve equal to 15% of 90-day or older balances not specifically reserved. However, the total reserve will not be less than 1% of trade accounts receivable. 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.

Based on management's assessment of the carrying values of such long-lived assets, no impairment reserve had been deemed necessary as of March 31, 2009 and 2008. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income.

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, 2009.

2009 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 2009 sales will be below those of the first quarter of 2009 based on current low order entry and a decline in our backlog to $58 million at March 31, 2009 from $75 million at December 31, 2008. While the Company is not capable of providing specific earnings guidance due to the unprecedented uncertainty within our industry, we do expect to be aided by our cost saving initiatives and better alignment of material costs to surcharges. The Company also expects to generate positive cash flow during the quarter.