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USAP > SEC Filings for USAP > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for UNIVERSAL STAINLESS & ALLOY PRODUCTS INC

Form 10-Q for UNIVERSAL STAINLESS & ALLOY PRODUCTS INC


9-Nov-2012

Quarterly Report


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

Overview

The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Universal Stainless & Alloy Products, Inc. (the "Company"). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.

We manufacture and market semi-finished and finished specialty steel products, including stainless steel, tool steel and certain other alloyed steels. Our manufacturing process involves melting, remelting, heat treating, hot and cold rolling, forging, machining and cold drawing of semi-finished and finished specialty steels. Our products are sold to service centers, forgers, rerollers, original equipment manufacturers and wire redrawers. Our customers further process our products for use in a variety of industries, including the aerospace, power generation, oil and gas and heavy equipment manufacturing industries. We also perform conversion services on materials supplied by customers that lack certain of our production capabilities or are subject to their own capacity constraints.

We recognized net income for the quarter ended September 30, 2012 of $2.7 million, or $0.38 per diluted share, compared with net income of $3.9 million, or $0.55 per diluted share for the three months ended September 30, 2011.

Our net sales decreased from $67.3 million for the three months ended September 30, 2011 to $61.4 million for the current quarter. This $5.9 million, or 9%, decrease is largely due to decreased volume recognized in the current quarter as compared to the third quarter of 2011. Tons shipped decreased by 9% in the current quarter when compared to the prior year third quarter.

Our backlog was $68.3 million at September 30, 2012 as compared to $102.6 million at December 31, 2011. We believe that the decrease in our backlog during 2012 is largely a result of inventory adjustments being made by our customers. Uncertainty surrounding the global economy and falling commodity prices have reduced order activity during the year, which has negatively impacted our backlog. We expect to see depressed order activity through the remainder of 2012.

During the current quarter, we continued to increase production at our North Jackson facility, a start-up facility which was acquired in the third quarter of 2011. In addition to conversion services provided to external customers, the North Jackson operation has provided increasing forging and remelting capacity for our other facilities, as well as providing our legacy operations with operating synergies. Melting in the facility's vacuum induction melting (VIM) furnace continued throughout the third quarter of 2012. Material produced in the VIM is now being qualified for future customer orders and we expect to begin selling this material in the fourth quarter of 2012. In October 2012, we commissioned two additional vacuum arc remelting (VAR) furnaces at our North Jackson facility, which brings the total number of VAR furnaces company-wide to eleven, including four at North Jackson. The additional VAR furnaces will be used to service our aerospace and oil and gas customers.

Our cost of products sold decreased from $54.7 million for the third quarter of 2011 to $52.0 million in the current quarter. This $2.7 million, or 5%, decrease is primarily due to the aforementioned 9% decrease in net sales. Our operations costs, which include certain infrastructure costs such as overhead and depreciation, increased on a percentage of sales basis from 39% for the quarter ended September 30, 2011 to 52% for the current quarter. We have placed a substantial amount of fixed assets in service over the past four quarters, primarily at our North Jackson facility, which has increased our depreciation expense. The higher depreciation expense, coupled with developing production at our North Jackson facility, had a negative impact on our operations costs as a percentage of sales in the current period. As we continue to increase production at our North Jackson facility, we believe that our operations costs as a percentage of sales will decrease from current levels.

Selling and administrative ("S&A") expenses decreased from $5.3 million in the third quarter of 2011 to $4.7 million in the current quarter. Included in our S&A expenses were $1.1 million related to the North Jackson facility acquisition for the quarter ended September 30, 2011 and $0.6 million and $0.1 million related to our North Jackson operations for the quarters ended September 30, 2012 and 2011, respectively. Excluding the North Jackson S&A related expenses, our S&A expenses as a percentage of sales increased slightly, from 6% to 7%.

Interest expense was $0.6 million for both the three months ended September 30, 2012 and 2011. Our current quarter interest expense reflects an increased debt load in the current quarter when compared to the prior year third quarter as a result of the North Jackson acquisition. During the quarter ended September 30, 2011, we incurred approximately $0.3 million of interest expense related to the settlement of an interest rate swap and the write-off of unamortized deferred financing costs on a repaid loan. During the first quarter of 2012 we amended our credit facility which, among other benefits, reduced our interest rate.


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Our effective tax rate for the quarters ended September 30, 2012 and 2011 was 33% and 42%, respectively. Our effective tax rate for the quarter ended September 30, 2012 reflects a net discrete tax benefit for a change in state income tax apportionment rates. Our estimated annual effective tax rate on ordinary income for 2012 is 36.3%.

The collective bargaining agreement ("CBA") at the Company's Dunkirk facility was to expire on October 31, 2012. The Company and the United Steelworkers ("USW"), representing the hourly employees at the Dunkirk facility agreed, to extend the CBA through November 11, 2012. The Company and the USW intend to continue to negotiate a new mutually agreeable CBA for the hourly employees at the Dunkirk facility.

On November 5, 2012 we filed a Form 8-K related to corrected results which was necessitated by the discovery of an incorrect customer invoice, for which a credit memo subsequently was issued after our earnings release on October 24, 2012. The discovery of the incorrect customer invoice was detected by an established key control in normal course prior to the filing of this Form 10Q. Additionally, the Company's management felt it prudent to add controls designed to identify errors in financial reporting on a more timely basis.

Results of Operations

Three months ended September 30, 2012 as compared to the three months ended
September 30, 2011

An analysis of the Company's operations for the three months ended September 30,
2012 and 2011 is as follows:



                                                    Three months ended
                                                       September 30,
            (in thousands)                           2012          2011
            Net sales:
            Stainless steel                       $   48,432     $ 54,746
            Tool steel                                 4,768        5,407
            High-strength low alloy steel              4,880        4,440
            High-temperature alloy steel               1,930        1,579
            Conversion services                          967          935
            Scrap sales and other                        383          192


            Total net sales                           61,360       67,299
            Cost of products sold                     52,023       54,725
            Selling and administrative expenses        4,685        5,343


            Operating income                      $    4,652     $  7,231


            Tons shipped                              11,614       12,813

Market Segment Information



                                                   Three months ended
                                                      September 30,
              (in thousands)                        2012          2011
              Net sales:
              Service centers                    $   36,631     $ 35,067
              Forgers                                 8,056       12,997
              Rerollers                              10,429       12,506
              Original equipment manufacturers        4,148        4,518
              Wire redrawers                            746        1,084
              Conversion services                       967          935
              Scrap sales and other                     383          192


              Total net sales                    $   61,360     $ 67,299

The above financial information includes the results of the North Jackson operation, which was acquired on August 18, 2011.

Net sales for the three months ended September 30, 2012 decreased $5.9 million as compared to the similar period in 2011. The decrease reflects a 9% decrease, for the quarter ended September 30, 2012, in consolidated shipments and a change in product mix.


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Shipments of power generation, oil and gas, service center plate, and heavy equipment manufacturing products decreased 30%, 16%, 7%, and 51%, respectively, and were partially offset by increases in aerospace products and conversion services of 13% and 1%, respectively, for the quarter ended September 30, 2012, compared to the prior year third quarter.

Cost of products sold, as a percentage of sales, was 85% and 81% for the quarters ended September 30, 2012 and 2011, respectively. The increase in cost of products sold is primarily due to increased operations costs as a percentage of sales incurred in the current quarter as compared to the prior year second quarter. This increase is largely due to the aforementioned increased infrastructure costs, primarily related to our North Jackson facility. The increase in operations cost as a percentage of sales is partially offset by lower material costs as a percentage of sales in the current quarter, primarily due to reduced raw material prices.

S&A expense decreased by $0.7 million for the three months ended September 30, 2012 as compared to the similar period in 2011. S&A expenses as a percentage of net sales was 8% for both the quarters ended September 30, 2012 and 2011. Our S&A expense in the third quarter of 2011 included $1.1 million of acquisition costs related to the North Jackson facility acquisition. There were no similar costs in the third quarter of 2012. During the quarter ended September 30, 2012, we incurred an additional $0.5 million of S&A expense when compared to the quarter ended September 30, 2011 as a result of including North Jackson for the entire quarter in the current year. Our S&A expenses were favorably impacted by reduced variable incentive compensation costs, which decreased by $0.8 million in the third quarter of 2012 as compared to the same period in 2011.

Business Segment Results

We are comprised of four operating locations and a corporate headquarters. For segment reporting, our Bridgeville, North Jackson and Titusville facilities have been aggregated into one reportable segment, Universal Stainless & Alloy Products ("USAP"). Our Dunkirk Specialty Steel facility is our second reportable segment.

We have included the results of our North Jackson operation in the USAP segment as a result of North Jackson having consistent characteristics as identified in Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting", with the USAP segment. As a result of the North Jackson acquisition, our operating facilities have become more integrated, resulting in our chief operating decision maker ("CODM") increasingly viewing the Company as one unit. As North Jackson becomes fully integrated within the Company, we expect to move to one reportable segment to more accurately reflect the information and measures which are used by our CODM to make key decisions.

An analysis of net sales and operating income for our reportable segments for the three month ended September 30, 2012 and 2011 is as follows:

Universal Stainless & Alloy Products Segment



                                                    Three months ended
                                                       September 30,
            (in thousands)                           2012          2011
            Net sales:
            Stainless steel                       $   30,138     $ 34,803
            Tool steel                                 3,703        5,047
            High-strength low alloy steel              1,106          662
            High-temperature alloy steel                 637          623
            Conversion services                          866          641
            Scrap sales and other                        267          230

                                                      36,717       42,006
            Intersegment                              16,556       18,554


            Total net sales                           53,273       60,560
            Material cost of sales                    27,548       31,265
            Operation cost of sales                   21,534       20,511
            Selling and administrative expenses        2,996        4,004


            Operating income                      $    1,195     $  4,780

The above financial information includes the results of the North Jackson operation, which was acquired on August 18, 2011.


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Net sales for the three months ended September 30, 2012 for the Universal Stainless & Alloy Products segment decreased by $7.3 million, or 12%, in comparison to the quarter ended September 30, 2011. The results reflect a 3% decrease in shipments for the three months ended September 30, 2012, as well as a change in product mix. Shipments of power generation, oil and gas, service center plate, and heavy equipment manufacturing products decreased 29%, 20%, 4%, and 35%, respectively, and were partially offset by increases in aerospace products and conversion services of 23% and 43%, respectively, for the quarter ended September 30, 2012, when compared to the prior year third quarter.

For the quarter ended September 30, 2012, operating income declined by $3.6 million as compared to the prior year third quarter. This reduction in operating income is a result of decreased sales, as well as higher operations costs per sales dollar, partially offset by decreased material costs per sales dollar. Operation costs per sales dollar increased from 34% for the three months ended September 30, 2011 to 40% for the three months ended September 30, 2012. Material cost of sales, as a percentage of net sales, remained consistent at 52% between the periods presented. S&A expense for the USAP segment decreased from 7% of net sales for the quarter ended September 30, 2011 to 6% for the current quarter.

Dunkirk Specialty Steel Segment



                                                    Three months ended
                                                       September 30,
            (in thousands)                           2012          2011
            Net sales:
            Stainless steel                       $   18,294     $ 19,943
            Tool steel                                 1,065          360
            High-strength low alloy steel              3,774        3,778
            High-temperature alloy steel               1,293          956
            Conversion services                          101          294
            Scrap sales and other                        116          (38 )

                                                      24,643       25,293
            Intersegment                                 135           34


            Total net sales                           24,778       25,327
            Material cost of sales                    14,269       15,847
            Operation cost of sales                    6,499        5,628
            Selling and administrative expenses        1,689        1,339


            Operating income                      $    2,321     $  2,513

Net sales for the three months ended September 30, 2012 for the Dunkirk Specialty Steel segment decreased by $0.5 million, or 2%, in comparison to the three months ended September 30, 2011. The decrease in sales is largely a result of a 4% decrease in shipments for the quarter ended September 30, 2012, offset by a change in product mix. For the three months ended September 30, 2012, decreases in shipments of conversion services, power generation, and oil and gas products of 87%, 32% and 9% were partially offset by increases in aerospace, service center bar and heavy equipment manufacturing products of 5%, 165% and 3%, respectively.

Operating income for the three months ended September 30, 2012 decreased by $0.2 million as compared to the similar period in 2011. The decrease during the third quarter is primarily due to decreased shipping volumes, as well as an increase in operation costs per sales dollar from 22% for the three months ended September 30, 2011 to 26% for the three months ended September 30, 2012, partially offset by lower material costs in relation to net sales, which decreased from 63% to 58% in the same period. Total cost of products sold as a percentage of sales was 85% during the three months ended September 30, 2011, compared to 84% during the current period.


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Nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011

An analysis of the Company's operations for the nine months ended September 30, 2012 and 2011 is as follows:

                                                     Nine months ended
                                                       September 30,
            (in thousands)                          2012          2011
            Net sales:
            Stainless steel                       $ 160,844     $ 149,797
            Tool steel                               15,638        18,376
            High-strength low alloy steel            16,959        13,925
            High-temperature alloy steel              6,099         5,037
            Conversion services                       3,831         2,945
            Scrap sales and other                       469           348


            Total net sales                         203,840       190,428
            Cost of products sold                   168,658       154,884
            Selling and administrative expenses      13,531        12,870


            Operating income                      $  21,651     $  22,674


            Tons shipped                             38,925        38,345

Market Segment Information



                                                    Nine months ended
                                                      September 30,
              (in thousands)                       2012          2011
              Net sales:
              Service centers                    $ 120,091     $  98,000
              Forgers                               30,924        36,792
              Rerollers                             31,851        35,983
              Original equipment manufacturers      12,693        12,844
              Wire redrawers                         3,981         3,516
              Conversion services                    3,831         2,945
              Scrap sales and other                    469           348


              Total net sales                    $ 203,840     $ 190,428

The above financial information includes the results of the North Jackson operation, which was acquired on August 18, 2011.


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Net sales for the nine months ended September 30, 2012 increased $13.4 million as compared to the similar period in 2011. The increase reflects a 2% increase, for the nine months ended September 30, 2012, in consolidated shipments, combined with a change in product mix. Increased shipments of aerospace products and conversion services of 20%, and 19%, respectively, were partially offset by decreases in shipments of power generation, oil and gas, heavy equipment manufacturing and service center plate products of 15%, 3%, 29% and 6%, respectively, as compared to the nine months ended September 30, 2011.

Cost of products sold, as a percentage of net sales, was 83% and 81% for the nine months ended September 30, 2012 and 2011, respectively. The increase in cost of products sold is primarily due to increased operations costs as a percentage of sales incurred in the nine months ended September 30, 2012 when compared to the prior year same period. This increase is largely due to the aforementioned increased infrastructure costs, primarily related to our North Jackson facility. The increase in operations cost as a percentage of sales is partially offset by lower material costs as a percentage of sales in the current period, primarily as a result of reduced raw material costs.

S&A expense increased by $0.7 million for the nine months ended September 30, 2012 as compared to the similar period in 2011. However, as a percentage of net sales, S&A expenses were 7% for both the nine months ended September 30, 2012 and 2011. Our S&A expense in the first nine months of 2011 included $2.1 million of acquisition costs related to the North Jackson facility acquisition. There were no similar costs in the first nine months of 2012. Our S&A expenses in the nine months ended September 30, 2012 were favorably impacted by reduced variable incentive compensation costs. Our variable incentive compensation expense decreased by $1.6 million during the first nine months of 2012 as compared to the same period in 2011.

Business Segment Results

An analysis of net sales and operating income for the reportable segments for the nine months ended September 30, 2012 and 2011 is as follows:

Universal Stainless & Alloy Products Segment



                                                     Nine months ended
                                                       September 30,
            (in thousands)                          2012          2011
            Net sales:
            Stainless steel                       $  98,926     $  94,037
            Tool steel                               13,560        17,184
            High-strength low alloy steel             5,093         1,816
            High-temperature alloy steel              2,125         2,050
            Conversion services                       3,476         2,203
            Scrap sales and other                       365           359

                                                    123,545       117,649
            Intersegment                             51,803        58,512


            Total net sales                         175,348       176,161
            Material cost of sales                   87,527        92,338
            Operation cost of sales                  67,730        58,811
            Selling and administrative expenses       8,648         8,872


            Operating income                      $  11,443     $  16,140

The above financial information includes the results of the North Jackson operation, which was acquired on August 18, 2011.


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Net sales for the nine months ended September 30, 2012 for the USAP segment decreased by $0.8 million, or less than 1%, in comparison to the nine months ended September 30, 2011. The decrease reflects an increase of less than 1% in shipments for the nine months ended September 30, 2012, as well as a change in product mix. Increases in shipments of aerospace products and conversion services of 16% and 49%, respectively, were partially offset by decreases in power generation, oil and gas, service center plate and heavy equipment manufacturing products of 16%, 10%, 3% and 34%, respectively, for the nine months ended September 30, 2012.

Operating income for the nine months ended September 30, 2012 declined by $4.7 million as compared to the nine months ended September 30, 2011. This reduction in operating income is primarily a result of higher operations costs per sales dollar, partially offset by decreased material costs per sales dollar. Operation costs per sales dollar increased from 33% for the nine months ended September 30, 2011 to 39% for the nine months ended September 30, 2012. Material cost of sales, as a percentage of net sales, decreased from 52% for the nine months ended September 30, 2011 to 50% for the nine months ended September 30, 2012.

Dunkirk Specialty Steel Segment



                                                    Nine months ended
                                                      September 30,
            (in thousands)                          2012          2011
            Net sales:
            Stainless steel                       $  61,918     $ 55,760
            Tool steel                                2,078        1,192
            High-strength low alloy steel            11,866       12,109
            High-temperature alloy steel              3,974        2,987
            Conversion services                         355          742
            Scrap sales and other                       104          (11 )

                                                     80,295       72,779
            Intersegment                                314          126


            Total net sales                          80,609       72,905
            Material cost of sales                   47,130       44,864
            Operation cost of sales                  20,195       16,230
            Selling and administrative expenses       4,883        3,998


            Operating income                      $   8,401     $  7,813

Net sales for the nine months ended September 30, 2012 for the Dunkirk Specialty Steel segment increased by $7.7 million, or 11%, in comparison to the nine months ended September 30, 2011. The increase in sales is largely a result of a 6% increase in shipments for the nine months ended September 30, 2012, as well as a change in product mix. For the nine months ended September 30, 2012, increases in shipments of aerospace products, oil and gas, service center bar and heavy equipment manufacturing products of 15%, 3%, 55% and 7%, respectively, were partially offset by decreases in shipments of power generation products and conversion services materials of 7% and 66%, respectively.

Operating income for the nine months ended September 30, 2012 increased by $0.6 million, as compared to the similar period in 2011. The increase during the nine months ended September 30, 2012 is primarily due to the increase in sales during the period. Our cost of goods sold as a percentage of sales for the segment was 84% for each of the nine months ended September 30, 2012 and 2011.

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